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Edited Transcript of WPP.L earnings conference call or presentation 3-Mar-17 9:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 WPP PLC Earnings Presentation

London Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of WPP PLC earnings conference call or presentation Friday, March 3, 2017 at 9:30:00am GMT

TEXT version of Transcript


Corporate Participants


* Martin Sorrell

WPP plc - Chief Executive

* Paul Richardson

WPP plc - Finance Director

* Adam Smith

WPP plc - Futures Director, GroupM


Conference Call Participants


* Ian Whittaker

Liberum - Analyst

* Tom Singlehurst

Citigroup - Analyst

* Annick Maas

Liberum - Analyst

* Julien Roch

Barclays - Analyst

* Patrick Wellington

Morgan Stanley - Analyst

* Chris Collett

Deutsche Bank Research - Analyst

* Matthew Walker

Credit Suisse - Analyst

* Lisa Yang

Goldman Sachs & Co. - Analyst




Martin Sorrell, WPP plc - Chief Executive [1]


Welcome to 2016. As usual, Paul's going to lead off. We've got a long presentation and there's a leave-behind on your seat.

Paul will cover the results. Adam's going to talk about this year and next year and GroupM's forecast for the media markets worldwide. And then, I'll come back and talk a little about strategy and objectives, and then we'll go into Q&A.

So, Paul. Thank you.


Paul Richardson, WPP plc - Finance Director [2]


So, hi. Good morning. Welcome to the 2016 full-year results for WPP.

I'm going to start on another record year with strong currency tailwinds, particularly in the second half of the year, which led to reported billings up 16% at GBP55.245 billion, which was up 5.5% on a constant-currency basis, and 3.3% on a like-for-like basis.

Our reported revenues were up 17.6% at GBP14.389 billion, up 7.2% on a constant-currency basis, and up 3% on a like-for-like basis.

Our net sales growth was up 17.8% on a reportable basis, 7.4% on a constant-currency basis, and 3.1% on a like-for-like basis.

Reported headline EBITDA was up almost 21% at GBP2.42 billion, and up 8% on a constant-currency basis.

Our reported headline profits before interest and tax, otherwise known as our operating profits, were up 21.8% at GBP2.16 billion, over GBP2 billion for the first time, and they were up 8.5% on a constant-currency basis.

The reported net sales margin of 17.4% this year was up 0.5 margin points on a reported basis, 0.2 margin points on a constant-currency basis, and 0.3 margin points on like for like, when you made the adjustment for the acquisition of STW acquired in April 2016.

In the headline, diluted earnings per share was up 20.9% at 113.2p this year, up 7.7% on a constant-currency basis, and compared to 93.6p in 2015.

The dividends per share of 56.6p were up 26.7%, reaching a targeted payout ratio of 50%, up from a payout ratio of 47.7% in 2015.

Turning now to the balance sheet, so average constant-currency net debt was GBP382 million at GBP4.34 billion, reflecting significant net acquisition spend, buybacks and dividends, which totaled approximately GBP1.7 billion, leading to an average net debt to EBITDA ratio of approximately 1.8 times, almost in the middle of our target range of 1.5 to 2 times, and consistent with last year's level at 1.8 times.

Net new business wins of GBP4.36 billion, or $6.8 billion, continued the good overall performance in the first nine months, but was slower than in the previous year.

The increase in the value of non-controlled investments by GBP151 million to GBP1.3 billion, was -- consisted primarily of Vice, Refinery29, and comScore.

And finally, our return on equity of 16.2% compared to our weighted average cost of capital of 6.4% in 2016.

So turning now to how we compared in 2016 versus consensus, we basically met or were ahead of consensus on all the lines in terms of the P&L, including earnings per share, resulting at 113.2p where consensus was basically 112p.

Our reported sales margin was up 17.4%. That was because of a greater foreign exchange effect on our margin in 2016 than we had previously expected. In fact, the foreign exchange impact on margins was plus 0.3 margin points.

So turning now to where we were versus our goals and achievements of what we set out at the beginning of the year, we were targeting revenue growth of well over 3%. We achieved 3%. We were targeting net sales growth of over 3%. We achieved 3.1%. We were targeting net sales margin improvement of 0.3. We achieved that on a pro-forma basis.

Our reportable diluted earnings per share was up 21%, i.e., above the range of 10% to 15% targeted, and on a constant-currency basis was up 7.75. However, if the tax rates had remained the same, our constant-currency earnings per share would have been up over 10%.

The dividend payout ratio again reaching our targeted payout ratio of 50% a year earlier than guidance, and basically a good performance overall, supported by a currency tailwind of over 10%.

So here's a summary of the headline results for the year. As you can see here, our margins moving up from 16.9% on a reported basis to 17.4%, again benefiting from the currency impact.

EBITDA strong at GBP2.4 billion, up 21%.

Tax rate moving up from 19% to 21%. It's really a combination of a couple of things.

One, we are a taxpayer in the USA. As our US profits become more profitable, we have to pay a higher rate of tax. Their marginal rate of tax in the USA, or corporate tax, is around 35%, with 4% state tax, so 39%. And similarly in other emerging markets, where we've had strong growth, we incur tax rates of around 40% in India and 25% in China, and that adds to the blended rate moving up from 19% to 21%.

In terms of diluted EPS, as I mentioned, we're up from 93.6p last year to 113.2p this year, assisted by currency. Our net debt position is a very similar level at GBP4.3 billion at a 1.8 times net debt to EBITDA ratio.

Headcount was well controlled during the year, and average headcount only up 0.3%, and at the yearend flat with December 2015. And our share price had an enterprise value of approximately 11.8 times this year versus the same valuation, 11.6 times, a year ago.

So in terms of revenue growth, the build of how we have grown revenues from GBP12.2 billion to GBP14.4 billion, it's the organic revenue growth of 3%, acquisitions adding 4.2%, and currency adding 10.4%. So overall revenues growing at 17.6%.

And a very similar picture on a net sales basis, which are now much more aligned with the growth in revenues. So net sales growth of 3.1%, acquisitions adding 4.3%, foreign exchange also adding 10.4%; so taking our net sales from GPB10.5 billion last year to GBP12.4 billion in 2016.

The effect of currency was very significant. We predicted at the half-year it would be between plus 8% to plus 9% on 2016 (sic). On a full-year basis, it's turned out to be plus 10.4%, with being strong in the second half, adding 17.2% to revenue and 17.3% to net sales.

If I was to look ahead to 2017 and take the current exchange rates and apply them to our budgets, we're expecting an 11% improvement or benefit from foreign exchange in the first half, zero improvement in the second half, and overall currency benefit for 2017 of 5% to net sales in 2017. As you know, we don't always get this right, but we're normally reasonably accurate if exchange rates stay where they are today.

So in terms of the headline IFRS statement, or the full headline profit and loss account, you've seen the summary and highlights before. Not a great deal more to add. Obviously, whilst the revenues have benefited from the currency, a number of our operating expenses have had the opposite effect. So in terms of finance costs, for example, moving from GBP152 million to GBP174 million, that could be fully accounted for by the change of FX rates on our borrowings and interest costs.

It actually was a combination of three things: the benefit of lower rates, the added volume as a result of higher debt, and the higher foreign exchange translation, resulting in a 15% increase in reported finance costs to GBP174 million compared to GBP152 million last year.

If I roll forward one more year, knowing what we do in terms of the cash flows, the expected cost of debt and the volumes and foreign exchange, I'm expecting interest in 2017 to be in the order of GBP180 million.

Obviously, I've talked about the tax rate in the slide before moving up to 21%. Again, with a change with UK legislation coming in 2017 where there's a restriction on interest costs in the UK on UK taxable profits, we're expecting the 2017 tax rate to be 22%. The UK effect alone is 0.8% on our Group tax rate.

And finally, on non-controlling interests, another difficult item to predict, again, a change really through the STW acquisition where we had associate income which has now been removed from the P&L, and instead we have fully-consolidated revenues and profits. And we now have to show the minority interest of the 39% third-party ownership in STW, so that shows up in the non-controlling interest element. So there's an increase in non-controlling interests as a result of STW, and a decline in the associate income as a result of STW and the change to it.

So in terms of our statutory P&L, the two items that are different or excluded from headline are the net exceptional gain for the year, which was GBP164 million, and I'll come on to that in a second, the slide following; and the goodwill and intangible charges, which again are affected by currency, but have moved up from GBP155 million to GBP196 million.

The net of the two means they tend to wash out, and so in the reported diluted earnings per share of 108p this year, it's up 22% compared to 88.4p last year compared to our headline earnings per share, which was up 21%. So, actually, the two items tend to wash out through in the statutory P&L.

In terms of the net exceptional charge for 2016, in the first [half] (technical difficulty) -- bring the shares closer to market value at the time at around $35 per share, which was also the share price around the year end. So there have been no further charges taken on comScore in 2016 apart from those that were taken in the first half.

In the second half of the year, we've incurred a benefit on a re-measurement gain on Imagina Group, where we have around a 23% to 24% holding, and that's based on a potential sale of the business and the market value indicated by various offers that have come in from third parties. So we've had to write up our expected value of that investment.

Again, the business is -- potentially is for sale. They've had bids in from third parties. And that adjustment would mean we have a re-measurement gain and had to record it in our P&L of GBP260 million benefit. We also disposed of a business, Grass Roots Group, second half of 2016, and had an exceptional gain of GBP27 million.

So overall for the year, there were exceptional gains of GBP190 million. We then had phase 2 of our IT restructuring program where we outsourced a further 250 people to IBM, and that was really on the back office systems and finance development and maintenance. And there were exceptional charges again taken in terms of to facilitate that.

And the phase 1 element, which is still ongoing, a little slower than we had originally hoped, but I think the upside is still to come on the infrastructure project. So that is an IT restructuring cost that came in really principally around phase 2 of the project as we move forward.

So net-net, an exceptional gain of GBP164 million recorded in 2016.

So in terms of currency, I think this is a build-up. I'll focus on the net sales line.

So on a like-for-like basis, our net sales growth was 3.1%, acquisition is adding 4.3%. Therefore, constant-currency rates of net sales growth was 7.4%, foreign exchange adding 10.4% to net sales and 13.3% to profits for WPP, resulting in reported sterling growth of 17.8%.

If we had been a dollar reporting company, our reported sales growth would have been 3.8%. If we had been a euro reporting company, our reported sales growth would have been 4%. And if we had been a Japanese yen reporting company, our reported sales growth would have been negative, minus 6.8%.

So turning now to revenues and net sales by sector for 2016. I'm going to focus on the net sales growth and the like for likes, but obviously, there's a GBP2 billion difference now between revenues of GBP14.389 billion and net sales of GBP12.398 billion.

So taking overall the net sales business, the advertising and media investment management business, which is approximately 44% of the Group and had net sales of GBP5.4 billion this year, had like-for-like growth in the year of 3.7%. Its first half growth was 4.6% and second half growth was 2.9%. The final quarter in this discipline grew at 2.4% compared to quite a strong quarter 4, 2015, where the final quarter was growing at 4.8%.

In data investment management, which is 16% of the business, has net sales of GBP1.994 billion, had overall growth for the year in net sales of 0.9% having grown at 1% in the first half, growing at 0.8% in the second half, with a strong final quarter growing 1.5% in the data investment management business.

In public relations and public affairs, which is 9% of the business, net sales of just over GBP1 billion at GBP1.079 billion, had like-for-like net sales growth of 2.4% for the full year, growing at 2.8% in the first half, growing at 2.1% in the second half; had a soft final quarter, having lapped a 6% growth in quarter 4, 2015.

In the branding, identity, healthcare and specialist communication businesses, overall 32% of the Group, net sales of GBP3.9 billion for the year, had like-for-like growth on net sales of 3.5% for the year; 4.4% in the first half, 2.7% in the second half. The final quarter net sales growth for this business was 2.8% following a very strong quarter 4, 2015, of 7.2%.

So overall for the Group, net sales of GBP12.398 billion; full year, 3.1% growth. First half growth 3.8%; second half growth 2.4%. The final quarter growth for 2016 for the Group was at 2.1%, which followed a strong final quarter 4 2015 growth of 4.9%.

And if we were to look at the digital revenues of the Group, which in total across all four disciplines are approximately 39% of revenues or $7.5 billion. Those revenue grew at -- or on a net sales basis grew at 6.5%, and the revenues grew at 5.9%. So strong growth in our digital businesses representing around 39% spread across all the four disciplines.

So turning now to the same by geography. So North America representing 37% of the Group at GBP4.6 billion of net sales had like-for-like growth overall in North America of 2.8%; first-half growth of 4%, second half growth of 1.7%. Quarter 4 growth was quite soft at 0.5%. However, it followed a very strong quarter 4 in the USA in North America last year where it grew 6.9%.

In terms of the United Kingdom, 13% of the business is here at GBP1.58 billion of net sales. Overall growth 2.1% for the year; 3.3% in the first half, 1% in the second half. Basically flat in final quarter of this year compared to 3.5% growth in quarter 4, 2015.

Western Continental Europe, 20% of the business at GBP2.4 billion of net sales. Overall growth for the year 3.6%, having grown at 4.2% in the first half and 2.9% in the second half. The quarter 4 growth was 2.7%, which followed 3% the year before. So again, good consistent growth coming out of Western Continental Europe this year, and also as was last year.

In Asia Pacific, Latin America, Africa and Middle East and Central and Eastern Europe, overall 30% of the business, GBP3.8 billion of net sales. Overall growth in the region 3.5% for the year; first half growth 3.4%, second half growth 3.6%. And the second half growth for the region in Asia Pacific was 4.7%, and the second half growth in Latin America was 6.5%. So both strong in the second half this year. And the final-quarter growth of this year was 4.8%, which followed a 4.7% final-quarter growth in 2015 for this region.

So now turning to how we look at our businesses really, and we are impacted by the quarter-on-quarter volatility in growth rates, or the half-year on half-year.

So you can see in 2015 the first half was relatively weak at 2.3%. Second half was stronger at 4.1%, which resulted in a full-year growth in 2015 of 3.3%. But when you add the weaker first half of last year with the stronger first half of this year you get to 6.1%. And when you do that for the last four quarters, four half-years, you can see we've been consistently trending around the 6% to 6.5% rates of growth on a two-year basis.

When you look at revenues, again, there has been a difference between revenues and net sales, as you can see, half-year by half-year. But in the final year, or this year, on a two-year run rate, we're running between 7.5% and 9%.

And as our competitors do not report both revenues and net sales apart from one, when we compare ourselves to the two-year half-year run rates on revenues, we're coming out at around 7.5% to 9%, consistent or similar to where Omnicom is at around 8% to 9%; consistent with where Havas is at around 7.5% to 9%. IPG is having a strong run currently at around 11% on a two-year basis, and Publicis at around 0% to 4% on a two-year cumulative basis.

So turning now to margins. Across the Group, we've had improvements in all regions and all disciplines in margin for the year, and I will talk about the reported growth in each of the disciplines, which obviously are impacted by the currency benefit. On average for the Group, remember, it was 13% benefit from currency to profits, which affects all regions and all disciplines obviously apart from the UK.

So overall adverting and media investment management profits just over GBP1 billion, up 19% on a reported basis, and a margin improvement from 18.5% to 19% this year.

In data investment management, profits were up 22% on a reported basis to GBP351 million and a margin improvement of 1.4%, again benefiting from the restructurings we have taken to take margin from 16.2% to 17.6%.

In public relations and public affairs, and I would cast your eye or point your eye to footnote 2, in one of our associates that we have previously, I suppose, just categorized as public relations, public affairs, they've given us a further breakout, and we've taken those profits and put it between the three disciplines. And, therefore, we've had to restate or reallocate the profits between the various disciplines of 2015.

But that taken into account, the overall performance has been very good. And public relations and public affairs have had profits up 24%, and a margin improvement of 1.2% to 16.7%. And in the branding, identity, healthcare and specialist communication businesses, profits were up 24% and margins were up 0.2%.

For the Group overall, again, foreign exchange has a benefit of 13%. And we've had profits up 22%, and a margin improvement again assisted by currency, up 0.5 margin points to 17.4%.

Looking at the same on a geographic basis in terms of profitability and margins, North America profits of GBP895 million were up 23% and a margin point up 0.6 margin points to 19.4%. United Kingdom, obviously not impacted by currency; profits up 7%, and a margin improvement of 0.3 margin points, up from 16.2% to 16.5%.

In Western Continental Europe, profits of GBP352 million were generated in 2016, up 27%; and the margin improvement of 0.8 coming through in a number of countries actually in Continental Europe, taking the margin to 14.5%.

And in Asia Pacific, Latin America, Africa and Middle East, and Central and Eastern Europe, again, a strong margin region for us overall at 17.2%, up 0.4 margin points, representing growth of 24% year on year in that region for 2016.

So looking at the net sales growth, both for the final quarter of this year and the full year 2016. Now just referring back to the final quarter of 2016 first, which overall was 2.1%, you can see here in the mature markets this year the final quarter growth was quite soft at 0.9%, but when I compare to the same information a year ago, we had the quarter 4 2015 like-for-like net sales growth of 4.9%, which I mentioned, at 5% in the mature markets, which was driven by strong growth last year in North America. And hence, lapping that in North America this quarter, we only grew at 0.5% whereas the year was growing at 2.8%.

And likewise in the UK, a softer final quarter, down 0.6% compared to quarter 4 last year of plus 3.5%.

But overall for the year, you'll see that, actually, our mature markets were growing at 2.9%, and our faster-growing markets were strong, both in the final quarter and in the full year, growing at 3.5%. So good performances coming out of Asia Pacific this year at 4.5% growth, in Australia and New Zealand that was in the quarter; on a full-year basis around 3.8% to 3.4% in Australia and New Zealand. We saw very strong growth in the quarter and the year in Latin America. And continued growth, as I mentioned, in Western Continental Europe, having grown 3% last year, growing at 3.6% this year. And even Central and Eastern Europe had a good recovery in the final quarter and on a full-year basis at over 3%.

So if I look at our top six markets representing around 70% of the Group, you can see the trend in the revenue growth on a full-year basis for net sales is what I'm focusing on. So the USA has been between 3% and 4% for the last three years. UK has softened a bit compared to the growth we saw in 2014 at around 5% to closer to 2%. Greater China, although slightly disappointing, remember it was down 3% at the half year, so we have been up plus 3% in half 2 to coming flat in Greater China in 2016.

Germany has been very strong for us, as you can see, growing from a rate of 3% or 4% two years ago to 7% today. And Australia and New Zealand has good momentum behind it; is growing at 3.4% on a full-year basis for 2016, having been flat the year before. And France is flat, but marginally positive, which is an improvement compared to where we have been.

Doing exactly the same on the four BRIC markets, you can see the standout performance really coming through India at 13.8% growth in net sales following two years of 10% or double-digit growth before.

Brazil, I think we have been relatively strong versus some of our competition, and we've certainly been strong in Latin America, but basically did have a tough year with minus 2.5%. And Russia has rebounded from minus 10% last year to plus 5% this year.

So again, just mapping the countries in terms of rates of growth, again, we've discussed many of them. Obviously, Argentina is in part driven by inflation. Turkey has had a good year. Those I haven't mentioned before, Indonesia and Mexico, have had strong years. And also in Europe, I've mentioned Germany, but Italy, Philippines, Denmark and Sweden, not all obviously European countries, also had good years.

In terms of categories, the big four categories, which we tend to keep an eye on in terms of they are the largest for the Group is automotive and food, so it's pleasing to see them in the top tier. Two other major categories for us, financial services and personal care and drugs, having a harder time in 2016. Obviously, this is impacted by wins and losses overall for the Group.

So turning now to wins and losses, this is the trade estimates, but it's directionally important and probably correct, although it is focused on media in the UK and USA, media created in the UK and USA as a general rule.

So what we have listed here is all the wins and losses year to date in size order. Those that are shaded in blue are those that have been won in the final quarter. Those that are red are those where we have switched between sister agencies within the Group.

So we now have very strong presence in the retail area having won the Walmart business in the USA, and having switched the target business within the Group in the USA.

Pleasingly, in the final quarter, we've had three European media wins coming through in quarter 4, and two agency wins of VML, pretty significant actually in the USA for VML. Both Electrolux and New Balance I'd call out as pretty significant for that agency. The wins continue but of a smaller nature, obviously different scale, but obviously a number coming through in the final quarter.

Then in terms of full disclosure, this is the full list of losses for the year. And again, this is one of the things that has hurt us and has affected our outlook for 2017 is the two major losses that were incurred midyear last year which are now just starting to take effect. So AT&T took effect around October 2016. Volkswagen is taking effect January 2017.

So again, there's a lot of noise and news around when these accounts wins and losses happen, but there is always a delayed reaction to the revenue side.

I won't go any more into -- obviously, you've seen a few more losses coming through in Europe in the final quarter.

So if I look at our own internal estimates of net new business performance, overall for the year it's $6.7 billion, which trended well with the growth at the half-year where we were $2.9 billion. So approximately $3 billion won in the first half; approximately $3 billion won in the second half. This was lower than last year, but overall, we won around $8.6 billion. The creative wins are of a similar nature, the media wins are less so in 2016.

So in terms of since the year has begun, we've had a very strong win coming through again. It will take about six months for us to get up to full steam in the Walgreens Boots Alliance, a global win by team WBA from Omnicom in the first two months of this year. We've had a switch of the BT business between Wunderman -- moving to Wunderman from OgilvyOne; and we've had two further wins on the media business, one in the UK and one in the USA. And then on the losses, we've decided not to pitch for one business, and we have lost a second in the USA, JWT.

So in terms of cash flow and operating profits, really what you see in operating profit is what you get in cash generation. So GBP2,063 million of operating profit. After non-cash compensation, depreciation, interest paid and taxes paid, we end up GBP2,042 million. So 100% conversion of cash from operating profit.

Compare that to how we spent the funds. Capital expenditure which is increasing mainly on the property side for the Group as we're taking a more aggressive stance in consolidation of certain buildings in major cities around the world.

Acquisition payments again was above our trend line. New initial payments this year were GBP605 million, down slightly from last year to GBP649 million. It was impacted by quite a sizeable deal in the latter part of last year called Triad. It's around $300 million. But overall, with the GBP600 million spent on acquisitions and the GBP1 billion distributed to shareowners through a combination of share buybacks and dividends, we've ended up with a net cash outflow of GBP156 million, lower than last year where there's a cash outflow of about GBP0.5 billion.

So when I translate that into the average net debt -- I think it's best to look at on a constant-currency basis because that, obviously, excludes the impact of currencies -- average net debt is up basically 10% at GBP4.3 billion, and the same on a point-to-point basis at GBP4.13 billion compared to last year.

If I look at it on a reportable basis, on a point-to-point basis, we're up 30% compared to a year ago, and again, I do have a chart to explain how that has occurred or how it's arisen.

Finance costs, as I mentioned, has gone up for various reasons, but in terms of interest cover it is stronger; and in terms of leverage, we are the same as we were in 2015 at 1.8 times.

So in terms of the build-up of the point-to-point December 31 net debt, GBP3.2 billion last year. The currency effect on our euro and dollar borrowings, which are significant as you'll see, has been minus GBP0.5 billion, or minus GBP466 million. That is added to the cost of net debt in reported terms.

When we acquired STW, there was no cash paid for the business. We took our ownership from 20% to 61%, but we did bring across the net debt that they had on their balance sheet of GBP144 million, so that obviously added to our balance sheet.

The net cash outflow for the year, as I mentioned, is GBP156 million. The trade working capital point to point was an improvement of GBP180 million. And other balance sheet items which are numerous -- and going through the details it's like severances and VAT and prepayments and accruals for various non-trade items -- was actually an outflow of GBP272 million.

So overall, net debt has moved GBP920 million from GBP3.2 billion to GBP4.1 billion point to point.

So in terms of where are we in our target range, again, we've shown two things. One, the target range, that we are consistent year on year at 1.8 times; and then what we've done is we've shaded the 2015 numbers to show the impact of what currency has been on both EBITDA, which is around 5GBP230-odd million, and net debt around the GBP0.5 billion in comparison to show where 2016 is.

So in terms of maturity profit on net debt, I think we're very pleased. We did finance early the GBP400 million bond that was due in April 2017. That has a coupon of 6%. And you'll see at the very top of the chart a 30-year sterling bond we've refinanced earlier this year at 2.875%. And again, I would just point out, down below, we do have the bank facility both of ourselves and the WPP AUNZ facility of AUD520 million on our balance sheet as well.

But overall, maturity profile very even; average maturity life, 10 years; and weighted average coupon around 3.5% for the Group.

So in terms of our targets for the year, acquisition spend will be a little heavy compared to our expected run rate of GBP300 million to GBP400 million, spending GBP605 million. Share buybacks were reduced to 2% this year deliberately to try and deal with the acquisition spend that was coming through. The dividend increase has been very strong at 27%, and the payout ratio has hit our target ratio of 50% payout, and with very significant headroom on our facilities available.

So I've mentioned really in detail the tax rate which unfortunately will be moving up next year because of the UK tax changes coming through and affecting us.

And in terms of overall EPS, again, just going back to quite a weak year in 2009, but showing the 14% CAGR and the various year-on-year reported EPS improvements coming through for the Group, ultimately at 113.2p this year.

And with that, I'll happily hand over to Adam.


Adam Smith, WPP plc - Futures Director, GroupM [3]


Thanks very much, Paul.

What I'm doing here is just reviewing our forecasts of the volume of ad dollars. 2016 remains the forecast until we come back to this in about April. And we will review the 2017 forecasts in June and then push the forecast forward into 2018.

So the situation when we published in December was that we thought 2016 ad dollar volumes had risen 4.3%, a little bit up from July 2016. The only spontaneous revision we've had to this since then is India who are a little concerned with the demonetization. That's pulled a couple of points off their growth rate, but they are still in double digits. It has no -- it will have no bearing on the 2016 figure.

The main thing about 2016 was it was a so-called maxi quadrennial, but the maxi-quadrennial effects were a little bit muted and certainly didn't surprise to the upside the summer Olympics, the European soccer, or indeed the US elections spend which was actually backwards for the first time.

The developed world ad [ex] appears to have grown. We think it grew 3.2%, which was probably a high point. And for 2017, we expect this to come back a little to its -- a little under 3%.

The outlook for 2017, as we saw at the end of last year, was 4.4% growth. The India effect does shave 1 point off this. If we were to incorporate it in the numbers, that would bring it back to 4.3%.

Nominal GDP appears to be picking up. Forecasters are dialing in slightly hotter inflation, more as a product as far as I can see of governments and central banks being a little less doctrinaire about targeting inflation rather than controlling it.

Anyway, enough inflation possibly to check consumer power, but not enough, I suspect, to materially improve pricing power of our advertisers, nor it seems encourage them to commit to big investment decisions.

Obviously, we have a lack of the maxi-quadrennial effect this year. Relatively, that makes slightly easier comp for the faster-growth world. We have acceleration of 7.3% in the faster-growth world, we think, a far cry from the old normal of 13.8% in the first 15 years of this century, except for some in the digital world.

Our view then, obviously, just after the election in the USA was that the USA was reporting no change then to 2017 budgets, and even talks then of some tactical advantage possibly. We'll know a bit more about that when we advise again in June.

From the rest of the world, the main comments came from Brazil and Turkey. They were both worried about Brazil second-order effects on their trading partners if trading is constrained, but emphasizing their own domestic problems were rather more immediate for advertising.

The same in Turkey, rather a dominant domestic agenda, but worried about the strong dollar.

Looking at the relationship of advertising to GDP, 2017 looks like it will be the eighth straight year now of real terms recovery and measured advertising. This is nominal curves, not real. But advertising share of GDP is still in a very slow decay. It was at [0.9] of global GDP in 2000. It's trending towards [0.7] in 2021, which is as far as our model goes. This is principally the effect of the movements to the faster-growth world where advertising intensity is inherently lower.

The bump in the yellow or orange curve is where our model takes over in 2018, and what that usually means is that the model thinks we're underestimating ad growth currently.

Now indexing advertising expenditure to pre Lehman, real ad expenditure is now indexing [106] to 2007. The new or faster-growth world is indexing [167] now, and its share of the total has risen from 18% to 29%. The developed or mature world is still indexing only [92], and only three economies have actually risen above the 100 index to date. That's Sweden, Australia, and the UK.

In the European context, the UK outlook has actually improved from our base case from just after the referendum. The rest of the European Union has improved slightly, but it's still only indexing at [80] relative to that 2007 index. Data points do seem to be improving from France and Germany.

But looking at the way these countries are indexing, Germany, which I would say has the greatest advantages within the Eurozone, is still only indexing [87] to where it was in 2007, followed by France at [82]. Netherlands is [77]. Southern Europe is where the damage was really sustained. Italy is still indexing [67], Spain [62].

So something about the Eurozone performance has obviously been particularly toxic for advertising. Its advertising intensity in 2007, that is the percentage of GDP, was 0.67%. Now it's 0.51%. The UK's comparative figures have by contrast risen from 0.86% to 0.91%.

The main reasons for this, I think, are that the UK ad market is very much more heavily digitized than the Eurozone one is. We have about over 50% now of measured advertising going to digital compared to about 30% in the Eurozone, and digital is capturing all of the growth.

At a macro level, I suspect that this reason is because the -- not only has the UK recovery been faster, but it's I think more importantly been more broader based; that we have this polarization of wealth in the Eurozone principally caused by persistent unemployment, whereas the UK polarity or GINI index is the lowest that it's been for 30 years.

The principal contributors to growth this year. We have this group contributing something around 75%/76% of total growth, a dependence which is gradually lessening now, but still substantial.

India, the effects on its recent revision; the 14% growth we'd hoped for in 2016 is now 12%, and the 12% that we'd hoped for 2017 is now cut to 10%. It is, however, still by far the fastest growing of the $10 billion plus ad markets, of which there are 10 in the world.

Brazil is hovering just outside this group. We have -- in our last forecast we had an upward revision to China, a fractional downward revision to the USA, which restores China to its position as a principal contributor to net growth. The UK is chipping in possibly $1.5 billion of growth in 2017. This is a forecast which has endured the consequences of the referendum result; again, as I say, all fueled by digital.

In the UK, legacy media are in aggregate shrinking, as indeed are most of the digital vendors now, apart from the ones that you might typically see on the home screen of your phone.

Argentina is continuing to stage a strong recovery, and other countries just lurking outside: Russia, the Philippines, Australia and Spain.

Looking at our reliance on growth from younger fast-growth economies compared to the old, in the first six years of the present ad recovery cycle, the new world was supplying 68% of our growth. This is rebalancing now prospectively to 54% in the new and 46% in the old, and that incorporates all the dollar appreciation of the last year.

The BRICs have one-half the world's population and are currently providing a rather -- somewhat below par 36% of net ad growth. But longer range, our model anyway has Brazil recovering in 2018 and restoring the BRIC contribution to a more normal 40%. The combined share of China and India continues to rise at about 1 point a year. That's rising from 17% of the world's advertising last year to 18% this year.

The other main division is the contribution of digital and the non-digital or traditional media. This, as you can see, is only growing more striking now from 72% of net growth in 2010 to 2015 to 94% for 2016/2017.

We have digital at 31% of measured ad expenditure in 2016, pulling in 15% growth which will take it to 33% in 2017, which will be the first time that it will be the same share in both the new and the old worlds, thanks, of course, to China, where digital is now on course to occupy more than one-half of total ad investment.

I am, however, these days caveating online generally -- it's $160 billion -- with the observation that it is principally an SME medium. My guess is that it's 70% SME, 30% big brand. Our CDO, Rob Norman, is a little more generous. He puts it at 30% to 40% big brand.

But there's an important consideration, because when you re-profile the world on that brand perspective of digital, the importance of TV rises to over one-half of big branding investment.

At this time of year, I'm gathering our annual survey of the digital world. That's not complete yet but there are some interesting numbers already apparent in the trends. We were predicting e-commerce up 15% in 2016. It looks like it's going to be higher than that, and possibly as high as 20%. And the prospect for 2017 is, again, probably, going to be between 15% and 20%.

It looks that subscriber video-on-demand and streaming audio had good years in 2016 in terms of adding users. And I've been asking about what's been happening to the 16 to 24 TV audience, specifically, and asking people to quantify, and that looks like over a two-year period, a loss of 10% of volume to TV, and a loss of reach of 5%, which is what I'll put in the manageable bracket, but it's a trend that we continue to watch.

I've been asking about ad fraud. Nobody is saying it's been eliminated but the strong consensus is that it's being satisfactorily managed. And ad blocking still growing, but appreciably more slowly, it would seem.

I've been asking what has been the single most useful innovation to brand advertisers in digital in the last year, and again, most votes are coming in for data-driven programmatic media buying. I am detecting possibly a slight pause in the adoption of automation because we have the most advanced countries getting towards -- not maxing out yet, but getting up there; the US is something like 80% automated now, what it can automate; the UK is probably 75%. And in the younger markets, they are having to basically catch up with the technology. So I think that might be the --

Another question I'm saying is who is getting any growth, apart from Google and Facebook in digital, and the UK's answer I would give as a good sample, Snapchat, Spotify, Pinterest, Twitter. Not Amazon yet.

And the last thing I'm trying to untangle is Google Preferred's pricing, which is positioned as a substitute for TV, and we're trying to establish what that means in pricing terms. And it's I think going to be quite an interesting result but we'll be publishing that in April.

So that in summary is where we saw the world in December. I'll have new numbers for you in June.



Martin Sorrell, WPP plc - Chief Executive [4]


Thank you, Adam.

So I'm going to do -- as usual, focus on our core strategic priorities and talk a little bit about our objectives. But first, let me just talk about what we see as being the -- what we call the macro and micro environment.

As Paul and Adam have indicated, GDP growth for 2017 similar to 2016; some forecasts a little bit stronger. Nominal growth about 3.5% to 4%; real about 3% to 3.5%.

Secondly, uncertainty about timing and implementation of the new administration's -- US administration's policies, but just to make the point, it's quite clear that the Trump administration is much more business friendly and pro-growth than the Obama administration. Just in 41/42 days, we've seen more contact with the business community in America with the manufacturing sector, the healthcare sector, retail, and other -- so the auto sector, than we've seen virtually in eight years of -- or saw in eight years of the Obama administration. So I would describe it as pro growth and business friendly, whatever you think about other aspects of that administration.

The key issue, of course, is implementation. Lots of good people in there: Wilbur Ross, Mnuchin, Gary Cohn. The question is whether they can implement a lot of the changes. Border tax doesn't sound as though it will get much traction, but beyond that, repatriation of earnings, lowering corporate tax rates, infrastructure spending, military spending, all auger well for short-term to medium-term US GDP growth.

And just to mention that US GDP growth is running around 2%. Pre-Lehman it was running around 3%, so it's sub-trend. And that's what the President, I think, is very focused on.

Growth projections for the UK a bit mixed, but the IMF have revised their figures upwards to about 1.5%. But what we see, we see a little bit of pressure in the UK, as we've indicated. And the next two years, 2017 or 2018, are going to be uncertain times for the UK and there will be ebbs and flows in the Brexit negotiations. I think we would prefer a soft exit quickly, and it looks like we'll get a hard exit slowly. So we'll see what happens.

Adding to that, to the list of potential woes are the key elections and referenda. France is developing into a quasi American election in terms of its ups and downs. Germany, we have an election where the gap between Angela Merkel and any coalition she forms and an alternative is narrowing. And, of course, we're waiting to hear what happens in the Netherlands. And there's instability in countries such as Spain, Italy and Greece.

Monetary policy lesser commented, and there's some upward pressure on global interest rates, although we would say that those rates are likely to stay at relatively lower levels than we've been historically used to. We've got migration issues; obviously, the terrorism issue still. Middle East countries such as Turkey, Ukraine, Russia disputes still to be resolved. And there's volatile foreign exchange movements, as we've seen.

Traditional media, as Adam has touched on, continues to be under pressure as new media grows. Measurement is a key issue. And there's convergence within content and telcos where it looks like the AT&T/Time Warner deal will go through. It also looks as though Fox and Sky will go through here, and we have the situation in Italy still to be resolved between Vivendi and Mediaset.

Having said all that, better growth prospects for China. I think we'll have to wait until the Party Congress in October/November this year to see what Politburo changes are made and where the emphasis of the existing regime's second five years is and whether it goes beyond 10 years. But obviously, oil-producing nations have also benefited from oil price increases and commodity price increases.

India impacted by demonetization, but we haven't seen it; and, as Adam indicated, probably not as significant as some might suggest.

At a micro level, if you asked us to describe the environment, and I can't stress this more strongly, in a low growth environment where GDP is growing at 3.5% to 4%, where there is relatively low inflation despite Brexit and the impact on the pound, despite what might happen in the US in the short to medium term as a result of Trumponomics, basically, clients have very limited pricing power, and in that, they focus on costs.

And then you have these three forces that are converging on them almost at the same time: disruption from technology and digital; zero-based budgeters, which is very much in the news in the light of recent events; and activist investors, also in light of recent events. And that's just intensifying the focus on the short term and is impacting mostly FMCG packaged goods sectors, but also impacts pharmaceuticals, Valiant and [Endo] less talked about now because the models probably have been discredited because of excess pricing, but still affecting -- and you can't over-estimate, I think, the impact that recent events have had in terms of corporate psyche.

Uncertainty, that uncertainty reduced investment, capital investment in favor of buybacks and dividends, although what we've seen in the last two or three quarters is some softening of that as markets have reached higher levels and lowering the attraction of buybacks.

Having said all that, greater importance of horizontality; making sure that we bring together our resources for the benefits of clients. So we have 200,000 people in one way or another in 113 countries. And making sure that the best people are available for clients is the critical issue, not where they come from in terms of the individual brands or verticals.

Shopper marketing, we ran a conference just this week in San Francisco. Tremendous importance of that. And I'd just make the observation that what tends to happen in companies is sales and marketing is split. It doesn't seem to us to be logical. A lot of money is still invested in discounting because of this pricing pressure. And the unification of sales and marketing into one whole and the reduction of pricing --

I see ITV blamed investment in pricing and discounting and slotting allowances and the like for the lack of investment in TV. I'm not sure I would wholly agree with that because, as Adam indicated, there is some pressure on linear TV versus over the top and alternatives.

But certainly, shopper marketing, in-store marketing, is becoming more important, along with e-commerce which enables clients to build direct relationships. Dollar Shave Club in the case of Unilever is a very good example of building a channel of engagement as well as distribution.

And then the opportunities to apply technology, whether it be things like AppNexus or Triad or [Satsys] and data, as we're doing through Kantar; and, of course, content through Vice and Media Rights Capital, Fullscreen, and other such things.

Fragmented media landscape, it raises the complexity of work and makes our job more complicated and, therefore, I think clients more dependent on agencies for advice.

But having said all that, efficiency and effectiveness is still key. There's tremendous client pressure on pricing and payment terms. We highlighted that in the report. And there is scrutiny by clients around the effectiveness of digital. Mark Pritchard and Keith Weed -- Keith Weed is CMO of Unilever, our second largest client; Mark Pritchard CMO of Proctor, our third largest client -- have both highlighted concerns about fraud, about fake news, about viewability, measurability. All these issues are issues that are extremely important.

Mark Pritchard only yesterday reiterated his comments and indicated that the measures being taken by Facebook, in particular, but Google also in terms of validation, what Keith Weed would call validation, are not sufficient. They're the base, and we could concur with that. In fact, we would express violent agreement with Mark Pritchard's views and the need to improve measurability.

Google and Facebook have a duopoly in digital media. Snap's IPO may be a seminal moment. We'll see. It's more of a threat, I think, to Facebook. Facebook have made, I think, 13 or 14 additions to their product suites and services to try and counter Snap, and we know that they made a couple of offers, or we are told they made a couple of offers for Snap prior to IPO.

I am told that the Yahoo AOL deal will go through in April, and that may create another third force.

Snap competes with Facebook. I think Adam mentioned that they haven't seen much from Amazon yet, but I think the threat to Google is clearly on search from Amazon. We'll see that.

And I would just mention the rise of Amazon, because in answer to the question, my favorite question is what worries you when you go to bed at night and when you wake up in the morning. It's not a three-month-old child (laughter), it's Amazon, which is a child still, but not three months. And Amazon's penetration of most areas is frightening, if not terrifying to some, and I think there is a battle brewing between Google and Amazon.

Now last but not least, and I say this with some trepidation but I will say it, there is fierce agency competition within our own industry which is giving rise to, in my view, excessive discounting and shifts in the terms of trade. Let me just give you one concrete example.

I won't say which or name the agency, but a piece of business that we did win -- it didn't make any difference in the end but it's just emblematic, competitive agency offering what I would call an upfront discount of considerable proportions to retain a piece of business. A good example of what's been happening and very significant price cutting at creative and media in combination in a couple of media pitches and creative pitches recently.

And the pressure on payment terms. Paul took you through -- our trade working capital improved this year, but you've seen if you look at the competitive situation, you've seen agencies with significant working capital outflows, and there is a trade-off here between margin and doing things like that.

So the alternative, the strategic choice is between stronger margins and resisting those changes in terms of trade, or lower margins and agreeing to it. And we're seeing that not just in the area of payments, but also in the area of other contractual guarantees that are given.

So I've just mentioned that in the general context.

The market environment in terms of GDP, you can see the GDP forecast here. You can see what people are forecasting. Interestingly, Goldman's forecasts are stronger than WPP's for the reason that our pattern of GDP -- WPP's GDP is different. Although we're very strong in Asia and Latin America and Africa and the Middle East and Central and Eastern Europe, we don't have the worldwide weighting that you would see, but if you look at the forecasts for next year, they're around the 3.5% to 4% GDP growth range.

Now this attracted yesterday at the Enders Analysis Conference -- I mentioned this. It was misinterpreted by one analyst. This was not our revenues with our leading clients; it's our clients' performance and results. And if you look at the fourth quarter of many of our leading clients, like-for-like revenue growth was around 2%.

Pricing led. That growth was pricing led. Volumes were weak, in some cases negative, and they've got some pricing. Most of the pricing actually came in places like Latin America. And US growth was ahead of international, and there was an increasing focus on cost-savings programs. There's a lot of reaction to ZBB taking place.

Our strategic priorities: horizontality, faster-growth markets, new media and data. Faster-growth markets are one-third of our business, 30% of our business; obviously, been held back by devalued currencies in these markets, but now starting to change.

One thing I would differ a little bit with Adam is that I think our sense is that the fast-growth markets, what others call emerging markets, there's a little bit of resurgence there. And maybe Brazil stabilizing, Russia stabilizing. China, as I say, we have to wait until the end of this year to see whether the current regime will spend the next five years; after the first five years focusing on corruption and quality growth whether there'll be a little bit more focus on a broader definition of growth.

New media, the statistics are clear from Adam's analysis, becoming more and more important; more and more important in terms of incremental growth. It will soon be one-half of our business and beyond. And making the distinction between the two is quite difficult as well between analog and digital. It's becoming increasingly blurred, and data is where we want to be at the half.

So in terms of horizontality, we now have 48 client levers. You'll find in the leave-behinds all the details of who those clients are. We focus on people, clients and acquisitions, to ensure that we work together effectively, delivering specialist skills, focusing on client needs. And recent team additions are Campari, [consolidation account] Campari, Google and Walgreens Boots Alliance.

In terms of new markets, as I've said, we're up to 30% with a target of 42.5% and that will continue to be the case.

New media, digital almost 40% now. The target is between 40% and 45%, and I'm sure we will be revising that upwards.

A bit more detail. Now this is the notorious Mary Meeker statistics which three things just to drive home the continued pressure on traditional newspapers and magazines, which is the left-hand block. The central block, which is this pressure on linear TV. And then the right-hand block which is under-exploited mobile, which alone in America would create a $22 billion opportunity; that's if you believe that time spent is the appropriate metric. Others believe engagement is important.

But also reflecting this is the growth of digital. This compares the position digital as a percentage of total ad spend in various parts of the world and globally for 2001-2015, and the estimate for 2020.

So just looking at globally, 2001 3% digital; 28% currently. 2015 are the latest stats. And the forecast for 2020 is 40%. So remember that we are currently 40%, so I would say the market's around now 30%, something like that. So we're over-indexed but not, in my view, over-indexed enough.

And a good example of this is Xaxis, which now has crossed $1 billion in annual sales, showing growth of 15% year on year, with a global scale and covering programmatic. And we've buttressed Xaxis with the acquisition of Triad e-commerce principally for Walmart in the US and abroad, but you can see other clients there that it is developing its activities.

And the final one is -- the final strategic priority is data and quantitative disciplines, which are 50% of our business.

The digital and faster-growth markets really cover, you could argue, 69%. There's a 10% overlap there. So really, 50%/60% of our business, to be precise 59% of our business, is focused in the digital and fast-growth markets. So that's the strategic background.

In terms of objectives and progress, improving operating margins. You've seen that from Paul's analysis. We're now up to 17.4%. Operating margin we've indicated for this year a further 30 basis points, 0.3% improvement on a constant-currency basis from where we were, and Paul took you through that. And the long-term margin target remains just under 20%.

I would just point out that pre-incentives, our margins are running at 19.9%. So whilst I think there was some skepticism about our ability to improve margins, I think we are making and continue to make considerable progress.

And the operational efficiency programs will be important in future margin growth. We made progress on shared service centers, on off-shoring and consolidation of our IT infrastructure. And these programs are projected to deliver 1 margin point, 100 basis points, from existing finance and IT cost base, which is 10% currently of revenue. So it's a 10% saving on what we're doing. Operational effectiveness and efficiency is expected to deliver this year and beyond.

Free cash flow, this just takes -- describes our dividend payout ratio. We've hit our target of 50%. The Board will be considering whether we should take it further than that. I think management's view is that there are sufficient opportunities for attractive investment internally for the dividend payout ratio of 50% probably to be the right payout ratio.

The FTSE 100 payout ratio, I think, is running currently at about 70%. And in our view, that's probably on the high side. But you see here the growth in EPS, the growth in dividends, and the payout ratio.

The return to shareholders slightly down this year as we trim back share buybacks; but dividends, obviously, up extremely strongly, well over 25% to get to the dividend payout ratio of 50%. And over the last 10 years, we have returned almost GBP6 billion to shareholders in the form of dividends and buybacks.

On acquisitions, we continue to be very active in small and medium-sized acquisitions. There remains a very significant pipeline of small and medium-sized acquisitions. They're very focused on digital, on fast-growth markets and on data.

And we've accelerated our target really to -- in terms of focus on the European markets. One of the impacts of Brexit has been for us to focus even more on Germany, France, Italy and Spain. I remind you. Germany is the number 4 market for us. Spain is number 10. Italy is number 9 and France is number 6. These are four big markets for us and we are concerned about influence in those markets and influence in the EU, and upping our presence is important, as well the BRICs and Next 11. And as Britain exits from the EU, those markets are obviously going to become more important to the UK.

We did a larger number of acquisitions last year, about 56 in total in small and medium-sized companies fitting those areas. Multiples valuations continue to be, I think, reasonable, with the exception of some data and digital assets, particularly in the US. Some -- the emerging markets market pressure, the fast-growth market pressure has lessened. So places like Brazil and India it isn't quite as competitive as it was, but you've seen from Paul's analysis that acquisitions added about 4% to our growth in 2016, the principal one of which was the merger with STW and now called WPP Australia and New Zealand, added almost one-quarter of the growth.

Just summarized on slide 74 the pattern, the Venn diagram of faster-growth market focus, quantitative and digital, and where they intersect, and you'll see there. In terms of return on equity, a slight fall in return on equity from 16.3% to 16.2%, but the cost of capital has come down from about 6.7% to 6.4%, so continued improvements really in the net position.

Creatively, the businesses continue to do extremely well at Cannes and with the EFFIEs. Four of the top 10 agencies, actually four of the top seven were WPP agencies. Ogilvy was Network of the Year. We had two of the top agencies, single agencies, Grey and [Ingo]. And, of course, WPP won the most effective agency with the EFFIEs with WARC; and, of course, with Cannes itself.

Now just finally, outlook and conclusions. Strong reported revenue and net sales growth, almost 18%, with like-for-like sales growth of 3.1%, the gap being filled by acquisitions, around 4%, and currency around 10%. Reported margin improvement of 50 basis points and 30 basis points like for like; and headline diluted EPS growth of almost 21%.

Record revenues, net sales, headline EBITDA and PBIT margin. Return on equity, as I mentioned, 16.2% versus average cost of capital of 6.4%. Dividend up to almost 57p up [to] 26.7%; and a 50% payout ratio achieved one year ahead of target.

Our net debt to EBITDA ratio in the middle of our range of 1.5 times to 2 times; at 1.79 times, to be precise. Increasing tailwind from foreign exchange: 1% in Q1, 4% in Q2, 16% in Q3, and 19% Q4, to give 10% for the year. And next year I think we're forecasting about 5% impact if rates stay roughly where they are now.

Net new business wins continuing, but not as rapidly as the previous year as [15%]. And a relatively slow start to 2017 with January like-for-like revenues up 1.5% and net sales up 1.2%, but against a stronger comparative January last year.

Looking to 2017, organic revenue and net sales growth of 0% to 5%. That's our model in line with market growth. Margin improvement of 30 basis points, with the long-term margin target of 19.7%. Using cash flow to pretty much equally really or balance between acquisition and share buybacks and payout ratio, acquisitions of GBP300 million to GBP400 million, share buybacks at 2% to 3% of the share capital, and a payout ratio at 50%.

The incremental buybacks, just to remind you, of 1% to 2% are equivalent to an extra 20 basis points on the margin. You put that all together, the financial model indicates 10% to 15% EPS growth.

As far as the budgets for 2017 are concerned, like-for-like revenue and net sales growth have been set cautiously, as we usually do, at around 2%, with a stronger second half. Margin improvement 30 basis points, excluding currency, off a constant-currency base margin of 17.3%. And acquisitions will add 2% to 3% to revenue and net sales. And at current exchange rates, currency will add -- the weakness of the pound will add 5% benefit to revenue and net sales.

Staff costs we remain focused on, and the headcount to remain controlled, and to deliver on the margin target. And the operational effectiveness and efficiency programs, the [IBMIT] program, is supportive in fulfilling that margin goal.

Okay. So that's the presentation. We'll take questions and we'll start at the front, so just we'll start here.


Questions and Answers


Ian Whittaker, Liberum - Analyst [1]


Ian Whittaker, Liberum. Three questions.

First of all, just in terms of the 2% organic net sales for 2017, would it be fair to say that the majority of the difference between that and expectations of 3% from the street was down to those two big account losses with AT&T and Volkswagen?


Martin Sorrell, WPP plc - Chief Executive [2]


Yes. I think that's fair. If you take AT&T and VW, it's about 1%, just under 1%. So the difference between 3% and 2% is that -- could be attributed to that.


Ian Whittaker, Liberum - Analyst [3]


Thanks. And just two other questions, more big picture.

First of all, just looking at your media businesses, and you may have answered this already with your comment on indexation, but on the whole, is it better for you to actually get GBP1 of spending from traditional media or GBP1 from digital? Because as you pointed out, digitally is more complex and, therefore, there's more demand for agencies; but as you've said in the past, you've also talked about the Facebook and Google, potentially Amazon, are more, as it were, potentially frenemies, friendlies, whichever phrase you want to use.


Martin Sorrell, WPP plc - Chief Executive [4]


They're friendlier frenemies than they were, and the degree of friendliness differs with the platform. I mean, to be very blunt about it, I think Google is a friendlier frenemy. I'd put -- and I'm tempting providence here -- I'd put Facebook in the middle and I'd put Amazon there. But it's early days on Amazon. You never know what's going to happen.

We are putting together -- well, we have put together an agency in Seattle specifically to deal with Amazon and cater to Amazon, but I think -- the answer to your question is, we've had this --

This is the chestnut, isn't it? Over the years, people have said, well, we're going to get killed when we move into digital, and the answer was we haven't. And you can see the margins. We give you the breakdown, not just geographically but by function.

I would be -- I would say there's probably more -- to be frank about it, I think there's more opportunity on the digital side actually, because the complexity is such. There's a negative complexity, which is the sort of stuff that you see in Mark Prichard's speech, which doesn't help in the sense of if people are worried about fake news, or they're worried about the editorial context of advertising, or brand safety, or if they're worried about measurement, that probably makes them more hesitant.

But the remarkable thing is that despite all the problems that Facebook had with measurement, and they had three -- I think there were three cases of where they altered or changed their measurement metrics, it hasn't seemed to effect -- have effected as yet the pattern of spending. You do hear CMOs say that they're very concerned about measurement and that -- imply that they're going to change their spending patterns. I think, to be frank, and maybe Adam's got a view on this, I've not seen that. I've been somewhat surprised that what has been said is watch what they do rather than what they say, and it hasn't seemed to have impacted the flow.

I mean, Google's spending with us was affected by currency, so it didn't hit GBP5 billion, but the reason for that was because of currency translation. Facebook did hit the number we thought, and it just hasn't translated into as yet impact I think on the spending. But I think to answer your question head on, I think probably there's more opportunity for us on the digital side.

Do you want to talk about what you see on Google and Facebook?


Adam Smith, WPP plc - Futures Director, GroupM [5]


I think the most notable revenue trend I've seen is that -- not the Facebook one, but brand spending on Search, which would appear to be stabilizing, and that's possibly as a result of better alternatives for brands in video and social. But there is more scrutiny being applied to the value of these impressions, and --


Paul Richardson, WPP plc - Finance Director [6]


Yes, and there will be a fight (multiple speakers).


Adam Smith, WPP plc - Futures Director, GroupM [7]


There's a developing battle between Amazon and Google on Search. So you'll have Facebook v Snap, Snapchat; and you'll have Google versus Amazon in different -- one in social and one in Search.


Ian Whittaker, Liberum - Analyst [8]


Just on -- third question. Actually, your comments lead into that. You said that you do violently agree with Procter & Gamble in terms of their comments.


Martin Sorrell, WPP plc - Chief Executive [9]


Yes, and Unilever.


Ian Whittaker, Liberum - Analyst [10]


And Unilever as well, just on that. But I guess of one commentary could be that the agencies maybe should have been, as it were, doing this job of pushing back against Facebook and Google in terms of demanding more on the -- more transparency. Do you think there's a risk for the agency groups themselves from this, as it were, growing spat?


Martin Sorrell, WPP plc - Chief Executive [11]


We've touched on this before. You talk about transparency. Where's the transparency on the algorithms, and where's the transparency -- well, and we talk about margins. Those two things, Google and Facebook, in terms of transparency of rankings, for example. And I can remember I was in Australia a few months ago and I think it was Facebook changed their rankings and people were mystified; asked the basis on which the rankings were changed and didn't get an answer.

So I find -- I think the focus tends to be on what people regard as being the weakest link. When you're trying to move something, you probably go for the weakest link rather than the strongest link. And it's very difficult to argue with Google and Facebook when they control 75% of digital spending as a whole. And I saw one statistic. They've got 100 -- and I don't know how that works, but 103% of digital -- [it was one] increment last year.


Adam Smith, WPP plc - Futures Director, GroupM [12]


Some of them are shrinking. Yes, anecdotally, it's when I talk to UK buyers, they love Facebook for its geo-targeting, but in terms of segmenting interest groups, not quite as brilliant as you might think. And what -- we launched mPlatform late last year, and I think the best way to visualize that is a means to toggle, that's the word they use, between lift and reach. And you cannot get the information from the walled gardens to do that. So one of the functions of the mPlatform is to work without it. They will accumulate and are accumulating their own data to look over the walled gardens.


Martin Sorrell, WPP plc - Chief Executive [13]


And I think that's --


Adam Smith, WPP plc - Futures Director, GroupM [14]


At a consumer level.


Martin Sorrell, WPP plc - Chief Executive [15]


And I think that's the biggest issue for Snapchat. People say, is it worth $24 --? I think Brian Wieser write a note this morning, I saw it last night, which said the share price should not be $24, it should be $10. But whatever it should be -- it did $400 million of revenue, $404 million last year, I think their internal target is something like $1.2 billion or $1.25 billion this year; we spent through WPP GroupM $90 million on them last year -- whatever it's going to be this year, in my view, would be dependent on their ability to show ROI, effective ROI.

The date of the piece is really important, and I think you will hear a growing chorus from CMOs asking not just about the dependability of the data, but on the access to the data. Mark Pritchard yesterday was -- the whole point was around that; that the measures that Facebook had suggested around the MRC, what is called the Reporting Council, was a base that was required but wasn't sufficient. It was welcome but it was a work in progress; it wasn't sufficient. So I think that's where the pressure's going to come.


Tom Singlehurst, Citigroup - Analyst [16]


Tom, Citigroup. I had a couple of questions.

Earlier on in the slide pack, slide 19, I think, you showed the difference between WPP and some of the other agency groups in terms of two-year rolling growth, the standout being IPG. I was just wondering what you would attribute the difference to. I know IPG has less exposure to what I suppose we would loosely describe as FMCG. Is it the pressures on FMCG, the consolidation that's driving (multiple speakers)?


Martin Sorrell, WPP plc - Chief Executive [17]


Well, I don't know. I think the margins are [12%]. So a little bit -- the answer to your question, they're one-third of the size. So a little bit of the question is -- or the answer, was what I said to you before. On this pressure -- they had a massive, for them, capital outflow in trading working capital. So clearly, some -- either that's poor management of receivables and payables, or it's giving credit.

We know that there are clients who do ask for 180 days/120 days/90 days. The norm historically has been 45 days. Okay? So we know that an [AEGIS] client went belly-up in Spain having been given two years' credit.

Now we don't know whether it is known within IPG or Dentsu what is done in Spain or elsewhere; if there's a central control which says our policy on credit is 90 days, or 60 days, or 45 days, or whatever. And frankly, we have enough moving parts in our Company that we can't be 100% sure that we're managing it as effectively as we should do. But we try very hard to do it. We think it's very important. We're not bank. We're not an insurance company. And we don't think it's right for clients to choose agencies on their ability as banks or as insurance companies. And I think you've seen that.

So part of the reason, I think, you're starting from a lower base; you're starting from a lower base of revenues and you're starting from a lower base of margins. And I think that they made a decision that they're willing to give on those sorts of things. That's something that we do not take the same view on.


Tom Singlehurst, Citigroup - Analyst [18]


And that makes -- do you think it will ameliorate, or is it something -- a question of you just [holding the line] and (multiple speakers)?


Martin Sorrell, WPP plc - Chief Executive [19]


Well, I don't know. I think it will result -- some things going on in the market place, Tom, are in terms of -- let's call them -- I mean media guarantees, for example. If an agency gives a media guarantee -- we touched on this before -- that is a balance sheet liability. Is that shown anywhere?

So if you guarantee price -- one of the things we do say in the statement is that if an agency guarantees pricing, it's very difficult for a [curement] department to monitor that pricing because there are so many variables that shift. If in the middle of 2016 you give a guarantee on pricing going through 2017 and 2018, there are so many variables that shift, it's very difficult to monitor it. There are so many transactions as well that you have to monitor. So a promise made in the middle of 2016 may not be a promised fulfilled, but nobody can figure out whether it was fulfilled or not. So it is quite difficult, but technically, it's a guarantee.


Tom Singlehurst, Citigroup - Analyst [20]


Okay. One more question on a slightly more positive note.

You've said in the past you don't want to be a plonker, which I think was -- you were referring to making outsize investments in IT services companies. We've seen some of the IT services companies starting to move the other way. You've obviously got pressure (multiple speakers).


Martin Sorrell, WPP plc - Chief Executive [21]


I don't think they're plonking though. They've been buying -- to be fair to them, when Accenture, which is, what, a $70 billion company buys Karmarama for GBP50 million, or whatever it is, or [SYNA Schroder] for EUR100 million, that's not what I would call plonking, that's what I would call small to medium size.


Tom Singlehurst, Citigroup - Analyst [22]


Okay. And in terms of emphasis for your M&A, should we see -- should we expect it going in the other direction into that?


Martin Sorrell, WPP plc - Chief Executive [23]


What other direction?


Tom Singlehurst, Citigroup - Analyst [24]


Into the IT services type --?


Martin Sorrell, WPP plc - Chief Executive [25]


Well, a journalist asked me this morning and said, is -- he actually said KPMG. It's the first time I've heard KPMG quoted, which I asked him where he'd got the KPMG from. He said Forbes magazine had mentioned KPMG. The closest that we get to Accenture, Deloitte's, IBM, activity in that area, those are -- McKinsey, the closest is probably Globant. And coming back to your plonker question, we thought it was better to invest in Globant pre-IPO than to plonk and so we took a 20% stake.

I think we have -- and that's the closest that we get to, I would say, significant competition with the consulting companies that you're referring to. There was a case last week, actually, where VML won a major contract. It was $3 million of revenue. I won't say which client. And the competition was Accenture, and the competition was, I think Deloitte's, and other agencies, like RGA. I mention it because they won the business. I wouldn't have mentioned it otherwise.

But that's one I can remember -- one of the only ones I can remember recently where we've gone head to head. But, Globant, I think, does; and Globant's pattern is very similar to Sapient; smaller than Sapient's. I think it's running now at about $300 million of revenue whereas Sapient's, when they were taken over by Publicis, I think their marketing services side, ignoring the government and bank side of governments, and government and financial services side was about $1 billion. So it's was about 3 times bigger. But that's the nearest we come.

So I think it's something we should talk about. In practical reality as yet I don't think it's that significant. But I think Pierre Nanterme at Accenture has said he wants to build the biggest Internet advisory firm -- I'm not quite sure of the precise words -- in the world. So you have to take that seriously. This is not -- this is a substantial consulting company saying that.

And Deloitte's, who are our auditors -- talk about frenemies for a minute -- who are our auditors, who we pay a substantial -- we pay $30 million a year for an audit, are competing with us. McKinsey do too, but we work with McKinsey on clients. Sometimes they bundle up what we do and then resell it. Sometimes, we work direct with clients with them in -- jointly.

So I think it is there. I don't think it's as substantial as the commentary indicates, but it is there.


Annick Maas, Liberum - Analyst [26]


Annick Maas, Liberum. My question is just on the dynamic of TV versus digital. During this earnings' season, I think quite a few broadcasters have suggested that they've seen the advertisers coming back from digital to TV. Now this doesn't really seem to correspond to what you are saying. So how have you seen this dynamic evolve over the year, and where do you think it's going to go in the next couple of years?


Martin Sorrell, WPP plc - Chief Executive [27]


Adam, do you want to --?


Adam Smith, WPP plc - Futures Director, GroupM [28]


Our published forecasts on UK TV, for instance, are essentially for a flat year this year. And we will revisit routinely in May when we publish a new forecast.

At the global level, TV share is resilient. It peaked at 44% in the earlier post-Lehman years. It's now down to about 42%/41%.

But I mentioned earlier I've been inquiring about 16-24 viewings specifically. The reason why is because television essentially sells reach, and that demographic is very rich in reach. And my supplementary question to volume and reach is what's happening to the pricing on that demographic. And the universal response -- I'm talking about 50 countries -- is that the prices are firming generally in line with the loss of volume. So if you have a loss of volume of 10%, the average pricing is rising 10%. That tells you that demand is healthy for that demographic. So I think fundamentally, the medium is in very good shape, and it doesn't face anything like the structural threats that the print industry did.


Martin Sorrell, WPP plc - Chief Executive [29]


But at the margin, there is some activity?


Adam Smith, WPP plc - Futures Director, GroupM [30]


Yes. So I don't know if it's an artifact of budgeting as opposed to a strategic review, but I also touched on the question of whether online video was a substitute for television, and I think the market is becoming quite sophisticated in how it prices that.

My impression is that the TV buyer will happily buy into online in equivalent price if they believe there's a benefit in reach, but they're looking at things called completion rates. People can stop watching videos online if they want, even if it's a so-called forced view; that is you can't stop it from running they just click away from the stream. And that's particularly prevalent in mobile. So if you're offering somebody the same audience, but there's a 70% chance they'll watch the whole ad, it's not so brilliantly attractive.

So what's interesting, I don't know this for certain, is the growth in online video being fueled by other than core TV demand?


Martin Sorrell, WPP plc - Chief Executive [31]


You should just touch on there's a tremendous shift, generational shift, in terms of how people consume TV and video.


Paul Richardson, WPP plc - Finance Director [32]


Yes. It would take even a 1-year demographic 16-24; the behavior across that range is quite different, and so it's something that we have to see how habitual will these habits become. My own view is that the main screen in the main room, that's got about as big and as flat and as beautiful as it can get, and so something else will now take its place, and that will probably be to do with navigation and the utilization of that screen.

So I think the device over there on the wall becomes -- I think the hours will remain the same but the distribution of the hours will increase. It will become a more versatile medium, hence the importance for TV to sort its measurement out because we buy TV for reach. The most powerful incremental reach is on digital media, and that is, obviously, a focus for the TV industry to get its measurement sorted out.


Martin Sorrell, WPP plc - Chief Executive [33]


The only thing I'd add is that -- or two things. One is the global media groups, and there are very few -- Murdoch is clearly the most global -- do not leverage their individual -- it's a bit like us on horizontality. There's very little horizontality, let's put it that way, within the big media groups. When you get pressure from Social or Search, or whatever it is, I would have thought the best way to deal with that is to integrate your offer, offer cross-platform approaches that are unique, offer data across those platforms. Right? So that's one thing.

The second thing is here -- the newspaper industry here in the UK is in dire shape, traditional. Why is it that they haven't come together on the sales side? And I know a lot of these things have being mooted, but it's because it's a bit like the agencies, it's very difficult for the agencies to come together for Ban Ki-moon's development goals that can, let alone anything else, when they're so competitive, when something is in their interests to do so. You see the same thing on newspapers.

So I would say those two things. Firstly, leveraging across platform in the big media companies, which is going to become more important. And the other thing is that the younger companies, because I think probably they are the disruptors, are much -- they plan better. Their planning process, their targeting, is much more aggressive than I think the incumbents. I think that's starting to change a bit, but Google and Facebook are very much sales orientated and thoughtful about their planning processes.


Julien Roch, Barclays - Analyst [34]


Julien Roch, Barclays. The first question is on M&A. Your official target is GBP300 million to GBP400 million, but the last two years you've done GBP600 million because you've found out bigger deals. So what is the target? Is it really GBP300 million, GBP400 million, or is it GBP600 million?


Martin Sorrell, WPP plc - Chief Executive [35]


It really is GBP300 million to GBP400 million, but we've had -- (multiple speakers).


Julien Roch, Barclays - Analyst [36]


In other words --


Martin Sorrell, WPP plc - Chief Executive [37]


But what was it? Consistency is the hobgoblin of small minds. Is that what it is? Okay? So these are opportunities that we thought were worthwhile.


Julien Roch, Barclays - Analyst [38]


And so do you think this thing --?


Martin Sorrell, WPP plc - Chief Executive [39]


It's not like buses. Well, it's a bit like London buses. You know; you wait for a long time and then three come along.


Julien Roch, Barclays - Analyst [40]


So do you see another bus this year (laughter)?


Martin Sorrell, WPP plc - Chief Executive [41]


At this point in time, no, but you never know.


Julien Roch, Barclays - Analyst [42]


The second question is OMC has some problem in field marketing. Amazon and Zalando, for instance, are these intimidating agencies and going direct on their home page. So as it is a food industry there and there's a risk of this intimidation there, what percentage of your revenue is linked to point of sales?


Martin Sorrell, WPP plc - Chief Executive [43]


The honest answer is I don't know, but it's small. We tend to have associate assets in that area, so the biggest associate asset, which will go against the drift of what you just said, is Smollan. We own one-third of Smollan. Smollan have done a deal with CVC and Advantage International, I think it's called, in the United States. So they have a joint Company with them in Europe and we're doing the fast-growth markets.

Barrows is a design -- again, South African-based in-store design company. Again, we have about one-third of it, again as an associate.

In China, we have very strong distribution assets, [Dawson] and [Always]. And in India two. But I would say -- as a proportion of total revenues, you're talking in the low single digit, if that.

I don't share that view on what you called, or what they call field marketing, because I think, in-store stuff is becoming more important. As the legacy retailers have to struggle with the e-retailers, whether it be Amazon, Alibaba, Flipkart, or whoever it happens to be, I think that battle for presence in store, physical in store, as well as online store -- that's why we bought Triad to be on the online e-commerce part of it -- but I think it in a funny way becomes more important.

So I don't know what the specific problems are they're referring to, and don't know whether they're US or non-US, but I think probably the attraction outside the US is greater than in the US. But we've had some very good success with major clients like Unilever and General Mills on shopper marketing in the States.


Julien Roch, Barclays - Analyst [44]


And the last question is, the outlook was clearly you're down. I thought you were a bit more down than usual. So if you could lift us up and tell us why your budget is conservative.


Martin Sorrell, WPP plc - Chief Executive [45]


I'm not in the business of trying to lift you up or put you down. Okay? We're in the business of trying to tell you as we see it. It's a really good question because we can -- we're meant to be in the spin business, so we can spin it if you want, but I don't think there's any great value in that.


Martin Sorrell, WPP plc - Chief Executive [46]


But then maybe qualify the conservative comment versus the budget.


Martin Sorrell, WPP plc - Chief Executive [47]


I'm not qualifying. I'm just calling you as it is. The first question was did AT&T and Volkswagen make a difference; if so, what; the answer is, yes, and the difference was 1%.

And again, it comes back to a previous question as well. I think it was Tom's question. We've had this -- this has peppered our discussions over the years. If you go -- if you look at those slides that Tom referred to which take one year and consecutive year revenue and net sales, and if we actually had another column which had margin, that's the trade-off. Do you want top-line growth and lower margin, or do you want a balance between the two?

We've talked about this in relation to our incentive arrangements as well. You know that our incentive pools, which paid out at 14.9% of [OPBBT] last year, was in about $500 million in the incentive pools, those are based on two metrics principally: operating profit growth and margin growth, usually weighted 50/50.

So we tend not to take unprofitable business even if we're offered heavy volume gains. And this brings us back to this discussion about what's the real metric that you should focus on as analysts. Should it be revenue or net sales? And you know what our answer is on that. It's all interlinked.


Patrick Wellington, Morgan Stanley - Analyst [48]


Patrick Wellington, Morgan Stanley.

I don't have an axe to grind on this one, but I think at the Citigroup conference in December, when you'd already lost VW and AT&T, you said you were going to see similar growth in 2017 and 2016; i.e., about 3.1%. So something has happened between December and now for you, two months later, for you to --


Martin Sorrell, WPP plc - Chief Executive [49]


What has happened is we've firmed up our budgets. That's what's happened. That's simply it. What we see in the budgets is we're comfortable with where we are; not comfortable with 3%.


Patrick Wellington, Morgan Stanley - Analyst [50]


And secondly, how weak is your weakest competitor, and who are they? Because you are only as strong (multiple speakers).


Martin Sorrell, WPP plc - Chief Executive [51]


You know -- your figures speak for themselves, Patrick. Don't be naughty (laughter).


Patrick Wellington, Morgan Stanley - Analyst [52]


And how weak are they, and what are the weaknesses that you're alluding to?


Martin Sorrell, WPP plc - Chief Executive [53]


You're the analyst. I'm not. I'll leave you to examine the runes. When you leave the stage, you probably can leave some problems with it (laughter); blame it on somebody else. Is that enough analysis for you?


Patrick Wellington, Morgan Stanley - Analyst [54]


That will do.


Chris Collett, Deutsche Bank Research - Analyst [55]


Chris Collett, Deutsche.

Just one question was really about I'm not expecting you to at this stage set your predictions for 2018, but just do you see that this step down from the 3% to 2%, do you see this as effectively a bit of a one-off, that normality should return at some point in the future?


Martin Sorrell, WPP plc - Chief Executive [56]


After Brexit and Trump, I think we got out of the forecasting business. I think we'll focus on 2017. We'll answer that question this time next year.

I just would add, recent events, particularly in the packaged goods sector, I think these are very significant events in terms of shaping corporate thinking. I think that a $105 billion company could bid $143 billion for a company is -- I don't think -- well, I don't think anybody in this room would have predicted that prior to the event. If anybody is brave enough to put their hands up and say I predicted it, fine, but I don't think anybody predicted it. So I think it's a wake-up call. That's the observation I would make from that.


Chris Collett, Deutsche Bank Research - Analyst [57]


With the implication that that's not going to change any time soon?


Martin Sorrell, WPP plc - Chief Executive [58]


Well, there's no implication whatsoever other than it was a pretty climactic event.


Chris Collett, Deutsche Bank Research - Analyst [59]


Could I just ask a second question? You talked about the trade-offs, obviously, between growth and margin, but I'm just wondering the margin improvement in 2017. I'm sure that -- have no doubt that you can deliver the 30 basis points, but really should you given that the low growth -- is it wise, or are you going to be putting too much pressure on the business?


Martin Sorrell, WPP plc - Chief Executive [60]


Well, go back a few years ago. We decided -- remember we had 50 basis points as an objective and we said -- and we got criticized; not criticized. I mean there were some questions about why did you go from 50 basis points to 30 basis points. Does this imply great weakness in business? And the answer to that was we thought there was too much pressure in the system.

And what we did was, and we still reference it in the slides, we were doing 2% to 3% buybacks -- sorry. We were doing 1% to 2% buybacks, and we said if we increase the buybacks by 1%, that's equivalent to 20 basis points on the margin. So we --

It's a good question. It goes back again to Tom's question about margins and IPG, higher revenue growth and the like. I think for us to be absolutely certain of the answer, we should note precisely what were revenues and what were net sales, because I think there is still scope for some misunderstandings. Let's put it that way. So you have to compare the right data with the --

But our view is currently that we should -- that market share for market share's sake is not what we're seeking to do.

Just to amplify. In media pitches, you can go -- you can employ two different strategies. You can either say this is what we think we can do, and mean it, or promise something that you know you can't do but the client's going to be unable to figure out what happened or what will happen; the difficulty of tracking it. Or you can say I'm not willing to participate, as we did do in the case of VW, in an online auction. And the question in the online auction was, what are you prepared to discount current pricing by? And the people who participated in the auction did not know what the current pricing was.

So effectively, you're bidding blind. You're saying whatever anybody else is doing, and in this case they were doing it for 19 years, and had been audited every year, etc., and had been told that they were pricing successfully, so on successful pricing, the question you're asked in the online auction is -- in that particular case -- is what are you prepared to discount it by?

Now our people said, even though they were the incumbent and they knew what the pricing was, they weren't prepared to go into that online auction. Others were prepared to do it. So I think it's a judgment call.


Matthew Walker, Credit Suisse - Analyst [61]


Matthew Walker, Credit Suisse. Two questions, please.

The first one is, I've seen an interview with the head of the ANA in which he says he thinks it's quite likely that the DoJ will move their investigation from production to media buying. If that was the case, what do you think the implications are for you and the other agency groups?

The second question is --


Martin Sorrell, WPP plc - Chief Executive [62]


Well, let's just deal with that. I don't know. I've seen that clip. It's not the Chairman of the ANA. It's the CEO of the ANA. Maybe he knows things that we don't know. So we can't make any observation on that, or the DoJ subpoenas in relation to production. I do think that's a bit of a fishing expedition.


Matthew Walker, Credit Suisse - Analyst [63]


Okay. The second question is on the thing that you mentioned with the packaged goods.


Martin Sorrell, WPP plc - Chief Executive [64]


Sorry. The what?


Matthew Walker, Credit Suisse - Analyst [65]


The recent issues with the packaged goods companies, Unilever, etc. Did that happen after you've reset the budgets and so do you think it poses further risk to the budgets that you've set, or will it impact in a different way?


Martin Sorrell, WPP plc - Chief Executive [66]


Well, difficult to predict. You don't know. You have to see how you go through the year. But the budgets have been fixed, or been finalized during that period of time. And there's not just -- you refer to Unilever. Procter have also had Nelson Peltz, take a 1.5% stake.

No. I think it's done in the context of all of that. I wouldn't put particular emphasis on that event in the context of 2017. I think it's more psychologically how people are thinking about things in the future.


Matthew Walker, Credit Suisse - Analyst [67]


Okay. Thanks.


Lisa Yang, Goldman Sachs & Co. - Analyst [68]


Lisa Yang, Goldman Sachs & Co.

My first question is on the gap between net sales and revenue growth which reversed, especially in the US and UK. To what extent do you think it's also reflecting some shifting away from principal trading, given the transparency issues?


Martin Sorrell, WPP plc - Chief Executive [69]


I don't think it's reflecting that overall. I think worldwide, if we look at it in terms of online or programmatic, it continues to be quite strong.

Adam, do you want to add anything more to that?


Adam Smith, WPP plc - Futures Director, GroupM [70]


No. I think it is -- we've tried to explain that it is a volatile figure and, therefore, try and focus on net sales, and it will come up with these differences. And it's three elements in terms of the difference between revenue and net sales.

You're right. There's one. There is the digital billings that go through Xaxis because we have to consider it as revenues, because -- where we act as principals. Secondly, of the GBP2 billion difference, that's about GBP1.1 billion in the media and advertising discipline. And then, you've got the second piece which is the production flow-through that can affect it, and then the pass-through costs in the research business.

And I think trying to sort of focus on the media side specifically, it's really about the median mix that the clients wish for, and actually the client mix at any one time that either Xaxis or GroupM has. And both of those do have an influence quarter to quarter on the volume of net sales and the volume of revenues.

And I would say, coming back to Martin's point, we are trying to drive the improvement in net sales by being more efficient, now be that in the research area where we're making greater use of our panels and less external researchers in terms of our pass through, so that has a disproportionate benefit to net sales. Likewise in terms of the media buying. And I've seen figures quoted that actually 80% now of the data we are using is all in-house resourced and not externally purchased. So if we can make that shift and increase the use of internal data, we're going to get a net sales, a disproportionate net sales benefit.

So you've got two elements flowing. You've got the changes in volume on media principally through mix, and what we're trying very hard to do is actually improve our net sales ratio on all revenues achieved. And it's that combination that I think is really driving the distortion.

Now on a -- and if you go back a couple of years, we'd say the first change is really broadening out the Xaxis platform more globally. And I think you've seen how this business has grown from, I think when we started GBP600 million or GBP700 million of billings to GBP1.1 billion. And I think when we look at the growth -- to be fair, where we are seeing the super growth with Xaxis, it is in the Asia Pacific, Latin America markets where they are newer, further ahead, and I think will be further enhanced by the [M] platforms; so the data spine that we're building in the top 10 markets.

So this difference is probably less at a Group level, but it's still going to affect by region and by quarter, in my view.


Lisa Yang, Goldman Sachs & Co. - Analyst [71]


I have a second one. I know it's difficult to predict, but what's your best guess on the FX part on your margin growth for 2017?


Adam Smith, WPP plc - Futures Director, GroupM [72]


So I can give you a very complicated answer to that, but given that we went -- so I'll give you a simple answer. Given we went up 0.3 margin points this year -- well, no. Try the complicated answer. I think it might be helpful to some people.

So if you start with last year's margin of [16.9%], and I want to explain this for two reasons, we said we've improved our constant-currency performance by [0.2 margin points] to [17.1%], and our like-for-like basis by 0.3 margin points. And that was simply because when we put STW Communications Group into the Group numbers, added their revenues and profits, the base margin from the prior year turned out to be [16.8%].

So if you think about a business where we achieved 17.1% on a constant-currency basis, we have always done our constant-currency budgets with set exchange rates at the beginning of the year. As it happens, last year, we used GBP1.55 to $1. As we translate the profits for the year, we were using on average GBP1.35 to $1. That generated the 0.3 margin points. That generated the [17.4%] endpoint for 2016.

When we've done the 2017 budgets at the constant exchange rate using about GBP1.25, that 17.4% translates down to [17.3%]. And that's why we are building our growth expectations off a base of 17.3%, plus 0.3 margin points, gets you to [17.6%].

So short answer is, yes, you could take the 17.4%, add 0.3 of margin points, [minus 0.1], but it's really best to think about it is we've reset the 2016 results to the current exchange rates. That's what resets it to 17.3%. We're not expecting it to be any different at today's exchange rates for currency.


Lisa Yang, Goldman Sachs & Co. - Analyst [73]


And maybe a last one on what's your view on the evolution of, let's say, creative versus media? It does look like a lot of --


Martin Sorrell, WPP plc - Chief Executive [74]


Creative versus --?


Lisa Yang, Goldman Sachs & Co. - Analyst [75]


Media, media buying. It does look like a few brands are less focused on branding right now, investing in branding. So are you seeing like creating being a little bit weaker? Or do you think it's structural, or it's more like a short-term trend?


Martin Sorrell, WPP plc - Chief Executive [76]


Well, it depends on how you define creative because there are creative people in all parts of the business, including financial, so if what you mean is, let's call it the traditional creative, or it's a bad phrase but let's call it legacy creative, if you said to me -- well, put it another way for a minute. What are the things that we've seen that differentiate offers most effectively in the last year, for example? Because in a sense, I think our job at WPP is about differentiation. How can we differentiate our offer? Coming back to this question about revenue growth and the like, how can we differentiate our offer sufficiently that you do get not just margin improvement, or revenue growth, or vice versa?

So there would be three things. One is we've certainly seen arts and sciences at Omnicom do a good deal. Some people in the industry say it's a good story and it's difficult to implement, or it's impossible to implement, or they can't implement it, but that doesn't matter. That -- certainly in the short term it doesn't matter. So that's one thing, and that's, I would say, the marriage of [mad men] and [math men] which we've been talking about and which we do through Xaxis, and at [Nexus] and Triad, and other things we do. So that would be one thing.

The second thing is the growth of production platforms, in our case, [Hogarth] but you see it elsewhere, where you've seen very significant growth in digital asset management programs. So you have a library, a digital library of your marketing assets. Instead of recreating it in one country and another, you just pull down the assets from a digital library, and if you have change them market by market, you change them digitally rather than hiring another agency to change it. So that would be the second thing.

And the third thing is -- and this is to your point, is digital agencies penetrating digital budgets. And let's call that for want of a better phrase below the line, and then going above the line. And the best example we have inside WPP I think of that is VML, and based in Kansas City; 600 people there; but global now. In fact, the Chinese agency is bigger than Kansas City. And it's a very good example. So with New Balance, with Electrolux, with Wendy's, with Pepsi, they've penetrated in the digital part of the budgets, and then they've gone above the line -- again, it's not an accurate description of it, but it's directionally right -- above the line and become agency record. I think on New Balance that was that case, on Electrolux it's the case, and on Wendy's. They started in digital and then went above the line.

And I think that is the answer to your question is that what you're seeing is some of the digital agencies, and that would be the same for Wunderman, for AKQA, for [Possible], for [Mirim], in our case OgilvyOne, increasingly getting into budgets -- let's call it at the digital creative side -- rather than for want of a better phrase the traditional creative.


Lisa Yang, Goldman Sachs & Co. - Analyst [77]


Thank you.


Martin Sorrell, WPP plc - Chief Executive [78]


Anybody else? Okay. We're here if you have anything more. Thank you very much.