WPP PLC (WPP) 2007 Q2 法說會逐字稿

Good morning, everybody. Interims for 2007 -- if we can just move up one slide. So we are going to talk a little bit about the interim results. Paul will do that. Then I will come back to strategy and then come back on some conclusions. And then we'll open it up for Q&A. Paul?

Good morning, ladies and gentlemen. I am going to take you through the slides. You should have a hard copy. There's a few things I do want to point out, of changes year on year.

So starting off with billings, which are up 5% on a reported basis to GBP15 billion. Reported revenue was up 2%, but on a constant currency basis revenues were up 7.7%, and on a like-for-like organic basis revenues were up 5.3%. So building up from the organic rate of growth of 5.3%, acquisitions added 2.4% to the growth to give you constant currency revenue growth of 7.7%. Now, foreign exchange was adverse by 5.7% in the half year, bringing the reported rate of growth down to 2%.

Headline PBIT was up 6% on a reported basis to GBP383 million and 6% higher at 12% growth on a constant currency basis.

Operating margins were up 0.5 margin points to 13.1% from 12.6%, in line with our full-year objective of 0.5 margin point improvement.

Headline profit before tax on a reported basis was up 6.9% to GBP338 million and was up 13.7% on a constant currency basis.

The tax rate for the half year on headline profits was down 2.1 percentage points to 26.9% from the half-year rate in 2006 of 29%, but in line with the full-year rate of '06 of 26%. And if you'll recall, I said that we expected the tax rate for next three years to be somewhere between the 26% and 27% range when we came down last year.

Diluted headline earnings per share was up 9.6% on a reported basis to GBP0.182 from GBP0.166 last half year and up 18.8% a constant currency basis.

The interim dividend was up 20% to GBP0.043 per share, and estimated net new business billings of GBP1.5 billion or $3 billion were won by businesses during the quarter.

The acquisition of new technology company 24/7 Real Media was completed, adjusting for second half on July 2, 2007, so none of this half-year results include any revenues from 24/7.

As a number of our competitors report in U.S. dollars and inter-currency comparisons are quite difficult to make, we've decided to give you one slide, which is also shown in detail in Appendix 2, as if we were a dollar-reporting company. So at the moment we are a sterling reporting company with 15% of our profits in the UK, so 85% of our profits were overseas. If we were a dollar-reporting company, we would have about 40% of our profits in the USA and 60% overseas.

So if we were a dollar-reporting company, our reported revenues would be up 12% to $5.76 billion as opposed to on a sterling basis of only 2%. The headline operating profits on a dollar-reported basis would be up 16% to $757 million and headline profit before tax would be up 17% to $668 million. EBITDA would be up 16% on reported basis to $894 million. And the diluted headline earnings per share would be up 20% to $0.36 per share.

On the reported revenue basis I've just mentioned on the first line of 12.3%, this is more easy to compare to the reported rates of growth by Omnicom of 10.8% in the first half and [then to Publicis] of 5.3% in the first half.

So trying to pull some of this together for you, going back to the revenues, and these are really the sterling figures, and then at the bottom you have the dollar-reported basis, so the organic like-for-like revenue of 5.3% for the first half, acquisitions adding 2.4%, and constant currency rate of growth of 7.7%. You can see the foreign exchange differences of minus approximately 6% at the revenue line bringing down the reported revenues to 2%, the headline PBIT to 6%, and the headline EPS to 9.6%.

On a dollar reported basis, revenues would be up 12%, headline profits up 16%, and EPS up 20%. This is the only time I am going to mention a U.S. dollar reported basis apart from -- and I said there's more detail in Appendix 2 at the back of the release.

So moving back to traditional UK GAAP on a sterling-reported basis, on the reported P&L there has been revenue growth of 2%, on a constant currency basis 7.7%; operating profits pre-goodwill up 7% reported; goodwill and intangibles are higher by about GBP13 million on a net in the first half, GBP44 million versus GBP31.8 million. There were additional goodwill charges we had to take in the first half compared to last year.

That leads to operating profit of GBP319.5 million, up on a constant currency basis 9.3%. Income from associates on a reported basis is GBP19.5 million this past year compared to GBP25.3 last year. One of the differences in this is in the 2006 numbers, one of our associates made an acquisition which had an accounting impact of a gain on acquisitions of about GBP4 million in the '06 number. I say one of our associates made an acquisition -- a rather usual accounting gain. So that really is one of the adjustments that one would take on a like-for-like reported basis.

Reported PBIT was at GBP339 million, up 7.3% on a constant currency basis. Net finance charges, which we do detail later, are pretty similar to last year at GBP45 million compared to GBP46 million. And the absolute tax paid in reported sterling terms of GBP90 million -- or charged, rather, rather than paid -- compared to GBP92 million the prior year on a very similar amount.

So on a profits after tax reported basis, earnings were up or profits were up 4% on a reported basis and 12.4% on a constant currency.

Turning to the headline basis of our results, you had revenues again up 2% reported, constant currency 7.7%. The PBIT was up 12% to GBP383 million, and within that, associates -- again, there is another adjustment, just want to bring to your attention. We have the accounting or the recognition of our interest in Mediapro, which previously was an associate, is now in other investments and more than accounts for the difference between the GBP21 and GBP19.5 million. So when you see the finance charges, it is your investment income going up considerably because of the treatment of the Mediapro investment in that category as opposed to associates in 2006.

Net finance charges, again, very similar to last year. And the tax rate, as I mentioned before on the first bullet point, at 26.9% for this half year compared to 29% last half year, resulting in profits after tax of GBP247 million, up 19% on a constant currency basis; headline diluted EPS of GBP0.182, up nearly 19% on a constant currency basis; and our margin up 0.5 margin point.

Turning to the disciplines on a revenue basis, we show here both the reported growth of 2%, the constant currency rate of growth of 7.7%, and the organic growth for the half year at 5.3%. I am going to compare the organic growth of the half year of 5.3% to that achieved in the first quarter of 4.3%. As you know, the second-quarter growth was stronger overall at 6.2%, and in all disciplines the growth was stronger.

So for example, in Advertising and Media Investment Management, which represents 47% of our reported revenues, the quarter one organic growth in this discipline was 4%, accelerating to a rate of growth of 5.2% at the half year. In Information, Insight, and Consultancy, the revenue growth in quarter one was 0.4% and at the half year was 1.3%. But I think a more meaningful comparison is the gross margin growth, and on the same basis, i.e. in quarter one on a like-for-like basis, the gross margin growth was 4.3% and maintained at a similar rate of 4.2% at the half year.

Public Relations and Public Affairs, approximately 11% of our business, quarter one organic growth of 6.4%, accelerating to a rate of growth at the half year of 7.7%. And the Branding and Identity, Healthcare, and Specialist Communications businesses representing 28% of our reported revenues, quarter one organic growth of 6.1%, accelerating to 6.8% at the half-year stage.

Likewise, on the same basis, North America, which represents 38% of our business in reported revenues, the first-quarter organic growth was 3.9%, accelerating to 5.1% at the half-year stage. Our UK reported organic growth was 0.7% of revenues or 1.9% on gross margin, accelerating to 2.3% on revenues or 4.1% on gross margin.

Continental Europe stayed flat compared to the first quarter at 3.1% growth in quarter one, remaining at 3.1% growth in the half year, and Asia-Pacific, Latin America, Africa and the Middle East growing at 9.4% in the first quarter, accelerating to 10.9% growth in the half year.

In terms of margin performance by discipline, we list out the four disciplines with the 0.5 margin point improvement, some margin improvement coming from all disciplines. In Advertising and Media Investment Management, we had a 0.6% margin improvement, moving from 14.1% to 14.7%, really driven by our media businesses in the main.

Information, Insight, and Consultancy margin was up 0.2% on a revenue basis from 9.5% to 9.7%. Public Relations and Public Affairs, on the back of strong organic growth of nearly 8%, had a 0.8% margin improvement from 13.9% to 14.7%. And Branding and Identity, Healthcare, and Specialist Communications had a margin improvement from 11.4% to 11.6% -- strength in our digital and direct businesses and some weakness in our healthcare businesses in the first half compared to last year.

In terms of regional margin performance, North America was up 0.3 margin points from 15.5% to 15.8%, particularly strong performance again in GroupM, our research businesses and some of our public relations companies. The UK had, I think, a depressed margin in the first half of last year of 8.8%. On the full-year basis, it was 11.4%. We did have a few closures in the first half of '06 that aren't being repeated in the same magnitude, but there is good margin [growth] across a broad spectrum of companies in the UK, and I would highlight particularly the public relations company in particular, who did particularly well. But that does bring our margin up in the first half from 8.8% last year to 11% this half year.

Continental Europe remains flat compared with a year ago at 11.6% last year, up 0.1% to 11.7% margin. In Asia-Pacific and Latin America, margin improving in both regions, on a combined basis up 0.6% from 10.9% margin to 11.5% margin.

Looking at the constant currency growth, which again, just to remind you, the group basis, the constant currency growth was 7.7%, and on an organic basis, the growth was 5.3%. So the constant currency basis is actually a very good reflection of the organic growth by country for the group. And you can see, as we mentioned in the press release itself, mainland China had organic growth of 29% in the first half. Our greater China constant currency basis growth was over 20%, as was India.

And you see here a representative sample, I think, of the stronger countries and the weaker countries. For interest, I just went through a further analysis of those countries outside our top 20 to give you an idea of those markets growing on an organic basis above 20%. And they would include Russia, Turkey, most of the Eastern European markets, Colombia, Venezuela, Argentina, Indonesia, Pakistan, Bangladesh, and a very small country, Nepal, is also growing very strongly. So those are the countries that don't make our top 20 on a revenues basis but are still growing organically at 20%.

In terms of growth by category, this is win/loss specific. Some of the numbers we have given you in the past, I think, is indicative of how our top 30 clients are growing. So if I was to take our top 30 and break it down for you, approximately seven of our top 10 are growing organically. 14 of our top 20 and 21 of our top 30 clients are growing organically year on year on a like-for-like basis. I think particularly pleasing in this slide is the relatively strong growth of automotive as a category, which is one of our larger categories.

In terms of the effect of strength of sterling, which is well known, sterling was strong on average in the first half of 2007 than '06 by 10% against the dollar, by 1.8% against the euro and by 14.3% against the yen. So the impact of currency reduced our constant currency rate of growth from 7.7% -- by 5.7% to 2.0%, and headline profits reported of GBP338 million would have been GBP358 million had sterling remained at the same levels of last year.

On trade estimates of major new business wins and losses, again, there has always been a bit of a caveat in these numbers in terms of the quantification of this. There tends to be momentum and industry-specific for the UK and USA advertising and media. We have had a number of wins in the first half. We came second a couple of times, which is disappointing. Wins across both the advertising and nonadvertising businesses.

We have also had a number of losses in the first half, which are more numerous in terms of the trade press than we believe to be the case -- in particular, some of the exaggerations that we have noticed, for example, on the MindShare losses of Sears and 20th Century Fox or the claimed wins of GBP1.2 billion in our own internal estimates the billings loss equated closer to GBP676 million, approximately a GBP560 million difference. And again, we have quoted the revenues on an annualized basis of the losses. So there is some exaggeration in the trade press in terms of the wins and losses.

In terms of if we look at our own analysis, at the half-year stage last year -- this year, we are at $3 billion of net new business gains. Our media business has won approximately $2 billion of billings compared to about $2.8 billion last year, so it is slightly down, but it's still growing very strongly. And our creative businesses won $1 billion of business this half year compared to $1.2 billion last half year.

I think, again, our own internal estimates are reflective of our second-place ranking against our peer group in our organic rate of growth, around 5.3%, which compares second to Omnicom in the first half versus our peers.

Looking at just again on a trade basis, because we tend to collect our data quarterly internally, since the half year we've had approximately $400 million of reported wins in the trade press, principally in the media area -- MediaCom, GSK and Michelin; mec -- BT, SABMiller; a good creative win by JMT in some Johnson & Johnson business in North America; and a couple of other wins and losses going through one switch between Ogilvy and Thompson there as well for the Kraft/Oscar Mayer business.

In terms of cash flow, we generated on a reportable basis GBP13 million more at GBP320 million versus GBP308 million. There are differences that I want to explain in terms of net interest paid. So overall, our cash generation was actually down compared to a year ago, principally because net interest paid this year was GBP67 million compared to GBP37 million the year before. That GBP30 million difference is partially explained by a GBP22 million what I'll call 1% rolled-up coupon on the maturity on our 3% convertible. So when that matured this year -- it's five years ago it was issued -- we paid the cash coupon of 2% each year, and the other 1% was rolled up to an end payment which was made in the first half this year. That accounted for GBP22 million of the cash interest paid of that GBP67 million.

So I think on an apples-to-apples basis, GBP45 million of interest paid versus GBP37 million would be a more appropriate measure of interest. And it is fair to say that interest costs are higher and as debit is -- so on average, being equal or just slightly above last year, that is a true effect. And tax paid is up GBP7 million. Our cash tax paid rate is still running at about 22.5% and is more of an estimation at the half-year stage.

So adjusting for those, you would have a similar difference in terms of our cash generation of around GBP10 million to GBP13 million, in line with the operating profit as we generated it in the first half.

And moving to spend in the first half, as you can see, depreciation and CapEx pretty much matching each other out. Depreciation is GBP70 million; CapEx is GBP72 million on a reported sterling basis. In terms of the big differences compared to a year ago, you have the net initial payments this year totaling GBP141 million. I think principally the larger acquisitions -- the initial acquisition included TAPSA in Spain and the 50/50 joint venture with Clemmow Hornby Inge in the UK, a number of other investments, both acquisitions and associates, made in the first half, totaling GBP208 million versus GBP125 million a year ago.

Our share buyback program has been more aggressive than in the prior year, buying in 28 million shares or 2.3% of share capital at the half-year stage. At the close of business last night, at the end of the close period I think we were at 2.9% of share capital had been bought back. And so the sum of all those results in a cash outflow for the first half of GBP138 million compared to a modest increase of GBP32 million at the same stage last half year.

In terms of finance charges, what I call the core net debt interest -- this is the average net debt adjusted, obviously, for the effect of interest rates -- showing the financing costs being closer to GBP41 million compared to GBP34 million a year ago. The investment income does include that income from Mediapro in the first half of '07 and it explains the GBP3.5 million difference from 2006 in the main, the other factor being dividends we received, in particular those from STW coming into also that line, the finance net income.

Pensions and interest convertibles are not significantly different. The GBP4.6 million notional IAS adjustment [I talked about] has now ended as that has terminated. So there won't be any further this year, so that will remain at GBP4.6 million this year because that convertible has been repaid. So headline finance costs of GBP45 million compared to GBP44.9 million a year ago.

So looking at the net debt and the interest coverages, on the point-to-point basis at June 1, net debt was GBP1.26 billion, GBP45 million higher than a year ago. On an average constant currency basis, we were GBP85 million higher than the year before. And on a reported basis, because of the effect of sterling and our dollar borrowings, we were only GBP26 million different at GBP1.196 billion.

In terms of coverage ratios, interest cover or finance costs over compared to PBIT headline was at 8.5 times coverage compared to 8 times the year before.

And I thought in interest of what has been happening in the markets recently, I will just give you our maturity profile one more time. I think what is encouraging is our committed bank facilities are out there in the main to 2012, and our first charge, a commitment facility, is due for renewal in 2009. We obviously do have some term bonds out there in 2008, but there is nothing in the imminent future that we need to worry about from a rollover maturity perspective.

Again, for those -- the seasonality of our net debt, I would just remind people we have a particularly strong fourth quarter and a strong cash flow, which reduces the amount of debt at that point in time on December 31 to around GBP800 million. At June, we do have an outflow in the cash flow where our net debt increases to around GBP1.2 billion. You can see the trend in '06 and '07 repeating itself year on year in a very similar fashion.

We seem to have missed or jumped a slide, but that is fine.

In terms of the interim results, there is one area where I think we are disappointed. There may be a slide in your book that goes through the terms of the amount of the share buybacks, which I will just remind you at this time last year, we increased our share buyback guidance from 1% to 2% to 2% to 3% on an annual basis, buying in at around 39 million shares last year or 3.1% of share capital. At the announcement of our full-year '06 numbers, we increased our guidance on share buybacks from the 2% to 3% to 4% to 5% in the years of '07 and '08, where market conditions are appropriate.

As we mentioned earlier, in the first six months of '07 share buybacks have totaled 28 million shares or 2.3% of share capital, and we have been continuing the share buybacks in the close period as permitted, and we're at 2.9% today.

I think what is disappointing is this has not had a significant effect on the diluted share earnings as we would have anticipated, and I will go through and explain why. In the first half, on the basic share count you can see the effect the of buybacks coming through, the 18 million on average last year versus the 28 million on average this year. ESOP is slightly down, but the basic shares in issue have decreased by 1.3% to 1.189 billion shares.

So the average basic 1.189 billion, unfortunately, is inflated by a higher number of potentially issuable shares in the first half of 2007 compared to the first half of 2006. I just want to take a minute to explain three reasons why the other potentially issuable shares will vary, not always under our control, at any one point in time.

The share option calculations, as you know, is the intrinsic value of outstanding share options that are in the money. And obviously, as our share price goes higher, there is more intrinsic value with those outstanding options. Last year, it was GBP80 million. This year, it is GBP24 million. To give you a feel for the range, if the share price at the half year was GBP7, the intrinsic value and therefore the share option dilution potentially available from options would be 90 million shares; at GBP7.50, 23 million shares; and at GBP8, 26 million. So as our share price goes up or down, there is a change to the amount of potentially issuable shares as a result of option exercises.

The second category is made up of two components -- the other potentially issuable shares -- LEAP I will deal with in a second. The first item is the performance restrictive share counts we have put in place two years ago. Part of our [vested] arrangements are now payable in restricted stock. Once that restricted stock is issued, it has to stay out there for two years. So the first year is a performance period which determines how much shares are issued. It's charged in [stip]. It is paid through the P&L. And then it is out there for two years. We are two-thirds of the way through the program. And so last year the number at the half-year stage was 7. This year, it will be 13. So that accounts for some of the increase in the -- about 6 of the increase in the other potentially issuable shares.

The second item is LEAP. Again, LEAP is slightly unusual. In the start of the program, you have to estimate the forecast match that the program will generate. And on average, it has been around 2 to 2.5 times, where at medium performance, the payout is zero. At maximum performance, the payout is 5. At this point a year ago, the expected payout or the actual performance did not generate a LEAP payout of shares. So there were no potential shares issuable.

This year, some of the programs are performing well, towards the higher end of performance, some at average. So we have on average a 2.5 times match. Now, the unusual thing about the LEAP potentially issuable shares is even if the program in six months old, you still have to put in the full amount of LEAP shares payable at the end of the five-year period. So it is not prorated for the length of the LEAP program.

So to give you, again, the range of what LEAP shares will do to us, if our performance is median against our peer group there will be a zero payout of LEAP shares. If our performance is towards the expected range of 2 to 2.5 times, there will be 7 million LEAP shares paid out. And if it is at maximum, there will be 14 million. These numbers include a 7 million expected payout of LEAP shares at June 30. It will change every half-year period.

So those two factors alone, [though] encouraging, have meant that the potentially issuable shares at June '06 was 2.4% in total or 29 million shares, is now 45 million shares or 3.8% in total. And two of those factors I cannot -- it has nothing to do with the Company; it is more to do with the share prices and relative performance.

So the disappointing factor net-net is that the diluted share count is not changing significantly at the half year. And we don't expect it to change significantly despite at least a 4% share buyback on a full-year basis.

So last year's shares in issue, fully diluted, 1.242 billion [sic -- see analyst presentation]. We are forecasting that to be the same, which I am afraid is higher than consensus share count issue, which is 1.222 billion. So that is one of the disappointing factors, I think, of having a relatively strong performance in the LEAP program and the third year of the three-year cycle on restricted stock coming through in the numbers.

And on that note, I will have to hand over to Martin.

Thanks, Paul. I just want to spend some time as usual on priorities, objectives and strategy. Won't bore you with this, because it is recapitulating on what we usually go through. But the six issues continue to be key issues -- the globalization, the rise of the East, of BRICs; overcapacity and the shortage of human capital; the Web; internal communications; retail concentration; corporate social responsibility and the environment are all six issues that continue to dominate what we're doing and underlying the importance of differentiation.

Just want to add one other thing that we have seen. And I think a number of companies are going through structural changes usually at the suggestion of major consulting companies, particularly McKinsey and Bain, but particularly the former, actually, rather than the latter. But Bain's solutions tend to be a little bit different, which involve the restructuring of companies from usually -- to a more balanced structure between global and local -- in one case I can think of, from local to global and regional.

And this results in significant changes in the corporate structures. I don't want to name specific clients, but I can think of three clients at the moment that are going through major structural changes as a result of consulting recommendations which are then having a significant impact on their overall organization and hence their marketing organizations.

And in all three cases, we are either pitching for the business or have pitched for the business. In one case, where we are the incumbent, where there is no pitch going on, but it involves significant changes.

I think this is a reflection of the fact that as top-line growth -- this is basically packaged goods companies, some consumer capital goods companies, but basically packaged goods companies -- as the pace of growth is, in money terms, small, real terms, quite significant in comparison to the '70s and '80s, it is true -- there is increasing pressure inside these organizations to take costs out and change. So either internally or externally through the use of consultants, they are starting to look at their organization in greater detail.

And as they continue to grow, albeit at 5% or 6% top-line -- 3%, 4%, 5%, 6% top-line growth, like-for-like growth, they look at their structures in increasingly intense ways. So probably we are developing that theory, but -- it is not theory -- developing that thought, and I think that is a seventh factor that is starting to drive our business someone positively. It is not negatively -- somewhat positively.

Our key priorities remain the same -- for the faster-growing markets to be one-third of our group, and you can see from the release today we are now up to 23% -- that is Asia, Latin America, Africa and the Middle East, and Central and Eastern Europe; marketing services, that is outside the traditional areas, to be two-thirds of group; and you can see, [in digital] work, 23%; and nontraditional advertising as a whole now is 53.5%; and then concentrated disciplines to be one-half of the total group, where they are roughly about a third of the group now.

We have made very significant progress in the faster-growing markets -- again, Asia, Latin America, Africa and the Middle East, and Central and Eastern Europe. And you can see that today, including Central and Eastern Europe, we are at 23%. If I include associates, we're up to 29%. So if you think about it just simply as if we converted all the associates, which would be difficult to do, to wholly owned companies, we would be at 29%.

And where do we want to be? We want to be at about a third. We would be happier, I think, with a third of our business being in these faster-growing markets. And these include China. We are going to be up this year in China to about GBP600 million of revenues. It will be, depending on how you define it, if you include associates or not, it is our third- or fourth-largest business. It will be difficult for it to become our second-largest business because our second-largest business is the UK at GBP1.5 billion. Our biggest is the U.S. at GBP4 billion. So China is GBP600 million, but it is growing. Mainland China is growing at 29%, excluding acquisitions. With acquisitions, it's faster. We will grow organically in China by more than our biggest competitor this year. We will grow by more than $100 million.

India, we're up now up to about $250 million, 5500 people. Russia, small I guess, but perfectly formed, in a sense -- it is getting up now to about $100 million, growing very rapidly at about 35%, but smaller than the other two. Middle East will be up now to about $250, $300 million in the Middle East. We are attempting to buy our associates there -- not an easy task, but we are in the process of doing that.

Central and Eastern Europe -- again, we will be up over $300 million, well over $300 million -- $350 million this year. Indonesia -- there are three new tigers at we see in Indonesia -- Vietnam and Pakistan. Indonesia we just put in here for relative comparison -- will be up to, I would say, about $50 million shortly. One of the things the Indonesian government has put in, quite worryingly, is some restrictions on foreign investment which don't just affect our industry, but a whole number -- when I was in Jakarta, there was a 42-page document list of industries that the government had mentioned as being sensitive. So there are some signs of protectionism -- Thailand, Indonesia in Asia would be two examples. Venezuela, obviously, in South America; Ecuador; Argentina post-Kirchner, maybe with Mrs. Kirchner as President, will be -- there may be protectionist issues as well.

Vietnam -- small, but growing very rapidly, will be I would think at about $40, $50 million. In all these markets, we are making acquisitions, but small ones. So it gives you an idea of the scope of these markets.

In terms of ranking where we dominate Asia, Latin America and Africa and the Middle East and Central and Eastern Europe, you can see here the relative sizes of our business. We are now in China up to 8500, well over 5500 people in India. And you can see the relative sizes of our businesses there in terms of revenues.

In terms of scale, we are running now an Asian strategy conference every year. Last year, our Asian, Latin American, Africa in and Middle Eastern businesses were about $2 billion and our competition was around $1 billion. They haven't really moved very much in the last year, and we are at $2.3 billion, so we're now about 2.3 times bigger than actually either Omnicom, IPG, Publicis, and then Havas much smaller. And they really haven't been as aggressive in consummating either organic growth or acquisitions as we thought this time last year. And we are very focused on maintaining and increasing our competitive position.

This sets out the latest RECMA figures for the Americas -- and that is North and South America -- Europe, Asia-Pacific and worldwide. And you can see that we have a very strong position in media planning and buying.

One of the points that we drew out in the press release, just going back to that again, is that I think we haven't managed to get over to people this sort of media engine that is inside WPP. We are the only company, interestingly, apart from Aegis that gives you a turnover figure, which I think in itself is sort of intriguing. And the reason we do is to point out the significance -- I mean, obviously it has an important impact on cash flow. Some of the liquidity crunch at IPG was due, there is no doubt, to the loss of media billings. And we put it in because our true turnover is our media billings plus other gross figures that we include. And it comes out at roughly $60 billion in total. But we reckon media is around $45, $50 billion. So $45 billion, $50 billion media engine, and it is going through the Company. One in four ads -- some of the RECMA data might lead you to one in three ads -- that you will see around the world emanates from a GroupM operating company.

This is a very -- I will come on to it a bit maybe later, but this is a very powerful, I think, phenomenon, because what we have seen, we have seen three waves in our business, again, which we have highlighted in the release. The first you might call the big idea. We have been in existence for 22 years. And if I went back 15 or 20 years ago, the creative idea that differentiated a business, a client's business, product or service, either tangibly or intangibly. That continues. It hasn't gone away. It is just as important, probably more important, for the six or seven factors that I mentioned at the beginning of the presentation or this section of the presentation. So that was number one.

Number two was what happened to media, the concentration in media planning and buying. About five, 10 years ago, the rise of the media independents -- Chris Ingram, the [Rodez] family, Dennis Holt with Western International, Aegis, the [Groh] brothers -- were all examples of people who broke away and started their own media independents and started to concentrate media planning and buying in a specialist function. And then we all woke up. The big parent companies, the agencies and full-service agencies woke up to it maybe a little bit late, but we woke up to it and created GroupM or Publicis Group or whatever they call it, OMD -- IPG really hadn't done it, but their media concentrations.

And we got this very strong media concentration. So not only ourselves, but Publicis and Omnicom and IPG has created centralized media buying points which have leveraged cross-media, cross-platform opportunities with media owners, obviously buying opportunities, in a highly perishable commodity environment. It is like airline seats -- if you don't sell the TV spot tonight, you don't sell the space tonight.

So there is tremendous marginal pricing leverage. And we saw in media consolidations and still see a 5% to 10%, I would say, gross media price saving as we negotiate more and more concentrated deals for our clients. No analyst yet, to my knowledge, has added up the total number, the total amount of media that has consolidated over the last, say, five years or even two years. I think it would be an interesting statistic, and you can get pretty accurate data, certainly off rate card, maybe not of the true rates off rate card, is what has been happening. That is the second wave.

And so traditional media had to deal with two things, or it has to do with two things. One is media concentration, media buying concentration, and the other is the threat or the opportunity of digital, of mobile, of Internet. So traditional media sort of got caught in a pincer between those two. So that is the second wave.

The third wave, which is what 24/7 Real Media is to us, what DoubleClick could be to Google if it goes through, and what aQuantive means to Microsoft as it was passed last week, and that is the application of technology, what we call high science, to our business. Our industry is not an industry that really is au fait with technology or the detailed thinking behind technology. I'm not being critical; it's just a fact of life. We are more consumed with intangibles and emotions and psychological and lifestyle issues rather than the application of high science.

And by the way, you have to push to one side the consolidation of digital agencies. It has nothing to do with what I am talking about. This has to do with the application of technology to our day-to-day business. It is a very different thing that Microsoft, Google and ourselves are trying to do in the technology area. We're trying to take the application of technology or take technology and apply it to day-to-day advertising and marketing services. It is not about the acquisition, for example, of an Aqua in South Africa or a Blue in Singapore or some of the other things that we will announce shortly in relation to Internet investments in terms of digital agencies or consolidation of digital agencies.

So it is not what OgilvyOne does, it is not what Wunderman does, it is not what RMG does, it is not what G2 does, it is something totally, totally different. And that is the third wave, in our view. And that is becoming increasingly important as we see the application, increasing application of Internet technologies, mobile technologies, and thirdly and probably more importantly now, video technologies, because that is the next wave.

So behind this, behind that second and third wave, the consolidation of media planning and buying into one point, GroupM UK -- 25% of DV, one-third of print, 45% of German media, 45% of Italian media, 50% of India, 15% of China -- behind that is that media engine there. So I think you've got to think about that as we go increasingly into the technological area, or application of technology.

The second objective is marketing services to be two-thirds of the group. Currently, it is -- today, it is about, based on 2006, it was 52% of our revenue. In the first half, it is 53.5%, so rising. If we include associates -- it doesn't make much difference -- whether we want to be two-thirds, one-third, for two reasons, really. One is the growth in new technology and the fragmentation of the media. And secondly, despite all, television still rises as a -- cost per thousand still rises. When you look at the up-fronts this year in the U.S., despite everything that was being thrown at it, network television continued to extract a higher cost per thousand in excess of general price inflation, even with inflation rising.

And in terms of the competitive landscape, Omnicom has a bigger bite by absolute size and percentage size -- marketing services business, we're still not sure where that lies. There is a lot of CRM in there. There is a food brokering business there. There is a [sell by tell] operation in there. And there is one other thing that I am trying to remember that is in there that is a little bit odd. But basically, they have a bigger marketing services business. The other two, IPG and Publicis, were considerably larger, and of course Havas smaller there. So that is the second objective.

And the third objective is measurability, consolidated disciplines. And when we talk about consolidated disciplines, we are talking about market research, we are talking about direct interactive Internet currently is 33%. We include associates, it's 34%. We want to be 50/50. Why? Because we think the clients are becoming increasingly concerned about measurability and quantification.

Now, there's a lot of debate as to what constitutes our digital revenues, not just ourselves, and what constitutes it industrially. We have two definitions -- a very narrow one, where we try and hone it down as much as we can to, really, to the direct businesses, and it comes out at about 11% or 620 million. This is all pre-24/7, by the way.

And the wide definition is 1.3 billion, which I think is a more accurate one because so much of the work is becoming intertwined. And the broader definition really includes some of our other businesses, but even here we haven't included things like PR, which is a $1 billion business for us and which, as we say in the release, has grown very significantly because of the rise of social networking.

There is no doubt, by the way, that things like Facebook, Flickr, MySpace, Second Life have all underlined and reconfirmed the importance of social networking -- sorry, of editorial publicity and the power of editorial publicity over paid-for publicity. So our public relations business and public affairs business is growing at a rate we really haven't seen at this stage in the cycle before, and growing much faster. And it is one of our higher-growth operations rather than historically, where at this stage of the cycle it might have been low-growth.

Our objectives, the same as always -- operating margins, flexibility in the cost space. In light of the turmoil that we have seen in the last two weeks, obviously, this now becomes much more front and center. No doubt there will be some questions about this. Happy to go into it. We don't see any of the financial turmoil in our business as yet. It is early days. But on the basis of historic experience, what we see in the financial markets sometimes sort of hits the real world about a year later. And it comes back to the thing that we have talked about at the half year and quarterlies and full years for the last three years, I think it is. And that is, what happens after the U.S. presidentials in '08?

And I think the issue is not about financial -- about a liquidity crisis which we're going through at the moment. I think the issue is about what happens when a new U.S. president, whether it is a Republican or Mrs. Clinton -- what they will do to the U.S. economy, given twin deficits and a weak dollar, although the dollar has got a little bit of strength as sort of a reserve currency in this liquidity crisis, but not a lot.

So flexibility in the cost base, again, is important. So that is very much in our thinking. Free cash flow to enhance shareowner value and improve return on capital employed. The role of the parent company -- it is not dead. Dell is a good example of a major pitch where all five holding companies, and we know what the result of the first round is, although it hasn't been made public yet. We know where that is going, so there is another big opportunity with Dell in its consolidation of its business, and yet another example of what is going on, a client wanting to ensure that he gets the best resources.

Emphasizing revenue growth more as margins improve, and we are pleased with the revenue growth this year. We have gone from over 4%, 4.3%, to 6.3% in the second quarter, and July was very strong. It was actually 7.7% in July, which was strong. And then finally, improving the creative capabilities and reputation of all our businesses, which I will come back to.

So this is what has been happening to PBIT and margins. You see what has been happening in the first half of '07, '06, up from 12.6% to 13.1%, which is consistent with our target of 15% for 2007. And we have seen margin progression consistently over the years since 2002, since the Internet bust. We are targeting 15.5% for '08, 16% for '09 and 16.5% for '10, and we see no reason why 19% is not achievable. I don't think we have run the figures by division recently for the top two. But it is still going to be around 17%.

In other words, if we took the best two performers, right? -- well, the best one performer in each of our categories and applied that margin, we would be at 17%. So we don't think that it is crazy, as some have suggested, to think about margins at that level. Certainly nothing we see in the faster-growing markets which we are expanding into or the digital markets which we are expanding into would argue against being able to achieve better margins.

In terms of flexibility, we are at full-time highs or close to all-time highs in terms of variable staff costs as a percentage of staff costs, or putting it another way, variable staff costs as a percentage of revenue. So we've got about 7 margin points of buffer, which you can see operating a little bit in the first half of this year. But we've got 7 margin points of buffer. We won't be able to lose all of it in a recession, but I would say 3 to 3.5 margin points are there of buffer.

The next objective is free cash flow to maximize shareholder return. Capital expenditure and depreciation are roughly equal over the longer term. Sometimes we get some dislocations because of the investment in facilities, but by and large it is the same.

M&A we are active on, and the third alternative investment is buying our own stock or dividends. Now, we have been raising the dividend by another 20% to GBP0.0432. I can't remember how many years now we have done it, but it must be getting on for 11 or 12 years that we have been raising the dividends by 20%.

And the distributions to shareowners in the form of share buybacks, as Paul has alluded to, has continued to grow. Last year, we bought back 3.1% of our stock, about GBP250 million, in addition to the GBP120 million of dividends. This year, we have already in the first half bought GBP209 million. We're up to about 2.91%, I think it is, as of yesterday.

And so we have been increasing the importance of share buybacks in terms of deployment of capital. And we showed this to you, I think, last time for the first time. We tried to express share buybacks and dividends as a yield on investment. So this is the sum of the share buybacks and dividends divided by the average shares in issue over the relevant period as a percentage of the share price. So it is sort of a yield of dividends and share buybacks.

And you can see that last year in 2006, it was almost 5% going back to shareholders. First half of last year, it was almost 3%. This year it's 3.3%. So we are deploying more capital. We still think we are underleveraged even post-24/7 Real Media. We think average net debt will be about, Paul, about GBP1.4 billion? GBP 1.45 billion for the full year, including 24/7 Real Media. We still think the Company is underleveraged, given its interest coverage of 8.5 times. So there is more scope for acquisition and buyback.

On acquisitions, we continue to focus on the small to medium-sized strategic acquisitions. We have completed a large number to date, about 27. There is more coming. The pipeline and the activity is considerable. One note of caution -- there are some excesses out there, we think. The French Internet market seems to have gone absolutely barmy. There seems to be panic on the Champs-Elysees, I would say. [WQ], Business Interactive, Nextedia -- Nextedia hasn't been announced, but an eye-popping deal there. No limit -- EUR50 million down, EUR50 on the come for a business with $17 million of revenue. It beggars belief. So there are some things happening in the Internet area which I think are a little bit troubling at the margin.

But our major focus will continue to be on the areas that we think are important -- Information, Insight, and Consultancy, faster-growing sectors within Branding and Identity, Healthcare, and Specialist Communications and of course the faster-growing geographies, and acquisitions and advertising to address specific client or local agency needs. So where we need to buttress a client relationship or improve a client relationship, we continue to do that.

We continue to find opportunities primarily outside the U.S. But some of the Internet stuff outside of the U.S. has gotten very pricey and even outdistance some of the prices that we saw in the U.S. For example, I don't know whether they call it AKQA in the U.S. or outside the U.S., but that would be an example, last time we met, where we thought that was on the high side -- $250 million for $70 million of revenue, a company that had only been profitable 18 months earlier going to $100 million promised for this year. But clearly some extravagant valuations.

But this is what we have done in the first half. There is another slide coming up on deals that don't fall in the fast-growing market in quantitative and digital. But this is the bulk of what we have done in the first half of deals in faster-growing markets, so Brazil, Pakistan, Colombia, Russia, South Korea, or faster-growing markets in interactive, like Aqua in South Africa, Lee & Jang in South Korea, Interactive TV in India, Star Echo in China, and Blue Interactive in Singapore, then pure quantitative and digital deals in the U.S. and Western markets, so 24/7 Real Media, All Global, etc. So a strong pipeline there.

Most of these acquisitions do not add to any horizontal span or control. They are all vertical in the sense that they are aligned to brands, so they are aligned to JWT or GroupM or MindShare within GroupM or Mediaedge or Bates, wherever. The only other area they would go into would be WPP Digital, which Mark Read is running.

Acquisitions and investments that fall out of those categories -- there are several here -- in advertising, Australia, CHI here in the UK, several others, and a healthcare acquisition in the UK.

And finally, in terms of the creative reputation, again, it's about recruitment, recognizing creative success, acquiring highly regarded creative businesses such as CHI here in the UK, placing greater emphasis on awards. And just to demonstrates what we have done, we have come first and second in the Gunn Report for media and creative, respectively. And we were the second most successful group at Cannes for the second year in a row.

So in conclusion, we think we are very well positioned by region and discipline to benefit from the key trends. The two key issues, in our view, are the geographic, the faster-growing countries, and the faster-growing functional areas of digital interactive and the Internet, mobile and video. Those two are 23% of what we have at the moment. We want them to be a third, basically. That is where we want to get to.

Scope for further margin improvement; cost flexibility becoming increasingly important because of the jitters out there; and the use of free cash flow to enhance shareholder value. And in the long term, we will be concentrating on those high-growth functional and geographic areas and improving the effectiveness of our cost structure. And last but not least, continuing emphasis on free cash flow after acquisition payments and share repurchases. And last but not least, return on capital.