WPP PLC (WPP) 2004 Q2 法說會逐字稿

Welcome to the WPP 2004 Interim trading update conference call on August 20, 2004. [OPERATOR INSTRUCTIONS]. I would now like to hand the conference over to Sir Martin Sorrell. Please go ahead, sir.

Thank you very much. This is the conference call on our first half year results. As usual, we split it into two parts, basically, the first some commentary from Paul on the numbers, and then secondly, I’ll talk a little bit about our strategy, and then we’ll take questions. We anticipate the presentation will take about half an hour, and then we’ll answer questions for as long as you want. Paul?

Hi, good morning, ladies and gentlemen. The slides again should have been emailed to you, for those on the authorized list, and they are also available on the web. So I will go through the slides, I will make reference to slide numbers, and I’ll give you some commentary about each of the topics we mention.

So we’re very pleased with the first half of 2004. The reported revenues are up 6%, on a constant currency basis, which excludes the impact of currency, revenues are up over 13%, and on the first half, like-for-like, revenues are up well over 2%, in fact, it was 2.4%, and we’ll talk later about the acceleration we see in the second quarter. Excluding Cordiant, like-for-like revenues were up over 4% in the first half.

Just to help you break that down, and think about it, you start with the organic growth figure of around 2%, acquisitions, primarily the Cordiant acquisition for the first half of this year that was not in our books for the first half of last year, added about 11%, or 7% of the 11% came from acquisitions, making a total of 13%, then the adverse effect of currency removed 7% from the revenue, and therefore reported revenue growth was 6%.

The pleasing news is that that the July like-for-like revenue growth, on the same basis as the 2.4% for the first half, was up over 6%, mirroring following a strong June since we last reported the May numbers at the AGM.

Reported operating profit, or PBIT, was up over 13%, to £265m, and up over 21% on a constant currency basis. The reported margin was up 0.8 margin points, to 13.1, from 12.3, and on Slide 5, the headline profit before tax, on a reported basis, was up 16%, to £234m, from £202.9m. If this was on 2003 currencies, reported PBT would have been £252m, an increase of 25%, an increase of 25% from last year.

Headline diluted earnings per share was up over 10% reported, to 14.1 pence, from 12.8 pence, and up almost 21% on a constant currency basis. The interim dividend, we continue to increase at the rate of 20%, up 2.5p per share this half year, and it’s 5.6 times covered by half year earnings.

In the first half, we purchased over 1% of share capital, approximately 12.175 million shares, at a cost of £67.6m, at an average price of around £5.55, and we further spent some of our free cash generation on acquisition payments, including earn-outs and loan note ventures totaling £144m.

Net new business billings were strong, at £1.5b or $2.76b, and we’re ranked number one on a number of net new business score cards, including Lehmans, William Blair, Bear Stearns and AdAge Surveys for the first six months of 2004.

On Slide 6, we turn to the reported, unaudited full statutory P&L which shows the revenue change of 6%. It shows the operating profit growth of 11%, and it shows the PBIT growing at 12% after goodwill and amortization.

The goodwill and impairment charge totaled £49.3m in the first half of this year, which was a combination of approximately £25m of amortization, and approximately £26m impairment, when you take those attributable to subsidiaries and associates three lines below. So, goodwill and impairment charges totaled £43.5m last year, so it’s pretty similar.

Associates’ performance was strong, raising profits from £15.8m last half year to £20.8m this half year. Particularly good performances came from Media Pro and [Eboti] in Latin America.

So with all that, the profits after tax at £115.7m, grew 13.5% on a reported basis, compared to £101m posted [indiscernible] and up 30% on a constant currency basis.

Looking at the headline income statement for the first half on Slide 7, we have revenue growth at 6% reported, or 13% on a constant currency basis, PBIT at £267m, up 21% on a constant currency basis, profits before tax at £234m, up 25% on a constant currency.

Just turning to interest for a second, which was £30m this half year, compared to £31.2m last half year, there were three factors at play. Firstly, rising interest rates would have added £7m to the P&L costs in 2004 versus 2003. However, the average net debt, which is more than £300m better both on average for the first half of the year, and at June 2004, meant we had lower [ROE] volumes, and we had an interest saving of around £3.5m to £4m.

In addition, a lot of our debt, approximately 50%, is in US dollars, and we have the benefit of the currencies on the interest line which saved about a further £3m. So again, just to sum up, we would have had a rate variance against us of around £7m, but this was mitigated, in its entirety, by both foreign exchange, and stronger working capital performance and therefore lower average net debt for the first half.

So coming through to profits after tax at £174m for the first half, using the same tax rate of around 26%, reported earnings grew at £15m, and constant currency earnings grew at 26.7%. That translated into earnings per share growth of 10% reported, 14.1p and over 20% on a fully diluted basis.

On Slide 8, we talk about the revenue for the disciplines, and of the just over £2b, the first time we’ve crossed that figure in a half year, and obviously again, this is affected, to a certain degree by the currency impact, but I want to talk about the organic performance of these disciplines for the first half, and to give you a flavor of how the trends have gone.

So, at the half year point, reported revenues of 6%, constant currency revenue growth was 13.3%, and organic growth was 2.4%. The way that is accelerated was that we reported just under 2% in the first quarter, at approximately 1.8%, and accelerated to 3% growth, organically, in Q2, ending up with 2.4% at the end of the first half. I am pleased to say that both the advertising and on-advertising businesses performed very close to the 2.4% growth rate in the half year.

Again, looking at results without Cordiant, on a half year basis, the growth was just over 4%, a little bit stronger in the Advertising, Media Investment Management discipline.

In terms of revenues by geography, on Slide 9, again this was an impact, so I want to give you the same trend, so the first half was 2.4%. North America was strongest and consistent, at very close to 4% organic growth for the half year, both in Q1 and Q2.

What is pleasing is that the growth in the performance organically was driven by continental Europe, UK and Asia Pacific and Latin America in Q2, in particular, and we saw a very strong rate of improvement in organic growth in Q2 in the first half organic performance, such that both businesses are fairly evenly matched on an ex-Cordiant basis, around the 4% in terms of North America and internationally.

It is clear that our Asia Pacific and Latin American businesses was the strongest of all our regions in terms of organic growth, and you can see that in the numbers that follow.

On Slide 10, I will talk about the margins by discipline. The margin impact, as a result of currency, is not that significant, really because of our overseas revenues and the cost in the same currency. However, the absolute profit performance is severely impacted by currency, so when you compare the Advertising and the Investment Management profits for the half year at £138.3m, compared to £125.3m reported last year, you would look at a 10% profit improvement.

You would look at a 13% improvement for the business overall bearing in mind that on a constant currency basis, it’s a 21.5% improvement by the four divisions. I’m pleased to say that almost without exception, every single one of our divisions grew close to 20%, on a constant currency basis, and therefore, the margin improvements are differing, but also very impressive.

In terms of Advertising, Media Investment Management, the margin was up 0.5% to 14.8%. The strongest margin improvement came from our Public Relations & Public Affairs business, growing over 2 margin points to just over 15% in terms of the half year performance. There was solid margin performance at Information, Insight & Consultancy, taking the margin from 7.1% to 8.3%.

Finally, Branding & Identity, Healthcare & Specialists margins were growing 0.6 margin points to 12.3%, making the reported, on a constant currency margin improvement of around 0.8%.

Turning to Page 11, and looking at the same metrics by geography, you can see an array of performances by the geographies in terms of the margin. North America was very solid, growing to a margin of 16.5%, almost 1 margin point higher than the same time last year, at 15.6%.

The UK was a little bit disappointing in margin terms. Profits were flat. This was partly explained by, let’s say, the first stage of a global roll-out of some work we’re talking at [Cantar] in terms of consolidation of back offices and field work services, a very successful project that will be rolled out to other markets in due terms, partly pulled down the half year performance in the UK.

In addition, we did have some property moves that we have to take some costs through. Again, it’s short-term, and not reflective of the long-term health of the UK businesses. The Advertising, Media Investment businesses in the UK, in particular, had a very good performance.

Continental Europe, despite its difficulties, we were still able to improve margins from 9.9% to under 11%, at 10.9%, a full margin point, and in Asia Pacific, even on a reported basis, the profits were up 65%, and on a constant currency basis, they were stronger, had a 3.3 margin point improvement to a 12.2% margin, so a very good performance. Latin America in particular was strong, and we’ve seen four very solid quarters with growth in Latin America now in the last four quarters.

Looking at the countries on Slide 12, this is indicative of where the performances are. There are no great surprises. It does also include some acquisition revenues, but the trend is very similar to what you’d expect, with some of the Latin America and Asia markets at the top of the chart, and some of the Continental European markets down towards the bottom. I’m not going to make any specific comment on those.

Likewise, on Slide 13, I think it’s reflective of corporate overall performances in some of the strongest performances, and you’ve seen how the Oil industry, and also the Financial Services springing back in the last couple of years, and now in particular quite strong, Telecommunications in the middle band, Drinks, Food, Personal Care and Drugs the one below that, and Automotive Electrical Retail in the one below that.

I think what’s quite surprising in this case is Computer. I think it’s not reflective of the overall industry. In our case, we did lose repeated business at some, but had very good, high-tech and computer clients, and that’s not reflected on what we’re seeing overall. So in broad terms, it reflects what is going on in the corporate world.

In terms of currency, we’ve made the point before that the strength of sterling reduced revenues by 7% and profits by 10%. So the headline PBT, which was reported at £235m, would have been £252m on the same basis, compared to last year’s number of £202m, an increase of 25%.

On the cash generation, Slide 15, the Group had operating profit of a cash basis £244m, after depreciation, interest and taxes, all with a similar amount to last year, generated £194m compared to £180m last year in pound sterling.

Then, looking at the uses of cash on Slide 16, we did slightly overspend our cash generation. £32m was spent on CapEx, very similar to last year at £33m. Acquisition payments for the first half totaled £144m, and you will see on the slide, last year we had the first part of the Cordiant acquisition in our numbers at June 2003, £177m spent, prior to any disposal proceeds coming in, so it was very heavy.

Over this year, the share repurchases of £71m reflect a pretty heavy allocation of our free cash to share buy-back for the first half year buying just over 1% in the first half, compared to £23m which I think was a half percent last year. So the net outflow of £32m doesn’t detract from a very good net working capital performance, and net debt reductions of around £300m from the year before.

We’ve accessed the capital markets in June, as you have all seen. We refinanced the €350m bond that was maturing in that month, and have effectively extended it with the $650m bond for a ten year period. What we have now is a very graduated, dealable with maturity profile, and the certainty not a cost, fixed rate funding for the Group going forward.

On Slide 18, we have a summary of our wins and losses. Obviously the most well publicized and single largest account win this year was the HSBC win, by Team HSBC. I won’t comment on the individual wins and losses, which are numerous, but just to say that there are a number there which are US-centric, a couple of them worldwide, and they’re spread across nicely, all our brands, and particularly you see Y&R Advertising up there, with both Microsoft and Toys R Us more recently.

We have our losses which have been disclosed. We did lose some business at Burger King, while on our advertising, we have maintained the relationship with both [Wonderman], Landor and MindShare.

Then finally, on Slide 20, before we hand over, in terms of the net new business fillings, we calculate and collate internally the half year total was $2.76b, which had a run-rate of approximately $926m, $1.8b, adding up to $2.76b. This compares to the $2.1b the year before, so approximately a 30% increase in net new business that is recorded internally, compared to a year before.

And with that, we’re happy to open up to questions.

Did you forget the strategy, Paul?

Oh, sorry. I’ll hand over to Martin!

We’ll talk a little bit about our strategy and a little bit about the background to what we think is going on in the marketplace at the moment. Obviously, there are some concerns on both sides of the Atlantic as to whether the stronger consumer spending that we’ve seen in 2002 and 2003, in particular, and the beginning of 2004, will weaken, and if government spending may be under threat, again, on both sides of the Atlantic because governments have been spending quite heavily in the US to stimulate the economy in front of the election, and the same is possibly true in some European markets as well.

There has been a business-to-business recession. The recession that started in 2001, after the internet bubble burst, was largely driven by businesses cutting corporate spending, and I think now that we may well be seeing a little bit of a tug-of-war between consumer spending coming under pressure because of higher debt levels, because of rising interest rates, and oil price concerns, and businesses which are exhibiting very strong profitability and liquidity.

I think it’s the fact that for the SMP500, we’ve seen increases in earnings per share over the last three quarters, over 25% in each quarter, and you’d have to go back to 1984, I think, to find two quarters of 25% growth. So as corporations have become more liberal and more profitable, they haven’t been growing their top-lines because inflation has been low, and they’ve had very little pricing flexibility, and there has been concentration of distribution. That’s an added pressure, but they’ve become more profitable. We may well see increases in corporate spending to counter-balance any decline in consumer spending.

The evidence at the moment on that particular issue is mixed. We have a very large base of high-tech clients, IT and Telecommunications clients, and some are saying they are seeing good increased spending, and some are saying they are not. But certainly, low inflation has given them limited price flexibility, and lower volume increases, and some of the reaction to that has been zero coupon financing and discounting, most prominently in the Automobile industry and indeed, in the Food Manufacturing industry. If you give consumers $5,000 a car or truck, it’s not surprising that they buy cars and trucks, or if you give money away at low interest rates that they buy houses and property.

At the same time, we’ve seen increasing retail concentration, not just Wal-Mart in the States and beyond, but Tesco here in the UK, and indeed beyond, and with Carrefour, so distribution has tightened. Similarly, we’ve seen procurement pressure across the industry, starting in the Healthcare industry, which has encouraged account consolidation, although I think procurement pressure has eased and the pound has become a bit more civilized and not as strident as it has been, as the economy has improved.

So similarly, we’ve seen continued increased media ownership concentration, not just here in the UK with ITV, but in the US, and indeed, in countries such as Brazil, and of course, the most recent phenomenon has been the increase in oil commodity prices. Commodity prices, driven by Chinese and Indian development in Asia, but oil prices obviously driven by increasing security concerns, and that has raised the issue of potential inflation.

So that’s a little bit of the background. On Slide 22, we outline the opportunities. I already mentioned that margins, profits and liquidity have improved significantly amongst our clients. They’ve been faced with three years of cost cutting.

There has been some up-tick in merger and acquisition activity, although there has been also some hesitancy to push forward with such expansion, I think largely due to the short-term considerations of institutional investors, and also their performance measures, which are also short-term, and to the preponderance of hedge market activity, hedge fund activity on both sides of the Atlantic. In the UK, for example, hedge fund volume activity is reputed to be half or two thirds of market activity, even in normal times.

Having said that, we’ve also had the quadrennial factors which have boosted spending in 2004. If the market was, for example, expanding, worldwide by 3% to 4% this year, the Advertising and Marketing Services, the Olympics and the Euro Football Championships and the Presidential elections would be contributing an incremental, maybe 1%, maybe as much as 1% to 2%.

And if you look back in history, you will see that in most quadrennial years, we’ve seen an incremental spend of around 1% to 2% in Advertising and Marketing Services spend.

Clearly, also, there have been increasing outsourcing opportunities as a result of the cost pressure inside many of our clients. Having said that, to sum up, I think that in a low inflation environment, what we’ve seen is that many of our clients have found it difficult to grow their top – and indeed, our competitive clients – to grow their top-line as significantly as they would like, and really, the recipe for volume expansion or revenue expansion has to be focus on innovation and new product development and differentiation, the two areas that are very important to ourselves.

Slide 23, we just outline our key strategic priorities. In the short-term it’s to continue the momentum. We replaced our historic short-term objective, which is to weather the recession. We are well and truly out of the recession, and we want to maintain the momentum that we’ve now established in the company. I think competitively, we’re in one of the best, if not the best positions that we’ve been in for a long time, vis-à-vis our competition, some of whom have significant short or medium-term financial difficulties.

Secondly, in the medium-term, we want to continually successfully integrate Y&R Advertising, focusing on Y&R Advertising, because I think the rest of the Y&R Group is in strong shape, and we are seeing significant improvements of Y&R Advertising, given, particularly, new business activity, Microsoft, Toys R Us, Callaway, the retention of 7UP.

All of that, I think, augurs well for growth and development, but we still want to develop that still further, and then I also mentioned Cordiant, not Tempus because now that is fully integrated into a strongly performing Mediaedge:cia, and indeed, strongly performing Media Investment Management operation including MindShare, Maxus, our third brand and our new investment in KR Media in Europe.

I would also mention Cordiant. I think that’s largely now integrated. The integration went faster than we anticipated. We are well ahead of schedule on that. I think we still have some work to do with Healthworld, which is building a strong relationship with Ogilvy and [Fitch] where Rodney Fitch has returned to the company, and we’re seeing improvements already of quite significant scale.

Long-term, it’s to develop our business in the fast growing geographical and functional areas, and you’ll see that highlighted in Slides 24, 25 and 26, but on 24, which is the geographic objection, you’ll see that broadly, if you exclude Associates, if you look on a reported basis, Asia Pacific, Latin America, Africa and the Middle East, and I should probably include Russia and the CIF countries, account for approximately 17% of our business.

If you include Associates, that’s taking all the companies that we own 20% to 50% of, and consolidate them, our concentration is about 25% in the so-called emerging markets, a phrase which I’m not particularly enthusiastic about. We should probably call it the faster-growing market. Our objective in the next five to ten years is to build that to a level of about a third of our business.

If you look at the [Bricks] document, for example, that was published recently by Goldman Sachs, use their assumptions for expansion in GMP over the next five to ten years, and assume advertising as a proportion of GMP will move in the emerging markets, or faster-growing markets, towards a more mature market, or slow-growing markets, you’ll see that if you plug those assumptions in, the Brick countries, the countries that we include in Asia Pacific, etc, would account for 38% of our business, excluding by 2014, growth by acquisition.

So that objective is achievable. We have very strong market positions already in Asia, in China, number one with a 15% share, and South Korea number one, with a 25% share, and India number one with a 40% share, and in the other, the largest of the Japanese markets in Japan, with a 10% share, including our associate interest in [Asatsu]. Interestingly is the joint venture that Asatsu has recently established with [Densu] which together, would account for about a third of the Japanese market.

Turning to the Slide 25, today, meaning in the first half of 2004, our non-advertising businesses have now reached 54% of our business. 46% obviously is in our traditional Advertising and Media Investment Management business. I’ll just point out that Media Investment Management continues to be one of our strongest, if not our strongest Advertising and Media segment, so we’re seeing very strong growth in our Media Planning and Buying businesses.

If we include associates, it makes very little difference. It just reduces it slightly. As far as our long-term objective, our long-term objective is for two thirds of our business to be outside Advertising, and one third in Advertising and Media Investment Management.

And the final objective on Page 26, or Slide 26, concerns what we call quantitative aids to decision-making, linked to the growth outside Advertising. I think it was interesting that Verona [Sooner] and OFCOM here in the UK, a government regulatory body, both issue statistics within two weeks of one another, highlighting the fact that subscription revenues have surpassed advertising revenues for the first time in both the US and the UK.

This clearly demonstrates the growing importance of new media, media such as direct interactive and internet, and indeed, the important of measurable activities, such as market research. Those two businesses now account for about $2b, a little over $2b, almost $2.5b of our $7.5b to $8b of revenues, so they are already very significant, and you will see that they account for about a third of our business in total on Slide 26. If you include associates, it makes very little difference. Our objective remains for it to become half our business in the next five to ten years.

On Slide 27, we just outlined our six objectives, which are improving margins, increasing flexibility in the cost base, using free cash-flow to enhance share owner value, and improving return on capital employed, developing the role of a parent company to stimulate cooperation between our various businesses, very much in line with what happened with the Team HSBC which Paul referred to in the first half of this year, and as we wait for the decision from Samsung on their worldwide review of their integrated [activity] which include market research as well.

Fifthly, emphasizing revenue growth as margins improve, and finally, and probably most importantly, improving the creative capabilities and reputation of all our businesses. We prioritize client objectives as being first the work or the thinking, second, coordination, and thirdly, effectiveness and efficiency.

I’ll just deal with each of these briefly. On Slide 28, we highlight our margin and profitability progress, and you see that margin growth of 12.3% to 13.1%, we’re very confident, very, very confident, is what I said at the conference this morning, about 13.8% for the full year in 2004, and today, we set margin targets for 2005 of 14.5%, and a minimum of 15% in 2006.

Our long-term target remains 20%. Some people, some analysts, and some institutions, believe that is a very ambitious target. It is ambitious, and there’s nothing wrong with that, but I think again, looking at our businesses today, if we were to take – and we’ve discussed this before on previous calls – if we were to take the highest levels of margins in each of our businesses, in each of our segments, and apply those margins to all of our businesses, so that it’s a bit of an optimistic assumption in the sense that everything has to be functioning in the same way, but I think it is practically realizable, but if we applied that to our current margins, so the best margins in each of our segments, our overall Group margin would already be around about 16% to 17%, so I don’t think that 20% is outlandish as a long-term hairy goal, as somebody described it, probably an athlete this morning.

Slide 29 is just to highlight our earnings per share, and earnings performance at the interim and full year level over the last five or so years, and you’ll see that levels of activity in 2004 are now starting to reach, or meet, our peak in 2001, and earnings panels projections for 2004 full year, our earnings per share indicate that we will surpass our previous record year of 2001. So we’ve weathered the recession in 2001/2002, and seen the stabilization in 2003, and now absolute levels of activity are back to where they were. I’m glad to say that they have not got the frenetic and unsustainable pace that we saw in 2000 and 2001 with the internet boom, so it looks as though it’s more manageable from a more solid and steady pace.

Turning to flexibility and cost structure on Slide 30, it’s not just a question of staff, it’s a question of property imported services. You will see from our earnings release that margins, pre-incentives were up by 1.5 margin points, 1.5 margin points, and that after incentives, about 0.8 margin points. You’ll also note that a significant part of our margin gains have historically and are currently coming from improvement in non-staff costs, and you’ll see that our staff costs to revenue ratio reportable was pretty flat, and a lot of the margin improvement came from SG&A gains, and the initiatives that we’ve taken in procurement, in Property, in Information Technology, and indeed, in Human Resources.

And you can see on Slide 31 that we are getting increasing flexibility in our cost base. We’re not right back to where we were in the peak year of 2000, where as a proportion of staff costs, our variable staff costs, that is freelance consultants and incentives, they were 12.4% of our staff costs. We’re now back up to 10.5%, and expressing the same numbers as a proportion of revenue, we’re now back to 6.2%, compared to 6.6% at the peak in 2000.

Now, as you know, we can’t eliminate all variable costs as we go through a recession or a downturn, but we’ve given the historic guidance, so I think we could eliminate at least half of the shock absorber that you have here, so there are at least 3 margin points of protection for any pressure on the top-line.

Turning to using cash-flows to enhance share owner value, on Slide 32, you’ll see that we continue to buy back shares. In fact, in the first half of 2004, we were buying at the heaviest rate that we have done. We invested £71m, well over $100m in WPP stock. That amounted to 1.1% of our share base, which is slightly higher than the 2.1% that we spent in 1998.

As far as alternatives to investing our £450m of free cash-flow, there are three options. One is capital expenditure, which roughly matches our depreciation flow, so it’s not a heavy drain on our free cash-flow. The other two areas are Mergers & Acquisitions, and of course, share buy-backs and/or dividends.

On acquisitions, we continue to focus on strategic acquisitions. We completed a number in the first half. We continue to focus on sectors where we have significant market positions, or high growth prospects, such as Information, Insight and Consultancy, or Branding & Identity, or Healthcare, or Direct Interactive and Internet. Acquisitions in Advertising are used to address specific client needs, or agency needs, and I think it’s fair to say that we continue to find in the small acquisition area in particular, significant opportunities outside the USA, which are better priced.

On Slide 34, 35, 36, we outline the acquisitions or increased equity stakes that we’ve taken during the course of the first half of 2004, and I won’t go into that in detail. If there are any questions, we are happy to respond to them.

On 37, in relation to the role of the parent company, which as I’ve mentioned before, is becoming increasingly important, given the pitches that we see at HSBC and Samsung, and the Nestle Media Finding and Buying Consolidation, which we’re in the course of too, and other pitches which I think in due course will take place, but the integration or coordination of our business is becoming more and more important, not only at an operating company or tribal level, as we call it, but also at a functional level. We’ve identified ten areas which you’re well aware of from media planning, buying and research, through to entertainment and media and listed on Slide 37, where we have driven coordination across functional areas, and are benefiting as a result.

I think this is a significant competitive difference. I think tactically, there are things that we’re doing in terms of integration which our competition can copy. I think, however, philosophically, and culturally, we do believe that coordination and cooperation is important, and that is very different to the strategies of even our strongest competitors, who have pursued, I would say, more independent lines, and now initially, in Media Planning and Buying, where we have seen significant Group consolidation, but more across the tribal, or functional levels, we’re seeing more coordination.

Slide 38 just emphasizes that as our margins improve, and we’re delighted with the progress we’ve made in the last couple of years on margins, and we’re confident it will continue, we need to emphasize revenue growth more, and I think what’s particularly encouraging is the upturn that we’ve seen, particularly in June and July, and the upturn that we’ve seen geographically, in Western Europe, as Paul mentioned, what has been happening the numbers.

But I think the one area of our business where we had some concerns at the end of the first quarter was Western Europe, particularly France, Germany, and the UK, and whilst it’s not perfect there, I would say now that geographically, things are pretty much on song, and functionally, that is the case too with the continued growth of the PR business, and we’ve now had three quarters where the PR business has shown good like-for-like growth.

But in terms of our strategy in the faster-growing geographical markets, the functional areas, and taking advantage of consolidation trends in the industry to gain market share, we think we’re well positioned, and that’s important in terms of developing revenue growth.

Finally, on Slide 39, we emphasize the importance of improving our creative capabilities. We think we are achieving that significantly at Thompson, and in a growing fashion at Y&R Advertising. Ogilvy clearly has a strong creative positioning – I’m talking about the advertising agencies principally in this presentation – and clearly, Berlin Cameron and Red Cell similarly has a strong creative position, given its recent successes and awards.

So it’s not just a question of recruitment, it’s a question of recognizing creative successes, both tangibly and intangibly, and we’re in the process of putting in a major new creative awards program across the Group. It’s also by acquiring highly regarded creative businesses, which again, we’ve been doing in the first half of the year, for example, in Argentina, but we will also be doing in the second half of this year in one or two countries in Europe, and more news of that in due course, and then finally, by placing greater emphasis on awards of the intangible variety.

So in summary on Slide 41, we think we continue to be well placed by region, by geography and by discipline, to benefit from key industry trends. We think there are significant opportunities for further margin improvement, further cost flexibility to give us protection in any uncertain economic conditions, and to use our free cash-flow to enhance share owner value. In the long-term, we’re very focused on positioning the Group in the highest grade functional and geographical sectors, and improving the effectiveness of the cost structure.

And last but not least, we’ll be looking continuously at emphasizing the importance of our free cash-flow, and maintaining neutrality after all acquisition payments, and after all share repurchases, and obviously focusing on return on capital invested.

That’s the formal part of the proceedings. We’ve been going for about three quarters of an hour, which is slightly longer than we anticipated, but we’re open for questions, and we will keep the questions open until the questions are finished. Can you set out the question session, please?

Thank you, sir. [OPERATOR INSTRUCTIONS]. The first question comes from Miss Laura Kennett. Please go ahead.

Oh, hello, it’s Laura Kennett of Morgan Stanley. One question – what would make you walk away from the Grey acquisition?

Well, as we’ve got Ed Meyer on the [web-call], it’s probably best to ask him that. I don’t that’s a fair question to ask me on this call, and all I will say on Grey is that we’re in the process of what is called due diligence, what I called in the press and some interests, [news link]. We continue to deal with it. We’ve met with senior members of the management. We’ve been very impressed with what we’ve seen from the people point of view, and from a company point of view.

If you look at Grey in the context of WPP, it’s not large. Combined Grey’s revenues would be about 11% or 12% of the combined Group, so it’s about twice the size in revenue terms of Cordiant last year. I think these things attract a lot of media attention, and indeed, questions on calls like this, probably because it’s a slack time of year, holiday season, probably because people have wide spaces to fill, and television time to fill. So there’s been an inordinate amount of interest.

I’m not dismissive of it, but I think it gets an undue degree of attention. I haven’t said all that. The clients of Grey are important clients, some clients who we do not have significant positions with, some clients where we do have common relationships with, and so there are clear opportunities.

Grey, moreover, has a strong agency, advertising agency, very strong Media Planning and Buying operation, very strong Healthcare operation, a very strong Direct and Interactive business. And geographically and functionally, a combination with WPP doesn’t use the needle or the percentages one or the other. Grey has a strong business outside the US, and a strong business outside Advertising, so in some senses, I would say it’s strategically neutral from our point of view, but I think it’s an important business in our industry, and it’s an important opportunity for us to examine.

Thank you.

The next question comes from Mr. Steven Barlow. Please go ahead.

Thank you, Martin, I’ll give you two questions here. You’ve had a lot of net new business wins in the first half, as you outlined, by those various surveys and which I only heard about HSBC. Are these complex transactions – I mean, something like an HSBC, making the transition time that much longer? If you could maybe just talk about the transition from the wins to actual revenue, and I would hope that this obviously accelerates your organic revenue growth in the second half. Would that be true?

Well, we’ve already made mention, and you can work out from the math what we set out, our organic growth rate was at the end of Month 5, at the end of May. You can work out what June is. We give you what July is at 6%. I think most new business – what you usually find in most new business wins is that the take-up, when you lose something, it winds down faster than you anticipate, and you win something, it takes longer to wind up than you anticipate.

Having said that, our experience, and I don’t want to be specific, to specific clients or accounts, our experience this year has been that the wind-up, the take-on of new business has been more rapid, I think, than we anticipated. It’s certainly the volume of new business activity and opportunities are very significant. There is an awful lot of it going on at the moment. There are a significant number of presentations and pitches that are being made, and then we’re waiting for a result such as the Samsung one, which is the second sort of parent company [indiscernible] pitch, is what I called it.

It’s not really a parent company pitch, it’s the point at which the client, both in these cases, HSBC and Samsung, there’s one other in Media Planning and Buying, Nestle, the point at which they made the entry into the organization, instead of us being an operating company or a tribal level, they made at the parent company level. So the execution of HSBC, for example, is primarily through Thompson, aided by other parts of our operation, and similarly, if we were to be successful in Samsung, it would be similar through a different part of the organization, and a combination of various parts.

So in answer to your question, I would say that the take-up probably, this year, has been more rapid in new business. That might be because of the scale of some of these changes, but usually, you find the take-up reasonably slow.

Thank you, Martin. And then you discussed, it’s really the top-line not growing a lot of the major clients out there as rapidly as they would want. Are you seeing them willing to take, I guess, more risk in terms of trying new things or giving you more assignments on? Is it sort of different things that are non-traditional for them as a regular, ongoing basis?

Well, I think that what it’s highlighting is that a low-inflation economy where you have increasingly concentrating distribution, you have very little pricing power, so I think because of the pressures that the people on this call put on them, whether they be institutions, analysts, the press, TV or whatever it is, because of the pressure for the short-term results, there is a natural hesitancy, particularly in these difficult times, to spend. And there is a focus on cost management, but we’ve had three years of cost cutting, in 2001, 2002 and 2003.

As I’ve said previously, we’ve got record levels of profitability, or profitability growth, and I think clients are starting to understand that if you look at the more successful companies in terms of their top-line growth, and ask how have they done it, well, a) I suppose they position themselves in the faster growing areas, b), they’ve been very innovative in terms of developing new products and ideas, and very rapid in their implementation, and willing to experiment, and then use the services that we provide, which you can call differentiation services, to differentiate their products and their services.

So I think the keys that are becoming more and more apparent to people are innovation, branding and differentiation but you know, it’s very difficult, it’s very easy to say that. It’s very difficult to implement, because the average life of a CEO is three or four years, whatever it is, and there’s a tremendous – you know, let alone issues of corporate governance and all the things that you’re only too well aware of, that have been going on in the last two or three years.

That pressure has, I think, tended to make people conservative, and more focused on costs and revenue, but I think now that the searchlight is turning increasingly to the top-line, and I think clients are becoming more expansive in their thinking and maybe the risk profile is altering a little bit because they’re finding it very difficult, particularly in the [packaging] industries. They’re very difficult to build volume and profitability unless they innovate and differentiate.

Thank you.

Okay, the next question comes from Mr. Sheen-Bishop. Please go ahead.

We’ll make that Bishop-Sheen. Good morning, gentlemen. Good evening over there. Going back to Grey, or any significant –

Sorry, so where did you say you were from?

It’s from Walkovia with –

You’re from Walkovia, okay, thank you.

Charlotte, North Carolina, one of your favorite banks, I understand. Sir Martin, going back to Grey, or any significant acquisition, what level of debt leverage would you be comfortable with initially to accomplish something like Grey, to be able to acquire Grey?

Well again, as the first questioner came on, I don’t think I can respond specifically on that. I think that we have said historically that we’re very comfortable with debt levels of around £1b on average, and you will note from our announcement that our debt levels were reduced by £300m on average in the first half of the year, down to about, I think it was £854m in the first half. So I think we were comfortable where we were last year. We were comfortable at the £1b level, and we’re comfortable, obviously, at this level. We have interest coverage ratio in excess of 7 times.

But I don’t think I can answer that question specifically in relation to Grey, or Grey Global. I think that would be inappropriate for me to respond to, but you know, we’re very comfortable where we are. We think we have excess liquidity. You know from what I’ve said that we were aggressively buying our stock in the buy-back program in the first half of this year, in fact, at a rate which is higher than since we established the program in 1998. Paul, do you want to add anything to this?

No, I think the other point I make is that we have – when we became public with our ratings, we were Triple D+. We’ve had three [purposes], one A-. We’ve upgraded to the A- level in 2000. We’ve come back to a B+. We would rather be at a rating that gives us flexibility to maneuver without being silly about it, but we’re very conscious that, you know, we have a capital market [sentiment] out there, and better, in the long-term, look to ensure that we don’t change that rating unduly, and so, in our fifth year, there’s been one rating change within our corporate debt profile.

If you look at the maturity profile of our debt, it’s also very stable, so very secured, so we will always be in a situation where we have ample liquidity to do with our day-to-day working capital needs, and some scope to dealing with acquisitions in addition to what we have available in our strong cash generation.

Okay, that is very helpful. Can I ask you, too, you talked a little about the Russian acquisition, that you also are in due diligence on?

Yes, well, there has been a comment in the newspapers about a transaction in Russia with a company called [Video] International, that’s right.

Okay, and I can stress that I do not know the size of that acquisition. Have you disclosed that?

No, there has been no disclosure. I think the press article referred to combined revenues of the companies being around $30m, but I mean, in the context of the Group, I mean, it’s very mini-meat in terms of any investment involvement.

Great, okay. Thank you very much, gentlemen.

The next question comes from Tim Nollen. Please go ahead.

Hi, it’s Tim for Alexia Quadrani. As usual, you’ve pre-empted just about every question that could be asked, for fear of what your presentation, but I just wanted to touch back on the strength in June and July. If you could comment maybe on what areas of the business those were from? I’m presuming all of them, and I presume that some renewed strength in Germany and France may have contributed as well. If you could just comment on that very briefly, and then speak a little bit as to the sustainability – those look like very high numbers in June and July. I assume that those are not quite sustainable at that level.

Okay, I think the chief change in June and July was Western Europe. I think what we saw was the maintenance of the positions in America, in North America, Latin America, as we indicated, and the Middle East have been very strong, stronger than the average for Asia and Latin America, etc. Asia continued with continued growth, but I think the chief change really was Western Europe, and France, Germany and the UK, and that being said, they’ve come out all guns blazing and I don’t think we’ve seen very significant growth there but we’ve seen a material difference in Western Europe.

As to sustainability, I mean, who knows? We’ll have to see how we go on that. I would just say exactly what we said at the first quarter, and what we said at the beginning of the year. We thought we would grow our organic revenues, or our like-for-like revenues, including Cordiant, at 3% to 4%. It was 6% in July, it includes Cordiant, so you know, if you were to exclude Cordiant, you’d be running at about a rate of 7% or 8%, so we look back on June and July to see June was slightly less, and was running at about – you can do the math yourself, but you come out at a figure of about 4%, including Cordiant.

We went back to look at June and July last year, and it wasn’t that we were soft in June and July last year. We had reasonable good months and so I think it might be something to do with the Euro Football Championships. It might be something to do with the preparation for the Olympics. I mean, our view of the Olympics – I was talking to one or two of my colleagues about it – our view is that the Olympics will be pretty much in line with NBC’s expectations of $1b, maybe a little bit less, but obviously picking up spending elsewhere, and audiences, I understand, have been a little bit better than people anticipated.

Certainly the Euro Football Championships were successful, and a good tournament and attracted good audiences, and we’ve seen that uplift in the UK, even with ITV. So I think it was really to do with Western Europe. As for sustainability, well, we’ll see as we go through the year. I wouldn’t make bets one way or the other at the moment.

And turning to the business mix, I’m presuming –

Well, business mix, as we’ve indicated before, we think that we’ve been firing on all cylinders, but one [advert] was Public Relations, which started to pick up in the fourth quarter of 2003, and then has continued in the first and second quarters of 2004, so it’s pretty much across the board. So yes, as we sit here today, I think functionally and geographically, our business is firing well on all cylinders.

Great, thanks.

Thank you. The next question comes from Miss Nancy Otterback (ph). Please go ahead.

Hi, yes, it’s along the same lines as –

Could you just let us know where you’re from?

I’m with European Credit Management in London. With regard to your leverage targets, could you tell us if you have a specific rating target when you are managing your balance sheet?

Well, I think Paul referred to it, but let me let him refer to it again.

Yes, in six years, we’ve only moved one rating notch, so that should give you an indication that we try and maintain the rating at around the Triple B+, A- range, which has been the trough and the peak of where we’ve been, and I think we’re not a company that requires a lot of capital market [debt] opportunity, but I think it’s useful to maintain that rating, and we are well spread with all the different types, for instance, that we have between the Eurobonds, the dollar bonds, the straight bonds, the convertibles, and the bank facilities. So I don’t think there’s any great need to worry about if our rating is going to change dramatically, so over a six year history, that’s been a range of one notch, and I think that’s the best answer I can give you.

And is there a desire to improve the Moody’s, which is one notch below SNT?

Traditionally, Moody’s has been one notch below SNT in our industry, consistently amongst the players. So when one moves up, they tend to follow [immediately], but the difference is that they don’t apply to our industry has been consistent. It’s very common having a split rating in our industry, and I suspect that will continue unless Moody have a change of heart about something, so no, there’s no – you know, as I said, we’re very comfortable where we’re at. We mentioned the figure of debt below £1b, significantly below today. We’re very happy with that, and we’d like our interest coverage [ready] so I mean, it’s really nothing to – I don’t quite understand why there are so many questions about this issue, to be honest with you.

We’ve seen spread widening in the marketplace.

Well, we’re not issuing. We’ve issued well, earlier on in this period and we’re very happy with the spread we’ve seen. I suspect that spread widening to general corporate bonds, and not specific to our [all] ratings concerns.

Okay, the next question comes from Miss Gail Szubert (ph) from Voltaire Asset Management. Please go ahead.

It’s actually Laurence Adio (ph) from Voltaire Asset Management. I just wanted to please continue, especially on this Grey acquisition, which I’m afraid to say, has an impact on your share price currently. I mean, is it fair to assume that, being the last advertising agency to my knowledge, in [the west] that the price which has been mentioned before could be at the high end? That’s my first question?

I’m sorry, but you referred to our share price being affected by Grey. I’m not sure that that’s true if you look at what’s been happening for the sector as a whole. What is your question about?

I believe – actually, it may not be your share. Maybe I mis –

So what was your question about?

My question, I think the price which has been mentioned was $1b. My understanding is that you are the last, let’s say, utterly looking at this Grey acquisition. Is it fair to assume that it’s the high end of expectation, because you are the last bidder, or not? That’s my question.

I don’t understand what you’re talking about. I’m sorry, I’m not with you. What do you mean, the last bidder?

Right, to my knowledge, [the business] have said no more interest, outside advertising has said the same, that they’re not interested any more, they don’t have the means to do it, so therefore, I presume as a big advertising company, you are the last one to be looking at Grey, so you are hopefully the only buyer?

So what is the question?

Therefore, is $1b, which has been mentioned by some of your competitors, at the high end of expectation, therefore, you can negotiate it down?

I have no idea. We haven’t got to that stage.

You’re not negotiating price?

I have no idea, we have not got to that stage.

And the last point on Grey, you know, ultimately, I don’t know exactly where, but I saw that the margin was around 5%, which is well below average in the sector.

I think you’re not up to date with affairs. I think if you look at the latest release results you’ll find them a little bit higher than that. I think it is true to say that they are less than the margins that we’re achieving, or Omnicom are achieving, but so what?

Well, exactly. Is it because the business is worse, or because it is the management which is worse, i.e. in other words, is that –

Again, that is something that you should come to a view at on your own. You know, we will come to a view as to what we think the margins are, what we think the margins should be, what they could be, but why is one business – why does one business have different margins to another? Some people may take short-term views, some people may take long-term views. Who knows?

Okay, so you’re buying the sense of the business then yours? It’s just managed differently?

You said that. I didn’t say anything, I just said businesses vary in the way that they’re managed. That’s why margins are different between one business and another.

Okay, thank you.

I mean, questions, I just want to say, it’s Paul here. I don’t particularly want to stand, you know, all the afternoon talking about Grey. We’ve made it quite clear our issues, and likewise, on the bonds and the debt markets. I mean, we’re happy to take other questions about our results for the first half, and if there are no more questions on that nature, we’re happy to move on, but we don’t want to keep repeat, repeat, of these sort of questions carrying on.

Thank you, sir, we have no further questions.

Thanks very much indeed. Thank you.

Ladies and gentlemen, this concludes today’s WPP 2004 interim trading update conference call. Thank you for your participation. You may now disconnect.