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Edited Transcript of WPP.L earnings conference call or presentation 23-Aug-17 12:00pm GMT

Half Year 2017 WPP PLC Earnings Call

London Aug 24, 2017 (Thomson StreetEvents) -- Edited Transcript of WPP PLC earnings conference call or presentation Wednesday, August 23, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Smith

* Martin S. Sorrell

WPP plc - Group Chief Executive & Executive Director

* Paul W. G. Richardson

WPP plc - Group Finance Director & Executive Director

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Conference Call Participants

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* Brian W. Wieser

Pivotal Research Group LLC - Senior Analyst of Advertising, Media, and Internet

* Daniel Salmon

BMO Capital Markets Equity Research - Media and Internet Analyst

* Douglas Middleton Arthur

Huber Research Partners, LLC - MD and Research Analyst

* Peter Coleman Stabler

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

* Timothy Wilson Nollen

Macquarie Research - Senior Media Analyst

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Presentation

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [1]

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Good morning in New York. Good afternoon here in London. I'm here with Paul Richardson and Adam Smith. We have our interim results, half year results for 2017. It's on our website, and I think you all have copies of it.

I'm on Slide 2, which are the contents page. We're going to cover -- Paul will cover the results themselves. GroupM forecast this year and next year are done by the wonderfully named Adam Smith. I'll come back and talk about our 4 core strategic priorities in times that we are facing. And then a brief summary on key objectives and even briefer summary on our outlooks and conclusions. There's a hard copy, also slides on our 31-year history and other financial information.

So we'll kick off with Paul on the interim results.

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Paul W. G. Richardson, WPP plc - Group Finance Director & Executive Director [2]

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Thank you, Martin. So I will refer to slide numbers, so people keep abreast of it. So on Slide 4, the interim results. We had reported billings up 6.3% at GBP 26.9 billion. They were down 4.7% in constant currency and down 5.9% on a like-for-like basis. The reported revenues were up 13.3% at GBP 7.4 billion, up 1.9% on a constant currency basis and down 0.3% on a like-for-like basis.

Net sales growth was up 13.7% on a reportable basis, 2.2% on a constant currency basis and minus 0.5% on a like-for-like basis for the half year. Reported headline EBITDA was up 14.2% at GBP 1,016,000,000, over GBP 1 billion for the first time in a half year and up 1.7% in constant currencies. The reported headline PBIT, profits before interest and tax, was up 14.7% at GBP 882 million but up 1.9% on a constant currency basis.

The reported net sales margin of 13.9% was up 0.2 margin points

(technical difficulty)

on a constant currency basis and up 0.1 margin points on a like-for-like basis. This led to headline diluted earnings per share up 16.1% at 45.4p but only up 2.4% on a constant currency basis. Dividends per share of 22.7p were up 16.1%, a payout ratio of 50% in line with our target.

Turning to Slide 5. The average constant currency net debt of GBP 421 million in the half year moved up to GBP 4.8 billion, reflecting significant net acquisition spend, share buybacks and dividends over the last 12 months. The average net-debt-to-EBITDA ratio for the year to 30th of June 2017 was under 1.9x but towards the top end of our target range of 1.5 to 2x. Share buybacks totaled GBP 290 million in the first half, approximately 1.3% of share capital, up from GBP 197 million or 1% of share capital last half year with a full year target for share buybacks still in the range of 2% to 3% per annum.

Net new business momentum returned together with leadership of the net new business lead tables in the first half year and beyond. Return on equity was 16.9% for the 12 months to 30th of June '17, up strongly from the 15.5% for the previous 12-month period compared to a weighted average cost of capital of approximately 6.3%.

On Slide 6, I compare our results to the first half and the consensus. For the first half '17, as you can see, we weren't able to achieve the net sales consensus numbers. And we were slightly behind on the PBIT, producing a reported number of GBP 882 million compared to the consensus of GBP 895 million. In the diluted earnings per share, we reported 45.4p. The consensus was slightly higher at 45.8p. On the reported sales margin, our reported rate of 13.9% was in line with consensus reported margins of 13.9%.

So in terms of how did we do on Slide 7 versus our targets. On a full year basis, we laid out a 2% net sales and revenue growth target for the year. In the first half, as you've just seen, we were down 0.3% on revenues and down 0.5% on net sales. On a full year basis, we are still targeting a 0.3% improvement in the constant currency net sales margin. And at the half year, we achieved 0 on a constant currency basis and 0.1 on a pro forma basis.

In reportable diluted earnings per share, our goal is to achieve between 10% and 15% per annum. And with the effect of currency, we did achieve that with a growth of 16.1%. On a constant currency basis, the diluted earnings per share targets are between 10% and 15%. And in the first half, we achieved 2.4%. We did achieve a dividend payout ratio of 50%, which we reached last year. As a result of the weak net sales that we saw both in June and July and having received the Q2RF, which our second half forecast and reviewed in detail with the businesses these forecast recently, we have revised our full year revenue target for net sales to between 0 and 1% on a full year basis 2017.

Turning now to Slide 8. On the summary of the headline results listed here, we'll go through many of these elements in more detail. But overall, we saw the net sales margin of 13.9% compared to 13.7% last year. Headline EBITDA, GBP 1,016,000,000 versus GBP 889 million last year. Tax rate is moving up from 21% last year to 22% this year. And the leverage is remarkably consistent at 1.87x average net debt-to-EBITDA compared to 1.89x a year ago. The average headcount was down 0.9% compared to a year ago over the last 12 months. And the closing headcount was down almost 2% point-to-point. The enterprise value to EBITDA valuation of the business last night was at 9.8x the share price compared to 12.6x the same time a year ago.

So in terms of how revenues have grown from GBP 6.5 billion to GBP 7.4 billion, on a like-for-like basis, they declined 0.3%. Acquisitions added 2.2% and currency added 11.4%. So overall, revenues grew at 13.3%. And on net sales, there's very little difference in rate of growth of revenues and our net sales in our group now. So the net sales saw a decline of 0.5% in the half year, acquisitions adding 2.7% and foreign exchange adding 11.5%. So net sales growth for the half year was 13.7% compared to a year ago.

The impact of foreign exchange on Slide 11 shows we had a very strong tailwind in the first half, on average 11.4% on revenues and 11.5% on net sales. But on a full year basis, we still expect to get a tailwind but in the region of 4% to 5% for the full year. Although these are taken at exchange rates where the pound is now slightly weaker, the rate against the dollar when this was calculated was $1.32 and against the euro was EUR 1.12. And again, the pound is slightly weaker on both of those now.

So in terms of the unaudited headline IFRS statement, take you through some of the items on Slide 12. So you have the PBIT of GBP 882 million versus the GBP 769 million of last year, a reported growth of 14.7% and a constant currency growth of 1.9%. Within that, we saw the income from associates jump quite considerably from GBP 24 million the first half of 2016 to GBP 46 million the first half of '17. And that was caused by 2 specific reasons.

First, one of our associates in media, Haworth, had won a large piece of businesses that took effect in January of this year, which returned its operating performance to more normal levels of margin and performance compared to 2016. So that was an incremental performance in that business, where '16 was a weaker performance of that particular organization. And secondly, in Imagina, where we held for a long time a convertible preference share, at the end of November '16, we converted that into equity for the business. It resulted in a 23% ownership of that company. And the incremental and the revenues, therefore, so the associate income, therefore, is coming through for the full 6 months of this half year, which wasn't there in equity income the first half of '16.

If I look at associate income on a full year basis, last year, it was GBP 60 million. And we are expecting the GBP 46 million in the first half to almost double to GBP 90 million on a full year basis. And that increment of the GBP 30 million of associate income year-on-year is fully explained by those 2 items I just mentioned.

Moving further down to P&L. I've mentioned the tax rate is currently at 22%, which resulted in a headline diluted earnings per share of 45.4p compared to 39.1p a year ago. And our margin on a reported basis is 13.9% versus 13.7% a year ago.

If I look at the statutory income statement, which showed in 2016 an earnings per share of 18.9p, there are 2 quite significant charges we had to take in '16 in the numbers, which I just explained, which in essence have reversed this year. So you'll see there a net exceptional loss in 2016 of GBP 114 million. A majority of that taken in the first half of '16 was the write-down of comScore. And secondly, you'll see in net finance costs a charge GBP 145 million last year, which related to the revaluation of our earn-out obligations. And in a year in which the growth of the businesses is strong and the future earn-out prospects are rosy, if we feel our businesses are going to exceed the average rate of growth of 20% to 25%, we have to revalue up that earn-out obligation. And the difference goes as a charge to finance costs. And that's what happened last year to the tune of GBP 66 million.

This year, however, we don't have that charge. In fact, 1 or 2 of our earn-outs have fallen on a tougher time and we reversed the amount of earn-out obligation we expect. And that has come through as a credit to the interest charge or the finance charges in 2017. When you look at our total of earn-out obligations at the 31st of December compared to June '17, we are now GBP 100 million lower in total obligations outstanding despite the acquisitions in the first half than we were at the end of last year. So the sum of all that is, in a statutory basis this half year, we generated profits after tax of GBP 634 million compared to GBP 282 million and earnings on a statutory basis of 46.6p compared to 18.9p.

Turning now to the makeup of our growth on Slide 14. Focusing on the net sales numbers, which we saw like-for-like net sales decline of 0.5%, acquisitions adding 2.7%, therefore, constant currency growth being 2.2%. To that, add the foreign exchange impact or the benefit of a weak pound and strong overseas currencies, added 11.5%, making reportable net sales of 13.7%. If we were a dollar-reporting company, our reported net sales would be growing at 0. If we were a euro-reporting company, our reported net sales would be growing at 3.1%. And if we were a Japanese companies, our reported net sales would've been growing at 0.9%.

So turning now to the revenues and net sales by sector and just to remind you the makeup of last year and how this year has performed before I get into the individual disciplines. So the first half 2016 saw quarter 1 net sales growth of 3.1%. Quarter 2 last year saw net sales growth accelerate to 4.3%, having a first half growth of 3.7%. In the second half of last year, the growth was 2.3%, which resulted in a 3% growth overall. We have already reported the quarter 1 rate of net sales growth this year, that was 0.8%. And as a result of the disappointing minus 1.7% rate of growth or decline in quarter 2, we've ended up being down 0.5 percentage in net sales in the first half 2017.

So with that in mind, I'll go through each of the disciplines. In advertising, media investment management, which represents 44% of our net sales, a total of GBP 2.8 billion of net sales, saw a first half growth of minus 1.7%. And the first quarter growth of minus 0.3% was followed by a second quarter of growth of minus 2.9%. The data investment management business, which is 16% of our net sales, just under GBP 1 billion, saw a decline of 1.9% in net sales and a decline in quarter 1 of minus 0.8%, saw a decline of 2.8% in the second quarter.

Public relations and public affairs, which is 9% of our net sales or approximately GBP 568 million of net sales, had growth in the half year of 1.8%, saw a strong growth in quarter 1 of 3.9% and a flat minus 0.1% performance in the second quarter. Branding & identity, healthcare and specialist communications, which represents 31% of our business or just under GBP 2 billion of net sales, saw a growth overall for the half year of 1.1%, having grown at 2.2% in the first quarter and growing 0.1% or basically flat in quarter 2. So overall, the growth was minus 0.5% in the first half, being 0.8% positive in quarter 1 and minus 1.7% in quarter 2.

If I do the same by geography, 38% of our business is in North America or approximately GBP 2.4 billion of net sales. We saw a decline in net sales overall for the half of 2.2%, being down 1.1% in quarter 1 and down 2.2% in the second quarter. And in the second quarter, we saw advertising, media investment management; data investment management; the healthcare businesses continue to come under pressure in the U.S.A. in the second quarter.

In the U.K., which represents around 13% of our business or around GBP 813 million of net sales in the first half, we saw growth continue with growth at the half year of 3.8%, growth in the first quarter of 3.7% and growth in the second quarter of 3.8%. And in the United Kingdom, we saw advertising and media investment management, branding, digital, e-commerce and shopper improve further in the second quarter.

In Western Continental Europe, which represents approximately 19% of our business or about GBP 1.2 billion of net sales, we saw overall performance in the first half of minus 0.3% on net sales. The first quarter was strong at a growth of 4.3%. The second quarter reversed that with a decline of 4.2%. And overall, following the strong first quarter, we saw weaker performances coming through in Austria, Finland, France, Germany, Italy, Holland and Sweden, all slowing in the second quarter. The only bright spots in the second quarter were Greece and Turkey.

And finally, in Asia Pacific, Latin America, Africa and Middle East and Central and Eastern Europe, which is approximately 30% of our business and net sales of just over GBP 1.9 billion, we saw overall in the half year minus 0.3%. Having been down minus -- having been up 0.1% in quarter 1, we were down 0.4% in quarter 2 but basically flat. And we'll come on to more detail into the subregions shortly.

Turning now to Slide 17. I'll just explain what this is, is we have found that rather looking at an individual half year or individual quarter, it's always helpful to look at the 2-year trend. So in our particular case in half 1 2017, that 4.0% represents the 4.3% growth in the half 1 of 2016 added to the minus 0.3% first half decline in 2017 i.e. being a net 4%. We have done the same for ourselves and all our competitors going back over time on a revenue basis. And whilst we feel this is not the most accurate measure, it's the only measure we could use to compare versus our competitors. And what you see here is in the second quarter -- second half of 2016 and obviously in the first half of 2017, a number of the competitors and ourselves weakening or slowing compared to the traditional trend rates that we've seen over the last 1 to 2 years.

So turning now to margins. Bearing in mind, it is always challenging to raise margins when net sales or revenues are down. So looking at the businesses, where in advertising, media investment management overall, the first half net sales were down, it did well to hold margins flat at 15.3%. In data investment management, again, likewise, difficult with net sales down, margins did fall slightly from 13.5% to 13%. But I'd like to remind people that in 2015, the half year margin was 11.7%. So the previous year, they had grown margins by 1.8 margin points from 11.7% to 13.5%. So over the 2-year run, it's still being very healthy and margins have grown 1.3% since 2015. In public relations and public affairs, where revenues were up, we saw margins held flat at around 14%. And in branding & identity and healthcare and specialist communications, where revenues were up, we saw margins improve from 11.7% to 12.3%. Again, this is on a reportable basis, so the group's margins went from 13.7% to 13.9%.

When I do exactly the same on a geographic basis, we see that in North America, again revenues and net sales were down, but margins were held flat at 16.6%. In U.K., which had our strongest growth, along with Latin America, I would add, we saw margins improve quite significantly from 12.6% to 13.8%, specifically good performance came through from the GroupM media businesses, the Kantar businesses and the digital businesses in the U.K. In Western Continental Europe, which -- on a full year or half year basis, revenues are basically flat. Margins were similarly flat at 12.4%. And in Asia Pacific, Latin America, Africa and Middle East and Central and Eastern Europe, margins were down marginally from 11.5% to 11.3%.

So giving you a little bit more color on the revenue mix of the 7 or 8 subregions. And you can see here on a revenue basis, which we do think is some distortion in this compared to the net sales, shows 4 of our subregions growing at the half year stage: United Kingdom and Latin America, the strongest, also Continental Europe, also Asia Pacific. But I think a fairer comparison on a like-for-like basis is using net sales on Slide 21, where we show both the second quarter change and the half year performance. And again, 2 regions are continuing to grow, United Kingdom at 3.8% in the first half and Latin America, but all other regions are down to varying degrees. When you look at the overall perspective, our mature markets and how they performed in the first half, they were down 0.7%. And the faster-growing markets were down slightly less at minus 0.3%. Overall, the group was down 0.5%.

And when you take the top 6 markets, which represents around 68% of the business, we saw net sales overall down 1.1%. As we have shown, and again we have a difference slightly because this is U.S.A. numbers versus North America, but net sales were down in the first half 2.5%, having had a good year last year, a growth of 2.8%, but follows a quarter in which the first quarter, we were down 1.3% in the U.S. United Kingdom has really had good 3 years, running at around 3%, slightly stronger this year running 3.7% to 3.8% growth in net sales. Germany is a bit of a surprise in terms of how strongly it came off in the second quarter. But likewise, it was very strong in quarter 1 growing at 10% and on a half year basis is basically flat. Again, we are impacted by certain specific account losses in Europe, specifically Germany, in the media business.

In China, which has been difficult for us so far this year, we started off with the first quarter down 7%. At the half year point, we're down nearly 5%. But we are still expecting growth or certainly breakeven on a full year basis in China. Australia, we can't report because it's a listed company and they report at the end of the week. And in France, you saw good growth in quarter 1 of 3.5% but flattening out to flat growth at the end of the first half.

Doing the same on the BRIC markets, which represent 11% of the business overall. They, too, were down 1.1% overall in part driven by the performance in China. India has had very good performance over the last 3 years. And we do expect very strong performance on a full year basis. Obviously, the introduction of the GST has had some impact on the economy around the half year point. So the half year growth rate in India was 6.6%, slightly down from the first quarter growth of 9.5%. Brazil, which had a good first quarter growth of 3.1%, overall for the first half is growing at 1% and is expecting mid-single-digit growth for 2017. Russia has been a bit volatile, having grown 8% in the first quarter, is down 3% at the half year stage but again expecting strong mid-single-digit growth on a full year basis in Russia.

When we look on Slide 24 at the top 30 countries, it gives you indication of who is either growing strongly or where there is particularly high inflation, such as Argentina. But otherwise, you get a sense of where the banding of the markets are within the group, those in the faster-growing geographies and how they're performing and those in Europe and the other markets and how they're performing. Likewise, on clients, again some of our bigger categories are not growing, particularly in the automotive. Again, account wins and losses do make a significant difference to some of these categories and across industry trends also make a difference as well. So again, won't spend a long time talking about this.

Moving now on to trade estimates of net new business wins. We do plot out on Slide 26 all the wins and losses that have been reported in the trade in the first half this year. Those that are shaded are the ones that have occurred in the second quarter. And pleasingly, we've had 3 $500 million billings wins this year so far, of which 2 have been in quarter 2. The major or the most significant being almost $1 billion in the PSA win. And also in quarter 2, a $500 million win for LVMH. Likewise, we've had a number of good wins both media and creative on this page and on Page 27. So far, we've had modest losses on Page 28 that have come through in the results so far for the first half.

When we look at our own internal estimates of how globally billings have performed, both creative and media, we think we have achieved around $4.2 billion of new business successes, which is up approximately 42% compared to the $3 billion of business successes we saw last year. And actually encouraging that both in the media and the creative disciplines, we saw an improvement year-on-year. And when we look at what has occurred since the 1st of July, again we had 3 significant wins coming through since the 1st of July for our businesses and only 1 loss reported so far.

In terms of cash flow, the performance and the numbers are pretty similar year-on-year. In 2017, GBP 724 million of operating profit led to net cash generation of GBP 686 million, about GBP 100 million more than a year ago. And how we spent that money, in a similar fashion, CapEx, a bit low at GBP 120 million. Acquisition payments, net initial payments, are slightly lower at GBP 179 million but overall pretty similar at GBP 241 million. And distribution to share owners, which are share buybacks, about GBP 100 million more this year compared to last year. But overall net cash generation of GBP 20 million in 2017 in the first half compared to GBP 36 million the first half of last year.

When we look at net debt, it has increased both on a reported basis, which is very significantly affected by currency and on a constant currency basis, around GBP 420 million to GBP 4.8 billion. And we do show a waterfall on the next page of how the net debt has moved from the 30th of June '16 to '17. Pleasingly, the interest cover continues to be strong at around 10x. And although the finance costs are higher, it's really a combination of higher debt levels, lower coupon costs and less investment income. But overall, our interest cover on our headline PBIT is at 10x. And our measure of headroom and liquidity on the rolling average net debt to headline EBITDA is pretty consistent with last year, this year at 1.87x, last year at 1.89x.

So when we do the waterfall on the net debt movement from GBP 4.3 billion to GBP 4.6 billion, you could see that in the second half of last year, we still had a pretty significant cash outflow. Foreign exchange, it still had some impact. Working capital, we held steady on a trade basis. But the other balance sheet provisions provide us some of the movement. And that really is the explanation of how we go from GBP 4.3 billion to GBP 4.6 billion. However, as you look at the historic average net debt-to-EBITDA chart, it's within the range where we've been the last 2 to 3 years. We have adjusted '15 for the effect of currencies, so you get a good comparison compared to '16 and '15. And obviously, you've got '17 there as well for the half year.

Looking at how our uses of the cash flow. And these have not changed in the style or the quantum of our target. So in acquisition spend, we're looking to spend between GBP 300 million to GBP 400 million per annum. Last year, we were higher at GBP 600 million. The first half this year, we spent GBP 179 million of new initial payments. In terms of share buybacks, we still aim to buy in between 2% and 3% of share capital. We bought in 1.3% of share capital so far year-to-date. And on dividends, we basically hit our target ratio of 50% payout ratio, leading to a 16% increase in dividends.

In headroom, really over the page on 37, you could see through our debt profile, we have approximately GBP 3.2 billion of headroom, a well-spaced, good average life of maturity of bonds around 10 years and a 3% coupon on average through the refinancing over the last 4 or 5 years. And finally from me, just a quick look back at earnings since 2010 to 2016 on a full year basis, i.e., going from 56p to 113p and at the half year stage going from 39p to 45p.

So with that, I'll hand over to Adam.

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Adam Smith, [3]

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Hello. I'm just here to talk through our new forecast, which we've just recently completed. Twice a year, we do a sweep of our whole network, covering about 17 countries. And the first question I ask at this time of year is, "What happened last year?" And the outturn for the growth in total advertising investment in media, we think, was 3.7%, which is a slight downgrade from our last prediction, which was 4.3%. Real GDP dropped away a little bit from 2.7% to 2.3% across our pool of countries.

And we had downgrades from a number of different countries. We had a small one in China; Brazil, where we have a slower recovery; Ecuador was very substantial, a result of the April earthquake and those effects unfortunately continue; Venezuela, of course; and the Gulf states, which are also an enduring drag on our present forecasts.

Not much a geographic pattern, but we may see one emerge with our annual Ad Categories report, which is a retrospective we usually publish in September. But I've done an early first cut of the 2016 categories. And I was looking in particular at CPG to see if there was -- if we picked up any evidence from the noises of falling ad spend in that category. The first blush on CPG looks like it was minus 1% in 2016. These are not audited or they are estimated, observed results. So they shouldn't be taken as much more than directional. And the CPG minus 1% does not include China for reasons which I shall come on to in a minute.

CPG is not a single category. It's a group of categories, which includes, in this case arbitrarily, food, beverage, personal care and household. I left pharmaceutical out of this particular definition. But those 4 categories together comprise about 25% of measured global advertising and that share index -- overindexes heavily in the faster-growth world. Retail is the single-largest stand-alone ad category, accounted for about 14% of overall advertising spend. And that looks like it was something like minus 3% in 2016. And this is, of course, one of CPG's principal allies. So the 2 probably had a sort of reinforcing effect.

With CPG and retail under pressure, you would expect to see some consequences in the TV growth and there were. In 2016, we think TV grew or underperformed by 0.5 point the all media growth average as it had done in 2015. This has been the first occasion since the financial crisis that TV has underperformed the market. And we think our forecasts have a similar 0.5% drag for 2017 and 2018.

The reason we've left China out of this is because China's category measurements were available only for TV and print. And there's no, therefore, no digital, attempt to measure digital. So we cannot see if a decline in TV is matched by a corresponding increase in digital. Were we to have left the unadjusted China figure in here, CPG would be really minus 5% on this chart. All I would observe from China is that advertisers are similarly monitored by an independent source. So again, not audited figures, but we will, in our forecast as usual, publish the top advertisers. And in China, it's notable that the Western multinationals on this reading did fall back, in some cases, quite dramatically, whereas 2 or 3 of their local competitors rose by similarly large amounts.

Last week, Crédit Suisse issued consumer staples, which is a thing they occasionally revisit. This is a -- they pooled 26 consumer packages companies to look at various performance indicators. But the headline was that their first half top line sales growth, volume is 1.3% in the first half, within which 3% was in the faster-growth markets. Both of those readings, the lowest in 20-odd years. And I forwarded this interesting report over to Jeremy Bullmore, who replied, "I hope it makes a few people stop and think or rather think and not stop."

For 2017, we have 3% ad growth forecast, which is revised down from our last call of 4.4% in December. The incremental advertising growth, therefore, falls from GBP 22 billion to GBP 16 billion, a GBP 6 billion gap. Half of the GBP 6 billion comes out of China, which has reported, I think, an unprecedented downgrade from 8% formerly predicted growth in 2017 to 4% now. And GroupM China is pointing to a number of reasons for this. First, a consumer pause, evidenced by Kantar data, which is showing the weakest growth in FMCG sales in 10 years. It's reporting weaker household income growth, a big fall in car sales. And secondly, the difficulty of digital growing at sustained double-digit rates, given that it's already accounting for nearly 60% of advertising in China. There is TV regulation already heavy and which GroupM expects will increase as a consequence or emerging from this autumn's 19th National Party Congress. In the U.S., our total forecast market growth for 2017 is revised down a little from 2.6% to 2.2%, reflecting sluggish growth and a continued heavy decline in print spending. This decline in print, by the way, echoed across the world. There seems to be still no floor for that for newspapers and magazines.

Our first prediction for 2018 is for 4.3% growth, equivalent to an increment of $23 billion. It's looking better for our growth generally, we think, including for TV, helped by hope for cyclical improvement in Latin America and the ASEAN countries, in particular. And we have the sport quadrennial of the soccer World Cup in Russia, which is a good time zone for advertising, Asian Games in Indonesia, Winter Olympics in Korea. And Japan is looking forward to the 2020 Summer Olympics. And it expects the advanced advertising effect of this to be in full flow by 2018. And Japan is, of course, still the world's third-largest ad market and growing at around 3%, quite a respectable clip. Russia is presently a big contributor to growth. Advertisers are investing into what they perceive as a stabilizing domestic market. Russia also, to accompany or preceding its World Cup, it has a presidential election in March, which will push up media occupancy. Our first call on the United States is plus 3.4% next year. And China, looking for 1 point higher or 5% growth.

The relationship of advertising to GDP. We've seen advertising underperforming the macro throughout this economic cycle. And the global advertising intensity ratio has been drifting off slightly since 2007. It was then 0.84% of GDP. And for this year, we think 0.7%. This shift is a consequence of the weight of advertising moving from the slower-growth world to the so-called faster-growth world. This shift has stalled a little in the period 2015 to 2017. But we think it will probably revert to a more normal 1% per annum shift beyond that. Advertising intensity in the Old World, if you will, peaked a while ago in 2006 and is in seemingly unstoppable slow decay. New World intensity appears to have peaked in 2013. And our China downgrade has exacerbated this. But obviously, taking a long-term view, if one's next 1 billion customers are going to come to this part of the world, one would expect long term this to track back up again.

Looking in real terms at what the trend in advertising has been in this cycle. 2007 was the historic peak in real terms advertising investment. This peak was regained in 2015. And in 2017, we expect global advertising investment to be 4% higher than that previous peak in real terms. The developed economies are up 8% in real terms since the nadir of 2009 but still 7% below that peak and we think unlikely to recover this within the time frame we operate to, which is 2022. The new world, the faster-growth world is, in advertising terms, 50% bigger than it was at the bottom of the market in 2009.

Looking now at the largest contributor to ad growth in 2017. China, formerly neck and neck with the U.S.A., but with the downgrade now is adding $3 billion, which is still exceeding the aggregate Western European increment of $2.5 billion. Our picture of the U.K. in our last forecast for 2017 fell from 7% growth to 4% growth partly as a result of the election and related uncertainties with revenues in legacy media in total contracting 4%. And despite a pronounced pause in, at least in our experience, in spending on YouTube, it is still pure-play Internet providing nearly all the net growth in the U.K.

However, looking at our own billings pattern, and we are something like 10% of the U.K. digital advertising, it is the movement within the digital realm, which is far more striking than its rate of growth. That is, needless to say, the decline of traditional publishers and the continued growth of Google and in particular, this year, Facebook. India comes up next to the U.K., a big steady contributor with an unmistakable pattern of increasing urban affluence with strength in many categories, FMCG, white goods, travel and interest in the health care, which is growing as a result of the development of the insurance market. Argentina is just off the chart, nevertheless, contributing $0.5 billion. The economy is growing, but the recovery has disappointed with consumers on the receiving end of inflation and rising unemployment.

Contribution, relative contributions from the New and Old Worlds. As this comparison moves past 2010 and China moves into a mature phase, we see the contributions from the New and the Old World coming into parity over our forecast period. Nevertheless, within this, the New World contribution remains well in excess of its 35% share of global advertising. And then we think that over a longer 5-year period, this contribution will once again return to a majority of net ad growth. Digital gearing has now dropped out of this particular exercise as it accounts for 34% in both New and Old Worlds. The contributions from traditional versus digital media. As a consequence of digital's rising share to 36% forecast in 2018 from 34% this year, exaggerates its already top-heavy contribution to growth. While having said this, in 2018, legacy media do make a positive incremental contribution of $3 billion comparing to digital's contribution of USD 20 billion.

Looking at the share trajectories by the main media. The print decay rate over many years has averaged a fairly consistent and predictable 2 percentage points. This was, of course, digital's first conquest of particularly the classified and directories business. TV peaked in the period 2010 to 2014. And the decay rate there at the global level has been about 1 point a year, although this is exaggerated by China, which is obviously a huge market and prone to very large shifts. And the reason for this peak in 2014 was, in fact, China, which up until that point, had been a tailwind for the TV share. But since then, rising regulation in China's TV accelerated the local shift to digital. And if we take China out of this, the TV curve flattens quite -- it becomes almost flat, in fact, at around 42%, reflecting a dynamic of shrinking share in the mature economies and rising share in the younger ones. Television has another mitigation, which is that it's been winning share from the other traditional media, principally print. It was 40% of the world's traditional media domain in 2000. Now it is 60% and it's still adding share.

I'm interested in the opinion of our younger planners and their attitude to TV, given that they are digital natives and had been speaking to a couple of them just last week. And they tell me that when advertisers are willing and able to apply data to their TV investment decisions, and being willing and able is not the harder thing that you and I might imagine, and that they can agree objective internally between departments and they control test the outcomes, it generally favors the medium, whether that's in sales lift or brand lift or most importantly, in my view, helping to get the most out of the other media in the schedule. So on that reading, the rise of the data-driven decision could be a positive for TV, notwithstanding its admitted structural challenges. The persistence of television, I look for evidence of that in TV pricing. And on this forecast sweep, we have reports of TV price inflation from Canada, Sweden and Spain, which indicates a lack of substitution.

Finally, a table just showing the regional headlines. These will be published in our forecast, which you are all welcome to, if you -- e-mail me if you're not on my list already. Assorted points of interest arising from this sweep. South Africa tells me that most of its media owners have now moved to a zero-commission model. Denmark has reported its first digital -- addressable digital out-of-home campaign, which is, I think, a first. Sweden has come up with the expression desktop death, which was new to me, and of course, relates to the relative decline -- the absolute decline of desktop digital advertising. Italy's print, radio and local TV are looking forward to tax breaks on incremental advertising (inaudible) in 2018. And one wonders whether there'll be other pleas for government intervention as we move forward. And the Netherlands is the first country to spontaneously nominate the European Union's General Data Protection Regulation, which is coming in May 2018 as a potential drag on digital advertising growth. And I've heard incidentally that, that may also be affecting the interoperation of addressable TV when technologies are shared between broadcasters. Thank you.

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [4]

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Thanks very much, Adam. I'd now like to turn to our core strategic priorities, obviously in light of what's been happening in the marketplace in the first 2 quarters of the year and, in fact, perhaps the fourth quarter of last year.

If we look at the macro environment and then the microenvironment, on a macro basis, worldwide GDP has certainly slowed in late 2016 and the first half of 2017. The IMF growth projections have slightly worsened than before with the Eurozone and China up but U.K. and U.S.A. down. Secondly, as the people on this call know well, there's uncertainty about the implementation of what we might call Trumponomics, 3 legs to that: anti-regulation or reduction in regulation, which I think, to some extent, has happened from what I hear; infrastructure spending, which is still -- because of the time span it takes, very much in its infancy; and then probably most importantly, tax simplification and tax reduction, particularly for corporates as corporate rates remain pretty high. And that, of course, has been delayed by what's been going on or not going on health care.

We still have crucial elections to be fought in Europe, in Germany and Italy. I think Germany, it's not a forgone conclusion, but it looks as though the Chancellor, the current Chancellor Angela Merkel will win but perhaps with a coalition. But Italy, the picture is much more clouded. It may be a coalition between Renzi and Berlusconi, but we'll have to see what happens in this electoral reform possibly in September. Monetary policies, we'll hear from Jackson Hole, no doubt, this week, is set to be or signaled to be tighter. But the question is how much tighter and by when. And of course, there are political concerns over North Korea, Afghanistan, Middle East, Venezuela and Ukraine. And just going back to the monetary policy issue. The issue is, I think, not whether interest rates will rise, but the question is by how much. And that has some significance in relation to what we've been talking about that's been happening in our industry.

We're awaiting results in China from the November People's Party Congress. Traditional -- and that's important as well in terms of what the President might do structurally in terms of the organization of the party and the administration. Traditional media remains, as Adam has said, under pressure as new media grows and provides much, if not all, of the growth in the market. And there has been convergence between content and telcos with, for example, AT&T and Time Warner and the content consolidation itself with Fox and Sky, Vivendi and Mediaset and last and most recently, Scripps/Discovery.

India has gone through demonetization quite well actually better than, I think, we thought it was going to in terms of continued growth. But now India has to deal with the general sales tax, which will be good in the long term, another example of Modi's leadership. But the question is whether how much disruption there will be as a result. And then finally, at a macro level, mobile, video -- virtual reality and artificial intelligence all indicate strong growth potential when we started to invest as you will have seen last week with our investment in Within in virtual reality.

In terms of micro, we tried to analyze or compartmentalize what has been going on in our marketplace into 2 phases. Phase 1, which probably stretched from 2009, just after Lehman, we had a recovery year in '10 and then record years in '11, '12, '13, '14, '15 and '16, those -- that period of time, those 7-or-so years were basically the basic features were low growth, low GDP growth, low inflation and therefore, consequently very limited pricing power for our clients and therefore, a focus on cost. And that was an era in which, as I say, we have eked out good results in what was a challenging environment but effective environment.

The second phase seemed to start maybe in Q4 of 2016 and has obviously extended into Q1 of this year and Q2 of this year. Probably the pace has quickened a bit in Q2. And the 3 key factors here were a trifecta of digital disruption, zero-based budgeting and activist investors. Digital disruption represents as much of an opportunity as a challenge for us as we wrestle with it ourselves. And as Adam has said, the media industry wrestles with it as a whole. And as our clients wrestle with it, we have the firepower and the armory to deal with that, not only ourselves but for our clients.

The second area is zero-based budgeting, the rise of investment groups, which have made takeover bids and investments in companies with relatively cheap money, which is the importance of monetary policy and trying to keep inflation under control and at the same time, avoid the impact of too much austerity, particularly post-Lehman. But zero-based budgeting funded by cheap money and activist investors funded by cheap money have put a tremendous amount of short-term pressure, particularly in the packaged goods but not confined to the package goods area, packaged goods account for about 30% of WPP's revenues, and has certainly increased the short-term focus of our clients and have impacted FMCG, major FMCG clients in particular. Most of the activity in zero-based budgeting has been going on in that sector, along with that by activist investors.

If you look at the S&P 500 growth, top line growth seems to be coming almost exclusively and certainly most strongly from technology and health care. And the package goods sector, and we'll come on to this later, seems to be growing in a much slow rate. Although valuations from a P/E point of view for both tech or both of the tech sectors and the consumer sectors in the S&P 500 seem to be around the same levels, at around 22x earnings. But again, we'll come back to that.

Turning to the second column. Uncertainty and short-termism is certainly reducing investment. That's physical investment in favor of buybacks and dividends, although market levels, the height of markets and record levels for the Dow Jones, are lowering in the attraction of that. In terms of growth prospects, horizontality, that's getting our people to work more effectively together in a more effective and efficient way and seamlessly is critically important. And the areas of shopper marketing, e-commerce, application of the technology and data and content are becoming increasingly important. This is where we see significant growth opportunities and any growth.

At the same time, as Adam has mentioned, the media landscape is becoming much more fragmented. So that increases the complexity of working it, which makes -- gives us additional opportunities as agencies. And efficiency and effectiveness, however, is still key. And there's continued client pressure on pricing and payment terms. But opportunities for agency consolidation, when clients are pushing for more efficiency, consolidation becomes even more important. But at the same time, scrutiny by clients around the effectiveness of digital, Adam made mention of YouTube's travails here in the U.K., but those concerns extend to fake news and value and viewability and verification and transparency and indeed questions about measurement, particularly surrounding Google and Facebook, and allied to the areas of viewability and measurability.

And despite that, however, have to say that Google now has become the biggest or is the biggest destination for our media investment division. We manage a portfolio effectively of about $70 billion to $75 billion. And about $6 billion this year or just under will go to Google as our #1 destination. And Facebook will probably be the second-largest at around well over $2 billion last year. And Google and Facebook were #1 and #3. And in fact, Google and Facebook do have a duopoly in the digital media. They account for about 75% of spending, which as Adam has pointed out is around 30%, 1/3 of the worldwide market. So those 2 companies account, on their own, for about 20% of worldwide media.

Where could a third force come from? It could come from Snap. I see this morning that there's a report that Snap have increased their penetration amongst 12 to 24 year olds, even stronger projected than Instagram. But obviously, Snap is operating at a much lower level of connection certainly with us. So our spending this year on Snap will probably be around $200 million as opposed to $100 million yesterday -- last year. But that pales into significance in relation to the $6 billion and $2 billion or thereabouts that we spend on Google and Facebook.

Another third force could come from the Yahoo!/AOL or indeed AppNexus in which we made an investment or indeed Amazon. See today that Google and Walmart are linking to compete with Amazon. But Amazon is becoming a force in advertising. We estimate on the basis of data we've seen, about $2.5 billion advertising on Amazon. And of course, on search, Amazon is becoming an important search also as well. 55% of product searches in America are initiated at least on Amazon. Surrounding all of these for our clients is the question of who controls the data. One of the things that has concerned our clients is Google and Facebook's unwillingness to share the data or their data to the extent that perhaps traditional media owners are being prepared to do that. And that accounts for the purchase, for example, in Unilever's case, of Dollar Shave Club, which gives it a channel and distribution and engagement to develop.

Rise of Amazon is obviously important in an e-commerce sense, but also brick retail with Whole Foods, cloud computing and indeed content. And content competition has become phenomenally competitive, with Apple announcing its $1 billion content initiative, Microsoft looking at content, Google, Facebook, Alibaba and Tencent. We were in China for 2 weeks a couple of weeks ago in July. And it's quite clear that Alibaba and Tencent, probably even more than Google and Facebook, are turning over the nature of the Chinese media marketplace and starting now to go even beyond the shores of China. And then the traditional media response to that, the development of OTT channels by traditional media outlets. We've heard Bob Iger's statement with the Disney results about the OTT channels for Disney, and we've heard the same from Les Moonves for CBS, and Turner pursuing the same course. So a lot of commentary about what the impact of these forces will be and also what the impact of consultancies will be on our industry. And we continue to see significant numbers of purchases of small fragmented digital agencies, particularly by Accenture and by Deloitte. And the question really is raised as to how much market penetration there has been as a result. There's little or no evidence of that happening as yet, but, of course, you can't rule it out in the future. But so far, it's been on a very small, very fragmented basis and perhaps from a quality point of view, not quite at the levels that we see in some other areas.

Google and Facebook, are they eating our lunch is another question I get asked. We think they're more focused on the mid- and long-tail of our clients -- or not our clients, but of clients generally, not clients that we traditionally service. And certainly, they're more focused on the mid- and long-tail clients than our traditional media customers. The response to that from the industry has fierce -- been fierce agency competition, which has given rise to discounting and shifts in the terms of trade, meaning the relationship between receivables and payables. And that you could see more and more in the context of balance sheets, agency balance sheets particularly, as we've seen in the last half.

On Slide 53, we just summarized what's been happening to WPP's like-for-like revenue growth. And you see we've highlighted Phase 1, which really stretched from -- actually went back to just post-Lehman. This chart starts from Q1 of 2012 through, really, to Q3 of '16. We started to see some impact of the Phase 2 forces as we've identified them in Q4 of '16 and into Q1 and Q2, obviously, of '17. And we're looking there on the right-hand side at the forecasts, the government forecasts, IMF forecast for GDP next year, which, as Adam has indicated, will be slightly stronger than this year, driven perhaps by the mini-quadrennial of the Winter Olympics and the midterm congressional elections and the Russian World Cup or the World Cup, in general. But we've seen a little bit of a disconnect between GDP growth and advertising growth. And I think that's been driven primarily what we've been seeing going on in consumer packaged goods. And the blue line and the yellow-colored line, the yellow-colored line is Goldman's view of nominal GDP over the years. The blue line is WPP's effective GDP. Although we're very strong in Asia and Latin America, Africa, Middle East, Central and Eastern Europe, we're effectively underindexed against the world, and that's why you see those differences. But Phase 1 or the first phase of post-Lehman era was one of low GDP growth, low, low inflation, little pricing power for clients and high focus on costs, but an environment in which we could operate quite effectively with, as I say, record results in each of the years from 2011 through to '16. What we've seen subsequently and maybe starting in the back end of '16 and into '17 is the emergence of 3, sort of, forces. Disrupters like Airbnb, Uber itself, which I suppose is being disrupted as well in the same way, and Amazon. That is a long-term trend and one that gives opportunities to agencies rather -- give some challenges. But basically, having to deal with the same issues ourselves, I think we understand the impact on marketing in terms of media consumption by consumers and media purchasing habits. The other 2 have been much more challenges. Activist investors, we've listed the -- probably the big 6 there or the leading activist investors, not just in the packaged goods sectors but elsewhere. And then the zero-based budgeters who deconstruct costs aggressively to a zero base. So 3G Capital being the most successful example of that, and Coty and Reckitt Benckiser perhaps being other examples. And we've also highlighted what happened in the pharmaceutical space with Valeant and Endo, which sought to do the same things in that industry, although those models have been discredited somewhat.

Now this is, I think, a good description of what the current environment is and the sort of effect it's had. And it's having an effect where executive life expectancy, put it that way, is still short term, with CEOs, CFOs and CMOs having limited tenures. But in addition, the impact of it is quite clearly seen on this graph on Slide 57, where we're looking at the proportion of earnings -- of operating earnings we've paid out in dividends and buybacks with the S&P 500. And then you can see the steady progression since the beginning of '09, post-Lehman. It was at a high level just post-Lehman. Obviously, the cutbacks in buybacks probably at a time when there shouldn't be buybacks after the Lehman crisis. But then, it continually grew until it reached 100% almost at beginning of '14, but more significantly, beginning of '15 and got as high as 131% of retained earnings or operating earnings. And, of course, it's come back a bit probably because of market value.

You see the same phenomenon in the U.K. Slide 58 just shows what's happened to the payout ratio. The solid red line for the FTSE 100, our own payout ratio is shown in blue, which is at 50%. The FTSE is around 65%, 62.5%. You see the earnings per share actually fell in the FTSE 100. They've revived, principally driven, I think, by currency and the weakness of sterling. But the payout ratios have been significant. And there's sort of mirror image or asymmetry if -- to that in terms of investment in fixed investment. These statistics of the U.S. total investment as a percentage of GDP clearly show that investment in fixed assets has not recovered to the levels that we saw in the '80s and the '90s and still remain significantly below. So companies basically unwilling to invest.

And coming back to this issue of what faces the packaged goods industry, which is about, I think Adam mentioned about 25% of his sample, is about 30% of our revenues. What's been happening there, we took this data from our clients, so this is amalgam of about 8 or 9 of our leading packaged goods clients, from the last 3 quarters, and we looked at their revenue growth, their like-for-like revenue growth, organic revenue growth over that period, which obviously consists of volume growth and price growth. Overall revenue growth was about 1% to 2% over the 3 quarters and pricing led as volumes are effectively flat. On Slide 60, you see in Q4 of '16, volumes were only up 0.4% out of the total growth of 2.5%, price being 2.1%. Volumes fell actually in Q1 of '17 by 0.6% against price growth of 1.5%, total organic growth of 0.9%. And then in Q2, really, volumes virtually flat at 0.1%, with price up 1.3% and total organic growth 1.4%. Most of that pricing game came in Asia and Latin America. So volumes were hard to come by. And anybody who's been involved in packaged goods companies, and we have a number of them on our board, say that when they see volumes come off, that is the warning signal. When the number of users of your product actually starts to flatten or drop, that is when trouble starts and should be a big wake-up call for further investment, not just in branding, which is we're obviously talking our own book, but also in terms of investment in innovation. The other interesting thing is that U.S. growth remains behind international and might explain why we're seeing such weakness not only in our own numbers in the U.S., but elsewhere in the industry, too, and the sluggish trends, although Q2 is slightly better than Q1 in terms of the overall trend. But the volume trend is, I think, the key one here. And some clients, as a result, are now saying publicly and openly in relation to their results, they would be investing more in half 2, and we certainly to -- of 2017, and we certainly see that in some of the media data that we manage across our media portfolio.

If we look at the S&P 500 on Slide 61 by sector, what's interesting here, and we just ringed 2 sectors. Information technology in the last 3 quarters has grown on average by about 8%. This is top line growth, and it's valued at 22x earnings. Consumer staples, on the other hand, has grown by 2.4% on average, but it's still valued at 22x earnings. So there seems to be somewhat of a disconnect between growth rates and P/Es. And we think that's driven by the cheap money phenomenon that we mentioned in relation to central bank policy and is likely to continue as long as rates are as low as they are, although we are hearing from central bankers that they will be tapering bond buying or ceasing bond buying and interest rates will start to -- they will tighten monetary policy and interest rates will start to rise. The question is how far, I guess, and how fast. But interestingly, overall, the growth of the S&P 500 is at 6%, against packaged goods around 2%. So they're growing at about 1/3. Whereas on valuation, they're at a 300 basis point almost, 360 basis point difference in terms of P/E multiple increasing or superior price earnings multiple. So there are some discontinuities here, which I think were explained by the cheap money phenomenon that we highlighted.

In 62, we just emphasized that the key to long-term total shareholder return is top line growth. And this is the summation of our 11, 12 years experience on BrandZ, the top 100 brands. And this is looking at the top global brands that we have measured against the S&P 500, the top 10 global brands against the S&P 500. And they've outperformed the S&P 500 by over 50%; and the MSCI, which is the true comparison because it's a world index, by over 3x in the last 11 years. So investment in innovation and branding works, not only from a pricing and volume point of view, but from a top line growth and total shareholder return point of view.

So what's our response to all this? Well, further focus on our 4 strategic priorities. Horizontality, which we moved up from, I think it was #4 a year or so ago to #1, is our first critical priority. And it really means ensuring that our people work seamlessly. They're accustomed to working vertically and by agency brand, but they work seamlessly horizontally across the group together through client teams, I'll come on to those, and country managers and subregional managers to provide an integrated benefit for clients. And clients are pressurizing us for more effectiveness and more efficiency, this is the way, probably the most significant way that we can respond.

The second priority has to be fast-growth markets because the next billion consumers are not going to come from the U.S. or Western Europe, whether it includes the U.K. or not. It's going to come from Asia, from Latin America, from Africa and Middle East and Central and Eastern Europe. New media, which, as Adam pointed out, is providing most, if not all, of the growth in the marketplace is already now 41% in the first half of this year of our total group revenue. And we want it to be significantly more than that. 40% to 45% is the range, and we've achieved that, as I said, in the first half of '17.

Data continues to be an important part of our business, about 25%. And quantitative discipline is as a whole of 1/2. And we're at that level with a particular focus on application of technology on data and on content. And we've been going through considerable structural change already in 2017, which go beyond the creation of teams and the appointment of country and subregional management. And they include John Seifert's initiative as the new CEO of Ogilvy -- of One Ogilvy, the merger of MEC and Maxus by Kelly Clark, who is now running GroupM to NewCo, which will be rebranded and renamed shortly. The expansion, again under Kelly Clark, of Essence, Essence's expansion across the world as a leading digital media agency. Eric Salama's initiative around Kantar to combine all of Kantar's brands, our data brands, whether it be TNS, Millward Brown and Kantar Health, Kantar Media, Kantar Retail, Kantar Consulting on a country-by-country basis. WPP Health and Wellness under Mike Hudnall, combining the assets and talents of our 4 professional pharma agencies, B to D Group with Simon Bolton and Jim Prior consolidating our branding and identity group closer together, Wunderman under Mark Read and POSSIBLE, and again Wunderman, smaller case, Salmon. So significant structural change taking place already.

On this critical priority of horizontality, we now have 50 global client teams. We've just schematically shown the structure of the company, the verticals -- the functional verticals, whether it's advertising, media, data, public relations, public affairs, branding and identity, health and wellness or digital. We have the global client teams, which represent one of the horizontals; country and regional managers, another as a geographical horizontal. And of course, there are cross-group communities and practices, for example, in retail or sports. So we now have 50 account teams accounting for about 1/3 of our revenues. We've added 2 recently, and they're about 40,000 people working on those clients. We have 19 country managers and regional managers, covering about 1/2 of the 114 countries that we operate in. And the critical priorities of horizontality are around people, around clients and making sure we're making the right acquisitions on a country-by-country basis, ensuring our people work together across our businesses and geographies to deliver the best resources. And then focusing on specialist skills that are particularly important and client needs and business issues. And the success, as been shown by the recent wins, we've really had a resurgence in net new business, as you've seen, for over $4 billion in the first half of the year on our figures, and you've seen the published account wins. But the particularly interesting ones are the team additions around Team Horizon, which was of British Airways and that consolidation; Team Google and the increased amount of work we're doing with Google for Google; the Sanofi partnership which secured creative and media assignments for Sanofi -- from Sanofi. And then last but not least, the consolidation of Walgreens Boots Alliance in the W Partnership.

New markets, those markets which are going to provide the next billion consumers, around 28% last year, 29% of our first half year revenues. The first half is a weaker half, and the second half will come out around, I guess, around 30%, 31%. So getting up to 1/3 of our business in the fast-growth markets, but it must be more because this is where the geographic growth is going to come from. And you see that despite the fact the BRICs and the Next 11 have been under some pressure from growth, maybe with the exception of India, our lead in terms of size in those marketplace remains strong. And our compound average growth rates, despite the slowdowns in China and Brazil and Russia, remain very strong, 16 years, 13% in China; 16 years, 11% in Brazil; 16 years, 15% in India; and Russia, 16 years at 38%. And in terms of strength in these new markets, you can see Asia Pacific and the Americas with very strong positions and overall worldwide leading position in media as ranked by RECMA.

In terms of new media, up, as I said, to over 40% in the first half. The objective was to get somewhere between 40% to 45% in 2 or 3 or 4 years' time, so we're well within there. And the reason why it's quite simple, as you can see on Slide 74, digital penetration in 2017, the estimate is it'd be 34% as against 3%, this for the world in 2001, and 42% in 2022. People often talk about the U.K. being the most sophisticated e-commerce Internet country, I'd probably disagree with that. We spent 2 weeks in China in July, and the sophistication in the technology industry there is phenomenal. If you go to Huawei's campus in Shenzhen where there are 50,000 people, last time I visited it 3 years ago, the -- Huawei's revenues were about $35 billion. Today, they're about $70 billion, $75 billion, 200,000 employees of Huawei. As I say, 50,000 sitting on one campus in Shenzhen. You look at Alibaba in Hangzhou with about 15,000 people, again, showing phenomenal growth and penetration. And Alibaba and Tencent almost combined all of the attributes of the Fearsome 5 in the West in 1 in terms of growth and development. So China is the force, and it's leapfrogged desktop, Adam mentioned the demise of desktop, what was it?

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Adam Smith, [5]

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Desktop death.

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [6]

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And where was that? Which market?

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Adam Smith, [7]

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Sweden.

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [8]

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Sweden -- in Sweden. Well, desktop death didn't even have to happen in China because they skipped really from analog to almost to mobile and smartphone in one leap. And so you will see the penetration in all markets, however, it's very strong. And that's mirrored by what we see in the U.S. This is the latest Mary Meeker data. I have to preface it by saying this is about time spent comparing consumer time spent with industry spending, not WPP spending, industry spending. And clearly, print, there's still the discontinuity. There is engagement data that shows that print is much more effective, and you have to take account of that. But on time spent, there clearly is a difference. Radio is about right. TV is about right, interestingly. Internet is about right. The big gap is on mobile, and that's where the big opportunity is in the U.S. market.

There's also been a lot of commentary by analysts and trade magazines about the growth of the consultants. This is published data from Adage. We've already deconstructed that data because what Adage did was to take Accenture as one block and Deloitte and PwC as one block and compare it to individual agencies, which was an apples and oranges comparison. So we've taken the blocks and, not just ourselves, but Publicis, Omnicom obviously have strong concentrations of digital revenue, which surpass Accenture's current digital revenues and IBM's and Deloitte's and PwC. So I think this conversation has to be in balance. So I mean to have consultants have an impact in our industry, I think it would be more from cross benchmarking than actually from the digital side. But we're in the foothills of this, and whilst consultancies might have just bought a series of fragmented small digital agencies across the world, we're yet to see how it morphs into strategy.

WPP's own share of digital revenues, as I said, has gone to 41%. We're in the range of where we want to be at 40% to 45%. And I just included on Slide 78, GroupM's focus on technology, on service and media through [m]PLATFORMs. This is the new platforms that they've developed in these 3 areas. Include Xaxis in the programmatic area, and Xaxis continues to grow at around 10% a year, with now 2,000 employees, annual sales of over $1.1 billion and operating extremely effectively in programmatic. And we're starting to see in the United States, a resurgence, I think, of the programmatic businesses. Clients acknowledge that they can get more effective use of their programmatic investment through programmatic media, such as Xaxis and others.

Turning to data. It's quantified or quantifiable or quantitative disciplines there. 50% of our revenues, which we want them to be are. Pure data operation is just under 1/4 of our business. And you can see how that matches up against other companies, other direct competitors.

And Slide 82 just emphasizes the investments that we're making in not only in technology but in data and content. And it's not just in technology like ActionX or Celtra in dynamic creative, but it's also in data like Infoscout and Invidi. And in content such as 88rising, recent investment made in Asian millennial content, in Mic, not dissimilar millennial content and in Within, which I mentioned before, which is Chris Milk's virtual reality company.

In addition, we've established very strong and unique global data partnerships, not with -- just with digital media owners such as Google and Amazon and Spotify, Twitter and Facebook, but also in specialist datasets, which I've listed on 83.

In terms of our key long-term drives, they remain digital and fast-growth markets. Fast-growth markets account for about 29% of our revenue, digital about 41%. There's a 10% lap over between the 2. So about 60% of our overall revenues come from fast-growth and digital markets as a whole.

Now turning to key objectives. They remain improving operating margins, flexibility in the cost base, using free cash flow to enhance share owner value, developing the role of the parent company, emphasizing revenue and net sales growth as margins improve and improving creative capabilities. And just a quick run through on what we see there. Improving operating margins, you see last year at 17.4%, and this year, moving up on a reportable basis from 13.7% to 13.9%, with a long-term objective of 19.7%, which remains in place. On a constant currency basis, of course, we were flat. And on a like-for-like basis, we were up 0.1%, 10 basis points behind our target, but an improvement.

In terms of payout ratio, we've now reached our 50% target. And that was maintained in the first half. And you can see the growth in our free cash flow and the growth in our dividend payments in the yellow blocks on 88.

89, we show the returns that we made to shareholders where in dividends and buybacks now, returning about 63%, or have done in the full year '16 and the first half of '17 to shareholders. Over 10 years, we've returned almost GBP 6 billion to share owners in the form of dividends and buybacks.

Acquisitions, there's still a significant pipeline of reasonably priced, small- and medium-sized acquisitions. You've seen Design Bridge in the branding and identity area this morning. And we continue to focus on the faster-growing and functional services, particularly digital, e-commerce and shopper and data. We accelerated our targets for new markets to reach 40% to 45% faster, but not just on BRICs and Next 11, but newer opportunities that exist as well. We made just over 30 acquisitions, small- and medium-sized investments in executing the strategy in the first 8 months of this year -- 7 months of this year, coming into the eighth month. And we continue to find opportunities on decent earnings-enhancing multiples, with the exception perhaps of some examples in data and digital assets where prices have been bid up significantly.

Acquisitions added, as Paul has mentioned, just over 2% to revenue growth in the first half of '17 and almost 3% to net sales. And here are the investments and acquisitions that have been made. You see fast-growth markets and quantitative actually accounted for -- most of them with the exception actually of only 3, and several of them where the -- this Venn diagram overlaps were not just fast-growth markets, they were digital as well. The 3 outside, 1 in Germany and 1 Hispanic in the U.S.A. and 1 in media in Italy. Just to give you an idea of how those acquisitions have done over the last 6 or 7 years, we've acquired 242 companies in the 7-year period, 38 in faster-growing markets, 94 in faster-growing markets and digital, 84 in digital on its own. And client or creative or specific client needs, 26. Total revenue in 2017 from those acquisitions were $2 billion -- $2.6 billion. Total consideration paid was $3.1 billion. And in terms of returns and performance, you can see organic revenue growth has been strong, particularly in the creative and faster-growth investments in terms of revenue growth. Operating margin has been strong in digital and faster growth and where we had both. Creative slightly less so in terms of margins, but well up towards the 17%, 18%, 20% range. And the return on capital has been at its highest where we combine faster-growth markets and direct digital at around 13%, 14% compared to our weighted average cost of capital of 6.3%. The average for all of them at around 11%. So strong growth.

We had a good year at Cannes this year. Our 4 major agencies were in positions 2, 4, 6 and 12. So out of the top 5, we had 2; out of the top 6, 3; top dozen, we had the 4. Voted Agency of the Year again for the seventh successive time. And the most effective holding company by not only WARC but by the EFFIEs as well. I think for the EFFIEs, it was for the sixth successive time. Ogilvy being voted the EFFIE's most effective agency, having come second in Cannes. We're the most effective agency according to EFFIE.

Now to summarize, just outlook and conclusions. First half of 2017, our net sales growth was 13.7%; constant currency, 2.2%; but like-for-like was down 0.5%. Reported margin improvement was 20 basis points, 10 basis points on a like-for-like basis and 0 on a constant currency basis. Headcount was controlled. It's been -- it's actually down 1% since 1st of January 2017 on a like-for-like basis to net sales. But like-for-like net sales declined over that period by 0.5%, as I said, with record headline EBITDA, which passed GBP 1 billion in the first half or 1/2 for the first time. And reported headline PBIT growth was almost 15%, with diluted EPS growth over 16%. Return on equity was almost 17% versus a weighted average cost of capital of just over 6%. Dividend increased by 16% to a 50% payout ratio at 22.7p per share. Average net debt-to-EBITDA was just under 1.9. It's at the top end of our target range of 1.5x to 2x. There will be a decreasing net sales tailwind from foreign exchange. That's the weakness of the pound against the dollar and euro, although I have to say that our forecast is based on dollar rates and euro rates which are stronger than currently. So the pound has got weaker, and it may not be quite as -- I think it's 4% to 5%, we're talking about, for the full year. It might actually be a little bit more than that. But for the Q1, it was 13.7%; Q2, 9.7%. And for the full 1 half -- first half, it was 11.5%. Our client spending, as you've seen, was under pressure in quarter 2, particularly in quarter 2, particularly in -- really in June and you've seen in July as well. And the Q2 like-for-like net sales were down 1.7%.

The model remains the same. Organic revenue growth, we've always talked about our net sales growth of 0 to 5% and not beyond that range or below that range. Margin improvement of 0.3 margin points before currency movements, with a long-term margin -- net sales margin target of 19.7%.

So cash flow equally -- pretty equally distributed between acquisitions, GBP 300 million to GBP 400 million; share buybacks of 2% to 3%; and a payout ratio of 50%. The share buybacks have been increased by 1% to 2% to give an impact equivalent to an EPS increment of 20 margin points. All in all, that model delivers 10% of 15% EPS growth.

And then finally, on 98, just to summarize the outlook for the full year. It has been a weak start to the second half with July like-for-like net sales down 2.6% and year-to-date down 0.8%. But our forecasts indicate like-for-like revenue growth and net sales growth revised downwards to between 0 and 1%. Just to remind you, we started the year really at around 3%, then we moved down to 2% -- around 2% at the end of the first quarter. And now we're talking between 0 and 1%. I have to say that a stronger second half looks more likely given partly reflecting easier comparatives. To remind you, in 2016, we did 4% increased net sales in the first half and 2% in the second half. So the comparatives are slightly easier. Margin improvement, the target remains in line at 0.3 margin points excluding currency, off a constant currency base margin of 17.3%. And acquisitions will add 2% to 3% to revenue net of sales. At current exchange rates, we expect full year currency impact to be 4% to 5%. And actually on current basis, it probably will be a little bit more than that. But the forecasts we've been making have been done on the basis of 4% to 5%. And staff cost and headcount remain controlled to deliver the margin target. And our operational effectiveness and efficiency programs support future -- our future margin goal.

So that's where we'll end the presentation, and we'll open up to questions. Can we have the questions, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question is coming from Mr. Brian Wieser calling from Pivotal Research.

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Brian W. Wieser, Pivotal Research Group LLC - Senior Analyst of Advertising, Media, and Internet [2]

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I was wondering, is any one particular region or business segment expected to carry the results in the second half? Or do you expect that to the extent that you see improvement, it will be broad-based? And then a separate question on GDPR. Adam mentioned The Netherlands feedback on expectations. I'm curious, frankly, as to maybe any expectations you have more broadly about how GDPR may play out. I realize it's not on the radar screen for a lot of folks. So maybe many countries in your suite didn't consider it. But related to WPP as well, I'm curious about the impact that GDPR may have on [m]PLATFORM. Does it incur cost? Does it create opportunities? And for marketers who maybe aren't themselves yet ready for GDPR, does that create an opportunity for you? Or is it more of a cost or just an unknown at this point?

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [3]

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Adam, do you want to respond and Paul comment as well?

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Adam Smith, [4]

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Yes. Thank you, Brian. And I think that [m]PLATFORM, our philosophy has long been to have independent architecture anywhere with data. And the m PLATFORM, which is about persistent ID is a -- contains no PII. And the focus when I speak to our people is very much on either anonymized data, which will be compliant or data which -- tracking which is consensual. An example would be the static application. I don't if you know that. Telefonica bought it this year, where the user allows apps to take geographic coordinates. And so I think that's the strategic approach. And -- so we're ready for it. Whether there's any costs, I wouldn't know if it has been reported to you and compliance related.

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Paul W. G. Richardson, WPP plc - Group Finance Director & Executive Director [5]

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I think the European companies, Brian, are much more alert of the issue because it does affect all companies that advertise or touch European consumers. And obviously, that can have much broader implications than just European data, it's data mix from other regions. So I'd say that our research businesses and our media businesses have been very alert to the issue. I think Adam has explained very carefully why -- how we are going about it and in the name, we are using anonymized data. And we are seeking much more positive or confirmed opt-ins. And I would stress that the PII data is broader, i.e., it does include web addresses now as PII data for all users. So it is a big task. It's really about tracking and making sure you know where your data comes from. And obviously, it's very important as you mix various data sources, both external and internal, to come up with your technical product we use. So I would say that most European companies are much more alert to this than some of our European -- or Asian companies, and they may be impacted because they will be touching European consumers. The costs, I think, are limited at this stage. It's more about understanding your data flows and how they integrate to deliver your various products to your consumers.

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [6]

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And just turning to your first question, Brian. I think by virtue of the fact that we talked about easier comparatives, again 4% last year in the first half of '16, 2% in the second half, the answer to the question is, it will be broad-based. Having said that, however, obviously FMCG has taken the brunt of the cuts or the cutbacks, both in media spending and in agency spending. We don't deliberately talk about specific clients, but you well know what specific clients have said in their own earnings calls or half year figures about what's been going on. If I look at our top 30 clients, which in the first half of the year, 14 of them were down and 16 of them were up. But overall, they were down by about 2.5%. This is net sales, not revenues. This is net sales. The bulk of them were in the packaged goods area. There were some financial services, there were some telecoms. But by and large, the concentration or the most significant cuts came from the packaged goods sector. So that's what leads us to the view that in the last 3 quarters, the primary driver of what's been happening has been cheap money driving activist zero-based budgeting activity. Some of the more prominent ZBB activity has obviously been a wake-up call to others. The volume data seems to us to indicate that we showed in the presentation that packaged goods companies should be responding to it given their valuations. Because ultimately, they won't get the price in a low-inflation environment, but they will only get the volume. So they -- and they will only get the volume if they invest in the innovation and the branding. But I would say, to some extent, what we're saying for the second half is based around the easier comparatives and, therefore, is general. But there's also an element here which is specific. Autos are also being a little bit under pressure, but principally, it's been in the packaged goods area.

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Operator [7]

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Our next question is coming from Dan Salmon of BMO Capital Markets.

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Daniel Salmon, BMO Capital Markets Equity Research - Media and Internet Analyst [8]

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2 questions. First on the consultants. It's quite interesting to see you add them here on Slide 76 laying out the digital revenues. But in your comments as well, you noted that you're not yet seeing significant market penetration. And so I'm just curious to have you expand on what you consider significant market penetration to be? Is that adding nondigital services? Is that more into the media planning and buying range? We would just love to hear you expand on that first. And then second, in your macro comments, you noted fairly clearly that you expect 2018 to not be terribly different than 2017. Recognizing you're not giving the full year outlook for your business just yet, at least maybe qualitatively, could you maybe tie that comment to how you view your own business going into next year?

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [9]

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When I talked about -- Dan, about significant market penetration, I was talking about significant sort of head-to-head account wins, if you like, both ways. I mean, either them or us or our competitors and them. And the answer is, limited amounts. I mean, we do see some, but not as much as the literature, whether it be analytical literature or trade literature would suggest. And trying to look at why do we have such a tough time, let's say, in Q1 or Q2, trying to analyze the reasons why. Was it because Google and Facebook were eating our lunch? Don't think so, given the relationship that we have on both sides of the house, as clients and the investments we make in them, given their market position. Was it because of the consultancies eating our lunch? No, I mean -- I think probably the most significant penetration that the consultants have made was -- would probably be not where you would expect it, but probably as advisers to clients on cost. I mean, there was an article yesterday by Michael Farmer on benchmarking or the evils of benchmarking. And what he wrote was a client would hire a consultant who would come in with benchmarked costs. And the agency, I'm talking about us, and any agency would say, show us the benchmark data. The consultant would say, your costs are too high to the agency. The agency would say show us the data. The consultant would say it's confidential. And it ultimately came down to a situation where if the agency wasn't prepared to accept it, they wouldn't keep the business. So I think consultants probably have had more effect in that sense. And what Michael Farmer was saying was, in a benchmarking, it's fine to benchmark as long as you're totally transparent about it. All this discussion about transparency was his point -- was transparency on the client side, too, about benchmarking and the rights or wrongs. And if WPP represents roughly around 25% of the market, we would be 25% of that benchmark, and we would know -- we would think at least 1 in 4 chance probability we'd know what was going on. And I think that's probably where they had their most significant impact. So when I talk about significant market penetration, I'm really trying to search for the reason as to why we saw the deterioration in top line growth starting in Q4 of '16 and into Q1 and Q2 of this year. And I think you come down to cheap money driving heavy investment, pools of money, pools of capital, low cost of capital for activist and zero-based budgeting. On the macro for 2018, Adam, in his forecast -- and there is a disconnect, as you see, in Adam's graph between what advertising is growing at and what GDP is growing at. The correlation is not quite as strong as it used to be. But having said that, there is still a correlation. And because Adam's figures are different to our figures, they're not about agency fees, they're about media spending, whether it be digital or traditional. In the old days, there was a 1:1 correlation because we were paid on 15% or whatever it was of the billings. If billings went up, agency fees went up. They went down, agencies went down. Now we're basically on time of staff or time of labor. And that, obviously, you can have spending going up without agencies fees going up. When spending does go up, activity goes up, and the likelihood is that fees or absolute amounts of fees will rise, so there'll be more activity. Looking at '18, it is a mini-quadrennial. Adam said he is optimistic or sounded optimistic about the Russian World Cup. The South Korean Olympics probably is a little bit more difficult given the situation in North Korea. But we have the midterm congressionals in America where people, I guess, will start revving up for the election in 2020, and we'll see what happens there. But I'd probably -- it's an early stage, Dan. And I don't think we should obviously give any forecast. But I would probably be, on balance, a little bit more optimistic about '18 than I would be in '17. And I've just underlined the point that I can't see how little or no volume growth in packaged goods can work. That if volumes do not grow in low inflationary times, you're going to have a problem. You won't get the pricing. Given the changes that are taking place in distribution, the pressure that Amazon is putting on retailers, traditional retailers, the article I referred to today that Google and Wal-Mart are getting together to take an initiative against Amazon on e-commerce. All this means, I think, it is unlikely that we will see the consumer will win. There'll be much in the way of pricing. Most of the pricing you see comes from Asia and Latin America, doesn't come from the U.S. and Western Europe. And -- so I think it's highly likely that spending -- investment spending both in innovation and branding will rise for the very good reason that if volumes start to drop off, that's the biggest warning signal. That's, I think, the signal where analysts look at. If they look at volume growth in packaged goods, they get worried when they see it tailing off.

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Adam Smith, [10]

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Sorry, Dan, before you go. Yes, I was thinking -- no, is it true in CPG that some advertising is about chopping up and sustaining awareness, and that is the clear link to volume. And I'm thinking that it's about time maybe we dug out some of those files we had in previous recessions where we talk about the fundamentals and the purpose of advertising and the cost of regaining lost share, so -- because CPG strikes me as being in a kind of semi-recessionary condition at the moment. Thanks, Dan.

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Operator [11]

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Our next question is coming from Peter Stabler calling in from Wells Fargo Securities.

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Peter Coleman Stabler, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [12]

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Two, if I may. We've also noticed the comments from some of the management teams in FMCG about expectations for reinvesting in the second half. Just wondering if you think that there's been enough structural change in the composition of their spending where the benefits of that will disproportionately accrue to the media owners and not necessarily the agencies. Martin, you just mentioned in a response to another question that increased media spending will lead to increased levels of activity. Do you think that that's going to hold true this time around? Or do you think there is a structural change that could prevent that from happening? And then secondly, going back to your commentary on some of the pressures on the business, you mentioned the consultancies. You mentioned the duopoly. One piece you didn't mention that has been getting a significant amount of airtime is the idea that clients are taking duties in-house. We know -- we all know that over the last decades, there have been areas -- there's always been areas of activity that clients handle in-house. We're just wondering whether technology changes over the last, let's say, 2, 3 years have essentially enabled marketers to take duties in-house that they would not have considered before?

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [13]

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On the first part of the question, Peter, the media -- where is the increased media going to go? A large part of it is going to go to digital. A large part of it is going to go to traditional. It was interesting that Adam highlighted the fact that even talking to millennial planners in his random sample of a few, they made the case for television. So I think what we'll see as a result of that -- I mean, I think it will be good news, as you pointed out, for the media companies, but it will also be good news for the agencies as well. And certainly, we don't do media planning or buying in all cases, I wish we did, for 100% of client spending. And we have ups and downs, we win pieces of business and lose pieces of business. And so sometimes it's difficult to plot it out. But looking at our top 20-or-so clients and the forecasts that we have for this year, there does seem to be some substance to the reinstatement of spending in the second half of the year, which I think we benefit from just as much as the media agencies. I don't think there's anything structurally that has changed that will prevent that happening. So that's one thing. On the consultancies' duopoly and in-house, I mean, I think -- I'm not sure where the data comes from that shows that there is that much more in-house activity. I mean, for example, in the development of content, one of the fastest-growing sectors that you see in the public relations, public affairs area or certainly public relations area is online content studios. You're seeing some of those in-house, but a lot of them are done out-house. And there's been a lot of -- I mean one of the growth areas that we've noticed in the public relations and public affairs areas has been in that part of the market. And I don't buy the argument -- I mean, I hear people ask the question, just like you have, as to what's stuff has gone in-house. And then I say, what's gone in-house? And it's quite difficult to delineate what it is. And the other thing is, if it goes in-house, that's incremental cost. If clients are looking carefully at cost, why would they want to take stuff in-house. The other cost that you have is once you start to do stuff in-house or if you choose to do that, you have a greater integration cost. The one thing I do think that we see is some clients want to do the integration themselves. Some clients want us to do or our competitors to do the integration. I think that is a difference. And there are some clients who say, I want the burden of the integration. We would say, we have operations in 114 countries and in one way or another, 200,000 people or whatever it is, 135,000 directly, let's -- we should take that burden off you, and you should focus on the bigger pictures. And that's where I think -- I don't think it's about in-house, out-house. That is where I see the -- not disagreement, the argument, but with the cost pressure, I think we see us winning that debate, because we have the capacity, we have the people, we have the distribution networks to get it done. There's no reason for a client to duplicate it.

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Adam Smith, [14]

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Yes. I think there's a few risks about in-house, which may not be obvious as well. If you're going to do direct deals with the publishers, you may find that you get no better terms than your agency could have got you. And you may find yourself lumbered with some kind of spending guarantee that you've got to honor. And secondly, self-service platforms are labor-intensive and you carry the risk. If you make a mistake, you're carrying that cap. There'll be no negotiation with the publisher if you make some inputting error and some clients would rather agencies carry that risk. And thirdly, there's a specific instance I can think of where a client chose to in-house, they hired some agency staff and then they found themselves with a little guilt, and they started making large wage demands because they were the ones that knew all the information. So the net of that is when I ask around, I find that certain, usually web endemic companies with fairly simple tasks will in-house. But for the more complicated ones, we already have clients who perfectly were able to do this by themselves but elect to leave it with us.

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Operator [15]

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We'll now go to Tim Nollen of Macquarie.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [16]

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Two things, please. Once again, on the CPG subject, I'm afraid. You mentioned, I believe, Martin, in your presentation and you have in your slides a comment that you've seen some CPG manufacturers talking about boosting spending in the second half. And we've done a bit of work on this, and it looks like not just some, but a lot, as in a dozen or more, have some pretty explicit commentary about boosting marketing spending in the second half, particularly after a number of them hit some decent margin figures in the first half. I just wonder, it seems like your guidance is not building in any incremental upside in spending. And then if I could just sort of pose the question as a positive, does this mean there could be some upside to come for you if, in fact, you're just staying at this low level, assuming there is no change. Maybe just a bit more comment on any potential for upside based on the comments that I've heard from those companies. Also, I don't believe you said anything about Brexit on this call or on the London call this morning, earlier. You had a couple of comments about Trump, and I just wonder if there's any further, kind of macro-risk comment you might care to make. And then question for Paul very briefly, I missed the first part of this call, but on the London call this morning, I believe you mentioned you can cut about 10% of your back office costs, which is approximately 10% of your total cost base. If I could just confirm that number, meaning do you think you can squeeze out about 1% of your total cost based on central efficiencies?

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [17]

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Okay, Tim. Let's deal with the last one first, and I'll come back on the Brexit in the second half question.

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Paul W. G. Richardson, WPP plc - Group Finance Director & Executive Director [18]

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Yes. I was really going through what our goal was because we did commit to a 1% margin improvement from back office and finance, which also does include IT. We are on the journey, and yes, you're right. It is over a period of time. But we now have, I'd say, most of the tools in place to achieve this. The finance systems, which we are on a disparate, to be honest, compared to others, we now have a -- let's say, a relatively standardized version of an ERP module that works for a lot of our businesses. It's being rolled out now systematically as fast as we can accommodate. The benefits we see in the near term are already on working capital management, and the efficiencies that we gain around that in time will be around audit control, et cetera. But it will minimize duplication of finance teams in market where these centers are built and they are successful. On the IT side, obviously, we've had an interesting sort of few months after the cyber attack. I'd say we have learned a lot. We've understood some of the weaknesses in our systems and what we need to do. And I'm pleased to say that whilst there was obviously some short-term disruption and major hard work put in by ourselves and all our suppliers, particularly IBM, to help us through this, we've got a much better understanding what needs to be achieved in the very near term to, what I'd call, solidify our defenses. It also means we have to accelerate some of the IT transition work that we were doing, which will give us more efficiency. Not to say that, but at least 70% of our 8 -- IT spend is on client faced and Digital Products, so the things that we are doing in the gaining of efficiency in the back office should help us deliver better top line on our Digital Products that we provide to clients. So it is a combination of things. It is that same number I started with 2 to 3 years ago, but we're now midstream on it. And it is around 1% of the group over the next sort of 3 to 4 years we hope to achieve it.

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [19]

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Just a...

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [20]

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And so does that...

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [21]

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Go ahead.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [22]

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Can I ask a quick question, please? Paul, does that mean on the margin expansion for this year, the 30 basis point constant currency, is that therefore roughly half or maybe 2/3 of that is staff cost savings and 1/3 maybe your central costs? Does it work out something like that?

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Paul W. G. Richardson, WPP plc - Group Finance Director & Executive Director [23]

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Well, I'd put it differently. I think we -- as you see through the numbers, we haven't done a great job on the staff costs manage in the first half relative to non-staff costs. And actually, the majority of our efficiency has come to non-staff area. We try not to be so, I suppose, prescriptive about where it comes from. We certainly need to do a better job on the staff costs management in the second half to achieve the margin growth, as well as continue the journey on the non-staff area.

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [24]

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Yes. Just -- let me come back to your 2 questions. I'm going get the reversal around Brexit. The irony about Brexit is if you look at our -- geographically, our strongest area, the U.K. in both quarters was strongest. And you may well ask, why is that? As we did. It may be something at a micro level that is to do with our business. We have a strong business in U.K., very strong market share, very good people, very talented, and that's maybe one of the reasons. The other reason maybe that there is significant uncertainty about -- and maybe fixed investment. I mean, there is some evidence, I think, that fixed investment is under pressure; and maybe variable investment, which is marketing is more attractive, particularly at the time of uncertainty. I just -- offer that as I hypothesis, I have no particular evidence to support it one way or the other. But the simple fact is, the irony is that we didn't spend much time talking about Brexit. Brexit looks as though it's going to run and run. It looks as though that negotiations will take some time, that we'll need a transition period from March the 19th -- from March of '19 onwards, we have to see how it sort of shapes up and shakes out. But I think the die is cast, at least, for the moment on Brexit. We ourselves are investing more time and attention in France and Germany and Italy and Spain because they are 4 of our top 10 markets, and we don't want to lose influence. If you look at our new business wins, it's interesting that a significant number of them have come from Western Europe in the last -- literally, in the past -- last few weeks or months, which is interesting. On the second half, I mean, I'm glad to hear that you see, you've done an investigation, Tim, a little bit or analysis of it, and you see significant spending in the second half. It's difficult for us, having gone through what we've gone through in Q1 and Q2, I think, to be expansive about it. We've looked at our media forecasts because we're running the media books for a number of our major packaged goods clients, for example, and it does look a little bit more better. But I have to be blunt about it, I think when activists or potential acquirers are knocking on doors, in an attempt to fend them off, companies will often do things that are good things in the short term but are not good things in the long term. And I think -- I mean, I'm trying to -- we're trying to wrestle, to be absolutely blunt about it, to wrestle with why what looked like a fairly manageable period of time from 2010, let's call it, through to 2016, has changed. Why, for example, did our forecasts, which we thought our budgets and our forecasts, which we thought were quite reasonable, looked so wobbly in Q2. And I mean, Q1 was not as good as it should be, but it wasn't bad, neither were April and May, really. I mean, June and July -- June was a tough month. July was a tough month, too. So why -- you could look at it and say, well, we had AT&T, we had VW, but we're not going to a stage where we've won enough business to counterbalance that stuff. It does -- the new businesses take time to kick in, AT&T and VW. AT&T went from the fourth quarter of last year and VW from the first quarter of this year. But I think we're probably a little bit once bitten twice shy on it, to be honest. And the other point is going back to the point that Peter made. We may get increased spending, but it's a legitimate question to ask whether that increase spending will flow through to the media owners or to the agencies or both. And if so, in what proportion? So I think to be -- again, to be very blunt about it, I think this cut in brand spending, I mean, just remember that slide on our -- from our brands, the analysis over the last 11 years, there is absolutely this incontrovertible proof that companies that invest in innovation, and then brand those innovations, get greater top line like-for-like growth or what retailers call same-store growth. And their TSRs, as a result -- I mean, this conversation, in relation to ourselves, is the same thing, that one of the biggest drivers of our TSR would be top line growth. Margins play a part, too. But in this top line growth, it's the same thing. And if you're not getting the top line growth, you can't win in the end. And I think -- and if your analysis is right, and you're seeing a lot, what your words, a lot is what I've written down, that would be emblematic of this. When volumes come off, it's a flashing red light. It's an alarm bell and we've seen that -- and that's why we focus on that data on packaged goods for the last 3 quarters. It has never made sense, and it never will make sense.

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Operator [25]

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We'll now go to Doug Arthur of Huber Research.

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Douglas Middleton Arthur, Huber Research Partners, LLC - MD and Research Analyst [26]

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Along on the same lines, so the glass half full, half empty. Paul, you talked about the new business wins being up quite a bit from a year ago. So I guess my first question is, sort of when do you see some incremental help from that versus the major account losses you've singled out in the past. What -- when do you see that flowing in?

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Paul W. G. Richardson, WPP plc - Group Finance Director & Executive Director [27]

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I'm actually not sure exactly when they'll come. But I mean, a normal process of this, is obviously the more global and more complicated a win, the longer they do tend to take to that end. And it's always nicer if both the local operating units and the center are in agreement about the change, which isn't always the case. So you can meet resistance at local markets to coming in even though you've won the global accounts. So we've seen a sort of longer lead in. I mean, in honesty, we are looking at those wins as really the support for 2018 as opposed to having a dramatic effect on 2017. But in addition, we do -- our businesses do assume an amount of new business at any one time in the months ahead. And obviously, what is comforting is we are being successful at new business run rate, which gives us a bit more confidence about the new business numbers in the back end of the year being fulfilled. So I haven't got specifics, but general sense is it's going to be pretty late in this year before some kick in, but hopefully, fairly fully in 2018. Just recalling that it was at this time last year, we announced the win of Walmart for Haworth, and it's really only -- generally, this year when it really kicked in, for example.

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [28]

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Yes. I think the usual -- I mean, the rule of thumb, if you're looking for rule of thumb, Doug, is 90 days usually most of these contracts, unless you had a prolonged pitching process. And one of these recent wins has been going on for a year, Media. And it was exactly a year that it took to announce the decision from the day that the RFP was issued. But I would say, you can still basically operate on the basis, if I was an analyst that if you've got a win, it would start to kick in probably in 90 days time. The disadvantage, of course, is you have some costs, that the winner has costs to build up, to staff up for the win. The loser probably has a runoff benefit as they reduce staff but continue income at least for the 90-day termination period. Sometimes, in these reviews, the terminations are issued at the beginning of the RFP process, and if one has taken that a year, then it'd be a little bit more immediate. But I think Paul is right. Basically, in the last 2 to 3 years, it's probably taking longer for these things to kick in, generally, because of the speed or lack of speed in the process.

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Douglas Middleton Arthur, Huber Research Partners, LLC - MD and Research Analyst [29]

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Okay. Great. And then just as a follow-up. In terms of the second quarter, I mean, the thing that -- the real head scratcher to me is Western Continental Europe. You obviously had exceptional growth in Q1 and then an exceptional downturn in Q2. I mean, that kind of volatility is pretty unusual for your company. We talked a lot about the CPGs, et cetera. Obviously, there's a big exposure, I would assume in Europe. But is there anything else unusual in that swing or is it just the way the ball bounces?

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [30]

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Well, I hesitate to say that it's the way the ball bounces. But I would say it's the impact of what we saw or happening last year on accounts rolling all the way through Europe. I mean, U.K. was stronger. If I look at it country by country, I think we were disappointed by our second performance in Germany. Italy has been sort of up a little bit but sort of flattish. Spain has certainly been improving. I'm talking about generally and not just in relation to quarters. In France, I mean, a tremendous psychological improvement with Macron. But I think it's too early to say. We haven't seen statistical strength as a result of it as yet. So I don't think -- I think things have been tougher. I mean, one of the things that's been going on in Europe, if you're looking at CPGs, is the stress and strain between retail and CPG. I mean, the -- their discounters, little -- whoever in Europe, have put a tremendous amount of pressure on the existing retailers. And the existing retailers in return, are much like referred pain, have put pressure on the manufacturers. And there have been -- there has been a lot of stress and strain even though the economies of the media are improving. And of course, the economies have improved from very low base rates. But we were surprised by the lack of strength in Q2, not just in Western Continental Europe, excluding the U.K., but also in -- elsewhere in the business. But I wouldn't put it down to any particular things. I think it was just -- it's generally has been tougher than people give it credit for. Paul?

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Paul W. G. Richardson, WPP plc - Group Finance Director & Executive Director [31]

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No. I think we do have some specific account issues that did affect certain markets, and they will have to be worked through the majority of this year. But if I look in sort of the second half, I mean, there are some disciplines that are seeing a quite positive outlook in the second half. But it's not universal, it's not consistent. So it is going to be, I think, better in the second half, but it's still going to be patchy. And I think we were probably a little strong in the growth in quarter 1 if you want, it slightly surprised us on the upside, and we've been corrected back to sort of flash-related growth. I think we'll continue to see growth, but it will be patchy and it will be modest. But it's not -- the underlying economies are still better than they were, and we still have very good market positions. But we can't exclude the fact that we do have certain countries that have had quite a serious impact from various account changes over the last 12 months.

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Operator [32]

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As we have any further -- sorry, as we have no further questions, I turn the call back over to the organizers for any additional or closing remarks. Thank you.

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Martin S. Sorrell, WPP plc - Group Chief Executive & Executive Director [33]

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Okay. Thank you, operator. Thanks, everybody, for joining us. If -- any further questions, Fran is -- Fran Butera is in London with us, along with Paul and myself. Adam, of course, is available for questions and Lisa Hau is also available. So we'll speak again soon. Thank you very much indeed.