WPP PLC (WPP) 2005 Q2 法說會逐字稿

This is WPP's interim results for 2005. Apologies for scheduling it today, when any self-respecting person would be on holiday, but thanks for joining us. We've got a fairly long and tortuous presentation, it's about 60 odd slides and we hope you will bear with us. It'll probably take us an hour to go through. Yes, realistically or unrealistically. We're trying to deal with the vagaries of IFRS as well.

I should also point out that we're in the midst of a scheme of reconstruction, which has put us under some constraints in terms of what we say about revenue growth. But maybe I can find some ways of dealing with that during the course of the presentation and questions, so don't be frightened to ask any questions on that.

Okay. Paul's going to deal -- apologies to anybody in the room that I've embarrassed. Paul, do you want to kick off? Yes.

Good morning, ladies and gentlemen. I'll first go through the six-month trading, and then a section really on trying to reconcile and explain better the various changes under IFRS and U.K. GAAP, both last year, this year and then between the two sets of results.

As you've seen in the release, which is a detailed release, reported and constant currency revenues are up almost 22%, and like-for-like revenues were up 6%. So putting it into context, with organic growth at 16% and constant currency growth of around 22%, the growth from acquisitions, which was principally Grey, was around 16% in the half year. And FX had zero impact on the Group overall between dollars and euros, so the reported number is 22% as well.

July like-for-like revenue growth was weaker than trend at 3%, but I would point out that July '04 was considerably stronger than trend last year, and therefore you can take your own judgments from that.

Headline PBIT was up over 31% to £299.6m, from £228m last year, up 30% in constant currencies as well. And headline operating margin under IFRS was up 0.8 margin points, to 12.1% from 11.3% for the half-year 2004.

And on a pre-short-term and long-term incentive basis, the margin improvement was stronger, at 1.2 margin points, going from 14.6% in '04 to 15.8% this year. And we will explain later how much is now accrued incentives on a year-on-year basis.

So headline PBT is up 32% to £254.8m. I will explain some of the changes on that later on, again, for the IFRS. Up almost 31% on a constant currency basis. Diluted headline earnings per share up 28% to £0.138 per share compared to £0.108 on an IFRS basis for first half 2004, up over 26% in constant currencies.

Dividend was raised 20% to £0.03, it's approximately 4.6 times covered by earnings. And in addition, 12.6m shares were repurchased, of which 10m were cancelled, the balance put into Treasury stock, approximately 1% of the share base, at a total cost of £75m at an average price of about £5.94.

Average net debt for the first six months fell compared to the average for the first half of 2004 by £80m, to just over £1b, at £1.028b. And net new business billings were strong, extremely strong, at just under £2b at £1.91b, slightly ahead of last year's run rate at this point in the year.

So on a fully reported basis, as presented in the press release, a couple of points I would make. There is a goodwill and intangibles charge of £33m in our P&L. £11.8m of that is the amortization of intangibles. So part of the consideration for Grey in the goodwill is allocated as an intangible asset for brands and customer lists. It's amortized over periods varying between two and 20 years. The balance is on a -- just normal goodwill that's subject to impairment on an annual basis.

There's approximately £20m of impairment charge we've taken, of some under-performing businesses, less than last year. But we do have each year some impairment and obviously that goes through the face of the P&L. So that's the £33m. That is the majority of the explanation in most cases between the headline numbers and the reported numbers.

The other difference I would like to stress or point out is that under IFRS we adopted one of the guidances from January 2005. Which, if you recall, is how we restated convertibles and had to take an extra £7m of notional interest. So it's just in 2005 within finance income and finance charges. Again, those are both interest income and interest paid issues only.

They net in 2005 to £44.8m. They net in 2004 to £35.1m. So on an apples-to-apples basis, you're looking at about a £2.6m increase in the cost of interest, which is really driven by the rate increases and U.S. dollar, negated in part by the better than last year average net debt, year-on-year. So that's one of the differences that isn't flowing back into both years under IFRS standards.

On a headline basis then, really making that adjustment for goodwill, you've got PBIT at just under £300m at £299.6m, up 30% on last year. We have profits before tax of £254.8m, up 30.6%. We will talk about one of the items in IFRS called holiday pay, which is of a timing nature; it represents £15m. That is included in the £254.8m.

Tax is currently at 28.5%, including Grey, at the half-year. Slightly down on last year's half-year, at 28.9%. That's the sort of range we'll be aiming to achieve on the full-year basis. I'd hoped to be a little bit lower, but we gave you guidance that the IFRS tax rate is likely to be in the range of 28 to 30%. And this is a good attempt, I think, in the first half, given Grey's automatically included, which just to remind you, was at a 48% tax rate when it joined the Group.

So moving on to headline diluted EPS at £0.138 compared to £0.108, is up 26.4% compared to a year ago. And in terms of operating margin, pre-goodwill at 12.1% versus 11.3%, or 0.8 margin points under IFRS compared to a year ago.

Some analysis of the two GAAPs year-on-year. First on the IFRS, based on the headline basis. So you have the margin of 12.1% versus last year's margin at 11.3%, a 0.8% margin improvement. You then have the PBT of £255m that you recognize versus last year £193m, up 32%. Then the earnings per share, which I've just quoted, £0.138 for the year.

If we were reporting U.K. GAAP for the first half of 2005, the margin would have grown by 0.6 margin points to 13.7%, and the fully diluted EPS would have been at £0.167 compared to £0.136 last year, up 23%. So the margin improvement and the growth in profits are very similar under both GAAPs. There will be more slides to help you in a separate section, to try and break this out for you.

So in terms of the Group, 48% of the Group now is in Advertising, Media Investment Management. That's growing at 6% on a like-for-like basis. We've broken out the like-for-likes by discipline for the first half of this year. As you can see here, the 6% growth in the first half was pretty evenly matched. In quarter one it was about 5.7%, in quarter two overall was about 6.2%.

15% of the business, 15.7% to be precise, was in Information, Insight & Consultancy, growing at 6.7%. 10.2% of the business in Public Relations & Public Affairs, growing at 6%. And the Branding & Identity, Healthcare and Specialist Communications represents 26.1% of the business overall, and is growing at 5.3%.

Moving on to the same analysis by geography, where North America represents 39.8% of the Group, growing for the first half on a like-for-like basis at 5.9%. The U.K., representing 15.8% of the Group, growing at 2.7%; stable growth, as we mentioned in the press release. And improving growth in Continental Europe of 4% compared to a year ago. Some of the markets there improving quite nicely, and represents 26% of the Group. So Europe as a whole representing 42% of the Group.

Asia Pacific, Latin America, Africa and Middle East representing just under 18% of the Group, growing very strongly at 12%. LatAm in particular is the strongest of the two regions, very strong high-teen growth in those regions, in all markets in that region, I should add, actually.

In terms of margin performance under IFRS, so taking the 12.1% this year comparing to the 11.3%, you can see margin improvement across all disciplines. Particularly strong margin improvement in the research businesses, 6.7% margin. This time last year they did improve to over 9% at the full-year basis. We did have the call center issue in 2003 and early 2004, that has been rectified. So what you're seeing is a continuation of that improvement.

In addition, we've had some very good growth at Lightspeed, our Internet panel. And after considerable investment there and the strong revenue growth, we are making very good profit improvement year-on-year at Lightspeed, and Millward Brown in particular is doing very well.

We're having strong performance continuing in our Public Relations business, both in terms of revenue growth and in terms of margin improvement, and just under 14% margins in those businesses at the half-year point.

And the Branding & Identity, Healthcare and Specialist Communications group margin up to just under 11%, at 10.9%; generally strong. Some investment coming in the direct and interactive business, in terms of revenue growth and new talent, holding the margin growth back a little bit, but otherwise very encouraging.

In terms of margin by region, again, no real surprises. Modest growth in North America but the strongest margin region at 15.6%.

Margin improvement in the U.K. to 8% margins. Quite good, I would say strong, improvement in terms of Continental Europe, taking the margin up from 8.7 to 10.4%. Particularly good profit contributions coming from a number of mainland European countries, such as Germany, Holland, Italy, Spain, Austria, Ireland. And some of the markets that we categorize at the faster growing - that's Turkey, Russia, Poland and Hungary - doing particularly well in profit contribution in Continental Europe.

Asia Pacific, Latin America, Africa & Middle East, margins at 10%, continue to improve year-on-year.

These are countries growth on a constant currency basis, so are impacted by acquisitions. A number of countries in all those markets are doing particularly well on a like-for-like basis. There are very few that are poor performing or stagnant across the whole range. So generally some very good performances country by country.

And likewise, in terms of clients and category, it's more meaningful than on the -- than the countries. I think one of the comparisons we've given in the past, and which is quite helpful in terms of looking at our top 20 clients, and on an organic basis 15 of our top 20 are growing year-on-year. Which is the healthy statistic of the top 20 clients. We have good solid growth of 15 of that top 20, which is one way of looking at the analysis. Recently we won the Shell media buying business that I'll come on to. Slightly surprising in terms of the oil how this -- how that figure comes through, but I think that will change in due course.

Currency had a negligible impact. So it's really moving the profit, PBT of £255m, would have been £258m if sterling had remained the same as last year.

In terms of net new business wins and losses, I think that the red represents the second quarter. And interestingly, of the wins and losses on this page, there are 13 media wins and six creative wins. The creative wins across the brands of Ogilvy for Lenovo, Thompson for Texas Instruments, Brand Buzz [Flash], which is one of the Y&R agencies, LG in the U.S.A. Joshua, which is one of the Grey Direct businesses. Swatch in the U.K. Ogilvy, on the creative side, Revlon in the U.S.A. And a combination of Ogilvy Healthworld/OgilvyOne for Wyeth in the U.S.A. The rest are media wins, either globally or locally, across the spectrum and across the brands.

Some losses; I should stress that the Novartis win on the other page was a consolidation, moving really the business from MediaCom and other agencies into mec. So a net result -- positive result for the Group, a loss to MediaCom themselves. A number of losses that have been announced in the press, nothing unusual or totally -- terribly significant here in the overall context of the Group.

In terms of the net new business, it's £3.5b. This is our own internal estimates rather than the previous two pages, which are just trade press. Tend to focus on media and creative, tend to focus on the U.S.A. and Continental Europe, solely in the bigger markets. And to give you the analysis in terms of the run rate, we had £1.6b of claimed new business wins, in the first quarter £1.9b, totaling the £3.5b you see in front of you. That compares to about £2.76b for the half-year in 2004. So continuing to improve our rate of media and creative wins year-on-year.

In terms of July, an encouraging start to July. The biggest win being the MediaCom/mec Ikea global win of $175m and a small loss for Richemont by mec in Europe.

In terms of cash flow, and this -- I'm presenting this in the way that we traditionally present it, before working capital changes. So operating profit of £286m. Non-cash compensation, which is basically options, the costs of options and restrictive stock. They obviously don't have a direct cash impact in the cash flow. Depreciation added back as well. Interest paid, tax paid, etc., coming up to £274m generated compared to £201m last year.

And how we spent that cash overall. Capital expenditure, which I did illustrate would be stronger in terms of property this year, would equate to around £140m, £150m in total, running at the rate of £70m at the half-year stage. Acquisition payments overall were totaling £336m. The net initial payment for Grey was £243m; that was net of the cash we received, of around £140m, at the time of the acquisition. The gross cost was £384m. Remember we've paid 50% in stock and 50% in cash.

Earnout payments, which total -- the current outstanding in the accounts is £233m. We paid £69m in the first half of this year. So totaling £336m of acquisition payments, £75m paid for share buybacks, a similar amount to the last half-year. So a net outflow, including Grey, of £193m. If one was to exclude Grey, a net cash inflow of approximately £50m. All dividends get paid in the second half of the year, just for your information.

In terms of average net debt, we did extremely well in the first half of this year, and despite the cash cost of Grey, still managed to have a lower average net debt than last year, at £1.028b. That had reversed by the half-year point of June 30. So our net debt at that point in time was £1.2b versus £1b at June '04. And I've talked about the difference in the interest, and how there is £7m more interest in that £45m. It doesn't exist in the £35m in '04.

And just for those who need it, this is a little summary of how we go from the basic average shares in issue with the various options, the share effect. And whether the convertibles are repaid or act as a dilutive, in terms of helping you calculate what is the shares in issue for average -- fully diluted basis is.

Okay, that was the easy bit. So we go on to the International Accounting Standards. I did note John Simon's comment that the new -- the Company's being forced to present numbers that almost defy explanation. So we shall try and better that or prove the point.

Our first IFRS results, our interim results for the six months ending today. We did our first Annual Report under IFRS for the year ending 2005 but will do, however, because of the prospectus, we are doing a full 2004, what is called a non-statutory accounts in the prospectus that is going to be finalized with UKLA shortly.

That is, we are currently -- we are doing the recalculation, as Martin mentioned. It would have been done under either U.K. GAAP or IFRS. It is to help us to put together approximately ten years' worth of distributable reserves available for share buybacks and dividends. We have traditionally kept around three years' worth of share buybacks and dividends capacity in the top co. We are quite a complex Group.

We do pride ourselves on managing the tax affairs of our Group wisely, and therefore there are some structures that are not easy to work with. But this transaction we have been thinking about for three or four years, and this we decided was the right opportunity. It wasn't affected by any dividend distribution lots. It wasn't affected by any pension funding issues, but purely a matter of time when we decide to come to the market.

So that is out there. We hope to conclude this around late October with a scheme of arrangement, if we get the necessary approvals from shareholders.

We talked to you before in detail about the various accounting adjustments that would come up through IFRS. I think we were at fault because we were surprised also by the magnum of the holiday pay accrual. We didn't tell you to expect this sort of swing factor at the half-year point.

And just to be clear what it is, under U.K. GAAP we weren't required to accrue precisely at the half-year point people's untaken holiday. So if you were receiving 20 days holiday a year, at the half-year point you hadn't taken all of ten, we now have to accrue that difference. Despite the fact that many people receive a lot -- take a lot of holiday in July and August, and at the end of the year in many of our companies they can't carry holiday forward.

We obviously accrue for it in all those markets where it's statutorily required but it wasn't, as a general principle, required for us to make significant accruals, apart from California and other places, in the U.K. and the U.S.A. That is a £15m difference in the half-year that will reserve -- reverse as the full year progresses.

So bearing that in mind, we're going to take you through some of the tables, explaining the two GAAPs as they currently are. First, on the first half 2005. Some of these numbers you are now more familiar with in terms of the headline PBIT at £300m, we've rounded, and the PBT at £255m and the margin at 12.1%, compared to under U.K. GAAP what would have been the margin of 13.7%. And the earnings per share of £0.138 today reported as headline, would have been £0.167, hence the £0.029 difference.

The right-hand column just excludes the £15m from the holiday pay accrual, and makes the corresponding adjustments. So the margin difference would have only been 1 margin point and the EPS difference would have only been £0.02. So one could assume that the EPS would have been closer to £0.147 without the holiday pay accrual.

I then break down the differences in the slide for you. You've seen most of these before in terms of the share-based compensation. The tax on associates that is now part of operating expenses and not in the tax line. And then the additional convertible interest, you see the sub-total there. I've then put the holiday pay accrual in as a new item, across both operating profit, PBIT and PBT.

Doing exactly the same for the first half 2004, comparing the IFRS GAAP numbers that we've now produced for you for the first time. PBIT of £228m on a headline basis and PBT of £193m, and the margin 11.3%. A similar difference year-on-year to U.K. GAAP as it was, with a margin of 13.1%, a 1.8% margin point difference. And in EPS terms, the £0.108 under U.K. GAAP would have been £0.136, and likewise a very similar affect of the change on the holiday pay column on the right-hand side.

Again, breaking down the differences, they are identical apart from there is no reconciling item for the convertible because we didn't have it in IFRS in 2004.

Moving through now, in terms of reconciling the change that would have been regardless of GAAP, year-on-year. So the top line is the IFRS PBT of £300m and a margin of 12.1%, compared to last year's £228m and a margin of 11.3%, which is a margin improvement of 0.8%. It is obviously similar if one excludes holiday pay. And if one moves right down to the bottom and looks at U.K. GAAP, headline PBIT of £338m that would have been reported and a margin of 13.7%. Last year's PBIT of £265m and a margin of 13.1%, was a 0.6% improvement we've achieved year-on-year. So either GAAP, the improvement ranges between 0.6 margin points to 0.8.

In summary, the holiday pay accounting charge is timing only. With limited full-year impact, the margin effect and earnings effect will reverse by the end of the year. The IFRS headline EPS of £0.138 would have been £0.147 excluding the holiday pay adjustment. The IFRS changes, excluding holiday pay, lowers PBIT by 7%, PBT by 11% and EPS by 12%.

And the margin improvement of 0.8 margin points under IFRS or 0.6 under U.K. GAAP are ahead of expectations under both sets of accounting rules. The future margin goals and reporting will obviously be on IFRS only in the future.

And with that, I happily hand over to Martin.

Okay. I just want to rehearse with you our key priorities, objectives and strategies and make one or two comments about Y&R Group initially, after I've just summarized what the priorities are.

First time, the short-term objectives are to integrate Y&R Advertising. The whole of the Y&R Group, I think, has been successfully integrated with the possible exception of Y&R Advertising, and I'll come on to that in a minute. And also Grey Worldwide into the Group, and you've seen the announcement last week of Jim Heekin as the Chairman and CEO, Chairman and Chief Executive of Grey Worldwide, which is the advertising agency within Grey Global.

The rest of the Grey Global Group really has been integrated - Healthcare, MediaCom, Grey Synchronized Partners which covers Grey Direct, Grey G2 and Grey Interactive have all been integrated into the Group, and GCI integrated in as well. And now the focus is very much on Grey Worldwide, which is the advertising agency.

In the medium term, we continue to focus on like-for-like top line growth, acknowledging that that's the key parameter that you, or most of you, look at in terms of indicating a healthy business. And secondly, to focus on enhancing the creative capabilities, not just of the brand advertising businesses but of all our businesses.

And then finally, long term, to focus on the two sectors -- on the two paces of growth which are stronger. It's clear to us that the non-U.S., non-Western European markets are the key markets - Asia Pacific, Latin America, Africa and the Middle East and Eastern Europe. And it's clear to us that functionally the non-traditional markets - that's defining traditional as network television, newspapers and magazines - that the real growth is coming direct, interactive and Internet, and coming in cable and satellite and outdoor and radio.

And the world in our view is two paced, and you've got to modify. It's difficult, it's very challenging but you have to modify your strategy to it. And you've seen a number of the traditional media owners grappling with that issue.

In talking to some of you just before, the real issue is if you transfer such a traditional model to the Internet, is how you make it pay. It's all very well sticking it on the Internet, but how do you actually generate some revenues out of it, otherwise it just becomes a value destruction move.

So that's the short, medium and long term. Y&R has come in, I guess, for some examination and indeed criticism over the past. So we thought we would just lay out for you what's been happening to Y&R Group. That is the advertising agency - Wunderman, Burson, Cohn & Wolfe, Landor, Sudler & Hennessey, Bravo, all parts of Y&R. And you can see that from a revenue point of view, this is the revenue performance 2000/2004. And I should say we've stripped out all the acquisitions, so this is like-for-like, and we've included a proportion of the Media Edge CIA operation in here.

So this is a reconstituted, if you like, view of what's been happening to Y&R. You can see the revenues fell in 2001/2002, recovered in 2003 and recovered further in 2004, not quite to where they were in 2000 but getting close to it. And that reflects growth in the bottom block really of the Branding & Identity businesses, and Specialist Communications businesses, particularly Landor and Wunderman.

In the middle block, the growth of Burson and particularly Cohn & Wolfe, and then in the blue block on the top the recovery in the Advertising, and indeed the Media Investment Management business and Media Edge CIA. From a margin point of view, you'll see that Y&R's margins as a group are in excess of the Group average. Now you can see the Group average there for 2004 just at the 14%, this is the pre-IFRS margins on the old 2004 U.K. GAAP basis. And you can see the margins were in excess, and have been in excess, of the Group average as we moved through the years, in all years actually.

In terms of return on capital, it's still not the -- the Y&R Group acquisition is still not making our average cost of capital but is moving up towards it at just under 6%, versus the average cost of capital of just over 8%. So returns are improving, margins are strong and the business, I think, is in reasonably good condition, although there is scope for further improvement on Y&R Advertising.

Just to make the point that in the last few weeks they've consolidated the Sears business and won the Hilton business, in a significant competition.

Now in terms of what are the factors that are worrying us or troubling us generally, or what are the opportunities that face us, clearly there are issues in the U.S., such as the fiscal deficit, the trade deficit, the impact of interest rate policies. Because governments and central banks, whether they're independent or dependent, seem to be totally focused on modifying or moderating inflation rates rather than worrying about unemployment rates.

And we have the specter of commodity price inflation, oil prices at $60 and $70, don't seem to have affected things too much, but a number of people believe that's just a question of timing. And clearly the impact on an economy such as China becomes significant because the oil price, in the context of Chinese national companies and the multinationals operating in China, becomes significant.

It seems to be the case that oil is not as significant a participant in GMP, or component of GMP, as it used to be in the 60s and the 70s, and that may explain why there hasn't been a significant impact to date. I think our view may be as to some extent it might be timing, and we're yet to see the impact of increased oil prices feeding through, but we shall see.

Against that, I think clients are in a major advantageous position, in the sense that I was somewhat surprised to see, I think I'm right in saying this, that in an article I read recently that European companies reported operating profits in the second quarter up by something like 27%, public companies, 20% on average, which is very high. And part of the reason for that is that, despite the lack of pricing flexibility that they have, pricing power that they have because of lack of inflation, because of retail concentration, despite that, outsourcing or the threat of moving manufacturing to low cost manufacturing centers such as China and India has kept in check labor cost increases.

We in our own business are very comfortable, and have been comfortable for the last ten or 15 years, plugging in salary increases for the year at 3 to 4% in line with general inflation. And it really hasn't exceeded that, and you'll see that our headcount has increased in the first half of this year. It's the first time for about two to three years, has increased by 5%, just over 5%, as our revenues have grown on a like-for-like basis by 6%, as we invest more in talent, particularly in the direct, interactive and Internet areas.

You'll see that there was very little margin expansion in our direct, interactive and Internet businesses, and that was principally because we've gone for revenue growth in those areas, and invested more and more in people, particularly in Wunderman and in OgilvyOne, which together are about $1b of revenue out of the $10b that we are at the moment.

Other features are the pressure on the consumer, clearly increasing debt levels, the issue of equity price -- house equity prices, what's going to happen there. And I think probably that one of the most worrying things at the moment is the lack of recovery in corporate capital spending.

If you look at our technology portfolio, which is unmatched in terms of competitors, it's patchy across -- well, there are some that are doing well, very well. There are some that are doing well and there are some that are doing not so well. The common thing seems to be that corporate capital spending is more maintenance driven rather than new spending driven. So we haven't got that balance yet, that if the consumer spending comes under pressure, that we'll see a recovery in consumer capital spending.

The lack of strength in Western Europe. These are big economies. These are $2 trillion GMP economies - France, Germany, U.K., Italy, Spain. There's only two Asian economies which are over $1 trillion and that's Japan and China, but they are growing faster. It's exactly the same as the direct, interactive and Internet business. That's only 3 or 4 or 5% of worldwide ad spending but it's growing like crazy. And you -- we've put into the release the organic growth rates for China and India. In the first six months of the year China's up 22%, India is up 13%. These are growth rates which are twice or four times what we're seeing elsewhere in the Group.

And I think that's the pattern that will continue. And I think Latin America will continue to be the strongest growing part, that's probably primarily driven by the recovery in Argentina. Although Brazil has also been strong but obviously there's political volatility there. But Asia is going to continue to be, and you'll see us be making, not big acquisitions.

We announced overnight, we haven't announced it formally overnight but we signed the deal overnight with TCG in Australia, which is the George Patterson Agency there. We've bought 70% of the agency there for AUD80m in equity, and another AUD20m -- AUD27m in debt. There's AUD132m of revenue. So it adds about $80m, $85m to our Asian operations.

Australia's another example. This is a country that's not really dependent any more on the Commonwealth or Europe. It doesn't look west or east, it looks north at China and India and it'll make us a growing participant, and we're by far the strongest group now in Australia as a country. We'll be merging Pattersons with Y&R, and it will give Hamish McLennan and his management team at Y&R a bigger challenge and opportunity in the context of Australia, and indeed Asia.

So we see that pattern geographically continuing but consolidation's going to continue. We're going to see more client consolidation. We've seen some in the first half. We'll see, continue to see more, particularly, I think, in the packaged goods industry as retail concentration becomes more and more significant. Media owners, we're clearly seeing it. The same thing goes for agencies and retailers, as I mentioned.

That all means a lack of pricing power and it's a grind in Western Europe. If you look at all our clients, whether they are in packaged goods or technology, capital goods, it's a real grind. There's not much top line growth. The growth is coming from a little bit of top line growth and a lot of cost control, and the opportunities then become the faster growing markets.

If you're going to invest money, why stick it into an economy where you've got labor market inflexibility, you've got structural problems if you want to make -- structural costs if you want to make significant changes in the structure of the business? Go to a market which is much more free and flexible, and that includes the U.S., where there aren't those structural problems.

And then finally, trade promotion, distribution and channel management. That still continues to be an issue. Unfortunately, the accounting standard's changed so we can't see any more how much clients are spending on the difference between gross and net sales. But we did get a window there.

And we've done some analytical research there through Glendinning, through Cannondale, through the store which is our retail venture through management ventures. Which clearly indicates that those packaged goods companies that have cut their spending on trade promotion and channel management, having invested the proceeds in advertising and brand differentiation, have benefited.

There is a direct correlation, we're picking out two parameters, and you may say there are other parameters that affect it. But in our view, there's a direct correlation between top line success and operating margin profitability, between that and cutting trade spending and increasing brand investment. And I won't mention the names but those packaged goods companies that have been successful, for example, in the first half of the year. You can see that there is a direct correlation between what they've done in cutting channel spending, trade spending and trade promotional spending. And the analogy with the automobile business is very, very apparent. It's no good just cutting prices.

If you give employee discounts to the consumer, it's natural that profitability is going to erode. You might sell a lot of cars and we might be -- I think it's a compound growth rate -- or not compound growth, annualized growth rates of 21m cars, whereas the average in America has been about 15m or 16m. I think in July and August we actually got up, or we are getting up to June, July, August, 21m annualized.

Well, it's clear. If you give employee discounts to the consumer, they're going to go and buy SUVs and cars in advance of what they would have done ordinarily. But it's not the way to long-term profitability. So that issue of dealer discounts is going to become more and more prominent, in our view.

There's still a move to fees but it's really stabilized. Half of our businesses outside Advertising, that's all fees. The half that's in Advertising is really two-thirds, 70% fees now, it's stabilizing around then -- there. Still pressure from procurement but not the intense pressure that there was in the early part of the new millennium. It's evened out a bit, as things got a little bit better.

Outsourcing, more and more opportunities there. Clients are looking at more and more opportunities to outsource with us. Super agencies, a big review at the moment, Bank of America. There are a number of others, the trade publications either don't want to highlight or -- because it offends the luvvies' view of the industry, or because they just miss them. But there are a lot of things bubbling under the surface of this nature.

And I think the super agencies, the holding company pitches, the parent company pitches, whatever you want to call them, are here to stay. And they're not just across the whole range; they're happening in Healthcare, they're happening in direct, they're happening in PR.

Network pricing, I think we saw an inflection point. If Irwin Gotlieb was here, he would talk about it being an inflection point. In 2005 in the upfronts NBC lost, I think, $900m of spending. Now that was a market share issue and programming issue but clearly, networks are coming increasingly under examination. And I think maybe there was an inflection point.

We now represent about 25 to 30% of media buying power in most markets around the world, that's on average. And in some markets, like India, we represent even greater figures. Clearly the balance of power is shifting. And then with the fragmentation of media and with the growth of new media, it's adding further pressure to the traditional media ownership companies, and that covers newspapers. You've seen with Murdoch -- with Rupert Murdoch buying now significantly into search and Internet businesses in a second wave.

But this second wave is happening at a time when Internet is much more important. It's probably double the relative importance that it had in the year 2000. And then media fragmentation and pressure on traditional media. So there's also some other technology things that are happening at the moment, which are altering consumption habits and improving measurability. PVRs alter consumption habits for media and they improve measurability. VOIP doesn't.

There may not be advertising ramifications but clearly there are ramifications in terms of what consumers do with their time, and clearly mobile and search is becoming more and more important. And we are in a very strong position with Wunderman, OgilvyOne, RMG Connect. Our other assets, such as VML in America, which all total about $1.5b of our $10b of revenue. So 15% of our business is direct, Internet and interactive driven at the moment.

In terms of the key trends, and I've gone over these before. The globalization, Americanization, rise of the BRIC countries, over-capacity and the shortage of human capital, the Web, internal communications and retail concentration, are all adding up to making us more important in the long term.

Now we've talked -- Paul's gone through the differences between IFRS and U.K. GAAP. But we just want to give you the new financial model, if you like, taking into account IFRS. Industry growth for 2005, most of the experts talk about 2 to 3%. We've given guidance historically of 3 to 4% this year. I'm prohibited, as I said in the opening, from making any judgments about what our revenue growth might be this year.

But any analyst worth his or her salt, I think would look at our first half 6%, July 3%, and come to the view that 3 to 4% was a bit conservative. And if I was an analyst, I would be talking about, say, 4 to 5%. That's where I would see it if I was an analyst, which I'm not, thank God.

Okay. Former -- our previous headline operating margin goal in 2005 was to move from 14.1 to 14.8%. Whenever we say former WPP, that's the old WPP, okay, under U.K. GAAP 2004. The Grey headline operating margin that we were seeking to achieve, you remember they did about 8, 8.5% last year. We said we would get to 10.5%, which constituted two things basically. A $20m synergy saving, really from combining two public companies, which we're largely achieving, and a 1% margin improvement.

So you start at 8.5%, the $20m gets you to 9.5%, and we've got a 1% improvement. Well, we're achieving that, if not more so. And so we -- historically our combined headline operating margin target was a minimum of 14.3% for 2005. You've seen the progress in the first half, and we think that it's realistic to bring forward our margin target for 2006 to 2005. So 14.8% replaces 14.3% on the old GAAP basis or 2004 GAAP basis, and that equates to 13.7% under IFRS.

The two critical changes, forgetting about holiday pay because it reverses out, being associate accounting and the -- sorry, the option costs, the share-based option costs. So share-based option costs and holiday, with the holiday pay disappearing out. 2006 -- so we've moved 2006 to 2005.

For 2006 we're taking up the operating margin improvement from 14.8 to 15.3%. The Grey headline operating profit margin will improve from 10.5 to 11.5%, and that would've left us historically at 14.8%. We're revising that up to 15.3%. So what was 14.8% is going up to 15.3%, and that equates to 14.2% under IFRS. The two adjustments, share-based option costs and the associate tax accounting making -- accounting for the difference. So 15.3%, or 14.2% under IFRS, for 2006.

For 2007 we're raising our target to 15.8% under U.K. GAAP 2004, or 14.7% under IFRS. And here's a summary of where we were. The old forecast in the left -- on the left-hand side for 2004. The actuals, the forecast for 2005, 6 and 7, and the new forecast on the right, just to summarize where we are. So we're going to go, we hope, from 13% in 2004 to 13.7% to 14.2% to 14.7% under IFRS. Our target long term remains U.K. GAAP 2004 20%, which approximates to 19% under IFRS. Again, the two principal changes being what I mentioned before.

Now this summarizes the history under U.K. GAAP 2004, to 2004, and the first half of 2004, compared to 2005. And you can see we've got two margin lines for the first half. One being U.K. GAAP 2004, which is the line above, 13.1 to 13.7%, and the one below being IFRS, going from 11.3 to 12.1%. And you can see the hatched line at the top, which is the IFRS long-term target of 19%.

I won't dwell on this, other than to emphasize that I think the strategy remains very pertinent to what's happening. We see the world as being two paced. We see things happening faster in some markets and slower in some markets geographically. We see them faster functionally in some markets and slower functionally in some markets. We want to be a third, a third, a third. We are currently, really roughly, 40% U.S., 40% Europe, and 20% Asia, Latin America, Africa and the Middle East.

The BRICs documents that Goldman put out, the couple of them. Basically we can get there just on organic growth, if you assume the GMP adjustments or forecasts that they made, plus an adjustment for advertising as a proportion of GMP. We will have something like 38% of our business in those key growth markets by 2015.

And just to put this in perspective, here are three markets - China, India and Brazil. This -- these are the figures 2004. You can see that China, including Hong Kong and Taiwan, in 2004 was about $275m. It's already at $350m. We'll be announcing a small, not big, acquisition in China in a couple of weeks' time. We'll be announcing a similar, smaller acquisition in India. Our Indian business is $125m. Brazil now has eclipsed India in terms of size, just almost up to $150m.

The market shares that we have in China is about 15%. We're the biggest buyer on CCTV already. We're the biggest group in China. In India we have a 50% share of the market, in the media market, probably a third in terms of creative brand advertising. And again, a significant growth there. And Brazil, we've probably got about a 25% share. Again, we're the largest force in the market there.

In terms of marketing services, it's slightly more than half our business, about 54% if you include associates, that's companies that we own less than 50% and more than 20% of, it alters the balance a bit. It's now two-third -- our objective is to be two-thirds/one-third, to capitalize on fragmentation and new media growth, and measurability is becoming more important.

One of the things that Eric Salama pointed out actually in anticipation of this meeting was that in the research business what's really interesting is that the research -- the advertising research business, that is research commissioned to evaluate the return on investment on advertising, is increasing at a far faster rate than the general market research market.

Both Ipsos and ourselves have seen a significant increase of that, and that's because clients are wanting to measure more effectively the return on investment on their advertising spending. And so measurability which covers direct, interactive and Internet as well, because those are more measurable than the traditional media, and research. Instead of being a third of our business, $3b out of $10b, we want to be half of our business.

What are our key objectives? Improving operating margins. Again, I wasn't allowed to put in increasing our operating profits by 10 to 15%. But any analyst worth his or her salt would point that out as well. Increasing flexibility in the cost base, we want to make sure that we have flexibility in the cost base. Free cash flow to enhance shareowner value. Developing the role of the parent company. Emphasizing revenue growth more as margins improve, and improving the creative capabilities and reputation of all our business.

The financial model boils down to organic revenue growth of 0 to 5%, that's organic excluding acquisitions. Margin growth in line with the objectives that we've outlined. Operating profit improvement in the range of 10 to 15%, as we historically said. Incremental profit growth from acquisitions of up to 5%, so 0 to 5% from acquisitions. And overall growth in EPS of 10 to 15%.

This is what we've done historically. Again, with the first half in red shown -- showing the IFRS interim EPS of £0.108 and £0.138, just to summarize the progress.

In terms of the second major objective, flexibility, it's not just staff, it's the other costs. And you can see here that again, in the first half of 2005, we've improved the flexibility in our cost structure. Not really as a proportion of staff costs, but as a proportion of revenue. We now have almost 7% of our costs in -- of our revenues in flexible expenses. So that'll be consultants, freelance and incentives.

And you can see that we give you -- we gave you the incentives, the short and long-term incentives including share-based compensation, in the results. That was about £90.4m, which accounted to -- amounted to about 23% of our operating profit before bonuses and taxes.

The most interesting point which I want to draw your attention to about that is that our margins, our operating margins, pre-incentives went up by about 1.2 points -- 1.2 margin points, against 0.8 overall for the business. So really, our growth in margins came from control of non-incentive staff costs; staff costs to revenue ratio excluding extensions was down by 0.1 of a percent. And also by better control of non-staff costs.

But we've got more flexibility and it's almost 7%, and our incentive pools are trending towards now the maximum levels. They're not quite at the maximum levels but they're pretty much there. You remember that our target was to get short-term and long-term incentives to about 20% of OPBT, excluding share-based compensation options. It's now 23% including those. So we're now at 6 -- if you exclude the share-based operations, share-based costs, we're at about 6.4% of revenue. So better flexibility.

Share buybacks, we bought back 1% of the share capital in the first half. The target is to buy back to about -- up to 2% each year. It was at a cost of £75m, our target is between £150m to £200m. We will continue with that, that buyback program.

On acquisitions, we consolidated Grey from March 7, 2005. So it's really four months of the first six months. I think the consolidation there has gone well, as I've indicated before. I think the focus now will switch with Jim Heekin's arrival to Grey Worldwide. I think the initial indications from Grey Worldwide have been good in the first four months, and I think there's scope for more potential growth, particularly with their existing clients.

We continue to focus on small and mid-sized acquisitions. I've mentioned TCG, I've mentioned a couple of things that we'll be doing on a small scale in China and India in the next couple of weeks. But the major emphasis continues to be on the measurable areas like Information, Insight and Consultancy with -- together with the faster-growing areas such as Branding & Identity and Healthcare and, probably most importantly, direct, interactive and Internet, where we do make acquisitions like we did with Malone, with JWT.

A week or so ago we focused on their relationship with retail, particularly with Wal-Mart, to try and build our knowledge of retail. And we continue to find the opportunities as usual, particularly outside the U.S. Pricing is still more expensive in the U.S., whether you're in the private or public markets.

This is just a summary of what has been done, I won't dwell on that, in the first half, including Grey.

In terms of cooperation, we think we have a model that has been very successful in these global, parent company, holding company, pitches. And I think the propensity of our people to work together at all levels, but particularly at the middle and junior levels inside the Company, is very, very strong. But we've identified these ten areas, again which I won't dwell on, which are areas for horizontal cooperation on the vertical brands.

It's interesting that now our competition, particularly Omnicom, is starting to mimic us in terms of the team approach. Although we think, because of the way that we've tried to organize the Group, we have a competitive advantage in implementing those types of arrangements. We'll see what happens in the coming months.

In terms of revenue growth, more emphasis on that as margins improve, obviously. Expanding the networks geographically is one way of doing that. Reinforcing our competitive advantage where growth is expected to remain higher, such as in research, direct, interactive, and the other areas mentioned. I think we do have a number of competitive advantages. Clearly, in media planning and buying, we have a very strong advantage.

We're the only major advertising marketing services group with a strong research presence now, which is becoming more and more important in terms of measurability, obviously. But more and more important, linked into media planning and buying. Our media pitches are not just media and investment management pitches. They are media investment management pitches and research pitches. And it's not bought-in research, this is research that we are doing internally.

You may have seen that MindShare have developed this MindShare powered by Kantar approach. What we're doing is increasingly linking our media and research businesses. We have an advantage also in direct, interactive and Internet; Wunderman and OgilvyOne are the only worldwide operations in that area. No other competitor has more global operations in that area, and certainly not of the size that we have, of $0.5b each in both of those businesses.

RMG Connect is rapidly being built up within JWT, by OgilvyOne and Wunderman, to do the same. Currently I think their revenues are around $150m but with other revenues inside the business in the direct area of another $350m, it takes us to a total of $1.5b. So we have an advantage there.

I think we also have an advantage in the emerging markets for the direct, both at the -- both in the traditional area and the non-traditional areas of activity. And again, we've got an unparalleled strength in those faster-growing markets.

And then I think the final advantage we have is the cooperative instinct, which is not difficult -- which is not easy to achieve, it is difficult, but which increasingly we're taking advantage of. So I think that bodes well for revenue growth.

And then finally, creative capabilities. It's recruitment, it's recognizing creative success by awards as well as financially. Acquiring highly regarded creative businesses, like we've done with Senora Rushmore, for example, in Spain, which is regarded as being one of the strongest, if not the strongest, creative businesses in Europe. Small businesses, small independent businesses.

And then in Argentina we've got three operations that we've taken really -- taken people from major competitors to start creative shops in Argentina, capitalizing on the problems in Argentina and the opportunities for creative abilities. And then finally, concentrating on awards.

So in conclusion, I think we're well placed geographically and function. We think there's more scope for margin improvement, certainly faster than we've given you previous indications. Certainly cost flexibility there and using free cash flow to enhance shareowner value. We're going to concentrate on the highest growth areas, functionally and geographically, in the future.

And we think there's scope for continued emphasis on free cash flow after acquisition payments and share repurchases. And obviously, last but not least, improving the return on capital.

Thanks very much.