WPP PLC (WPP) 2009 Q2 法說會逐字稿

Okay, good morning, everybody. Thank you all for coming. First half 2009; Paul's going to take us through the results and then I'll come in, I think, at about slide 34 when we start to talk about TNS; all right.

Okay, good morning. Hopefully you got a hard copy. It will help as we go through this.

So, the interim results of 2009. Billings were up 11% to GBP18.72 billion (sic - see presentation) and reported revenues are up 28%, really as a result of both currency and acquisitions, our revenues are strong. So, on a constant currency basis, excluding the impact of foreign currency, which is approximately 20%, revenues were up 8.6%. And on a like-for-like basis, revenues fell 8.3% in the half year. And gross margin fell by less; but down 7.8%.

Headline profits before interest and tax were down 24.5% to GBP342 million from GBP453 million the year before. And headline operating margins were down 4.5 margin points to 8% on a like-for-like basis and down 3.1 margin points pre-severance and one-off costs.

In the text, the press release, we take you through the difference between both reported, like-for-like and like-for-like pre-severance and one-off costs. And I'll take you through it again verbally to see if I can help.

So, on a reported basis, our margins were 13.6% last half year. As a result of the acquisition of TNS, which was margin dilutive, some currency impacts of about 0.2[%] and other minor adjustments, the like-for-like margin equivalent to 13.6% or our pro forma margin for the first half of 2008 was 12.5%. Compared to what we achieved at 8%, that was a margin decline of 4.5 margin points.

The severance in the first half of 2009 was considerably greater. It's actually 1.6 margin points this half year. So on a pre-severance basis, our margins on a like-for-like basis were 9.6%, which compared to last year's pre-severance margin of 13.1%; so a 3.5 margin point decline.

Then, adjusting for the one-off costs of property moves, where we had double rent of the Ogilvy Worldwide Headquarters, when they moved buildings in New York, and some restructuring costs in relation to TNS, which was approximately 0.4 of a margin point on a pre-severance, like-for-like and one-off cost basis, our margin was 10%, compared to 13.1% the year before.

It was down 3.1% was disappointing compared to some of our competition, which held margins declines in the order of 1% or 2%. The revenue declined the same order of magnitude organically in the first half.

So, in terms of headline PBT, which is down 35% to GBP252 million, obviously that was impacted by the extra debt that we had on board as a result of the acquisition of TNS, which was two-thirds funded by debt; and extra interest costs, which rose from GBP64 million last year to GBP90 million this year.

The tax rate on headline profits improved by 2.1 margin points to 24.8%; similar to that achieved at the end of last year with some modest benefits coming through from the re-domicile of our tax status.

Diluted headlines earnings per share were down 40.8% to 12.9p from 21.8p a year ago. And as a result, the dividend was maintained at 5.19p or flat compared to last half year. It was covered by 2.5 times by after tax profits or after tax headline profits.

Estimated net new business billings of GBP1.2 billion or $1.87 billion was achieved in the first half of this year.

So [building] up organically on the revenues. The like-for-like revenue decline was minus 8.3%. The acquisitions, principally TNS, added 17% to revenues in the half year, to show a constant currency revenue growth of 8.6%. Foreign exchange impacted the revenue line by plus 20% and impacted both the EPS and profits line by approximately 10%.

On a full year basis, I'll expect foreign exchange to positively impact the revenue line by closer to 10%. If we were a US dollar reported currency, and US dollars was our base currency, our reported revenues would have been down 3%.

Turning now to some of the headline P&L statement; so, revenues of GBP4,289 million were down 8.3% on a like-for-like basis, but up 8.6% on a constant currency basis or 28% on a reported basis.

The PBIT at GBP342 million was 24% or GBP111 million lower than last year. Profit before tax at GBP252 million or 35% down compared to last year. And headline diluted EPS at 12.9p was 40% below that we achieved last year of 21.8p.

As I mentioned before, the headline operating margin on a reported basis was down 5.6%, and on a like-for-like basis was down 4.5% pre -- after severance and one-off charges.

Headline EBITDA at GBP455 million was down GBP76 million or 14% compared to the year before.

Turning now to the statutory profit and loss account, pulling out the items, I think, that are different to those in the headline. In terms of the goodwill amortization and impairment that is significantly higher this year, because of the amortization of intangibles and brand names in the TNS acquisition. So, of the GBP124 million, GBP88 million relates to amortization, which compares to approximately GBP25 million in the first half of last year, pre-TNS.

And in terms of goodwill impairment, we took a charge of GBP40 million in the first half of this year, compared to GBP20 million last year. So, those two factors are the key elements of the GBP124 million charge for goodwill, amortization and impairment.

The other point I wanted to bring out in terms of the net finance costs, the headline finance costs are GBP90 million; what I call true interest costs. We had two benefits reducing this cost to GBP39 million. One was a GBP25 million gain on financial instruments. The second was more real and long-term, with a GBP26 million gain on termination of swaps taken out on TNS debt that has subsequently been repaid. GBP14 million of that cash was generated or received in 2009. The balance will be generated over the life of swap. But those were the hedges against the debt that was ultimately redeemed by us and ended up with a cash -- an ultimate cash and an accounting gain.

Those are the items, I think, of merit to talk about in the strategy P&L. And ultimately, profit after tax on a reported basis of GBP138 million down 41% compared to a year ago.

In terms of, I think, some color about how the first half progressed and how our performance compared on the various expense lines, if you recall the first half organic decline this year was minus 5.8%. It followed a flat quarter four 2008. But I think a surprise to us and most in our industry was the speed of decline in quarter two. In our case, we were down 10.5%. In -- very similar to our competition, whereas Omnicom were down 10.8%, Publicis 8.6%, Interpublic 14.5%. So, it was the speed of the decline in the second half that we found difficult to cope with.

So, our revenues, the figures on the left hand column are the reported revenues and expense items for 2009. The right hand column is the reported numbers then adjusted on a pro forma basis to include the impact of TNS, which obviously wasn't in the numbers at last June '08. And adjusting for currency. So, this is like-for-like pro forma sterling comparison to June '08. As you can see there on the revenue side we were down 8.3%.

On the staff costs, we were only down 3.2%, as a result of the lateness in taking out some of the staff in the first half of this year and the headwinds we had coming into the year from the staff costs growth, both in headcount and costs, in the backend of 2008.

Establishment costs are up, principally because of the increase in rents in the economies in the Far East and Asia Pacific, Latin America in the last two years feeding through into rent increases now in addition to that one-off property move. And we are similar to our competitors in moving our establishment ratios from about 7% to 8% at the half year point.

Obviously, we've been very proficient at utilizing less space in the property portfolio. We couldn't mitigate the rent increases that had arisen in the last 24 months on the global macro economy.

On other G&A expenses, we did okay. We achieved an 8% reduction in G&A expenses, in line with what we had hoped for, with an 8% decline in revenues. But net net, with revenues down 8.3%, our total operating expenses were only down 2.9%.

I think one indication of how we are performing at the end of the half compared to the beginning of the half is looking at both the June and the January revenues and salary costs. So, if I was to take the January run rate of salaries ex-severance and compare that to the June salaries ex-severance and use an index of 100%, if January was 100%, June was 93% on the salary basis. And this is despite revenues in June being traditionally higher. So, if revenues were 100% in January, revenues in June would be 120%.

So, if I do the same for May. The revenues were indexed at 113% months compared to January. And salaries ex-severance in May were about 95%. So, we are achieving -- without severance, sorry. We are achieving a core reduction in the staff cost ex-severance in both May and June compared to January. You can see the corrections that we're beginning to put in place more clearly, I think, as a result of the terminations that have happened in the first half and will continue throughout the rest of the year.

So, the severance charge specifically is $100 million, or about 1.5%, 1.6% of revenue in the first half; 1% more than the prior first half. And if you look at the organic revenue declines, the average headcount reduction and the point-to-point headcount reduction; so, in March at the end of the first quarter our organic revenues are down 5.8%. But because of the tailwind at the backend of last year and the speed of action in the first half of this year, our average headcount was only down 0.6% for the three months ending March. Whereas point-to-point from the end of last year to March 31, we were down 3.1% in headcount.

By June, revenues were falling further on average 8.3%. Average staff declined on average by 2.8% and point-to-point headcount was down to 5.2%. At July, the average headcount is down further still at 3.5%, and the point-to-point headcount is down 6.3%. So, we are catching up in terms of the speed of correction of our cost base versus our revenue lines.

On average, in the first half, our estimated cost of severance is five months of salary, but when you exclude the Company costs, the payback is around four months. There will be a continuation of severance in the second half of not dissimilar amount that we have accrued for and spent in the first half this year.

In total, I'm expecting somewhere around 1.25% to 1.5% on severances on a full year basis as a percentage of revenue compared to 0.8% last year. I think we are one of the few that are recognizing that severance will be continuing item of the second half, which will have almost all of its benefit in 2010.

Moving now just through the traditional revenue splits by geography and by discipline. As we mentioned, so the first quarter, the revenue decline was minus 5.8%. In the second quarter, the revenue decline was 10.5%. And if I look at it by discipline; Advertising which represents 39% of our business, the like-for-like decline in the first was 7.8%. By quarter, it was minus 3.9%, and the second quarter minus 11.2%.

On the Consumer Insight business, the renamed Information Insight Consultancy division, which includes both traditional Kantar businesses and TNS, which now represents 26% of our business. Organic revenue declined for the half year with 10.3%; on a GM basis was minus 7.8%. And in terms of the quarterly split, quarter one was minus 6.4%, and quarter two was minus 13.6%.

On the Public Relations & Public Affairs discipline, which represents 9% of our business, organic decline for the first half was 8.2%. The quarter one decline was minus 6.1%. The quarter two decline was minus 10.1%.

On the Branding & Identity, Healthcare and Specialist Communications businesses, representing 26% of our revenues, the half year decline was minus 6.9%. The first quarter split was minus 7.9%; down organically. The second quarter split slightly better at minus 5.9%.

So overall, organic revenue declined 8.3%; quarter one minus 5.8%, quarter two minus 10.5%.

A similar pattern by geography. There was no region that was exempt. The decline in revenues in the second quarter, with North America representing 36% of our revenues, was down consistently in the first half, of 10.1%, but on a quarterly basis was minus 9.2% in quarter one and minus 10.9% in quarter two.

The United Kingdom fared slightly better in the first quarter; was down 2.2% organically but down 8.2% in the second quarter, making 5.3% decline for the first half.

Western Continental Europe, which represents 26% of our business, was impacted overall by 10.5% in the half year, minus 7.2% in the first quarter, minus 13.4% in quarter two.

Asia Pacific, Latin America, Africa, Middle East, Central and Eastern Europe, on combined region totaling 26% of our business, overall the first half organically was down 4.7%, was down 0.9% in the first quarter and minus 7.8% in quarter two. And even Latin America is the -- of this region Latin America is the only market to be just about flat in the first half. Asia Pacific overall is down about 8%.

So turning now to margins, on a reported basis all our disciplines and geographies are profitable but margin declines have been quite severe across the board. So in Advertising and Media Investment Management the margin decline is 5.7% to 10.2% on a reported basis. This is using a 5.6% decline as a benchmark for the whole Group.

The Consumer Insight business was down 4 margin points from 10.1% to 6.1% in the first half. The Public Relations business margin declined from 16.1% by 4.5 percentage points to 11.6% and the Branding and Identity, Healthcare and Specialist Communications businesses margin declined from 10.7% by 5.3 margin points to 5.4%. Overall, the Group decline on a reported basis 5.6% margin points.

In North America the margin decline was 6.2 margin points, or 15.8% to 9.8% (sic - see presentation); in the UK, faired slightly better, margins only down 3.1% at 12.9% to a margin of 9.8% at the half year. In Western Continental Europe a margin decline of 7.8%, taking the margins down from 12.8% to 5.4%. And in Asia Pacific, Latin America, Africa and Middle East, Central and Eastern Europe margin decline of 3.5 margin points down to 7.5%.

Looking at the relative strengths of certain markets, it's been again highlighted in the press release, but those markets that are still exhibiting growth in the first half included Argentina, Brazil, Poland, Russia, South Africa. In the zero to minus 5% revenue decline organically regions included mainland China, France, India and Mexico.

And then in revenue decline of 5% or greater and probably the most impacted were countries like Japan and Australia for us in particular, but a number of European markets were pretty severe in their declines. I think we mentioned Netherlands, Portugal, the Scandinavian markets and Spain in our press release as having probably the most severe of declines organically in the first half.

By clients on a like-for-like basis we've had some business wins and so the growth in computers, electronics and entertainment are very specific to new business put on in those various sectors. The vast majority of businesses obviously organic declines of 5% or more automotive, financial services, retail, telecommunications and travel and airline; and then in the mid-band, drinks, food, government, oil and personal care and drugs.

In terms of currency, very significant is in terms of the reported numbers; they're up 19.8% in revenues reflecting the weakness of the pound against the dollar and the euro and the yen in the first half. As I mentioned on a full year basis, I think currency will impact the revenues by about 10% positive.

If I was to take the headline PBT of GBP252 million, based it at 2008 levels, we would have reported a profit before tax of GBP210 million in the first half.

In terms of new business, the underline or red on the slides are those businesses won or lost in the second quarter. A number of solid wins coming through; Wunderman Agency a record for Microsoft, a high profile win for Grey of the NFL account in the USA, JWT launching the new search bar for Microsoft, Bing, again on a worldwide basis of note in the first half and second quarter.

Likewise a number of other wins on the next slide; I won't go through them all. And then a number of losses in the first half, both in the first half and the second quarter, principally Media, a number of losses or reallocations and consolidation due to -- on the Media side, which is fairly prevalent right now; a limited number of Creative wins and losses taking place in the first half.

So in terms of billings, overall a fairly weak second quarter compared to a fairly strong quarter one this year. Overall, $1.8 billion of billings won. It was down compared to last year's billings first half of $2.5 billion. It was identical in Media and in other Creative businesses, but it was lower, so I think there was less business churn in the Creative Advertising category. So, billings this year won about $540 million, was considerably lower than last half year of about $980 million.

In terms of wins or losses since the half year, we've had a couple of quite significant wins. They're both in JWT in the worldwide basis for Microsoft and MEC in Germany for Mercedes Benz.

Turning now to cash flow, so in terms of operating profit, on a reported basis GBP199 million compared to GBP378 a year ago. The items in the P&L of a non-cash nature that set -- that would affect the cash generation are the non-cash compensation, i.e. share-base compensation charges, depreciation, amortization and impairments which is significantly higher this year compared to year before.

Interest paid obviously increased over the year ago. The tax paid is actually higher than the year before, principally because of the cash taxes paid on prior year's profits are flowing through this half's P&L due to the '08 strong profitability versus '09.

In terms of how do we use that GBP272 million cash that we generated? GBP129 was on capital expenditure. Unfortunately, decisions taken two years ago for major relocation moves in New York of both Grey and Ogilvy this year have resulted in about a run-rate of GBP55 million of CapEx higher this year. It will probably run through to the end of the year, expecting CapEx in the order of GBP275 million, GBP280 million this year compared to GBP212 million year, solely as a result of those property moves. All other CapEx is significantly reduced.

Where we have been very disciplined is in terms of new acquisition payments in total, both investments in wholly owned businesses totaling GBP55 million in the first half, and an out-payment that was scheduled at GBP38 million making total acquisition payments of GBP93 million.

Share buybacks of a minimal amount for 0.2% of share capital generating GBP30 million in the first half of this year, compared to GBP31 million last half year; and that was before networking capital charges or changes. And if you look at the balance sheet we see about GBP100 million improvement in networking capital from June '08 to June '09, would -- actually hides the fact that we've had an even greater impact, because TNS brought with it something like $300 million of working capital that we've had to deal with, and we still have a GBP100 million improvement.

And when you look at the cash outflow in the first half compared to December to June, it's running at an outflow of GBP481 million in our traditionally weak cash first half and very strong second half, compared to GBP572 million the year before; again, so GBP100 million improvement. So, on both counts we have done well in working capital management in the first half of this year.

In terms of interest costs, again just breaking out the detail to -- I think to point you to the direction of the GBP90 million on the headline finance costs, which is up 41% compared to year ago when overall debt levels were up 55%. And again, just to go through that, so net debt at the end of June, GBP3.5 billion compared to point-to-point a year ago up 86% to GBP1.8 million. On an average basis we're up 55% on a constant currency basis.

Headline finance costs of GBP90 million are covered 3.8 times by PBIT at the half year point, but that's not a covenant measure. And again, I'll come on to the covenant measures straight away.

In terms of debt, this is just to give you some pictorial view of how we're doing on the balance sheet net debt. So taking the June '08 position of GBP1.8 billion, adjusting for currency would be GBP2.2 billion. Writing that across you'll see we've actually done slightly better than that on the core business when you allow for the yellow, which is the TNS effective cash costs and extra debt that we took on. We're actually below the GBP2.2 billion line.

So the core business is doing well but on an absolute basis, because of the debt we took on for TNS the total is GBP3.4 billion, down from the June point -- for the March point of GBP3.7 billion.

In terms of maturity profile, as you know we had to refinance the [GBP650] million term facility from the banks. We've successfully completed that since the end of -- since the end of the results last year in the first quarter, issuing both a convertible bond and the strike price of GBP6. I think trading about GBP1.20 currently, so doing well. And the US dollar bond more recently at -- both out to 2014. So we have satisfied our refinancing requirements.

On our next call on any facilities is the bank facility 2012 and the bond market is 2013. And just to remind you, we are generating sufficient cash to repay the TNS acquisition revolver, which was GBP600 million, which is currently GBP400 million, because the first GBP200 million has been repaid. And remaining out there is GBP236 million that was drawn at the end of June. So those elements will be repaid from surplus cash generation.

So in terms of the banking side, we've gone through this before, but just to remind people. There are no covenant or ratings triggers for the public bonds other than the most recently issued US dollar bond that has a -- some investment grade trigger of 50 basis points should we go two notches down on the rating. And that would have an absolute cost of $3 million.

The bank and the TNS facility has the following on identical covenant; net debt to the last 12 months' EBITDA less than or equal to 3.5 times measured at June and December. And EBITDA against the last 12 months' net interest to not be greater than 5 times; again, measured at half yearly intervals.

In the covenant definition of EBITDA and net interest, we're allowed to exclude non-cash and non-operating items, such as bank fees or bond fees, in the calculations. So the net debt to EBITDA calculation, which must be less than 3.5 times, as at June measuring we were 2.7 times. It's slightly higher and we are traditionally higher at June versus December, when we were 2.3 times, again, well within the covenant headroom of 3.5.

And the EBITDA to net interest cover, we show on a reported basis on the face of the P&L for the last 12 months you'd calculate 6.9 times cover, on the banking covenant basis we have an adjustment to the ratios as is consistently shown. And every time we've shown these covenants that we come out at 8.2 versus a covenant of 5 times; again, sufficient headroom on the banking side.

Dealing with the ratings, I think it's important to try and keep you up to date on where we are. And the ratings calculations are complicated and I think we will happily hand out to you separately an appendix that details both the Moody's and S&P calculations for both EBITDA as adjusted and debt as adjusted for rent and leases to those that interested to actually follow through on the ratios in some detail.

But again, on a 12 months trading basis as at December on S&P we had a ratio of adjusted debt to EBITDA of 3.2 times, as at June rolling forward the last 12 months it's reached 3.7 times. It is just on the cusp of the ratings boundary of 3.5 times, just over in fact.

Likewise Moody's on a different calculation but a similar trend, as at December the adjusted average debt to EBITDA ratio is 3.2 times. It's now 3.8; again, right on the cuff of the ratings boundary, from BBB down to BAA2 to go down a notch.

And then I wanted to point out what Moody's said in their last release. So ratings maintenance requires, amongst other things one, leverage not to exceed the ratio of 3.75 times on a sustained basis; two, a focus on cost control and operating margin protection; three, the use of discretionary cash flows towards debt reduction; four, successful and timely integration of TNS with realization of synergies in line with the Company expectations, again, Martin will comment on that shortly; and five, the Company to manage liquidity pro-actively and discretionary outflows tightly.

And to that aim we just listed out the three levers that we are actively committed to maintaining tight control over, both new acquisitions. We are restricting up to GBP100 million a year for both '09 and '10. And currently the first half we spent GBP55 million.

In share buybacks, we have reduced the scale of share buybacks quite considerably over the last few years. It now will be restricted to up 1% of share capital, currently running at 0.2% or GBP10 million.

And dividends, we brought down the rate of growth, which historically has been a 20% per annum growth to no greater than 15% and, in fact, decided in light of the results to have a -- maintain a flat dividend in the first half.

So despite the downturns we still generated GBP272 million of cash and had a net cash generation for the first half.

Finally just two slides on ordinary shares; again, this is purely mechanical. One factor is obviously the share price and the option calculations. But on a basic basis the full year impact, the shares we issued for TNS, is flowing through -- which was about 7% a share capital is flowing through into the basic share count. And when working through into the full year diluted basis there is no difference.

A couple of things, the Grey convertible has been redeemed and the sterling convertible -- actually I apologize, that should be a sterling GBP450 million with anti-dilutive. So it wasn't included in the calculation in the first half year.

Our estimation for the full year headline weighted average share count diluted is in the order of 1,240 million shares. Again, it's an estimation, because the share option dilution figure does change as a result of the share price, as does the other potentially issuable shares.

And with that I'll hand over to Martin.

Paul gets the easy part of the presentation. Let me just move on to TNS integration, which is an important part. Whilst it's true that revenues are down in the Consumer Insight business, and Consumer Insight has been hit by the recession pretty much as other parts of the business. Revenue performance does tend to look as though it's in line with peers and I think IPSOS is reporting this morning, I haven't seen their second quarter number, but you can see in the first quarter and the second quarter the position -- the revenue level is pretty similar. And half one is -- we'll see how that all pans out.

But if you look at the gross margin level the position is somewhat different and that's partly due to the impact of moving the business increasingly online as we discussed before. But the revenue decline at the gross margin level is about 7.8%, which compares much more favorably with what's been going on inside WPP itself. And July, like as we've indicated for other parts of the business showed an improvement in the revenue performance and, indeed, the pipeline.

Just on the integration process itself it's been reorganized, a number of things have been reorganized. First is that TNS' custom business has been brought together with RI, Research International, throughout the world. Kantar Health, Kantar Media, Kantar Retail and Kantar Worldpanel have been formed out of the TNS businesses in those areas -- in those four areas and the Kantar businesses and brought together under the Kantar brand.

There has, it's true, been some delay on severance actions due to European regulations. That's a negotiation with the Works Councils and implementation of the regulations themselves. But the synergy program is very much on track; in fact, probably is in advance of where we thought it would be and synergy benefits have been raised from GBP52 million to in excess of GBP60 million.

So we feel confident about the achieving of the synergies that we set out at the time of the acquisition; in fact, if anything more so. And the combined product and client offering is proving to be more competitive than we thought. There are more consolidation opportunities with common clients at TNS and Kantar and even beyond that than we thought.

And just one other observation the strength of technology and automotive both in TNS and, indeed, in Kantar has affected the first half performance. In other words, those are the two sectors that have been negatively affected by what's been going on.

I'll just flip through quickly the strategic side, just because there have been one or two changes. In terms of the objectives they remain the same, the faster growing markets to be one third. We're up at 26%. Marketing Services to be two-thirds of the total Group, we're almost there in terms of Marketing Services as you'll see. And Quantitative disciplines, including Consumer Insight, to be one half of the Group; again, we're almost there, about 46%.

If you look at in the faster growth markets as you can see, today including associates almost gets us to where we need to be in terms of the position. But clearly, we have a significant [BRICs], and next '11 presence with the objective to be a third, a third, a third.

Performance in China, Brazil, India and Russia is still very strong. Brazil and Russia, interestingly, were only two of four markets, the others being Argentina and Poland where we saw a positive growth -- revenue growth in the first half of this year. But we have strong businesses in all those markets and market leadership positions.

And the same applies to the Middle East, Central Eastern Europe and on a much smaller scale Indonesia and Vietnam. And we've just re-worked or updated the numbers in terms of our position in these faster growth markets in Asia, Latin America and elsewhere.

Competitively you can see that from a geographic point of view we still have an extremely strong position in terms of Asia Pacific, Latin America and Middle East. I think recent acquisition activity doesn't make much of a difference in relation to the size of the businesses in the faster growing markets. And we've just updated here, these are the GroupM estimates for what's going to happen by region and for the world as a whole in terms of advertising spend in 2010.

You can see the GroupM is still forecasting 2010 spending to be down slightly, but much less so than in 2009 and you can see the growth markets of Latin America and Asia Pacific. I just reinforce what Paul mentioned, that the pressure in Asia Pacific is really coming in Japan and Australia -- Australia, New Zealand; that's where the two -- those are the two markets that have the most significant impact, particularly in Japan in terms of the pressure in Asia Pacific.

It's not so much the growth -- the other growth markets like China and India have suffered, particularly in Q2, but are nowhere near as affected as we've seen in the two markets Japan and Australia. So that's the pattern spending for next year.

In terms of Media Billings we still have worldwide leadership according to the latest RECMA figures. Slightly number two in the Americas, in Europe a clear number one position in Asia and worldwide.

Including associates does not make too much of a difference to Marketing Services being two-thirds, but you can see we're at 61% or 60% if you include associates, again with the objective of being two-thirds. Our Marketing Services businesses are extremely strong.

This includes our Digital business and recent acquisition activity doesn't make much difference to that. We calculate that our Digital business is now about 25% of our business or about $3.5 billion of our $13 billion running rate business, so it's still a very significant business in terms of growth and development.

Quantitative disciplines now are up to about 47% of our business. By Quantitative we really mean Digital plus Consumer Insight. And we think these are two of the growth engines, particularly as we come out of the recession.

Here's the Digital for the first half, I said about $3.5 billion for the full year, so you can see about $1.7 billion in the first half at around 25% of our business. And it was just pleasing to note that Forrester in their -- a leading independent research firm, which is Forrester, in their interactive agency report highlighted three leaders OgilvyInteractive, VML and Wunderman out of the top seven leader agencies or the leader agencies as they define them.

Objectives remain the same; operating margins, flexibility in the cost space, free cash flow, which Paul has already touched on, not only to enhance shareholder value and return on capital employed but in regard to ratings; developing the role of the parent company; emphasizing the revenue growth as margin improves and improving creative capabilities.

And here's the pattern of profitability with what has happened in the first half. Our targets remain the same in the long-term. We have indicated in the press release that the second half we are forecasting to be stronger and we're looking to maintain our margins in the second half in line with what they were last year in the second half. And we'll see how that progresses, certainly the indication in July is only one month out of the six was more positive both top and bottom line.

In terms of flexibility we've given you the numbers in the press release in relation to incentives. We've actually given you in relation to severance costs, total severance costs and relative severance costs and extra property costs.

The flexibility has been reduced by the reduction in the absolute amount of incentives that were -- that are in the P&L in the first half of this year versus last year. But there is still flexibility in the cost structure. It's running at about 8% variable staff cost as a percentage of staff cost and 5% as a percentage of revenue as opposed to the 6% or 7% that it has been historically.

In terms of uses of free cash flow we bought a little bit of stock back this year, only about 0.2% of the share base, but you can see the totals and pattern for the last year. And this is the graph that we've used every half year to demonstrate returns to shareholders and you can see the first half return in 2008 was a total of 3.2% taking to chart -- into account the dividends plus share buybacks and it was 2.7% in the first half of 2009.

On acquisitions we've limited ourselves to up to GBP100 million a year, part of the discretionary control that we have. We've spent a fair bit of that, not right up to the limit. We've focused on a number of smaller acquisitions in geographical areas and Marketing Services areas that we think are important, particularly Direct, Internet and Interactive and Consumer Insight.

We did 10 small mid-sized acquisitions in accordance with that strategy and we've made one or two in advertising to bolster or reinforce local agency or client needs. And again, we particularly find interesting opportunities outside the US where multiples are more attractive. This is the pattern of them.

The venn diagram intersects between faster growing markets and Quantitative and Digital, but you can see a number of smaller acquisitions that have been focused on that.

In terms of creative capabilities again we carry on in terms of recruitment, creative success, acquiring highly creative businesses like Jupiter Drawing Room in South Africa, placing greater emphasis on awards. We were second for the second time in two years -- two years in succession at Cannes and narrowing the gap to the first place.

So in conclusion the financial crisis and the credit tightening certainly has triggered a recession across the Group -- the globe and has had a severe impact on our first half results as you can see.

We had a significant deceleration in Q1, which I think understandably we couldn't manage the headcount too in Q1. And an even greater decline in Q2 revenues and the consequent severance that's had to be taken as a result of that, particularly as that second quarter decline spread into Western Continental Europe has depressed the half one margin. You saw that pre-severance costs and pre-exceptional property costs the margin was around 10%; 9.5% to 10% depending on what definitions of severance, whether you include incremental or the absolute amount.

The number of people in the business, as Paul has indicated, is much better aligned at the end of the first half and increasingly at the end of July where there's been a further percentage point increase from about 5.3% to 6.3%. The balance is far better now than it was at the end of the first quarter or going into the year. We didn't take a massive general provision at the back end of 2008 to protect the margins in the first half or, indeed, of 2009 or indeed the full year.

And for 2010 the actions should -- taken should allow us to improve the year-on-year margin between 2010 and 2009 given a stable revenue environment. And although I guess we don't like to be pushed at this time of the year to talk about what might happen in 2010 from a revenue point of view, it does seem as though there is more stability in the market place.

As we were discussing before and we discussed this morning with the media there is a sort of, maybe it's a definition or a semantic issue here. People talk about things getting less worse and all these things are relative statements. I think CEOs and CMOs do feel better about life, but I think for sort of strange reasons. The basic reason is they did look into the abyss after the Lehman catastrophe. And companies were faced -- a number of companies were faced with the prospect of bankruptcy.

They've survived that. Armageddon didn't happen. And they feel a bit better about life. There is a relief rally -- I think we've had two relief rallies in the stock markets.

I don't think we've had a fundamental change in the pattern of investment in branding amongst our clients yet. I think what's happened is that people feel better about life and so their heads and hearts are stronger, but that hasn't extended, as we said at the end of the first quarter, to the check book or investment in branding.

Most clients give you a number of advertising and promotion, and I think the breakdown between advertising and promotion is an interesting one. My instinct is -- or from the data we see, is that promotion is up and price based promotion is up, and market share is being bought by sacrificing pricing to some extent in many sectors.

But what we've not seen yet is that greater confidence that -- greater confidence, because you saw all the de-stocking that took place in Q1 and Q2 and the back end of 2008, that was the panic reaction to the lack of credit and the supply chains being squeezed. But we've not seen the next step.

Now it may well be that we lag the upturn. I think we lead the downturn. If people get worried they cut and we've said this before many times. And I think we lag the upturn. In other words people don't start to invest in branding aggressively until they're sure of a return.

And again, the reason why I think it semantic, and this I think is important, is it's rather like looking at the national GDP statistics. I'm somewhat amazed that people think that things are improving when they look at sequential quarters and they don't look at the year-to-year comparisons. And that's the thing that we look at. We don't look at sequential quarters. We tend to look at year-to-year comparisons.

So to some extent there is some stabilization, because the comparatives are getting easier. And as we go into 2010 we're going to be lapping a very tough first half 2009 and things should get better just naturally because of the sequencing of the numbers.

Again, what we're really looking for, which I think will make us more optimistic was if we saw a change in the pattern of behavior of clients, and I don't think that has happened as yet. I think just things look better, and because we are cycling tough numbers. And so I think that's the outlook.

The outlook for 2010 we have said even-steven. We have said we think that it will be next year roughly where it is this year. Having said that there are five things happening next year, which give you a little bit of cause for optimism; probably in order of importance I guess it's the FIFA World Cup in South Africa, not as big as Beijing and China, but important for Africa. And Africa is a region where we continue to see some growth interestingly on a small scale.

Second probably is the Vancouver Winter Olympics; again, not massive but helpful particularly in a North American context. The third will probably be the mid term elections that President Obama faces in November 2010; and then the Asian Game -- probably Expo in Shanghai and the Asian Games in Guangzhou.

So there are some events that are happening in what we would call, I guess, a mini quadrennial year 2010, that give you a little bit more umph in the media markets as a whole.

New Markets, New Media and Consumer Insights are the three things that we are focused on strategically. We think those three areas are going to become more important. Bids in [next -- '11], I think it's obvious; the -- that China surpassing, albeit minimally, Germany as the world's largest exporter and the last few days is just another iconic movement or statistic.

New Media -- and new markets is already 25% or 26% of our business; New Media 25% of our business we effectively have a $3.5 billion New Media business.

And then Consumer Insights, some commentary that Research has not performed as well in the recession. I think there was no -- this recession has not discriminated against any segment or sector or geographic sector. I think the Consumer Insights will continue to be very important. Data will continue to be very important.

You saw the latest moves by a consortium. Rumored, I guess, it's not official yet; rumored consortium in the US in relation to media measurement of group of media owners and, indeed, agencies that are rumored to be putting together a new approach or new tenders for media measurement that go beyond the traditional, go to the new in particular.

These sorts of insights that New Media give you are becoming increasingly important and clients are going to be very focused on what changes to consumer and, indeed, corporate spending will take place or have taken place or might take place as a result of the recession.

We think we're very well placed to benefit from those trends. We think that the TNS acquisition gives us a major competitive advantage and we're seeing that as I've indicated in our approach to clients on a combined offer, as well as a source of future margin improvement.

We'll continue to position our business and the top line in the highest growth functional and geographic sectors and improve the effectiveness of our cost structure. And we'll manage our cash flow to return average net debt to EBITDA, as Paul has indicated, that ratio to below two times in the medium term, which is what we said at the time of the TNS acquisition. We said it would take us two to three years and with the goal of maintaining our investment grade rating.