WPP PLC (WPP) 2002 Q2 法說會逐字稿

Good morning. My name is Leslie and I will be your conference facilitator. At this time I would like to welcome everyone to the WPP 2002 interim results conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and then the number 1 on your telephone key pad. If you would like to withdraw your question, press star and then the number two. Thank you.

Mr. Martin Sorrell, you may begin your conference.

Thank you very much. Good morning to New York from London. Before we start the call, I have Paul Richardson here with me. We're going to go through a brief presentation on four aspects of our interim results.

But before I start, just a brief message regarding the call. I believe we have some press and media on the call. What we would like is the questions be reserved for investors, institutional investors and analysts rather than journalists. If there are any questions from journalists, perhaps they will call Feona McEwan after we finish for any further up or comment.

Having said that, I believe that some, or if not all of you, have got details of the slides that we have in our presentation. There are about 66 of them, I think, in total. They're broken down into four sections, and Paul will deal with two of them, the two bigger items, and I'll deal with two of them.

The first is a summary of our interim results for 2002. The second is a summary of our strategy, our strategic priorities and objectives. A smaller section on conclusions. And then finally what we've termed supplemental information, which we thought investors and analysts would be interested in. There are three areas dealing with executive compensation and options and our decision to expense options to our income statement in accordance with the latest changes or suggested changes in the United States and the U.S. transitional guidelines.

Secondly, a section on our balance sheet obligations in relation to earn outs which receive some degree of concern and concentration recently. Also potential put options in relation to those earn outs, and finally on pensions, there's been some comment about pension obligations and funding or lack of funding, which I think to some extent in our view has been misinformed which we worked to try to correct.

Having said all that, we've steered clear, because we think we've dealt with three issues that have arisen in the last few months in our industry and in relation to some of our competitors. That covers the definition of organic growth rates which we've been quite clear in our case is a pro forma calculation.

The inclusion of earn outs on balance sheets which we've included, all our earn out liabilities in our balance sheet at growth rates of 10 to 15 percent, and the final area was the method of accounting for Internet investments, we have no off balance sheet vehicles and have expensed any diminution in value of Internet investments through our income statement and did so largely in 2001 when we took a 70 million pounds write off for those Internet investments.

So going back to the presentation, let's start with Paul on the interim results for 2002.

Good morning. Again, you should have been emailed a copy of the presentation. It will be going up on the web very shortly, if not already.

In terms of the interim results of 2002, the reported revenues were down two percent for the six months. The cost of currency basis, excluding the impact of acquisitions, revenues are flat.

This affects the strengthening [inaudible] Against the U.S. dollar and yen which was less than offset by the weakening [inaudible] Against the Euro.

On a like-for-like revenue basis, the third six months of the year, revenues were down eight percent.

For the month of July itself revenues again on a like-for-like basis were down over four percent compared to July 2001. PBIT, which is operating profit with associated income pre-goodwill and goodwill impairment charges was down from 284.7 million pounds to 253.9 million, a nine percent drop on a cost [ph] Of currency basis. Margins on the same basis, i.e., pre-goodwill and impairment, were down 1.3 margin points to 13 percent, from 14.3.

Projected headline earnings per share, which excludes the effective goodwill impairment and extraordinary gains and losses was down 12 percent to 13.2 pence from 15 pence. And the standard earnings per share dilution calculation, which includes everything, was down from 14.6 to 10 P.

Just one item of note, because both the [inaudible] Convertible and the WPP convertible were positively accretive to earnings, under the U.S. GAAP guidance, they have to be excluded from the number of shares and income add-back. If they're diluted, we add the shares in and the income adjustment; but as they're accretive, they're excluded from the EPS calculation, which means that the average shares in issue in the combination of the basic shares plus the employee share options only. No adjustments in the half year for these convertibles, which is different from a year ago, which was just some line off [ph] In existence. It is actually quite clearly stated in the notes, to the P and L balance sheet attached with the formal statement.

The interim dividend was up 20 percent to 1.73 P, which is still more than seven times covered in the half year earnings, and 10.7 5 million shares, approximately [inaudible] 9 percent per share capital was actually brought in the third half, or to be more precise, in the second quarter at a total cost of 68 million pounds. Acquisition payments, including earn out payments of a gross nature, totaled 201 million pounds. Again, this is clearly explained later on in the cash flow slide.

Net new business billings were encouraging. Total of 1.2 billion pounds or 1.8 billion dollars for half year. We were ranked number two in this year's SB [ph] Recent report for the first five months of the year which is the latest report they have done on business wins and losses.

On to slide five, we have given you some information about what we've got in terms of the revenue decline and the cost abatement activities we've tried to put in place.

The like-for-like revenues are down almost 217 million dollars or over eight percent for the first month of 2002 compared to the first half of 2001.

Cost reductions were also down eight percent and totaled over 200 million dollars, 77 percent of the revenue decline.

Of that 200 million cost reduction, a total of soft cost was down over 160 million, again over nine percent compared to the year before, representing eight percent of the cost reductions or 60 percent from revenue decline.

Like-for-like soft cost of revenue ratio improved on a cost of currency basis by half a margin point. And on a reported basis at 57, with more point, one margin point better than last year. This reflected the reduction in average head count of over nine percent in the period and the reduction in incentive in our first half 2002 P and L.

Other non-store cost were also down eight percent compared to the year before.

Within that, personal costs were down 19 percent and establishment costs were down three percent in the second half of 2001 and the total property portfolio was reduced by 400,000 square feet worldwide. Again, this is about three percent of the portfolio on 1 January 2002.

Turning to the income statement for the half year on slide six, you'll see revenue of 1959.8 million pounds of a cost of currency basis minus 1.3. Operating profit before goodwill impairment at 238.1 was down 8.4 percent. Goodwill and impairment charge totaled 36.7 million in the half year, of which 24 million was impairment and 12 million was the running rate for amortization, which compares to 4.8 the prior half year.

The operating profit after these items is 201.4 million. And including income from associates of 15.8, we've got 217.2, the PBIT, down 21.5 percent of a cost of currency basis after goodwill and impairment.

Interest at 43.5 pounds included two and a half million pounds of [ph] FRS 17 interest again, which we'll cover in a lot more detail later. The profit before tax of 173.7 and a tax rate again reduced to 27 percent compared to 30 percent of the first half 2001.

Headline dividends share of 13.2 P were seven cents worse than the same calculation on 2001 of 15 pence. Again, the margins of 13 versus 14.3.

Turning to slide seven, looking the revenue by discipline. Again, including acquisitions on the cost of currency basis, the group was basically flat. With amortizing the investment, management up north .5 percent, information and consultancy up 6.8 percent in revenues. Public relations and public affairs down 11.2 percent for the first half compared to a year before. [Inaudible] Health care specialist flat for last year.

On a pro forma like-for-like basis, organic revenue to the group for the first six months was down eight percent. It was the same in [inaudible] Investment management as it was in the nonadvertising businesses, both around a eight percent decline organically.

Looking at it by region, on a cost of currency basis, North America was down 6.3 percent. UK, Continental Europe, Asia Pacific, South America were all up including acquisitions, again looked at organically on a pro forma like-for-like basis. North America was down between 12 and 15 percent. International businesses when combined was down around five to six percent.

On slide nine, looking at margins, the group overall margin declined by 1.3 margin points to 13 percent. Three of our disciplines declined in margin. One improved.

Advertising media investment management still was our strongest margin business at 15.7, despite being down from 17.3 the year before.

Information consultancy margin declined from 9.6 to 7.6, two percent decline. We incurred some costs of restructuring and closure costs in some of our businesses there. In Scandinavia we had some restructuring. In Gold Farb, which is also a market research consultancy group, we had some office closures there. In our call center business on the west coast was very rapid growth for the last two years, because of its main client, telecommunications company, they had a drop off in volume, therefore profitability has gone down. Still very strong but not as good as it was a year before.

Those factors account for the decline in information consultancy for the first half of this year.

Public relations, public affairs number had revenue decline of around 11 percent. The margin has actually improved from 10.9 to 11.9, and it's a credit I think to the very strong actions taken last year in terms of cost reduction, and first, and most particular, it's performing very well on new business interim.

Brand new identity health care [inaudible] Margins 11.8 down from 13.1. Some of those businesses are under - for which we take an impairment charge.

[Inaudible] Geographies on slide 10, again across the globe all our margins are down slightly. Our strongest margin remaining in North America at 16.1 percent down from 16.7, UK at 12.5, down fractionally from last year. Continental Europe is down 2.2 margin points from 9.4 and Asia Pacific, Latin America, Middle East, some impact from what was going on in Argentina but still had to be strong in other markets such as Brazil, China, India all performing pretty very well for us. Again, that strong period is the second half of the year. And it's quite typical for them to have a 30 week first half margin.

Countries on slide 11, cost of currency basis, the only European countries that were performing at five percent or better in revenue growth was Spain and Italy. And Sweden is also at three. And in the other markets, [inaudible] China and India perform particularly strongly, along with Singapore. The rest basically were either only growing at five percent or were negative and listed on the slide.

On the revenue growth by category, all but one category was growing at modest single digit levels or negative. The only category where we had strong growth was, particular for WPP, were the drinks category where we have some significant wins in the Coke business, which is growing at 15 percent plus. But all the big categories such as personal care, drugs, automotive telecommunications were single digit or less in growth for the first half of this year.

On slide 13, we talked about the strength of Sterling. Strengthened against North American, Asian, Pacific and African American [ph] Currencies but less than offset by the weakening of the pound against the Europeans. Interestingly, from January to May the PBT impact was positive three pounds, reported number. In June we had a big swing around of minus five. And so for the half year 174 million pounds reported would have been 176 had Sterling remained the same at 2001 first half levels.

Cash flow in slide 14. We break this out in great detail. We had operating profit in the first half of 201 compared to 259 a year ago. The add back for depreciation amortization of 96 and impairment. Interest paid of 43. Tax paid of 44 less than the tax rate charged in the P and L. The net cash generation of 210, again greater than the operating profit in the group. This compared to 257 a year ago.

I'm looking on slide 15 how we spent that 210 million pounds. Capital expenditure is much reduced from 62 million pounds from the first half 2001 to 34 million pounds in the first half of 2002, mainly because the property which did require fix out and furnishings in the prior two years is now being let go and so a limited amount of that. In addition to that, a big move going on in Y and R in New York is scheduled for the second half of this year to start the capital expenditure.

[Inaudible] Acquisitions and earn out payments which on a gross basis totaled [inaudible] Just 201 million pounds or so is now broken down here. Initial payment fee acquisitions, 110 million pounds in 2002, compared to 220 in 2001.

However, one of those businesses in particular had a lot of cash on its balance sheet for which we paid dollar for dollar. It was a concept acquisition in Germany. Cash acquired in the first half of this year was 58 million pounds. One could net down the initial consideration being around 60 million pounds for first half from one to two. Assume the figure for last half year, cash acquired was 18 million pounds.

Earn out payments in prior acquisitions tamed the first half of this year with 45 million pounds compared to 67, similar period last year. And another item which has been in the balance sheet, low notes of other acquisitions where principals hold these for tax reasons for which we charge interest in our P and L were redeemed a total of 46 million pounds in the first half of this year.

Adding those four components together, I'm looking at acquisition earn out payments less cash acquired with acquisitions of 143 million pounds in the first half of this year compared to 269 in the first half of last year.

Share repurchases were very similar for the two half years, 68 pounds this half year, 70 million pounds last half year. Finally option proceeds from employees exercising options in the cash coming to the company, 22 million pounds this half year, 48 last, leading to a net cash flow after cap ex, after acquisition payments, less cash acquired, after share repurchases, of minus 13 for the first half of 2002. And minus 96 million pounds first half 2001.

Major new business wins and losses are on slide 16 and 17. I'm not going to go through in great detail, but you'll see on the slide a number of worldwide wins, the first two, two largest, Reckit Benkiser and Vodafone came to join us on a worldwide basis. Novartis and [inaudible] On a worldwide basis. VHL for Ogilvy, [inaudible] FTA on a worldwide business and [inaudible] Worldwide basis as well. A number of other pleasing domestic wins in various markets, not lead [inaudible] Piece, [inaudible] Thompson in U.S. Payless and Media Edge CIA in the U.S.A. and Datek for Ogilvy in U.S.A.

This list totals about 1.5 billion dollars in business wins. The following page identified about 400 million dollars of losses in the first half of this year, the largest being the Deutsche telecom lost by mine share in Europe, 100 million dollars.

Coming up on slide 18, looking at the net new business wins in the first six months of 2002, as in the press release, it's 1.79 billion dollars, or 1.2 billion pounds. I'm pleased to say that 1794, to be precise, billion dollars of new business wins was up 31 percent compared to the 1366 in the first half of 2001.

The actual run rate for the quarter were 748 million dollars in new business, wins in quarter 1, and one billion and 46 in quarter two also shows an improving trend.

I will now turn it over to Martin.

Thank you very much, Paul. Paul will come back and talk to you about the supplemental information I mentioned at the beginning.

I just want to recap on our strategy. We have really three key priorities in the short-term to focus on weathering the recession, which clearly as you can see from the first half results have had an impact on those results with revenues like-for-like revenues being down eight percent. In the medium term, to continue the successful integration of Y and R Young and Rubicon [ph], Inc. and Tempest, although integration is probably the wrong word in the case of Y and R, where we're not integrating brands into any of our existing structures, is probably more an appropriate word for Tempest where we are consolidating the media edge and MCIA businesses together, and that integration has gone pretty well in Europe and the United States.

It is now being implemented in Asia Pacific and in Latin America where Tempest's business is fairly small. It's now operative.

The long-term objective is to develop our business in faster growing geographic and functional areas. You can see on slide 21 the current distribution of our business, 40 percent in North America, about 15 percent in the UK. About 20 percent in the Continental Europe. And the balance of under 20 percent in Asia Pacific, Latin America, Africa and the Middle East. As you see from slide 22, the objective is to move one-third of our business into each of those geographic areas. The reason being simply put is that Asia Pacific and Latin America will become more dominant over the next five to ten years. In fact, by the year 2014 two-thirds of the world's population will be in Asia Pacific alone.

On slide 23 we talk about our functional priorities. Today about 55 percent of our business is in marketing services and 45 percent in advertising. Over the next five to ten years, the objective is to move that into two-thirds in marketing services and one-third in advertising, despite what's been happening in the market in the last two years, we do feel it is clear that marketing services will become increasingly important in the context of our client's businesses. If only to do the fact of the increasing pricing of net worth, relative pricing of network television and the increasing attraction of new forms of media, particularly as new generations consume media in different ways and media fragments. Within that objective there's really a third one, which is to move what we call quantitative aids to decision making on slide 24 from about a third of our business, market research and direct and interactive account currently for about a third of our business, two billion of our six billion dollars of revenue to move that to about 50 percent again within the next five to ten years. In terms of key objectives, there's still six on slide 25, improving our operating margins, increasing the flexibility in our cost base, using free cash flow to enhance shareholder value and more of that in the end because I think our focus is going to shift given what is happening to institutional and [inaudible] Sentiment and views in this area. Fourthly, more qualitate actively to continue to develop the role of the parent company, and emphasis revenue growth as margins improve because obviously we are disappointed over the last two years we've been unable to reach our margin target and finally to continue to improve the creative capability of the reputation of our businesses.

On the margin target, you can see a summary on slide 26 of what's been happening to our margins and the impact of 2001 where our margins flattened out and what's happened in the first half of 2002 where our margins have fallen by 1.3 margin points to 13 percent.

Our AGM in June, we basically indicated that we thought it was unlikely we would hit, highly unlikely we would hit our margin target of 15 percent this year. In the statement today we've also indicated we think it would be difficult to even reach our margin target of last year of 14 percent. And I think most analysts in reviewing our statement here in the UK are looking for margins for the full year of being at least 13, maybe a little bit more than that.

As far as 2003 is concerned, our target will remain to be one percent above whatever we achieve in 2002. With our longer term target remaining 20 percent. Some people have expressed some concern about the extent of that margin target. But I just draw your attention to the fact that our margins in North America, despite the ravages of the recession are still around the 16 percent level. But our margins in our advertising and media investment management business, again despite what's been happening around 17 percent. And therefore we think there is scope to move our margins in the longer term so that target remains a realistic one.

On page 27 we just summarized the progress in our earnings and earnings per share over the last five years and what's happened in the first half of this year, earnings per share down by 12 percent as opposed to the operating down 10 percent. And the pretax downturn of 20 percent.

That 12 percent was achieved by the amelioration in our tax charge as Paul had mentioned. The next objective is increasing [inaudible] Cost base. Obviously that's become more important in the context of what's been happening economically. It's not just a question of staff cost, but it's of property cost and bought-in services. Our margins in the first half have dropped by 1.3 percent. Interestingly, our staff cost of revenue ratio has been flat as reported, actually improved by .1 of a percent, on a cost of currency basis it improved by .5 percent. It demonstrates on the staff cost side all our businesses, without any tremendous encouragement, have been focused on staff cost to revenue. You see that what's happened in the head count in the first half of the year. Head count is down about eight to nine percent, which compares for a like-for-like revenue growth decline of eight percent. The head count is equated on a pro forma basis.

If you look at the head count since the first of January, it's down by another three to four percent, point to point, and January the 1st to June 30th, indicating that head count is being lowered by about half a percent per month.

We'd expect that to continue as long as the like-for-like revenue growth was negative, as soon as the like-for-like revenue growth starts to come into equilibrium or even increase over the previous year, one would expect the head count to stabilize and maybe even increase, although we will try and make sure it doesn't increase in direct proportion to the increased in revenues. But it is clear that our businesses have been taking the right action in balancing start costs to revenues and the head count as a result has reduced. But obviously flexibility is going to become increasingly important.

On slide 29 you see we summarize what we have left in the locker, if I can put it like that, in terms of flexibility in the cost base.

If you look at variable staff costs as a percentage of staff cost, the potential staff cost being defined as incentives, [inaudible] And consultants. The potential of staff cost it's about eight percent, as a percentage of revenue, which is probably the more appropriate measure, it's about four and a half percent. This will compare to eight percent, seven and a half percent of the peak in the cycle. So you can see that our staff costs are, variable staff cost have acted as a shock absorber to our margins. In fact, if you look at the release, you'll find an analysis of our margins prior to bonuses and incentives. I think we are the only company that gives out details of margins before incentives. You can see the investment that's being made in incentives and how that's changed over the course of the cycle.

Turning to the third objective on free cash flow. We look at the investment of free cash flow in three ways. First, it's capital expenditure, which is down pretty sharply in the first half of last year, as Paul indicated. And that is add on depreciation flow usually or a little bit above. This year it's below that. That's one alternative for investment. The second alternative is margin acquisitions result, I'll talk about in a minute. The third is dividends and share purchases. And you see we've bumped up the dividend in the first half by 20 percent, which is in line with what we've been doing historically. We believe the institutional investors are becoming more preoccupied with cash returns and yields. And unless our yield is similar to the Nasdaq, it certainly not as close to the [inaudible] 100 here as we would like it to be. So we've been taking the opportunity to increase our dividend because we think it will have a disproportionate impact on total shareholder return. And the second thing we have been doing is buying back shares, continuing to buy back shares in the first half of this year. You see a summary on slide 30 what's been happening. Just under 1 percent of our share capital has been bought back at a total cost of 68 million pounds, 10.75 million shares.

We remain committed to investing about 150 to 200 million pounds a year, equivalent to three to three and a half percent of our share capital in share buy backs and repurchases.

Turning to acquisitions, on slide 31 we continue to emphasize we'll focus on strategic acquisitions. These will tend, by their nature and by pricing, to be focused on the specialty sectors, information and consultancy. And the faster growing sectors within branding and identity health care, specialist communications, such as direct, such as interactive, such as health care. Where we do acquisitions in advertising it will be where we think we have specific needs or creative needs, and as a result of pricing we continue to be focused on opportunities outside the U.S. We still find that vendors in the U.S. are committed or have expectations of pricing that harken back to 2000 and better economic conditions and haven't adjusted their expectations. You can see the impact of that in slides 32, 33 and 34 where the bulk of the acquisitions, in fact all but one in the first half of this year have been outside the United States.

On page 35, we're in slide 35. Just turned to developing role of the parent company.

We focused a lot on human resources. With the addition of Beth [inaudible] Chief talent officer. We focused a lot on property and procurement and information technology. But we were also very focused on practice development. As you look at those ten areas that we've been focused on for some time, there are a number of areas that are interesting in the context of the current environment where spending has been relatively - and I underline relatively stronger, and more buoyant. Health care is one, where health care activities being strong, brands such as Cerebrex, Claritin, Clarinex, all brands which we are involved in, consumer spending DGC, OGC spending has been being quite heavy. This is an area where we're grateful there's procurement pressure as I mentioned before.

Privatization is another area, representing government spending, including a big privatization program in France, but spending by governments on both sides of the Atlantic, for example, the UK government has become the biggest advertizing spender and the UK bigger than Procter and Gamble and Unilever. Government spending has been up. We've also seen packaged good spending relatively stronger, although it's patchy, from client to client, the situation is different. Retailing is another area where we've seen significantly stronger relative growth, low value. Sorry, low priced, higher value retailers in particular being heavy spenders, so more Mart [ph] And Home Depot, Office Depot, Lowes, the results you saw yesterday, all indicating that the high value/low price retailers are slightly more buoyant than say mid markets or department stores.

Other areas which have been relatively strong, not represented in our practice areas would be oil and energy. That's another area which you have seen significant growth. Just one other observation. Although we highlight financial services and new technologies in both areas are under pressure at the moment. We think in the media's long-term these will continue to be very strong areas. Entertainment and media is being buoyed by spending on films and new releases.

The next objective is revenue growth as margins improve, on slide 36. And you see we intend to do that by expanding networks to take advantage of faster growing geographical markets, reinforcing competitive advantage in segments where we think our position is very strong, market research, direct interactive retail health care high tech would be examples of that. And taking advantage of consolidation today, market share, such as we saw last week and this week with Matel, with the concentration into both Ogilvy and Young and Rubicon [ph].

The final objective is to place more emphasis on creative capabilities through recruitment. Recognizing creative success, both tangibly and intangibly. Acquiring higher value creative businesses and placing greater emphasis on creative, both tangible and intangible.

In conclusion before Paul comes back on the supplemental information, then we'll take questions, I think there are four conclusions which we should highlight. The first is we believe we continue to be very well placed by geography and function to benefit from key industry trends.

Despite what has been happening recently. It is clear to us that the non-U.S. markets are becoming increasingly important and nonadvertising poorly referred to as advertising, marketing services activities have become more prominent or more important.

Secondly, we still think despite the difficulties we've had in reaching our margin targets in the difficult times, we still think there's scope for significant margin improvement.

Also scope, clearly, for further cost flexibility and using that flexibility in terms of improving our margins. And to focus on free cash flow to enhance shareholder value. I'll come back to that in the fourth point in a second. The third objective is to continue to concentrate on tour positioning in regard to our top line growth. And focus on the highest growth functional and geographic executors and improving the effectiveness of our cost structure, which still I think we can find ways of streamlining what we do, becoming more efficient at doing more at less cost for our clients, which they are continuing to demand.

The final point I think refers to what I referred to this morning to analysts and institutions here is I think we need to refocus and reemphasize our emphasis on free cash flow. I think in the boon turn times of the late '90s, in particular, there was a tendency to take our eye off of free cash flow after two items that normally are excluded. Acquisition payments and share repurchases.

I think analyst sentiment and institutional investor sentiment as shifted in the last six months or so. And the inability to distinguish between organic and acquisition growth, the tendency for companies to believe that they are a box into which organic growth and acquisition growth flows and therefore the result that comes out of the other end really doesn't matter, as long as you make the numbers.

I think that approach probably is a little bit old-fashioned now.

And that analysts and institutions are focusing on free cash flow after two items. One is acquisition payments themselves and the other is share repurchases. The feeling that share repurchases may be there to cover the dilution that's taking place as a result of option allocation and option exercise. Those are the four conclusions.

Before Paul goes into the three areas, just sort of introduce them. I said before we haven't focused in this presentation on organic growth, Internet investments or earn outs in the balance sheet because we think we're well covered in those three areas, which have been somewhat controversial in the past few months. But there are three areas we want to focus on.

The first is executive compensation and options. We do think that options are a cost of doing business. We have decided, New York times carried an article some weeks ago saying we had decided to expense options. These are our first set of results where we have included the cost of options in our statement because of UK gap and the interest accuracy of UK gap and basically UK gap does not accommodate expensing of options as of yet, we included in effect in a dummy P and L income statement in appendix 3 and you'll see the cost expense there, in accordance with what we've called, I think what are commonly called U.S. guidelines which are similar to the approach taken by Coca Cola, expensing options from the first of January of this year and the first half of this year but doing it in a different way, using a back shawl [ph] Evaluation because of the volatility of our stock and the fact that we got three vesting on these options doesn't really help us very much in amortizing the cost, but I think it gives you an idea of the impact. That's one point. The second thing is the balance sheet obligation. We wanted everyone to be quite clear on what our earn out obligations were, within the balance sheet. They're done on a basis of future growth and profits. But we also wanted to cover a number of other areas, including the put options and the balance sheets as well. Finally, there's been some comment, not so much in America, but in the UK, particularly on potential pension fund deficits and the impact of the stock market and the impact on those deficits. So Paul will finish off in the next 10 or so minutes on these three areas.

Thank you. On slide 42 we've got a slide on senior [inaudible] Compensation options. If I took all the aspects of the compensation, the breakdown [inaudible] First of all the LEAP, leadership equity acquisition plan. The 22 most senior people in the company, including directors and CEOs, participate in a five-year co-investment plan. It's running between 1999 and 2003. Each participant had to put up one-third of new cash and commit two-thirds of existing stock for a five-year period. The reward in shares is based on the comparative performance against WP and a group of 14 others on total shareholder return. The full cost of LEAP, which we estimate to be 75 million pounds, is fully charged income statement over the five-year period.

The second award or second category award is our, the top 10 percent [inaudible] The annual [inaudible] And three year rolling performance plans, [inaudible] Again which are fully charged income statements. The [inaudible] Take out in cash after each year-end and the LTP pays out 50 percent in cash and 50 percent in shares which are purchased by the companies from the ESOP. The shares held in the ESOP as a strict stock for a period of up to two years, so long as the employees are retained within that group that two-year period he can receive those shares.

The first category performance is five percent of senior executives participate in our annual option growth award. And fourthly, there's a worldwide share option program eligible to all full-time employees [inaudible] In the group.

Moving to slide 43, just reiterating a point I have made to a number of institutions. UK companies are governed pretty strictly by ABI guidelines and shareholder approval of [inaudible] Awards has to be gone through.

Our allowance is to issue up to 13 percent share capital for options over a ten-year period. This covers both executives and the worldwide option plan. So you can see that the annual flow rate expected is about 1.3 percent share to capital.

In 2001, the grow out level was 1.3 percent growth, was 1.1 percent net on share ops from last year. This is basically employees leaving before three years vesting, the cumulative option dilution now totals 6.7 percent at balance sheet date December 2001.

Under FAS 123 of the full cost the estimate value of all option grants over the last three years is put through the P and L and totaled 26 million dollars pretax in the 2001 income statement. This was equivalent to 3.6 percent of 2001 headline EPS. On the next slide I show WPP interpublic [inaudible] The value in the US GAAP FAS 123 accounts and the cost of options each of those years for those three companies. In our own case, after tax cost of options was 6.8 million in 1999 has risen to 17.7 in an after tax basis in 2001. In the case of Interpublic, they've gone from 34 million dollars to 68 million dollars in 2001. In the case of [inaudible] They've gone from 15 million dollars to 47 million in 2001.

In terms of graphically, slide 45 looks at the PAT percentage FAS 123 expense represents in each the three competitor groups. In 2001, our estimation for companies filings show in our cost the - in our accounts, the options cost approximately 3.6 percent PAT, and Interpublic's preexceptional cost is about 19 percent. And [inaudible] Is about 9.4 percent.

Slide 46 shows the net share option grant each year and the outstanding share capital. In the case of WPP, this ranges from north point five percent in one year by half a percent to 1.1 in 2001, over three years 1999, 2001. In our competitors, the lowest is 2.2 percent in any one year and the highest it's five percent in any one year.

Slide 47 shows the dilution due to cumulative share option grants resulting in balance sheet as of 31st of December. In our own case, as I mentioned before, it was 6.7 percent. Interpublic's case it was about 9.9. Omnicom [ph] 8.9, [inaudible] 7.2. Again around this level, high single digit in all five cases.

Slide 48 looks at the dilution of the overhang of each of the major three competitors, looking at options plus the option, the share dilution resulting from the convertible stock in issue should they convert. In our case the maximum dilution would be 10.4 percent. Inter public's about 14 percent. Intercom is about 14.6. This is assuming the convertibles aren't put but are converted into equity before their end date.

Slide 49 looks at the extent of the share option grant in the money at various share prices. I think it's interesting to note in our own case the level of grants and the spreading of them even at the price of four pounds, 52 percent employee share option grants is still in the money. Five pounds 68 percent. Similar percentage was not achieved in the other competitors. So at Omnicom, at a 60 dollar range, about 70 percent. $80 or probably north of 70 dollars for the options come into money. Interpublic's case it's around 36 percent at 20 dollars with 100 percent of the money by about $40 a share.

In the case of [inaudible] On slide 50, we go through expense of cost of options in the income statement. FAS 123 calculates the fair value option granted each year and stipulates that this cost of charge over the period option vesting which is three years in our case. Fully expensing in all options granted over the last three years would reduce first half headlines diluted EPS by five percent in our case to 12.6 P. Under the U.S. transitional rules only options issued during the current year 2002 are expensed. On this basis the first half 2002 charge would be 1.3 million pretax, less than one percent of EPS.

I'll now move to balance sheet and debt maturity obligations. I just want to go through what I consider a very strong balance sheet with a very favorable maturity profile for WPP. On slide 52 I make the point that the very sources of long-term funding available to us both the convertibles, Euro and Yankee bond market, there's no dependence on short-term banking securities or CP markets. The bank revolver matures in 2006. The first maturity of any debt instrument in WPP is 2004. Our ratings remain stable at triple B plus and A minus and there are no puts on both our convertibles.

Y and R 287, maturity 2005, and the recently issued 450 million pound WPP convertible matures in 2007.

Historically, we have targeted about 75 percent of our debt exposure sure to be fixed interest and 25 percent in floating interest rate. This is to guard against a roughly rising interest rate environment and the effects of the P and L. The current balance of our maturities reflect this. The fixed rate debt costing between two percent and 6.8 percent are maturities between five and ten years.

Slide 53 lists out all our debts profile from 2004 to 2008 with a credit facility firmly in place of 750 million dollars in 2006.

Slide 54 is graphic and shows the bar chart including earn outs of our maturity profile from 2002 to 2008. It needs to be seen to be comprehended.

On slide 55, I've gone through the exposure on the Internet on a calendar year basis. And node 10 on creditors in our statements today, you've got the earn out best estimates of future earn outs obligations which total 227.9 million pounds over the next five years and it's split within one year 59 and it's spread out over the five-year period.

Slide 56 I've tried to show fixed rate debt, 70 percent of our total debt position is still at around 50 to 60 percent of our debt obligation in 2005, 2006. And the interest income we will pay regardless of what floating rate interest, floating interest rate will be between three and four and a half percent all the way out 2007 on our fixed rate debt. This gives us some certainty about interest costs in our P and L whatever the interest rate environment.

Slide 57 is a competitive graphic illustration of the major three holding companies, just showing debts, not earn outs and the first possible maturity dates if the puts are - put backs are invested to the companies in all cases showing graphically the maturity profile of the three leaders in the industry.

Slide 58 I'll now talk about pensions. In the UK we introduced FRS 17, one of the very few companies in the UK to do so. I think there's some misunderstanding or miscomprehension about what these costs are and what the effect of P and L. I have tried to answer the question. I do so in these slides about what is the effect in the group of a 30 percent reduction in asset valuation on equity securities held by our pension funds.

The first thing I want to make a point of is the majority of our employees are on defined contribution schemes. The 2001 pension charge was 60 million pounds. 75 percent of the cost [inaudible] Relates to the defined contribution terms and will not vary as a result of stock market performance.

That's the cost of the company. All senior executive defined benefit plans have been closed to new members for some time. Some as long as a decade. Most have salary caps in place. All pension and post retirement health obligations are included on our balance sheet and as of December 2001 the net liability was 135 million pounds.

Slide 60 lists out the cost of P and L of the 60 million pounds, which is defined contribution cost 41 million. Defined benefit servicing cost 14 million. And the [inaudible] Interest cost on this net liability of 135 million pounds charged to interest of 3.8.

Slide 60 is something that is not yet available publicly. It breaks out our present value liabilities of 458 versus our share value back of 323. I.e. the 35 million [inaudible] Between funded and unfunded schemes. We have 77 million of unfunded schemes which do not have assets letter are not required to have assets and is quite common in countries such as Germany and Japan.

Of the funded schemes, the present value liabilities 381 million pounds. The fair value of assets is 323. A benefit of only 58.

Again, the unfunded schemes have about 20 years for these fundings to be accumulated by those schemes.

Slide 61 goes through - [inaudible] Interest cost is calculated and I won't dwell on. Slide 62 shows the asset allocation of all other funded schemes, i.e. total 323 million pounds under assets, of which only 47 percent is equities. And because of lower advanced schemes have closed, we have reallocated investments of equities to [inaudible] To cash, which now total 53 percent of our total pension assets.

This is a quite high percentage compared to most. I can also reassure people that none of our 401(K) plans, U.S.A. UK equivalent have more than 25 percent invested in WPP shares. That's the maximum. I know the vast majority have far less than this.

To summarize, [inaudible] 30 percent decline in the stock market. In P and L terms the only change will be on the expected return on the assets which will fall by approximately 3.2 million pounds per annum and lead to higher merchant interest cost. On the balance sheet, the variable equity assets of 153 million will decline by 150 million pounds or 107 and this deficit will be charged to something called the statement of recognized gains and losses at the bottom of the P and L. Again, on the balance sheet the net liability should this occur would increase from 135 to 181 million. I have not assumed any bond held for a gap in value.

Finally, my last point is on cash flow, to make up for this additional shortfall on funded schemes over the average working life of the scheme members would mean an additional approximately five new pounds per cash per annum contribution which would obviously reduce [inaudible] Recovered. That is the totality of the effect on WPP should asset values decline by 30 percent in our pension funds.

With that I'll happily hand it over to questions.

We'll take questions. 00:00:00

At this time I would like to remind everyone if you would like to ask a question, please press star and then the No. 1 on your telephone key pad. We will pause for a moment to compile the Q and A roster your first question comes from the lines of Alexis Quadani [ph] With Bear Stearns.

With the main focus of your acquisitions going forward being in the nontraditional areas or earn outs outside the United States, is there any concern that making these acquisitions will detract at least in the near term from your margin targets, given that these tend to be your lower margins businesses?

I think that's a little bit unfair actually. The margins, it's true, the level of margins in North America is around the 16 percent, 16.1 percent level, even in these difficult times.

I think there are high margin business outside the United States and if you look at our businesses, for example, in information and consultancy, to some extent even in public relations and public affairs, and advertising and media investment management. If you take last year's margins on a geographic basis, I think one of the remarkable things was the margins in each geographical jurisdiction were at the higher levels. In fact, they were all in the medium double digit areas. So I think it would be wrong to assume that America, because they've [inaudible] Necessarily also the home of inexorably high margins. I think there are high margins on the outside.

On the valuation, we found that U.S. vendors are less enthusiastic about lowering their expectations of value, maybe - and also a number of businesses being drawn because due diligence would discover their levels of profitability are not as claimed or negotiated prior to the recession over the last half of the year.

So we think the better opportunities are outside. Having said that, our level of acquisition activity in the first half of the year is probably running about a quarter of the level it was at the same time last year.

I take that from the fact that our initial payments in the first half are about 110 million pounds versus 220 in the previous six months. And of that 110 about 50 million was cash that came in through a payment in respect of cash that came in through concepts. So really you have to adjust that to about 50 million. So it's running about a quarter of the level it was last year.

I don't know what others are going to do, but my guess is given the focus of others such as yourself and institutional investors, the companies probably will get significant premium for organic growth and rather than growth by acquisitions. I think for that reason total shareholder return will probably be better served by investing maybe in capital expenditure and less so that. But certainly in dividends and repurchases.

And just a couple of follow-up questions.

If you just look at I guess the results in the latter half of the first half that you're reporting, ending the second three months versus the numbers you reported for the first three months. It looks like you were saying at least modally better results in almost every area. Am I right, is there a reason to be a little hopeful here or is it just really maybe new business or acquisition kicking in that are lifting those numbers?

You're accusing me of being a serial pessimist.

I think not so much in the second quarter but you can see we stuck in the July number of minus four percent on a like-for-like basis, which is certainly nothing to be proud of but is certainly better than minus eight percent on a like-for-like basis for the first six months. I think what we're seeing is the beginning of comparable improvement. In other words, as the recession hit in the third quarter of last year, second and third quarter of last year, and then the total since September 11th made things materially worse, the comparables are going to get easier.

Having said that, I think the asset price deflation that falls on the stock market in June, July and August in the U.S. and elsewhere, there is a concern that as a result of that the consumer might become a little bit less bulling and pull in as far as spending is concerned.

As far as what's going on in the automobile and truck industry in America can't carry on forever. Certainly our view is that price promotion, cash back zero coupon finance do not do long-term - will do long-term damage to brands, emphasizing price rather than brand at this particular point in the cycle is really not the way to go, even if you're faced with an overcapacity situation. So I think there is a risk which we're indicating of double dip, which makes the second half comparatives, although they're easier, less easy than they were a couple of months ago. And I think that's what we're sort of signaling to some extent in the statement that is one of our concerns.

So I think the comparatives get a little bit better, to come back to you in the second quarter. And July. But I don't think we want to decrease our vigilance on the cost side of the equation, because we may be in for a double dip or some form of double dip as we go through the year.

Just lastly, you mentioned that the auto category. I noticed it was one of your weaker categories in your slides.

It remains one of the strongest at least on media in the United States. Do these zero percent financing offers which are drawing so much of the spending here, do they have minimal benefit to your business because they don't involve much creative work?

It's not so much that. Clearly spending in that area has to be advertised. So promotional spending has to be advertised. Dealer spending is based on volumes. So when volumes are high, there's more dealer advertising. So when we do a significant amount of dealer advertising, so we get a benefit from that. But I think some of the media spending, you have to look at it by brand and you've got to look at it by manufacturer. Some have been stronger and some have not been stronger. So there's been some differences by manufacturer.

I think the issue remains that the Japanese brands - [inaudible] In particular, are making significant inroads in the market. I think a lot of American comment has been that the strength of the yen gave them a price advantage. If you actually look at the cash backs and subsidies they're putting in. I think it averages about $800 a car or truck versus what the big three are spending, around 3,200, 3,400. Clearly that's heavier investment by the big three in promotional discounts, whereas the Japanese are investing in product. If you look to Toyota's results for the first half of the year I think they were up by about a third. And they pointed to increased sales in the United States and North America in particular as being the reason.

So I think to some extent that promotional spending helps us, but not as much as if it was fully pledged brand advertising.

Thank you very much.

Your next question comes from Luke [inaudible] Of 1 investments [phonetic].

I just have one question. On your cost base, you're showing your slide after the viable costs now in going forward in 2002 is only four and a half percent of your personal cost - [inaudible] Cost you have.

Of revenues. That's a proportion of staff cost.

How can you - do you think you can carry on reducing your personal cost should you - should revenues go down in the second half.

Personal costs different you mean variable staff cost?

Variable staff cost.

I think there is some flexibility. Obviously with the performance of the group, the decline in profitability that has a significant impact on incentives. It's very difficult for us to measure what that impact is in relation to others. Because I don't think that anybody else in our industry gives a breakdown of what's happening to incentive payments or free-lance or consultants, which are the tore component parts of the variable staff cost. I think the answer to your question is yes. Obviously it gets easier at the beginning of each year because you rebase the incentives which is the largest part of it. You rebase the incentives each year for it.

So you were going to say something?

No, I was asking what kind of decline can you afford in the second half before not being able to -

We said in previous years that we thought that our incentive costs could have at least for two years without having a significant, not just incentive costs, variable staff costs. We thought that would give us - the height of the recession I think I said the height of the cycle, I think I said that variable staff costs were about seven or eight percent. And we always said prior to the recession, in the '90s, that we thought that would give us a cushion for at least two years. After that it gets more difficult. But every year, going back to point I just made, you rebase the variable costs.

So in 2003 the base for growth in our incentive pools, which really are determined, the funding mechanism for the incentive polls are by and large operating growth and margin improvement. It varies from company to company, but that's largely what it is.

We thought in those cases when you get to 2003, can you rebase the incentives and then the variability becomes more pronounced next year.

So I think those pools can take a little bit more strain in 2002 and then in a sense they'll be reintroduced in 2003.

The other point, within staff costs again, to be complete, we do include all our severance costs. We did take a fair amount of severance in the second half of last year. You can see it very clearly in other public relations companies that despite revenue decline is improving its margin profitability. So in the second half of 2002 there were some, I wouldn't say extraordinary, but we dealt with a nine to 10 percent point-to-point head count reduction in 2001 through severance. [Inaudible] There's a little bit of comparative ease in that particular category that helps us on our half year basis on the full staff costs.

We've resisted the temptation to expense severance payments or restructuring costs as extraordinary or exceptional items as I think most of our competitors with one or two exceptions have done. We thought it was better to try and keep it as a clean [inaudible] Commerce P and L rather than break out those costs, because those restructuring provisions or severance costs tend to become permanent each year. And they lose their extraordinary or exceptional character.

Moving from this, if I'm allowed another question, is on your revenues, can you elaborate in the trend between your revenue mix between CE income and viable income [phonetic]. Would you make money as a percentage of what the [inaudible].

All our advertising business, which is 55 percent of our business is fee based. About 45 percent is in advertising, approximately half would be commission based and half would be fee based, which is probably a higher proportion of commission income than you would see in the United States. I think before it talks about two-thirds fee and one-third commission in the U.S.. but it approximates to about 50. But it is moving more towards fee than commission.

Have it moved [inaudible] Before this year.

I don't think this year was a material difference.

But the trend is more fee and less -

Yes, and we welcome that because we believe we can plan our businesses, there's no seasonality. There's less volatility in the income we receive. Because you know the quarters, the second and fourth quarters are stronger than the first and third quarters. So it was to plan our business better.

Thank you.

Your next question comes from Frederick Serby [[ph] Of JP Morgan.

This is Frederick Serby [ph] From JP Morgan. I wanted to compliment you on the level of disclosure. It's excellent in this piece.

A couple questions for you. First, several of the large holding companies have talked about at the beginning of the year RFPs coming up and that being a precursor to some kind of rebound. Where have we been in the last several months? Is that still something - some have mentioned that it's abated somewhat. And then secondly all of the large holdings companies reporting fairly exceptional net new business wins. And I wonder, to what degree is this really a zero sum game or is this sort of cliche about stealing from the empty medal or incremental new business in marketing services really materializing or is this just a reshuffling of accounts that calls into account the strengthening of the numbers from all the companies.

The disclosure might be good but I wish the numbers were a little bit better.

On the question of RFPs, I think seems to be apocryphal stuff and random pieces of information. My sense is that the level of new business activity, I think what [inaudible] Said this week in terms of surveys has been pretty constant in the first, second, beginning of third quarters. I don't sense any enhanced level of activity. It might be like last year. What we do sense is that Easter was a strange period. The economy in the U.S. which usually keeps going, except for Christmas and new year, those two weeks, seemed to not stall but slow down a bit. There was a lot of holidays taken at Easter. It seemed that the two weeks coincided with kids holidays. It was interesting I think both in the U.S. and Europe holidays in the summer seemed to be started to be taken earlier in July. Clients were on holiday. I think more at that time. I think almost a feeling of getting away from some of the issues they were dealing with might help. Of course when you come back they're always still there. It's a bit reminiscent I think of last year and what happens prior to Labor Day or the August 9th holiday weekend over here which is coming up this week and the following week. And that when people come back to their desks and look at third and fourth quarter, they might reappraise what they're doing and they might be a little bit more activity on the new business front.

I think as it was last year, as a result of people focusing on the numbers, worrying a little bit about 2002 or the back end of 2002. And more importantly looking at what's going to happen in 2003.

On the question about whether this is a zero sum game, I think there is still a movement from independence to the bigger groups. Interestingly, if you appoint, there was an article in today's daily telegraph, didn't have any statistical justification to it. But talked about some independent agency, new agency wins in the UK market. I don't think it's a discernible trend other than there's the same polarization that we've seen between, on one end, the bigger end of the spectrum and the other., the smaller end of the spectrum.

Clearly the bigger parent companies, as we call them, have become more widely embracing of other activities. Some have pointed to some of the parent companies or holding companies of being too broadly spread and getting into some areas that don't make sense and that build a conglomerate structure. So I think broadly what's happening is there's more coverage by the parent companies. They are pulling in more revenues as a result. The question is whether that goes too far. But I think the focus will increasingly be on the organic areas. So new business will become increasingly important, either as extensions of activity like last week with ma tell, with Ogilvy and YMR and breaking into new businesses we did in the first half of year with the Reckitt Benckiser and Vodafone

Next question comes from [inaudible] From Merrill Lynch.

A follow-up Martin to your answer to Alexia. Are you seeing any indication from clients that they intend to increase spending prospectively and also how do you reconcile what you're seeing with the, throughout the U.S. TV market and strong scatter pricing in the U.S.

My sense was just on the last point we had a strong out front but staff was weaker initially. And that matched sort of in a sense matched the previous year when the up front was weaker there was a movement into local and scatter markets. So I'm not sure I necessarily agree with what you just said. I think on the question of whether there is any lag factor to the agencies, I mean there could be a lag factor in the sense that increased spend would only show up in the fees, not in commission, going back to Luke's question, but would only show up in fees on a lagged basis. And that may be reflective of that. But I just don't see much, or rather I should put it another way. I see contradictory evidence. On the one hand you have bullish statements and numbers from CBS Viacom and Sumner Redstone and [inaudible] The news court numbers were good. But when you look at them maybe some of it was coming or most of it was coming from the [inaudible] Side of the business. You certainly end up in the print media of seeing strong negatives, for example the reporting by peer son over here, other news clip paper group in the United States would substantiate that. There was an interesting article yesterday on magazines in September. The interesting thing was that the article pointed to strong page growth, advertising page growth in September in certain magazines, the biggest ever magazines they produce. But the article also pointed out that for the category as a whole growth over September was only, I think it was only north.2 percent. So you're getting this conflicting evidence coming back to your question and Alexia's question, we see nothing - everything that we have is or most of what we have is there for to you see. And we have given you July numbers. We obviously don't know what the actuals for August are. The comparatives are getting slightly easier. I don't think they're as easy as they were a couple months ago because of the potential double dip.

At the moment if you are seeing signs of strength in the media owners, it hasn't shown up in our numbers as yet.

But are clients as a whole sort of indicating that they are -

I think it would be a fool who could say to you that talked in a group of our nature to every client and had a good statistical sample. I can think of clients, without naming them, who are saying we'll spend more in the fourth quarter in anticipation of what's going to happen in 2003 and in order to get a better base for 2003.

Equally, you'll find clients who are still looking carefully at their budgets. I think the biggest group of people who are still hesitant, if the average life of a CEO is three years or whatever the commonly accepted statistic is now, if the average is quarterly reporting and you've got Brussels, Brussels commission over here in Europe saying quarterly reporting would become the norm for European companies too, the focus on the short-term is clearly going to drive people to be hesitant.

From our strategic point of view, we think price promotion makes little sense. Every piece of statistical evidence that we have, and we would have it, wouldn't we, but the evidence that other people have points to the fact that those people who spend on brands in recessions do better when there's a recovery in the economy than those people that don't.

And given human nature or what's going on with the quarterly reporting, the focus on the short-term, the length of management positions, I think it's unrealistic to believe that people are going to take inordinate risks at this point in time. I think there's another issue. If you compare this to the late 80s, the inflation, government policy was focused on controlling, not controlling inflation, but focused on unemployment. Governments did not want significant unemployment. If you look at unemployment now, it's significantly high historically at this stage of the cycle and I think in most other cycles, even in the UK and US, five, six seven percent, there are obviously regional differences which would take it into double digit. If you look at France, Germany Italy, Spain, they're all at seven, eight nine percent unemployment generally across the board. And in some parts of southern Italy, south of France, Germany it's high double digits. That's resulted in some of the political changes that have taken place or the political trends that have been established. I think in this environment, with little pricing power whereas in the late 80s our clients had significant pricing power, with little inflation I think is helpful to our clients there is no inflation at significant - significant to speak of and that makes it difficult and I think broadly it makes them more hesitant.

Thank you.

Next question comes from Kevin Sullivan from Lehman Brothers.

Two questions. In your slide on cash flows, you don't include change in working capital. Can you just touch on working capital through the first half of the year. And what your expectations are for the year. And secondly and more theoretically, general consensus is that marketing services as a whole have a higher margin than the traditional ad business. You guys are one of the only companies to break out the profits by category and the margins there are below traditional advertising. Is consensus wrong on that. What are your thoughts on that?

To deal with the latter point first, I think we do think that's one of the opportunities in marketing services. Probably the margins for the research business, which are done on revenues rather than gross margin understate the position. They probably would double up the margins if you looked at gross margin, because gross margin is about half of the revenues. But having said that, we think there is a significant opportunity in the marketing services area, particularly in those [inaudible] That we were talking about, the decision making, direct interactive research which tends to be more syndicated variety rather than company gives us the opportunity. On the working capital point, I think we presented in the second half of last year our working capital notes in an ill advised manner. I think we lost some working capital in the fourth quarter of last year, about 150 million dollars in working capital as a result of the decline in billings, in that fourth quarter due to primarily to the events pre September 11th.

I think the information Paul I'll go into it now in detail, the position since December 31st has improved. We've had a relatively positive improvement in our working capital.

With the focus on free cash flow post acquisition payments and share repurchases, obviously the working capital change is going to become increasingly important. So that's something that we're placing more and more emphasis on. But Paul has some things he wanted to say in detail on this.

Let me stand back and say one thing. First of all we maintained [inaudible] As being working capital every June and every balance sheet date. If you look on page 10 of the cash flow, you can get a little confused. At December year end we're very heavily working capital negative. We were less so on December 2001 than we were December 2000. But we had a bumper year in 2000. What is also shown on the cash flow payment is a partial outflow of that negativity between December and June, although still being negative working capital on the balance sheet date 3rd of June 2002. I calculated about 75 million pounds negative [inaudible] Trading working capital which is census with [inaudible] [Inaudible] The outflow in the first half of this year was 199 negative. The outflow in the first half of 2001 was 295 million pounds negative. So about 100 million pound improvement.

There's a lot of focus and attention on this. We're going to benefit I think from the superior management working capital by the Y and R group of companies across our businesses, especially in the U.S.A. and bringing together some of the working capital management within mine share and Mead SCA which is a result of big machines that manage to flow very carefully is having some advantage. But not to take away from that, I'm very conscious of the ratios [inaudible] Public. We're very focused on maintaining the middle amount of working capital and have significant businesses. Our business and ourselves to achieve each year. On a full year basis I would advise you not to assume any significant improvement or deterioration of working capital. We do give you the average net debt figure for each period. That is the compilation of the opening balance sheet, the average cash flows and working capital on the average basis over the period [inaudible] If we do it well we will bring the average net debt down regardless of cash generation from businesses by better improvement of working capital. It's important. It helps interest. We're very focused on that.

It was very helpful. Thanks.

Your next question comes from Simon Silverstone of Chilton.

Could you possibly just run through the way you think the business will grow. Talk more about focus on organic growth, because that combined with the folks on free cash flow after acquisition spend. I just wonder whether that would lead you to down [inaudible] Long-term prospects for revenue growth. Because presumably cap ex will take longer to turn into revenues than the immediate impact from an acquisition.

Just on our financial model as being based on low single digit revenue growth anyway. So I don't think that's in contradiction with what we said before. I mean what we're faced with at the moment is negative like-for-like decline in revenues on a like-for-like basis. So switching to let's say a more settled scenario, let's assume that the recession, as we said in the statement, we think 2003 will be a better year than 2002 but not much so, that we'll have to wait for a significant recovery in media markets until 2004 and the presidential election and the Olympics.

If you agree with that, low single digit growth in the market, low single digit growth in our revenues plus margin improvement, which we think we can achieve and that level of revenue growth I think will give us what we need.

I just don't think coming back to your question that the market buys today in the same way as it did three or four years ago. Models of businesses that are built heavily on acquisition growth.

I think it's very focused on cash returns, witness the increasing importance of dividend yields, the reason why we continue to increase our dividends at the same rate that we've done historically. [Gap in audio] AOL time warner, all those sorts of issues that are being raised. And the questioning about given the size of some of these businesses, again, not referring necessarily to our own industry, the ability to grow them continuously by acquisition. The strongest professional service companies, probably those that have grown organically, MacKenzie or Goldman Sachs or whatever it happens to be, companies that grown organically rather than by acquisition. It's a simple fact of life. It may not be an easy fact to accept if you want to grow aggressively. But organic growth does tend to be stronger. And I think as you see in the retail sector, for example, like-for-like store growth is better and is valued more highly than building new stores. Or acquiring new stores. So like-for-like growth I think is the critical measure. And something that we are, I think we have to like it or not, coming back to your question, like it or not it's hard to work than acquisitions. Certainly making them. Not necessarily making them work.

But I think that's where the focus has to be. But again, coming back to what you said, I don't think lower growth - north to five percent increases in the industry or in revenue growth rules out strong growth in free cash flow after share repurchases and acquisition payments or rules out us achieving our organic [inaudible].

Have you set any targets for free cash flow growth either as a percentage of net -

We were asked that question this morning. The answer to that was as much as possible. But instead of stopping looking at free cash flow before share repurchases and acquisition payments, we're looking at - I think the focus has to be after. Because I don't think many of the people on this call or others can understand now how some of these businesses work.

So what people are starting to say is acquisition payments are a cost of doing business. Share repurchases are a cost of doing business. If you're spraying options around like confetti, they have a cost. At the moment they're excluded in most P and Ls as a cost. They are a staff cost. Warren Buffet pointed this out ten years ago. You wouldn't give a financial institution a call on your stock for ten years at zero cost. So why do you do it for management? And that is now come to a head for good or bad reasons because of some of the events of the last six to nine months. They're a cost of doing business. They're a staff cost. We have two advantages in that area. One, we've not used options as aggressively in the UK and Europe as American companies have.

In our own industries you've seen from our presentation that is the case, too.

Secondly, as a result of that, our cash compensation is higher than I think compared to companies in the U.S.. now, they've used stock mainly in the form of options to address compensation issues.

And also because it escapes the P and L.

Coming back, we don't have a specific objective in relation to a numerical objective in relation to precash flow after those two items. But the objective is to maximize the free cash flow of those two items over time, because I think that's where - that will have, I think, a significant impact on total shareholder return.

One more question. On the share buy back point, you mentioned 150 to 200 million per annum of buy backs. Would that be 150 to 200 million to cancel or would that partly be to fund the ESOP.

To fund the ESOP. We've taken it to five percent share per capital. We'd like to limit the growth in the ESOP. [Gap in audio] The answer will be we'll attempt to do it by cancellation, too.

If I could ask just one last question.

I mean you said a month or two months ago that the margins would be probably north 15 percent and now we're at 13, I'm sorry.

We're not at 13. I think analysts have responded to the statement saying it will cost [inaudible] I think the analysts are a bit north of that.

I wondered what the sensitivities were what you're seeing in terms of revenues, just what the flex is in the model for the second half as far as you're concerned, the scope of where margins could actually, what's the range they could ultimately turn out to be?

I don't think we want to comment on that other than what we've said in the statement. What we're effectively saying is 14 percent, if you look at, in the statement we said we budgeted 12 and a half percent in the first half. And actually a margin. And we actually did 13. That tells you a little bit about what we were seeking to do in the second half. It was obviously very much, the budgets were very much skewed to the second half. Clearly it will be difficult even having done 13 percent margins in the first half to improve significantly.

You know what we've done in terms of revenue growth or lack of it in the first six months, you know what we've done in the seventh month. I think it makes some extrapolations for the last five months and come to your own conclusions. Analysts in the UK and in the U.S. before our statement today were looking at revenue, like-for-like revenue growth of somewhere between minus two to minus six. I think one analyst was a minus six. So we've got minus eight for the first half and we're going to do minus six, you'd have to do minus four in the second half if they were roughly equal, which they're not quite. That will give you guidance. I think you can come to your own conclusions.

Thanks.

Ladies and gentlemen, we have reached the end of the allotted time for question and answers. Would you like to continue with the question and answer session at this time or would you like to give your closing remarks.

It's fine to continue if anybody has any other questions

Thank you. One moment.

Your next question comes from Troy Mason from William Blair and company.

I wanted to ask some questions regarding new business wins. I'm really trying to reconcile the divergence between most of the holding companies and their reported new business wins and what's actually showing up in the results. This speaks to a question earlier. I wonder if you could give some more color on how new business has been materializing. So what you've been reporting over the last several quarters and halfs going back say a year and a half, versus what's materializing. So are business wins materializing as expected. And then as kind of a follow on, if you were in my shoes how would you like at new business wins being reported today as an indicator of future growth in the business? Thanks.

I think that clearly because of the economic conditions new business wins probably on balance over the last 18 to 24 months have materialized at lower rates than were indicated by clients going in. I think that's that clearly must be the case.

And I think that continues to be the case as long as these conditions prevail. The sources of data, the data that we give on slide 16 and 17, we just take from media and media sometimes, the data we give on slide 18 is internal - [Gap in audio] Rather than look at the figures and believe they're sacrosanct. I think that the numbers that come out from the agency groups I would imagine are reasonably sound businesses. Reasonably sound figures with the exception that they tend to be grossed up. So they don't estimate, they might be a good estimate of billings or equivalent billings, but they may not be as good an estimate of the impact on revenues. But I think all of the data, whether they come from the companies themselves or the data that, for example, is compiled by CSFB, which I think still is the most consistently inaccurate source for comparison, that data is better looked at directionally.

Kind of a follow-up I wonder if you could maybe characterize new business today as an indicator versus in the past. Is it a better, worse or equally good indicator of future business?

I think it's equally good, directionally. I think to your point before, it's probably not as good in terms of impact, because inevitably, the problems that are made, it's not the clients like to exaggerate, it's the force of economic conditions. And I think what people commit to at budget time may not be what they actually spend as they go through the year, because it depends on what's happening in the marketplace.

If you take the sort of apocryphal thought we were talking about before, about Easter and summer and I think hesitation, in response to eve's question, that would seem to indicate that people would tend to postpone at least some of the spending they had promised.

Then maybe just one final one. Is there potentially anything missing from new business wins, maybe project related work that you would see maybe in the marketing services side of the business that materializes once as a new business win but then never falls out of the business loss category that would have been anomalously large during the heavy year and now we don't see the losses falling out?

Clearly, when you have project businesses, you have - first of all, nonadvertising - the businesses, the flow of businesses tends to be smaller. In the market research business, you might win a project worth a million dollars. You might in terms of revenues. You might win a project for $500,000 or $250,000. That would not make the sort of data, the cutoff I think for our data wins and losses in billing terms in about 30 million dollars. So it wouldn't make that data. So it wouldn't show up.

So what comes in and assumedly what goes out the back wouldn't show up. But I think in the nonadvertising businesses, I don't know whether the churn is greater or less. I think by nature of being a project business, the churn would tend to be greater.

But whether it affects one company as opposed to another, more or less, I don't think you can jump to that conclusion.

I think it's just a factor in the business. The PR business, is, for example, or the branding and identity businesses, even the health care businesses, although with the greater OC and DC business and spends in the 50 to million dollar category, there's a bit more province in the health care area, the direct business our win last year the consolidation of IBM because it was a consolidation into one [inaudible] Into Ogilvy win, I guess that achieved some notoriety or notice, but those things don't get looked at in great detail. So I think it's quite difficult to come to a conclusion about that.

The other point I made a number of times it doesn't help you determine what the current 5,000 client list is actually spending. It gives you information about the potential churn which in any one year even at its peak, [inaudible].

What you don't see is incremental spend by the client on new product or product launch which considers a new client win. [Gap in audio] Those two site variables are very, very significant in the overall performance as a group and are much more profitable bites of new business to win. What you see is in some ways the least profitable type of business to win which is brand new business from a brand new client. If there's a late effect of winning this businesses in converting to revenues, although I totally agree these things are great momentum indicators about the health of a particular business. It only gives you a very partial snapshot of what our total revenue picture and outlook is like to be and the best way we can help you with that is one to report regularly as we do and to give you our view of what's going to happen in the future revenues of the business. It is only one of the variables. I think people just don't seem to, that is the disconnection in some ways, in my view.

Thank you

Your last question comes from Allen [inaudible] From Fortune Investments Management.

Hi. You just mentioned your credit rating in the presentation. I would like to know how important is it to you and your strategy and seeing that the net debt, your net debt has a little bit increased and that you tend to pursue an acquisition strategy do you expect to have an increased pressure on those ratings?

Just before Paul responds to that, I think that may be a miscommunication. On acquisitions, I think the theme of what we've been saying continuously through this presentation and conversation is that acquisitions are probably likely to Payless of an important role, not just for ourselves but for the industry as a whole. And I pointed out in the first half of this year acquisition activity, if you look at initial payments, has probably been running and allow for the cash we acquired in the case of concept, acquisition activity has been running at a quarter of the level it was last year. I'll pass on to Paul.

In the ratings we've actually had privately for about 92 to 97 and went public. The current rating level I think has been in the [inaudible] I have to check this, since at least late 1999, early 2000.

We've resisted, it's a personal choice of being very aggressive with the agencies trying to push our ratings up to a higher level. Because you always have wanted the cushion that should fix months or [inaudible] Not come the way we expected. There wasn't the sudden down grade in ratings. For example, the rating agencies attended our conferences this morning in London. I think one is on the phone now. We have a very healthy dialog with them and I think we're very clear that the ratings are helpful in terms of the capital markets but it is much more important, the stable ratings there and there are no surprises up or down on them. That's what we followed. We're comfortable with the relationship we established with the agencies. I think they understand our business model. And we are very comfortable in not pursuing overly aggressive ratings ratchets or price points because we know it's more important to have flexibility and stability in that rating agency guide.

Thank you very much.

Anything else or is that it?

Your next question comes from John Davey of Fidelity Investments.

I just want to follow on from the debt. What are your expectations for debt for the full year? And also with regard to credit metrics or credit ratio, do you have internal targets for EBITDA, net debt to EBITDA targets.

The last half of the question is yes. Paul will respond to that. We have certain targets. I think, if you look at the March 31st net debt position, position has already come down from March 31st to June. I think by a couple hundred million.

And we expect to see and have seen actually through July and August so far a continuous improvement in that.

So I think within net debt levels which were primarily increased by acquisition spending last year, particularly on Tempest, will come back as the cash flow inside the business takes care of that.

Paul.

Very simply, when we got our triple B plus A minus rating, the level that we and the rating agencies feel comfortable is that a fixed time interest cover ratio. We've been as high as ten. [Inaudible] For the forecasting is at eight range of I guess on a full year basis. That is very [inaudible] And I personally would like to stay above six on interest cover on a full annualized basis. We've been - we've had masses of head room in that. I don't see any change in that. That's what I'm trying to get at. Despite at one point being close to ten, we didn't go [inaudible] We say we wanted a higher rating. Because we wanted the scope to be well within that comfort zone. That's our main target. I've spent a lot of time explaining to you that interest cost exposure is something we monitor very carefully. And therefore that's an important component of the PBT and finally there's the EBIT is very well covering the interest. That's the key ratio that we watch. Dividends traditionally have been a very low percentage of PAT. Interest is a [inaudible] Component in terms. The convertible is helpful in terms of cost in terms of the coupon. The ratio we watch is really net interest to EBIT somewhere north of six is where we want to be.

Okay. Just to sum up. In terms of net debt, you expect net debt could come down possibly by 200 million for the full year.

I don't put a figure on it.

I said it came down by a couple hundred million between March the first and June 30. The balance sheet from March 31st.

And you'll get on it the average basis. It's [inaudible] Managing working capital [inaudible] Will impact the average debt. We've been very successful in quarter two.

Thanks. Just one final question. In relation to your bank facility, or your revolver.

Is there any ratings that triggers in that revolver?

No nothing. It's there until 2006.

Regardless of ratings?

Regardless of ratings.

Your next question comes from Hasan [inaudible] Morgan Stanley investments.

Good afternoon. I have three questions about the earnings obligations, the earnout obligations.

The first half number that you're showing on the cash flow statement on page 15, is 45 million and it suggests an annual number of 90, if I just double that.

You shouldn't make that assumption. That's a wrong assumption. 45 is deferred cost. And I think we gave you the year-end last year. It was around 100, at December 31st estimation on the one year basis was approximately 103 and 288 in all future years.

Now you've got it broken down year by year.

That's what I was hoping you would help me reconcile between that 90 or badly assumed 90 and the 79 that you're showing for 2002. And in particular, if you can speak to the footnote at the bottom of the page.

I think that's properly balanced.

I'm sorry?

It follows on the footnote. It's the second half effectively what's left. It's not dissimilar. We do vary the earn out estimates depending on current performance and then building it up by 10 or 15 percent. The most precise analysis is the one in the footnote to the account. But that is - I need to turn to it myself.

If you could just clarify for me, please is the 10 to 15 percent in that footnote there, at the note at the bottom of the chart, that's an assumption for growth rate rather than a range for operating margins; is that correct?

That's growth rate. The most precise definition of future earn out and put obligations for that matter is on note 10, page 18. It says the following: It is based off everything having been paid up until the 30TH of June, total obligation in all future years of 228 million pounds and then it's broken down within one year from the 30th of June 2002 to 2003 of 59 million pounds.

It starts basically all the way out giving you a shape over the next five years. That is the most precise account information that we have. The chart I've made it into calendar years to try to make it easier because maturity breaks in our various bonds.

But that is the precise [inaudible] Total outstanding two 2.79 having spent 45 million pounds in the first half of this year.

Thanks.

At this time there are no further questions. Do you have any closing remarks?

No, I think we've covered it. I think we've been going for almost two hours. So thanks everybody for attending. If you have any further questions, feel free to contact myself or Paul. If there are any members of the press, thank you for not asking any questions and leaving the investors to ask. If you have any questions, by all means call Feona McEwan or Kevin McCormick or indeed myself.

Thank you very much.

Thank you for participating in today's conference call. You may now disconnect.