WPP PLC (WPP) 2016 Q4 法說會逐字稿

Good afternoon from London. Good morning in New York. We're here with the presentation for our results for 2016.

As usual, Paul will kick off with a review of the numbers. And we have Adam Smith with us from GroupM, who will talk about this year, next year, GroupM's forecast to media, looking at 2016 and looking at 2017 and beyond. And then I'll come back and talk a little bit about our strategy and objectives. And then we'll take Q&A.

So, Paul, over to you.

Thank you, Martin. I've got about 35 minutes, I think it was, this morning in terms of results overview for 2016.

2016 was a record year with strong currency tailwinds, particularly in the second half. Reported billings are up 16% at GBP55 billion, up 5.5% on a constant currency basis, and up 3.3% on a like-for-like basis. Reported revenues were up 17.6% at GBP14.389 billion, up 7.2% on a constant currency basis and up 3% on a like-for-like basis. The net sales growth that was reported was 17.8%. We showed constant currency growth of 7.4% in net sales and like-for-like growth of 3.1%. The reported headline EBITDA was up almost 21% at GBP2.42 billion, and was up 8% on a constant currency basis. The reported headline PBIT was up 21.8% at GBP2.16 billion, and over GBP2 billion for the first time. In constant currency terms reported headline PBIT was up 8.5%. Reported net sales margin of 17.4% was up 0.5 margin points, up 0.2 margin points on a constant currency basis, and up 0.3 margin points on a like-for-like basis. Again, this was adjusting for the effect of the acquisition of STW, which we acquired in 2016 in the month of April.

In terms of headline diluted earnings per share, we were up 20.9% at 113.2p, up 7.7% in constant currency basis; and this compared to 93.6p in 2015. The dividends per share were up 56.6p, or up 26.7%, reaching our targeted payout ratio of 50% this year, one year ahead of schedule, up from a payout ratio of 47.7% last year. In terms of the average constant currency net debt, this was up GBP382 million, at GBP4.34 billion, reflecting significant net acquisition spend, buybacks, and dividends, which in total were over GBP1.7 billion. However, the average net debt to EBITDA ratio at 1.8 times is almost in the middle of our target range of 1.5 to 2 times, and was at the same level as last year. The net new business wins of GBP4.36 billion or $6.757 billion continued the good overall performance for the first nine months, but was slower than the previous year. The increase in value of GBP151 million in noncontrolled investments to total GBP1.3 billion consisted primarily of Vice and Refinery 29 and comScore Return on equity for the year at 16.2% versus our cost of capital for the year of 6.4%. That was in 2016.

Turning now to the headline performance versus consensus, as you can see on the slide we pretty much met or exceeded consensus across most lines of the P&L, including the earnings per share, where consensus was 111.9p and we achieved 113.2p on a reported basis. The margin, as I mentioned before, was 17.4% on a reported basis; consensus was just under 17.3%.

Turning now to performance versus our targets, at the beginning of the year we had set out targets of revenue growth where we were hoping to be well over 3%. We achieved 3%. On like-for-like net sales growth of 3% plus, we achieved 3.1%. On like-for-like net sales margin improvement of 0.3 which we achieved on a pro forma like-for-like basis. And a reported diluted earnings per share of 10% to 15% growth, achieving 21% with the benefit of currency. On a constant currency basis we achieved 7.7% diluted earnings per share growth. However, if we're adjusting for tax, and keeping tax at the same rate as the previous year, our constant currency EPS growth would have been over 10%. The dividend payout ratio, again, achieving our target range of 50% one year ahead of schedule, as I mentioned before. So, good performance overall versus our target, assisted by a strong currency tailwind of over 10% for the year.

Turning now to a summary of the headline results at a glance. Really, a consistent picture with what I have said before, maybe focusing on some of the changes from the prior year. Obviously strong growth in EBITDA at GBP2.42 billion, up 8% on a constant currency basis. The tax rate has moved up from 19% to 21% this year and will continue to grow at approximately 1% next year as well. The principal reasons for the change in tax rate are as follows. With significant improvement in the profits in the USA, where we are a taxpayer, their corporation rates of tax are currently at 35%. That adds to the weighted average cost. Likewise, the performance in India and China in profit terms have both been very strong, and India has a 40% tax rate and China has a 25% tax rate. So, as those markets become increasingly important to the Group, the weighted average cost of tax will basically increase modestly. The only other point I'd mention is really on the average headcount, which has basically maintained flat or, to be precise, it was up 0.3% on average during the year, but on the point to point, December to December, the headcount was consistent with last year -- in fact, slightly down by 0.1%.

In terms of the buildup of revenue growth, what we call a waterfall chart, from 2015, the GBP12.2 billion of revenues last year was assisted by 3% organic growth, 4.2% from acquisitions, and 10.4% from foreign exchange, leading to revenue growth of the year of 17.6% reported or GBP14.4 billion of revenues. Likewise, a very similar picture on the net sales basis. Organic growth of 3.1% off a base of GBP10.5 billion, acquisitions adding 4.3% and foreign exchange adding 10.4%. So, overall net sales grew by 17.8% to GBP12.4 billion.

Looking at the foreign exchange over the last 12 months, as you can see there, in 2015 it was a slight negative on the business but in 2016 it's been a strong positive. In fact, in the second half the tailwinds have been approximately 17% on revenues and 17% on net sales, and on a full-year basis, 10% overall benefit to the Group. If we take the current exchange rates prevailing and apply them to 2017 results, we're expecting foreign exchange to increase revenues by 11% in the first half, zero in the second half, making that 5% overall for the year. So the 2017 impact of currency we're expecting to benefit the Group by approximately 5%.

Turning now to the full headline profit and loss statement for 2016 compared to 2015 -- again, many of the things we have covered already. But in the same way that foreign exchange has helped revenues, a number of the cost items have also been increased as a result of foreign exchange. For example, the interest finance cost last year of GBP152 million would have been significantly better apart from a foreign exchange effect on net interest which basically added the difference year on year. That was mitigated by a certain degree by lower coupon cost and higher volumes of net debt. So, net-net we've ended up going from GBP152 million to GBP174 million of interest through those three factors. If we look forward to 2017, adjust for the volume of the debt, adjust for the better coupons, adjust for the modest rate of foreign exchange impact in 2017, we're expecting interest to be around GBP180 million in 2017.

The only other item that has changed as a result of what we've done in 2016 is the associate income line, where in 2015 we would have had the associate income from the STW Communications Group, and did so for the first quarter of this year. But then after that we fully consolidated results as we owned 61% of the business. We fully account for the revenues for last nine months and the profits, and in addition have a minority interest for the last nine months of the 41% we don't own in the business in the noncontrolling interest. That is why it has moved in the main from GBP85 million out to GBP102 million and the impact of foreign exchange, because the majority of our noncontrolled interests are in the fast-growing markets.

If I look through now to the statutory P&L, the results really of the business are similar, although there are two quite different items obviously in this P&L. First, there is a net exceptional gain of GBP164 million, which I'll go through in more detail in one second, offset by the normal goodwill intangible charges running through the P&L last year of GBP195 million. So net-net, the profit attributable to share owners, the GBP1.4 billion, saw a 20.7% growth in 2016, very similar to the headline growth; and, likewise, the reported diluted earnings per share of 108p grew at 22% on a statutory reported basis compared to 21% on a headline basis.

Now turning to the exceptional gain for the year of GBP164 million, in terms of the new items -- and I'll just remind you, first off, what was already recorded in the first half -- on the acquisition and merger with STW we did have a small book loss on the merging assets of GBP24 million we reported in the first half. And on our comScore investment we impaired our view of the business by GBP80 million, bringing it down to an approximate share price of $35 at the time, making a total of GBP114 million charge in the first half of this year. In the second half of this year, we've had to recognize a remeasurement gain on one of our nonpublic investments in Imagina, where we own around 24%, based on the potential sale of the business and the offers received from third parties. And if the sale were to go through, this would be the approximate gain that we would realize if we were to sell our stake in the business. So, we have had to write off our investment by the amount of GBP260 million. In addition, we had a sale of a business, Grass Roots, where we realized a book gain of GBP27 million on that. So, the total in exceptionals, net gains were GBP190 million.

And then in phase 2 of our IT infrastructure project, we've outsourced the back office finance systems, both the development and maintenance of those, including 250 people that should transfer to IBM, and part of that there were some one-off costs in that process in 2016. So, overall the net exceptional gain excluded from headline was around GBP163 million, GBP164 million.

Turning now to the growth and how it fills up in the various currencies, focusing on net sales first, like-for-like growth of 3.1%. Acquisitions, as I mentioned before, adding 4.3%, result in constant currency net sales growth of 7.4%. On the sales line, foreign exchange added 10.4%. On the profits line, adding around 13.2% to 13.3%. Hence, in sterling, on a net sales basis we reported growth of net sales of 17.8%. If we had been a US dollar-reporting company, we would reported net sales growth of 3.8%. If we were a euro-reporting company, we would have reported net sales growth of 4%. And if we were a Japanese company, we would be reporting net yen sales growth of minus-6.8%.

Turning now to the revenues and net sales by sector on a full-year basis. I'm going to focus on the net sales as, again, we have stated before, we believe it's the most accurate underlying measure performance of the Group. Overall, and you can see there is a difference of about GBP2 billion between total revenues of the Group of GBP14.389 billion and total net sales of the Group of GBP12.398 billion. First turning to advertising and media investment management, it represents 44% of the business, or GBP5.4 billion of net sales. On a full-year basis, growing at 3.7% on a like-for-like basis, the first half growth was 4.6%, the second half growth was 2.9%. A slightly softer fourth quarter at 2.4%. However, it did lap a very strong quarter 4 2015 of 4.8%.

On the data investment management business, representing around 16% share of the Group, it had net sales of just under GBP2 billion and had overall like-for-like growth on net sales of 0.9%, being 1% in the first half, 0.8% in the second half, and a strong quarter 4, growing at 1.5% this year. In public relations and public affairs, representing around 9% of the business this year, we're just over GBP1.079 billion of net sales, had overall growth of 2.4%, having grown at 2.8% in the first half, 2.1% in the second half, a fairly flat fourth quarter, which followed a very strong quarter 4 last year of nearly 6%.

In the brand-new identity healthcare specialist businesses, in total around 32% of the Group, with net sales of GBP3.9 billion, and overall growth for the year of 3.5%, growing 4.4% in the first half, growing 2.7% in the second half, and 2.8% in quarter 4, following a very strong quarter 4 last year where growth was 7%. For overall for the Group, net sales, GBP12.398 billion, with overall growth of 3.1%, first-half growth of 3.8%, second-half growth of 2.4%, final quarter growth in this year of 2.1%, lapping a strong quarter 4 last year in 2015 of nearly 5% growth. When I look at the business on a different cut, we look at the digital revenues across the Group, which are around GBP7.5 billion or 39% of the Group across all four disciplines. That discipline, if it was separated out, would have grown revenues by nearly 6% and net sales by 6.5%. So, strong growth throughout 2016.

Taking the same analysis through the geographies for the year, North America, which is 37% of the business today, is GBP4.6 billion of revenues, grew overall like-for-like at 2.8% growth, having 4% in the first half and 1.7% in the second half, with a tough quarter 4 modest growth of 0.5%, a very strong quarter 4 2015 of nearly 7% growth. In the United Kingdom, which is 13% of the business, had net sales of GBP1.588 billion, had overall growth of 2.1%, having grown at 3.3% in the first half or 1% in the second half. Again, a fairly tough comparator, growing at 3.5% in the fourth quarter of 2015. Western Continental Europe, around 20% of our business or GBP2.4 billion of revenues, overall growth 3.6% for the year, first-half growth 4.3%, second-half growth 2.9%, and in the final quarter continuing that level of growth, growing at 2.7%, lapping a 3% growth in the final quarter of 2015. Finally, on Asia-Pacific, Latin America, Africa, Middle East, and Central and Eastern Europe, a business representing 30% of our revenues, or GBP3.8 billion of net sales, overall growth for the region is 3.5%, first-half growth 3.4%, second-half growth 3.6%, and in the second half, the Asia-Pacific grew 4.7% and Latin America also grew strongly at 6.5%. In the final quarter, the growth in that region was 4.8%, very similar to the final quarter of 2015.

When we look at the swings in the quarterly or half-yearly growth we find it quite useful to look at the two-year run rates, especially on a net sales basis. As you can see, the first half of 2015 we had relatively weak growth at 2.3% and then 4.1% in the second half of last year. This year we had relatively stronger growth in the first half at 3.8%, slightly weaker growth in the second half of 2.4%. When you combine the two years together you see a very consistent pattern of around 6% to 6.5% growth for the last six to seven half-year periods. So, that's probably the best measure to see how we're doing momentum-wise. Unfortunately, as one of our other competitors reports on a net sales basis, we have to look at revenues. And when we do that on a comparative basis you can see that, on a half-yearly two-year basis, we're trending around 7.5% to 9%, on two-year aggregated revenues, similar to Omnicom which is around 8% to 9%, similar to HAVAS which is around 7.5% to 9%, Publicis in the region of 0% to 4%, and IPG at around 11% currently.

In terms of headline profits and margins by sector, I'm pleased to say that all disciplines and all regions improved margins. Taking you through this in terms of looking at the profits generated from each of the disciplines and regions, bearing in mind overall foreign exchange added 13% to profits in all regions and disciplines, apart from the UK, obviously. In advertising and media investment management, profits grew 19% to GBP1.027 billion and margins improved 0.5 a margin point to 19%. In data investment management, profits are up 22% on a reported basis to GBP351 million, and margins improved 1.4% from 16.2% to 17.6%. In public relations and public affairs, there were profits of GBP180 million in the year and a margin improvement from 1.2% to 16.7% for the year. In branding identity, healthcare and specialties communications, profits of the year up 24% to GBP602 million, a margin improvement of 0.2% from 15.2% to 15.4%. And overall for the Group, profits were GBP2.160 billion, up 22% for the year, and a margin improvement of 0.5% from 16.9% to 17.4%.

And doing the same by regions, with North America we saw profits grow at 23% and a margin improvement of 0.6 margin points to 19.4%, our strongest margin region. In the United Kingdom we saw profits growing at 7%, obviously no currency impact there, and margin improvement of 0.3% to 16.5%. In Western Continental Europe, we saw profits grow at 27% to GBP352 million and margin improvement of 0.8% to 14.5%. In Asia-Pacific, Latin America, Africa, Middle East, and Central and Eastern Europe, we saw profits up 24% to GBP652 million and a margin improvement from 0.4% to 17.2%. Again, overall, a margin improvement of 0.5% reported, and up 22% in reported profits.

If I take the regions or the seven subregions on net sales for the year, we show two figures. We show the final quarter as the top figure and the bolder figure is the full year like-for-like growth. First, I'd like to draw your attention to the box on the right-hand side that shows the growth in quarter 4 being strongest in the fastest-growing markets of 4.8%, and weakest in the mature markets at 0.9%, and overall 2.1%. This compared to a very strong quarter 4 the prior year, where mature markets are growing at 5%, and you can see that, and the faster growing markets last year growing at 4.7%. So, overall for the business this year, we had 3.1% growth, with mature markets growing 2.9% and the faster-growing markets growing at 3.5%.

I think good performance is coming through, both for the final quarter and the full year in Asia-Pacific, Australia, New Zealand, in Latin America in particular. And then good growth overall in North America at 2.8%. And solid growth coming through in Western Continental Europe for the year at 3.6% this year following a 3% growth the prior year. And then, finally, a return to growth in Central and Eastern Europe where we saw 8% growth in the quarter and 3.4% for the year.

Now taking the top 6 markets, approximately 70% of revenues and net sales, where we saw overall growth of around 2.7%. You can see here the three-year trend in the growth in North America, which has been around the 3% to 4% for the last 3 years. United Kingdom has come down a little bit from the 5% growth we saw in 2014 to around 2% this year. China has been a little disappointing. If you remember, we were minus 3% in the first half, so we had a plus 3% growth in the second half in China, coming up flat year over year. But overall, still a very strong and good business for us. In Germany you can see a very strong performance over the last three years, growing from 3% to 4% to 7% growth organically. Australia, New Zealand, there's been some momentum behind, with the merged businesses growing at 3.5% this year compared to basically flat in prior year. And, finally, in France, modest growth but off a very low level, basically 0.3% growth for us in 2016.

If we look at the BRIC markets, as they're so-called, over 12% of our revenues and average growth of 2.4%. You can see they're driven by the growth in India, with double-digit growth again for the third year in succession, growing at 13.8% in net sales. China we have mentioned. Brazil overall quite a difficult market. I think we did well versus our competition, but we were down around 2.5% in Brazil for the year. Russia, springing back from the down 10% last year to be plus-5% in 2016. Turning now to countries in terms of brandings. Those that I haven't mentioned before, Argentina and Turkey, very strong growth, one more driven by inflation than anything else. Indonesia, very good, as was Mexico. And then in Europe and Asia, Denmark, Italy, Philippines, Sweden, all had good growth in 2016 in addition to what we saw in Germany, as well.

In terms of categories, not a great deal to report in terms of -- I tend to look at the big four categories. Two of them pleased me, in the very strong band, top band -- automotive and food; two of them less so in terms of financial services and personal care and drugs not growing quite as fast as those other categories.

Turning now to new business wins, this is trade estimates of mainly new business wins. It is indicative of what is happening, but it tends to be focused on media and advertising, and tends to be focused on US and UK/European wins. Overall, again, to just explain the chart, the shaded bars are those which have occurred in the fourth quarter, and anything in red means a switch between sister agencies at WPP. In the final quarter, we consolidated our position in the retail sector, winning another major retail account, now having acquired or won both Walmart and Target throughout the year. And pleasingly, we've had three European media wins in the quarter and two strong wins from VML: one, Electrolux in the USA; and second, New Balance. Both very significant wins for an agency of its size in the USA. The second page is really just more of the same. Obviously scale is slightly less in terms of second page wins going through for the full year.

Turning now in the same way on losses, those that we have spoken about before. The two major losses that have occurred for us, both in media earlier in the year, one taking effect January 2017, which is basically the Volkswagen loss, and the AT&T took effect around October 2016. Again, it's some ways to go in terms of the effect on this year's performance as a result of those two losses. If we look through now where we think we are in our own estimates of wins and losses on a new business basis, overall for the year we reckon we have won a net $6.7 billion of billings. At the half year we reported $2.99 billion. So, we have been trending at the same rate of around $3 billion of wins first half and second half, but it is less than what we recorded last year, where we showed a total of $8.6 billion for the year 2015.

If I look at where we are since the beginning of the year, we've had a very pleasing major global win across all practices with Walgreens Boots Alliance. Billings estimated at around GBP600 million. A switch of the BT business from OgilvyOne to Wunderman. And two further media wins, one in the UK and one in the USA. And two losses, one I think we chose not to pitch for, and one we have lost in a competitive pitch.

In terms of cash flows for the year, in very simple terms, what you see in operating profit is what you get in cash generation. So, GBP2.063 billion generated in operating profits and GBP2.042 billion made available of cash for disbursements. Looking at the payments, CapEx is reasonably modest, around GBP285 million. And then a further GBP1.7 billion was spent through acquisitions, which, of new initial payments, is around GBP605 million. Dividends of GBP617 million and share buybacks of GBP427 million. So, in total, GBP1.7 billion of disbursements in addition to the CapEx, and overall a net cash outflow fee of GBP156 million, which compared to an outflow last year of GBP564 million.

The impact on our debt, if you looked at the constant currency basis, that removes the impact of foreign exchange. So, the debt on an average basis is 10% higher, at GBP4.34 billion, and on a point-to-point basis is 12% higher at GBP4.1 billion. But now comparing the point to point where it has moved very significantly as a result of FX, we'll show you on the following slide the buildup from GBP3.2 billion December 2015 to GBP4.1 billion December 2016. But I'll come on to that in one second. The good new is, on the interest cover, cover is stronger at 12.4 times. And on the leverage, the average net debt to headline EBITDA remains the same as last year, rounded to 1.8 -- but, to be precise, 1.79 in 2016.

In terms of the buildup of the debt, we took the balance sheet last year, December 31, 2015, foreign exchange on our balance sheet has added GBP466 million of additional debt reported on an external basis. In addition, in the acquisition of the shares of STW we also acquired the total business, including their balance sheet and bank borrowings of GBP144 million, so that has been consolidated in our numbers. And we had a cash outflow for the year of GBP156 million.

Pleasingly, as was the case during the year, we had a working capital benefit, which showed up on December 31 also being a benefit around GBP118 million. And then other items on the balance sheet resulted on a year-to-year translation of around GBP272 million. So, that is the build up from the GBP3.2 billion in last year's balance sheet and GBP4.1 billion in this year.

As we show it now, on the historic net debt to EBITDA chart, what we've done; just to give you some sense of comparison, we've added to 2015 the currency impact that has occurred to the 2015 numbers, so you can see it on the shaded charts, compared to the 2016 numbers. So, while the numbers are greater in both cases, the shading is the currency effect on both the EBITDA and the bank debt. So, overall, just about in our mid-range at 1.8 times, as you see it here on the chart.

Turning now to the debt profile of the Group, we're in pretty good shape in terms of any debt financing coming up. It's all well-spread. You can see the average wait to maturity is 10 years, and the average coupon is around 3.4%. Pleasingly, we went early with the sterling bond in 2016 in anticipation of April 2017 maturity, which matures at around a coupon of 6%, and we took on a 30-year bond in sterling, maturing September 2046 at a rate of 2.875%. So there's no imminent needs for bond refinancing in early 2017.

Compared to our uses of cash flow, our target still remains, we were asked about this in the meeting this morning, in the GBP300 million to GBP400 million range for new acquisitions, having spent a little stronger than that in the last two years. That remains our target. In our share buybacks, we continue to be in the 2% to 3% range for each year, last year spending 2% at GBP427 million. Our dividend increase, as you know, was strong, coming up 27%, having reached our target payout ratio of 50% one year ahead of schedule, and with strong undrawn facilities and surplus cash of around GBP4 billion.

In terms of tax rates, I've explained why it's moved up from 19% to 21%. Unfortunately, with the new legislation coming to the UK in April 2017, where interest is restricted against taxable profits, it will mean a further 0.8% tax increase in 2017 on our blended rate from the 2017. So, we're expecting a range of around 22% as the tax rate for 2017 to come through.

Finally, just showing you the earnings growth of the compound nature since, again, a benign starting point in 2009, when we were at 44.4p, compound growth of around 14%, resulting in 113.2p in 2016.

And with that I'll happily hand over to Adam.

Hello.

A quick look through our forecasts as they stood in December when we last compiled them. These forecasts are our attempt to quantify the weight of advertising dollars being spent in 2016 and 2017. And we will review these forecasts, as usual, in June. We start by looking at what is still a forecast for 2016, because its number won't be known finally until April or so. We expect 4.3% growth in total investment in 2016. This is continuing to shadow the rate of nominal GDP. 2016 was a maxi-quadrennial, but without as much maxi effect as we're used to, with no upside surprises from the summer Olympics or the European soccer or the United States election. I believe the United States election spend was actually the first one to go backwards.

Moving to 2017, we have [a distinctly rare] 4.4% growth in total advertising investment. We've had one interim revision to India in respect to its demonetization. The effect of that is not great, but it would reduce this to 4.3%. We have nominal GDP picking up as IMF and other forecasters seem to be dialing in expectations of a slightly (inaudible) use of money, perhaps less doctrinaire central banks about targeting investments. We have the faster-growth world, growth 6.1% in 2016, accelerating to, we think, 7.3% for 2017, which we refer to as a new normal.

The word post election in the USA was no budget changes there, although we will obviously be reviewing that in the USA and around the world with our next forecast. The principal comments that came out of the election results were, from Brazil that was worried about its second-order effects on its trading partners, really, were trade to be impaired in any way. But as pointed out that its domestic affairs were far more important for the matter of advertising. Turkey was the most concerned there, again, with domestic problems dominating, but worried that a strong dollar in particular would exacerbate the situation.

Looking at the relationship between advertising expenditure and GDP, this familiar chart shows the nominal year-on-year trends in both. 2017 is in line to become the eighth straight year of advertising recovery. But as a share of GDP, advertising is in a long, very slow decay rate, which we track from 0.9% of GDP in 2000 to prospective 0.7% in 2021, which is as far as our model goes. That's largely the result of the shift of advertising away out of the developed world into the faster-growth, newer economies. The bump in the curve here is where our model takes over from our bottoms-up forecasts in 2018. And this is the model telling me that we're being a little too conservative in our forecast, but there we are.

Looking at how the advertising expenditures recovered since the financial crisis, indexing what was being spent in 2007 at 100, the [second] world in total now back to 106, so, firmly back, firmly restored to its pre-[layman] levels. However, the new world, faster-growth economies are indexing 167 and its share of measured advertising has risen in this period from 18% to 29%. The mature economies in aggregate are only indexing 92. There are only three economies which appear to have restored their pre-layman level in the developed economies. They are Sweden, Australia and the UK.

Looking at Europe in particular, we see that the outlook for the UK has probably remained the same or maybe a little bit improved since the outcome of the Brexit referendum. The rest of the European Union has improved slightly, too, with sequentially encouraging signals, particularly from France and Germany. However, the European Union ex-UK is only indexing at 80 relative to the totality of mature economies indexing 92. And within the EU, the highest indexation is Germany at 87 still, followed by France at 82, and the Netherlands at 77. The picture in Southern Europe is grimmer than that. Italy is indexing 67 to its 2007 position, Spain is 62.

The Eurozone performance has been, evidently, for some reason or other, toxic for advertising. Its advertising intensity, that is, the percentage of advertising growth to GDP in 2007, was running at 0.67. Now it's only 0.51. The UK has, by contrast, risen from 0.86 to 0.91. The main reasons, I think, for this are that the UK advertising economy is substantially more digitized than that of the Eurozone. The UK is now at 50% digital advertising, the Eurozone 30%, which is probably a little bit below the global average. And all the growth in advertising is essentially being captured by [digital] At a macro level, I think what distinguishes the UK recovery from that of the Eurozone, apart from being somewhat faster, it's also notably more broader based, with our income inequality shrinking to its lowest level in 30 years; whereas, the Eurozone is still plagued with a widening polarization of wealth, principally the result of its persistent unemployment.

Looking at the main contributors to 2017's prospective growth, India, we see, remains still the fastest-growing of the top 10 markets, that is, in the [$10] billion-plus bracket of advertisers, despite its growth rates coming down from 14%, as we hoped last year, to 12%; and 2017's 13% now being revised to 10%. This group of countries is in total generating something like 76%, 77% of net growth -- still a substantial dependence but tending to fall. An upward revision to China in our [sickle] forecast, and a fractional downgrade to the USA, meant those two reversed their positions in this table, and China returns to being the largest contributor. The UK is contributing something in the order of $1.5 billion of net growth in 2017, all fueled by digital. Legacy media are in aggregate now shrinking in the UK. Argentina staging a strong recovery. Brazil just outside this group. And other ones closing on it are Russia, Philippines, Australia, and Spain.

Looking at the profile of growth geographically, in the first six years of this recovery cycle, the faster-growth economies were generating 68% of the growth. This is rebalancing to a prospective 54% to 46%, in favor of the faster-growth economies. The principal variables within that are the value of the dollar and China's path. The BRICs have half the world's population and are presently generating somewhat below par, 36% of net ad growth. Our longer-range model has Brazil recovering in 2018 and bringing BRIC contribution back to a more normal 40%. China and India's combined share of advertising is rising from 17% in 2016 to 18% in 2017.

The other principal vision of growth that we make is between traditional media and digital, to the extent that we can define those. And here the digital dependency is obviously very striking, generating 72% of growth in 2010-2015, and now it's in line to generate 94% for the period 2015 to 2017. We have digital at 31% of measured ad expenditure in 2016, of 15% growth, taking it to 33% in 2017. And this will be the first time that both the new and the old worlds have digital at the same share, 33%. That's mainly due to China, which is now in line to become a digital -- to pass 50% of measured ad investment. I am, however, qualifying this digital commentary with the observation that it's still principally an SME medium. I estimate that about 30% of measured digital ad investment is coming from large brands, big agency business, and brands dealing direct. Our CDO, Rob Norman, puts his estimate at between 30% and 40%. The one aspect of that is that, if you reprofile the world's advertising without the SME element it does make [television] a bit larger in the big brand portfolio. In fact, about 55% of their investment.

At this time of the year, GroupM is compiling its digital survey. There's a few interesting (inaudible). eCommerce would rise 15% in 2016. It appears to have risen certainly higher than that, maybe as high as 20%, and with something similar, between 15% and 20% in the pipeline for 2017, too. A big supporter of digital advertising.

It looks like streaming subscriber video on demand, streaming audio had good progress in 2016, judged by users. And we have been asking about how [ad ford] is being dealt with. And the consensus is that one hasn't been completely eliminated; it is being managed at a satisfactory level. Ad block growth is still [competent] but slowing down. Finally, I've been asking what has been the most practical innovation in the last year for brand advertisers in digital media. And favorite, relative, appears to be base-driven automated or programmatic buying.

So, that is all I have to say, I think, for now.

You're going to leave everybody with your forecast for the year by region. Okay. Thank you, Adam.

Now, I want to, as we traditionally do, focus on our strategic priorities and objectives. But firstly, let me just talk a little bit about how we see the macro and micro environment. Global growth projections for GDP for 2017 are slightly ahead of 2016, roughly the same at around 3.5% to 4% nominal. I think most commentators are around that level. So, tepid growth. Maybe the fast-growth markets, so-called, of BRICs Next 11, growing a little bit faster and catching up with some of the progress they had before.

There's certainly uncertainty about the timing and implementation of the incoming US administration's policies. What is clear, however, is those policies are very pro-growth and business-friendly. And if they can be implemented, whether they be repatriation of profits or tax cuts or infrastructure spending or military spending or reduction to regulation, it's certainly a very different atmosphere in the United States in terms of the attitude of the government to business as contrast with the last eight years.

The IMF projections for the UK show revised growth upwards to 1.5% for 2017. But there is considerable discussion, to put it mildly, debate about what the prospects for the UK economy will be over the next two years. There's clearly uncertainty from key elections in Europe, whether it be in France or Germany or imminently in the Netherlands. And in addition to that, there's political instability, still, in Spain, Italy, and Greece.

Monetary policy certainly has become less accommodating. And there's some upward pressure on global interest rates, although it's our view that those rates will remain relatively lower than what we've been used to historically. There's still those [grace] ones around, the migration crisis and terrorism, and Middle Eastern issues around Turkey and obviously Ukraine and Russia, and what will happen there in terms of relationships with Western countries. And ForEx movements do intensify the pressures because of their volatility.

Traditional media continues to be under pressure as new media grows, as Adam has pointed out. And convergence issues are being sold or attempted to be sold by emerging content and telcos such as AT&T and Time Warner, which looks as though it probably will go through, as will Fox and Sky here in the UK. And there's obviously disputes between the [vendor and] media set to be ironed out, but it does demonstrate the coming together of telco and content.

Having said all that, there's better growth prospects for China, although we'll probably have to wait until the People's Party Congress later this year in November of this year to see what the prospects are for the second five years of the new regime there; and whether, in fact, it goes on longer than that. But oil producing nations and countries dependent on commodity pricing are doing better. And India has been impacted to some extent by demonetization, but not significantly, and from what we can see in our own business.

At a micro level, we still see a world where there is low growth, low inflation. We may see some more inflation here in the UK following the weakness of the pound following Brexit, and maybe in the United States if the Trumponomics, if I can put it in that way, is implemented. But basically, across the world, very little inflation, very little pricing power as a result, and therefore there's a renewed focus on costs. In addition to that general trend or set of trends, there are three things that legacy companies in particular have to deal with: disruption from new technologies; zero-based budgets, recent events over the past few weeks have emphasized yet again the power and influence that zero-based budget has had; and last but not least, the role of activism. Investors have also see some activities in the packaged goods sector and that's increased the short-term focus, particularly of SMCG, or fast-moving consumer goods clients; and, to some extent, on other sectors like pharmaceuticals, although those models have been somewhat debased by pricing activity.

There's uncertainty, which is reducing capital investment in favor of buybacks and dividends, although recently the higher market levels have probably lowered the attraction of buybacks relatively. And if you look at the S&P 500 dividends and buybacks as a proportion of retained earnings in the last couple of quarters have fallen slightly below 100%. But generally, over the last two years, dividends and buybacks have been a very high level at or above 100% of retained earnings.

Having said all that, there's the growing importance of the horizontality, that's agency groups working more cohesively together for the benefit of clients; sharper marketing. We held a conference in San Francisco earlier this week on sharper marketing; and there's this increasing trend to look at sales and marketing as one, and not be as willing to invest in heavy discounting with retailers and trying combined premium branding, and to reduce price activity which, after all, diminishes brands to commodities. A focus on e-commerce, obviously. Adam has pointed out the growing importance of that. And the use of technology, in our case, companies such as Xaxis or AppNexus, or Triad, data with Kantar and comScore. And content, the sort of things we're doing with Vice or Fullscreen or Refinery29.

The fragmented media landscape means that deciding on media optimization has become much more complex and that's a significant opportunity for agencies. But efficiency and effectiveness are still key with clients. And clients are putting pressure on pricing and payment terms. And we are seeing increasing activity in that area. There's scrutiny by clients around the effectiveness of digital due to the concerns that we're all well aware of: fake news and value and viewability and verification and [three visa], through tweets. Unilever, our second largest client, has been focusing on for a number of years, and GroupM has been backing him very much with that. We're in violent agreement with Mark Pritchard, CMO of our fertilizers client, Procter & Gamble, who has been a Chairman of the ANA, focusing on measurability particularly, and even yesterday was talking about the lack of adequacy of the recent moves made by Google and Facebook on measurement that has to be taken to an even higher level.

And Google and Facebook do represent a duopoly in digital media, accounting for about 75% of spending in digital. But Snap's IPO perhaps is an opportunity for more balance in the marketplace, certainly in respect to Facebook. And we know that Facebook has tried to buy Snap on a couple of occasions, and in addition have altered their outputs to reflect the progress that Snap has been making in social media. And of course we're probably going to witness a significant battle between Google and Amazon over search. A third force might also come from the merger of Yahoo and AOL, which I understand will probably take place later on this year, probably in April. And if that is the case, that will give us another opportunity. And of course, as I mentioned before, there's the rise of Amazon.

Having said all that, there is fierce agency competition. We highlighted that in our statement and that has given rise to significant discounting and shifts in the terms of trade. That's payables. I don't think agencies or banks or insurance companies, but increasingly they're asking to become such. And there have been some examples recently in agency pitches and presentations over heavy discounting, even to the extent of offering up-front discounts to retain contracts. And on payables there's been a shift in the terms of trade, as I said. You can see that in the results of the agency groups, where margin is being sacrificed to win business through altering payment terms.

On slide 53 we just highlight the growth in GDP. You can see how WPP's growth has tracked GDP growth. And you can see the difference between WPP's GDP and worldwide GDP. Forecasts by Goldman, in this case, to worldwide GDP in excess of 4%. This is nominal. If you adjust our GDP for our under-indexing, although we're very strong in Asia, Latin America, Africa, Middle East, and Central and Eastern Europe, we're under-indexed against the world GDP index. We're over-indexed in the US and the UK and Western Europe. But, of course, as those fast-growth markets start to get a little bit more traction after the last few years, you're starting to see the gap widen between worldwide GDP and our own The WPP GDP on that definition is growing or would be growing at around 3%. GDP growth forecasts vary, but basically they're in that range, as you can see on the right-hand side of that graph, at 3.5% to 4%.

Turning to our leading clients and looking at their published trends, not our revenues with them, but their results, looking at their published results, we've not got all of the leading clients; but if you look at them there are some clearly discernible trends. Fourth quarter like-for-like revenue growth of clients was around 2% of those leading clients. And pricing were about equivalent to that growth, as volumes were either weak, some were negative, but volumes were pretty flat. This indicates this low growth, low inflation, low pricing power environment. US growth generally was ahead of international, not just reflecting a stronger US currency, but tended to be ahead of international. And there's increasing focus on cost-saving programs given the zero-based budgeting pressure that we see.

Our strategic priorities remain the same -- horizontality, ensuring our people work to the benefit of clients. Clients want the best people working on business, not necessarily as concerned as we are with our vertical brands. The faster-growth markets, the BRICs Next 11, are around 30% of our business, our GBP20 billion of revenues. The objective is to be 40% to 45%. And the growth rate is starting to accelerate, as you saw from Paul's analysis of the numbers, not just last year but when we look at the budgets for 2017 as well.

New media, around 40% of our business already. The target is 40% to 45%. We'll get well within that pretty quickly and probably revise our estimate upwards for that, or target for that. Having said that, it's becoming increasingly difficult to distinguish between analog and digital. But broadly, this gives an indication of how important digital is. And worldwide now, digital budgets are probably around 28%, 29%, 30%. So, we're over-indexed but probably not over-indexed enough. And then, finally, data investment management is about half of our business, which is what it is.

Taking each of these objectives, priorities, one at a time. Horizontality -- we now have 48 client teams. And in the [lead] behind you can see where those clients are. We focus on people, clients, and acquisitions at a country level as where we have about 52 countries covered out 112. We're ensuring our people work across our businesses, our clients, and geographies to deliver our best resources. We focus on specialist skills and particular client needs and business issues. And some of the recent key additions include Campari, Google, and Walgreens Boots Alliance.

As far as new markets are concerned, fast-growth markets are already 30% of our business. The objective to be between 40% and 45%. Held back a little bit by currency, but progressing well, particularly as those markets pick up, as I've said. New media, digital, 40% of our business. We want it to be 40% to 45% and we're well inside of that target and we'll probably revise it.

I would just reiterate here, revisit what I call the Mary Meeker data, which shows three key trends in digital. The first is the continuous pressure when you compare time spent data to investment by the industry, not WPP, the industry, and this is US data. On the left-hand side, the first three blocks, the continued pressure on newspapers and magazines and traditional form. The middle block, where we're starting to see signs of some pressure on linear TV, although I emphasize this is basically network TV, not screens as a whole. There is significant evidence that screens as a whole, time spent, is growing quite significantly. And that's shown in the far right block on mobile, where there's clearly a major opportunity for increased advertising and marketing on mobile. And really the clients and ourselves have not developed that approach as significantly, perhaps, as we should or we will do as screens become bigger and more high def, and as screens also become more significant in terms of consumption and broadband capability. We've seen this in India with 5G, with [locatia] and [Barney's] launching in 5G through geo in India, where take-up is very significant when the bandwidth in there.

On the next slide we're just showing the penetration of digital, comparing 2001 to 2015, 2015 and 2020, and just looking at global. In 2001 it was 3% digital penetration, 28% by 2015, and the projection is 39% by 2020. So, we're five years ahead of the game. But, as I said, there's more to go. And just to demonstrate the things we're doing, Xaxis now over $1 billion in sales, 15% growth year on year, good coverage across the world now and growing significantly geographically. And then we've added the capabilities of Triad in retail media, with its emphasis on e-commerce and its client groupings, mainly with retailers, particularly with Walmart, in terms of e-commerce and developing online partnerships.

The final strategic priority is data. It's already half of our business and we're pretty much where we should be in relation to that. Fast-growth markets in digital represent, if you added the two together, about 69% of our business, but there is overlap to the extent about 10%. So, digital and fast-growth markets, almost two-thirds of our business at just under 60%.

In terms of key objectives, there are six of them: operating margins, flexibility in the cost base, free cash flow to enhance share owner value, developing the role of the parent company, emphasizing revenue and net sales growth more as margins improve, and improving creative capabilities. Just running through each of them, slide 68 shows our progression in terms of operating profits and margins. Margins, as Paul described, reached 17.4% reported and operating profits at GBP2.16 billion. The target margin for us is about 19.7%, just under 20%. I'd just point out per incentives margins are running about 19.9%. So, good progress there.

Our operational effectiveness programs are really important in terms of delivering these margins over the coming years and reaching that 19%, just under 20%, target margin. We're moving up by 30 basis points a year and we've reiterated that guidance for 2017. But it covers areas such as shared service centers, off-shoring, consolidation of IT infrastructure. And those programs are projected to deliver about 1 margin point. So it's about one-third of the projected margin improvement that we're targeting. And the effectiveness programs are going to contribute to our profitability and margins increasingly as we go through 2017 and beyond.

Free cash flow to enhance dividend payout ratio -- here we've reached our target of 50% payout ratio one year ahead of target. That's probably where we'll stay in terms of payout ratio. We think there is significant opportunities for attractive investment in our business. The average FTSE 100 payout ratio is around 70% of earnings. We think 50% is about the right balance and we'll be balancing our capital expenditure, our acquisitions, our dividends and our buybacks consequently. This slide highlights the growth in diluted EPS and dividend payout ratio over the years.

In terms of distributions for share owners, it fell slightly in 2016 as we moderated our share buy back program. But, still, you can see very strong returning distribution to shareholders through dividends and buybacks. And, in fact, over the last 10 years we've returned GBP5.9 billion to share owners in total over those years. In terms of free cash flow for acquisitions, there's been a significant pipeline of reasonably priced small- and medium-sized potential acquisitions, and that continues to be the case. So, significant continued -- (technical difficulty) significant pipeline of reasonably priced small and medium size potential acquisitions.

We continue to focus on the priorities, the strategic priorities around faster-growth markets, around digital, and around data. And we're accelerating to reach our 40% to 45% target outside the BRICs and Next 11 to newer potential opportunities. But in addition to that, following Brexit we have started to focus more on Germany and France and Italy and Spain, as we're concerned that following Brexit we might lose influence in some of those important EU markets, remembering that Germany is our fourth largest market, that France is our sixth largest market, that Italy is our ninth and Spain is our tenth.

We executed about 56 transactions in 2016 with these small- and medium-sized acquisitions, and we continue to find good opportunities to enhance earnings at respectable multiples. And whilst we saw some elevation of values or excess valuations in digital in the United States, for example, or data in the United States, generally in some of the fast-growth markets we've seen the pressure on valuation ease up. Acquisitions, as Paul mentioned, added about 4% to our revenue growth last year and to our net sales growth last year, of which the STW acquisition or merger in April of 2016 was the biggest, adding about a quarter of that growth.

And on slide 74 we just show the Venn diagram of the uniting of our objectives, fast-growth markets and quantitative and digital, and where they intersect. You can see that the vast majority of the deals that we did were very focused on our strategic acquisitions. And our return on equity remains strong, just a fraction under where it was last year, at 16.2%. Weighted average cost of capital has come down from 6.7% to 6.4%. So, very healthy returns.

And we're very focused on the creative reputation. For the sixth year in a row WPP was voted the most creative holding company at the Cannes festival. Ogilvy, Y&R, Grey, Thompson were four of the leading seven agencies that came positions one, three, six and seven. Ogilvy was network of the year at Cannes. Two of our other agencies were in the top three of Cannes, two and three, that was Grey and INGO. And Ogilvy & Mather was voted the EFFIE most effective agency of the year, as was WPP at the holding company level, and also in the WARC awards.

Just, finally, outlook and conclusions. Another record year, complemented or fueled with strong currency tailwinds, particularly in the second half of the year. Very strong reported revenue and net sales growth of almost 18% and like-for-like net sales growth of over 3%. Reported margin improvement of 50 basis points and 30 basis points like-for-like. And headline diluted EPS growth of almost 21%. So we had record absolute revenues, net sales, headline EBITDA and headline PBIT margin. The return on equity, as I said, was 16.2% versus weighted average cost of capital of 6.4%. And the dividend was raised to 56.6p, up 27% almost, and a 50% payout ratio. Net debt to EBITDA ratio, in the middle of our target range of 1.5 to 2 times, at 1.79, to be precise. And increasing tail winds, as you can see, of ForEx going from 4% in Q1 to 19% in Q4, with 10% being the figure for the year. Net new business was strong but not as strong as the previous year. And a relatively slow start to January of 2017, with like-for-like revenue up 1.5% and net sales up 1.2%, above budget but against a stronger comparative last year.

Our long-term financial model remains the same: organic revenue and net sales growth of 0% to 5%, in line with margin growth, market growth. Margin improvement of 30 basis points or more before currency movements, with the long-term target of just under 20%. And acquisitions adding another 0% to 5% in terms of growth. Using our substantial cash flow to enhance EPS through acquisitions and share buybacks and bank debt reduction, target acquisitions GBP300 million to GBP400 million a year, of about GBP1.6 billion of free cash flow. Share buybacks in the 2% to 3% range and a payout ratio of 50%.

The incremental share buybacks of 1% to 2% that we've been doing over the last few years, I just want to point out, is equivalent to an impact on EPS of an incremental 20 basis points. So, that goes back to the date when we were very focused on 50 basis points of margin improvement. If you put that little lot together, that's the 0% to 5% organic revenue growth and the 0% to 5% acquisition growth, that would deliver, plus the margin improvement, 10% to 15% EPS growth.

As far as 2017 is concerned, our budgets indicate like-for-like revenue and net sales growth cautiously set, as usual, at around 2% with a stronger second half. Margin improvement in line with the 30 basis points of margin improvement excluding currency, off a constant currency base margin, as Paul explained, of 17.3% versus the 16.9% in the previous year. And acquisitions add at least 2% to 3% to revenue and net sales. Current exchange rate, the full-year currency impact in 2017, would be 5% in terms of additional benefit to revenue and net sales. And staff costs and headcount remain controlled to deliver the margin target. Last but not least, the operational effectiveness program and efficiency program is supporting that future margin goal.

There's a lot of material that we've included in the leave-behind, both for the 31-year history of the Company and also background data. But now we're open for questions.

(Operator Instructions)

Our first question is coming from Peter Stabler from Wells Fargo Securities. Please go ahead. Your line is open.

Thanks for the question. I wanted to turn to slide 21 in your presentation, please, on margins. Just a couple questions for Paul. With the progress in Europe on the return to some consistent growth here, wondering if you could comment on the margin profile in Europe and whether this fairly significant gap we've seen over the last couple years between Western Continental Europe and the UK and North America would start to close as the growth metrics close a bit. Thanks very much.

Yes. It's a good question, Peter. I think we're very pleased with the margin improvement in Continental Europe. It obviously has been aided by a couple of years or at least two years of restructurings that we've had to undertake. And as you fully appreciate, part of the management of our business is about the frictional cost of change.

So, when revenues deviate from a set course in North America, it's very easy and relatively quick to make the changes and have the return economically within three to six months. Europe it's more like a two year return for any changes you make on of staffing. So, obviously in a benign environment, when all improvement in general economies is rising it is a little easier.

I have to say, still, in our view quite choppy in Europe in certain markets. And obviously you can see good growth in Germany coming through. But not all markets are the same. So, markets like Spain have been through a tough time and recovering nicely. Italy, again a tough time but the market leadership position. Some of those markets have not had a dramatic deterioration in margins over quite that time. Other markets like Greece and even to a certain degree Turkey, which are much more volatile, have a changing scenario.

So, you're right in theory, but it's a large number of quite small markets, and that doesn't make it particularly easy to be efficient. So, part of our infrastructure, back office projects, two elements are quite interesting. One, in certain cities we're putting all our businesses into one location. We've got a big project going on in Madrid this year, the same coming up in Milan and Amsterdam. That should get tremendous efficiencies and synergy almost regardless of the market environment. Likewise, on the shared financial service centers, whilst there is investment cost the ultimate benefit of efficiencies, both in the controls and in the working capital, are quite significant.

I think, yes, you're right in a benign environment, but I only go back two years to see what a difficult time we had in Russia and how difficult that was to extract ourselves and return the margins to more normal levels 24 months later. In theory you're right, but I would hesitate to say. It's a large number of quite small units, a large number of countries, which makes the blending to get to the margin likely in North America quite challenging.

Just to add, Peter, the costs remain high of restructuring, in even a substantial period of time after the recession of 2009. And we're looking hard at it but we remain quite careful in terms of the structural costs that we have to take.

Thank you. And a follow-up for Adam, if I could, going back to your forecast for advertising spend in the US. I was a little surprised at the weakness of the forecast of 2.6. Is that a function of comping political? Or do you think that there's a bit of weakness or that the digital tailwind is slowing in the US, or something like that? Thanks.

I think there's a comping element there. The forecast was made in November. Digital, we'll be revisiting this in June. I'm hoping we'll see a little bit of an uptick there in the headline rate, in the digital growth rate and maybe the absolute digital figure.

It depends, Adam, on what happens with the new administration's implementation of its economic policy.

I'm hoping we'll have the perspective on that. The impression I'm getting that it's as you say it's a pro business agenda. That alone one would hope would stimulate some planning. But yes, I take the point, Peter. Thank you.

Thank you very much.

The next question is coming from James Dix from Wedbush Securities. Please go ahead.

Good afternoon. I had a couple. Maybe the first one, just relates to the outlook, I think, on the UK. At the UK meeting you were fairly granular, Martin, in saying it was about 100 basis points headwind from two account losses leading to the 2%. My first question is just the difference in the granularity you seem to be able to give in terms of the impact of some large losses like that as opposed to in times where you have net wins, which is the more normal case, it doesn't seem as though we normally get from you a line drawn between wins and a certain increment to organic growth. So I was just curious about how you see that when you look at your outlook.

I think the answer, James, is that you can be much more definitive, unfortunately, about losses than you can be about wins. The budgets are usually prepared on a conservative basis. So you had to put it through that lens. But if you're looking for the reasons for the difference between 3% and 2%, that's 3% where we'd like to be and 2% where we think we are. The most easy explanation for it would be those two particular losses which total just under 1%.

Okay. Great. And then just looking more broadly beyond just 2017, are there large secular forces which are pressing against each other in terms of the growth which your business can see? For example, downward from procurement but maybe upward because of the complexity of marketing increasing and increasing the role for you to perhaps participate in planning below the line as well as above the line? I'm thinking at some point the industry's going to break out of the 3% to 4% growth range one way or the other, and I'm just wondering whether you agree and what your top suspects would be for driving it one way or the other.

It's difficult to be in the forecasting business, given the misstatements or the misforecasts that have been recently in other arenas. But I think looking at it fully in the face, you have to come to the view that absent -- one of the reasons for an upside breakout, let's say the complexity outweighing the procurement pressure. And I think at the moment one would have to say that it's unlikely that we'd see a breakout, for example, on GDP growth globally of more than the range of estimates that the so-called experts are predicting, let's say, 3.5% to 4% nominal at a global level.

I think the scenarios, as we tried to point out, the first is the general conditions at low growth, low inflation, limited pricing power and therefore a focus on cost. The three factors -- technological disruption, zero based budgeting, and activist investors -- that forces a more short-term approach. And it's interesting that companies that have [GIB] capital structures such as Snap, which was floated with probably one of the most controlled structures, they maybe can take a longer-term view.

Having said that, I think where you're seeing the differences between packaged goods and technology and pharmaceuticals. Pharmaceuticals is mixed with some companies investing more and some not because we did are the Valeant and Endo models that put a lot of pressure on the pharmaceutical companies.

But I don't, just directly to answer your question, see reasons at the moment for an upside breakout -- or, indeed, a downside one, by the way. I don't think interest rates are going to increase sufficiently in relation to historic levels to cause problems. They may increase but not to such a significant level relatively that that would cause problems. But I think it's likely that we remain [locked].

The one rogue elephant, in a sense, is what happens in the US. It is a pro business regime, a pro growth regime. The question is whether those measures, whether they be tax, repatriation, infrastructure, whatever, are implemented quickly. I think the indication the tax bill would be brought in or presented in August. Some commentators believe that's a very fast time track and it would take longer and you'd spill over into 2018.

The border tax, there's debate as to whether that's going to happen or not. I think most people believe it's a very difficult bill to be passed through Congress. And of course, that would cause problems in terms of growth in the US.

US is $19 trillion out of $70 trillion out of worldwide GDP. If the US grows at 3% instead of 2%, and 3% was the long-term growth rate before Lehman, that might make a significant difference. But I think that's going to take a little bit of time.

And then when it does happen, how long will it last because there's a big deficit in the US anyway of $20 trillion. So whether we'd have increased inflation would bring a check after two or three years.

I would say net-net you stay in the range of 3% to 4% worldwide GDP and make your adjustments from there. And then advertising as a proportion of GDP remains pretty much the same, with the fast-growth markets maybe a little bit more and the mature markets a little bit less.

Great. And then maybe one for Paul. You talk a little about the impact of shared services and your IT projects on the margin target longer term. Do you have a specific target for savings this year? I think in the past you've given some kind annual breakout in pounds. I didn't know whether you had anything like that this year. And then I had one last one for Adam.

I think you're right, we have given targets. I think we are in line with the gross savings but I'd say that the implementation and the task is probably more challenging than anybody anticipated on day one. I think to be honest there's going to have to be some reinvestment this year to ensure that the service maintains the quality that we're used to whilst we're transitioning across to the new model.

I think in one sense we may have been a bit guilty of trying to move too quickly in certain areas. And whilst the savings are there in dollar terms I think there is going to be a period this year in part in reinvestment. But actually that sets us up well for, I think, a steeper curve of the savings coming through in late years.

The project overall is on track. There's still an awful lot to do. But I do believe that actually everyone understands where we're trying to get to. The speed in our organization is pretty challenging whilst we're trying to run business as normal with pretty significant investment in digital on a daily basis.

So I'm pleased in terms of direction. The speed I'm a little disappointed with and therefore some of the real savings or net-net savings not in line, are probably a little bit later coming through than we originally thought, but actually they're still there.

So, I hesitate to give you a net answer to this year but I'm not making a massive assumption in the budget for the saving from the IT project in 2017. We really should see some delivery coming through in real terms in 2018. But that's actually quite good news, in my view. I'd say it was a little bit of a drag on the profitability in 2016, to be honest with you. So I think it's a little later but in the same dimensions we laid out at the very start of our project three years ago.

Okay, great. Adam, I think in the UK call this morning you mentioned in your outreach that you're doing for your digital update, you're going to ask a little bit about pricing on Google Preferred relative to other options like TV. Are you going to be asking about specific demographics, like younger demographics? And do you have any sense, even at this stage, as to whether any premium or discount between Google Preferred and TV varies materially by how you ask the question, what demographic you focus on?

I keep it deliberately open-ended to see how they respond. My impression is that if you're asking a TV buyer, typically, or somebody who's principally TV, they will look at Google Preferred as a kind of even weight alternative, as a top-up for reach and possibly with an element of engagement. In other words, I think you would be looking at a pricing equivalence there. The talk of the premium comes in when you look at the rates achieved at Google Preferred and then compare them to other demographics which may not be as natural or most efficient delivery.

So where I think this is leading is that, yes, in theory there are multiples, 4 times TV, even as high as 8 times. But whether these will be practical buying audiences is quite another matter. The second part is that the demand, which I haven't yet uncovered, is the demand for Google Preferred coming out of core TV or is it coming from other sources, perhaps alternative video streams. I'm getting the sense that for TV pricing purposes Google Preferred's core market, which is an under 45 audience, is probably trading at something like the TV rate.

Okay. Great. Thanks.

The next question is coming from Brian Wieser from Pivotal Research. Please go ahead.

Great. Thanks for taking the question. A couple first about programmatic trading and related activities and a second one on margins. On programmatic, first of all, part A, in the (indicate) to indicate that Xaxis grew by 15% year over year, I just want to clarify if that includes Triad. And relative to the first half, there's an indication of 25% growth. At the same time, the absolute sales figures were identical. So, I just wanted to get some clarity around what went into those numbers.

More conceptually around programmatic, there's a continuum, as you know, between the full managed services -- a la Xaxis -- to a brand-based trade desk inside of one of your agencies or marketers taking components in house. I'm wondering what you're seeing in terms of that trend in terms of what elements marketers you're seeing taking what parts in-house and why versus what they choose to leave with you or let Xaxis do.

And then the second question about margins is, we know clients are trying to squeeze on like-for-like revenues, and you grow your revenues by adding new services, but are they trying to manage your margins, as well, when it comes to individual accounts?

Xaxis, I think, has not been dramatically impacted by Triad because the revenues at Triad we have brought are only the one month of December. So, really, what you're seeing is the vast majority of the Xaxis business in its pure form for the full year and around 15% growth globally. Obviously we have taken into account the expansion in some of the other markets.

So, I think what you saw early on was there was a very quick pick-up in Xaxis revenues in some of the newer markets that it had gone into last year, particularly in Latin America, which was very strong, starting from nothing. I'd you say 30% to 40% rates of growth we saw very early on in the year in some of these new markets as it became embedded into those markets.

Overall on a global perspective, 15%, 16% is approximately the right number, in our view, representative of how the growth in the Xaxis business was overall. So, Triad really had very limited effect on these numbers.

On in-house, Brian, my colleagues at GroupM would be closer to it than I. But I don't detect any significant increase in in-house activity. I haven't seen their one or two celebrated examples of it historically, but if anything I've seen an erosion of that.

And I think, as we said a year or so ago, it's difficult to do that internally with one client. You might start with a good technology or good technological base but retaining the people on one client or one set of brands inside a client is not easy. And then updating the technology is not easy.

On the question of managing margins, I wouldn't say necessarily managing margins, but there is no doubt that procurement has become, as we said in the statement, in some cases become equal in influence to marketing. And I would have to admit that in some cases it's become even more powerful than marketing, again with this focus on the short term. And that's not helped by the technological disruption that we've seen or the zero-based budgeting approach that many clients are looking at.

So, I wouldn't describe it as managing margins but I would say there has been pressure. And as you look at the results of our competitors, you can see some who have been prepared, for example, you've seen net working capital outflows which clearly indicate that they are prepared to extend lengthier payment terms. And whether that's the right criterion or which to select a creative agency, a media agency or whatever is another question, but it is indicative of the type of pressure that we see.

So, I wouldn't say they manage our margins but I do think that there is a significant focus on profitability. The irony about that is that when people talk about transparency with the technological platforms such as Google and Facebook, there is no transparency. And when you look at margins, the margins are obviously considerably higher. And when there is the criticism or the concern about brand safety, that really is better placed with the platforms or engines that place the advertising than necessarily the agencies. So I think it's not about managing the margins, it's just the general level of pressure that there is in the system.

Thank you very much.

The next question is coming from Dan Salmon from BMO Capital Markets. Please go ahead.

Good morning, everyone, or good afternoon on the other side of the Atlantic. As referenced before, Sir Martin, you mentioned this morning on the earlier call a couple specific account losses that were impacting the view this year. But maybe from a higher level, could you walk us through a little bit more what your expectations are in there, maybe by region and then by vertical? Obviously the account moves in question around auto and telco will be impacted. But are there some verticals, in particular, out there where, despite all of the issues we've discussed about macro, are you seeing new product innovation, or maybe you're a little more enthusiastic or likewise seeing some structural issues?

Technology, clearly, whether you're talking about companies like Google or Alibaba or Huawei, for just some examples that immediately come to mind, pharmaceuticals, we're certainly seeing innovation. There is concern on the procurement side but there is significant innovation, as well. Autos is very dependent on new mobile introductions. Retail, a lot of activity but of course with the online battle, the e-commerce battle that's taking place between physical retail and online retail, although there are omnichannel models, obviously there's a concern about cost as well as where investments should be made.

Geographically, I think I'm a little bit at odds here with some of the things that Adam has said. My sense is, you can see it in the stock markets in the fast-growth markets, if you look at it geographically, it seems to me that Asia, Latin America, Africa, the Middle East and Central and Eastern Europe, despite the challenges that China and Russia, for example face. China we probably at the end of this year will have a clearer picture after the People's Party Congress as to the nature, the composition of the politburo and how the second five years of this current Chinese politburo will pan out.

Obviously there's been the anti-corruption drive and the focus on quality growth in the first five years. The other question to answer is whether it will go beyond 10 years, whether the current structure and leadership will remain in place for even longer. So that has to be sorted.

Brazil is showing some signs of bottoming. Russia, as you see from our numbers, is getting a little bit better. And India, of course, remains the one shining star, and demonetization didn't really hurt it.

I think Latin America also is very interesting. Mexico obviously has been challenged by the debate, if I can put it that way, between the US and Mexico. Argentina is showing strong signs of life under Macri. Mexico, I think, will recover. I think it's too important to both the US and Mexico itself for it not to. Countries such as Colombia and Peru are showing reasonable growth. And of course, as I said, Brazil is improving.

Africa, a bit enigmatic. You may have seen that Nigeria -- obviously there are issues in South Africa -- Nigeria for the first time, I think, in 25 years, its GDP fell. That's obviously oil price driven. North Africa we see a little bit of progress.

Middle East very mixed. Lots of opportunities in Saudi and in Dubai, but very mixed. And Eastern Europe, probably getting a little bit better.

So, I would say those countries are, functionally I think it's the same as before. Digital obviously is where the significant opportunities are. And the application of data to that and media and new media obviously, as well.

Public relations has been a bit more lively recently in the last couple of years, particularly as it's expanded into social and content. And branding and identity is actually getting stronger and that project base business has got stronger. Healthcare, as I said, is mixed depending on pipeline. And, of course, digital, as I already said, is very strong. So there are significant opportunities.

But coming back to, I think it was Peter's question before, do we see growth patterns overall shifting dramatically -- no. Again, if you look at the results we included, that slide on our leading clients, which cover many categories, not just packaged good, but would cover pharmaceuticals, autos, and some technology. Overall, top-line growth has been difficult to find.

When you read the newspapers or watch so-called pundits on television, you get a lot of things are getting better economically. I'm not sure that that is necessarily so. I think, if anything, things are tending to tighten rather than get better. And you can see that in what we see in Q4, and you can see that as we conservatively look at 2017. And I'd rather be conservative on the top line at this stage of the year, in particular, than be expansive.

Great. And then if I can slip in one quick follow-up regarding the DOJ subpoenas that are looking into in-house production units. I think most investors have done their work around this and recognize these are fairly small parts of your overall business and for your peer, as well. But one common question that we will still get is along the lines of -- I'm worried that they're going to find something else. Are you worried based on what your knowledge is of what the DOJ is looking?

No.

Okay. Thank you.

The next question is coming from Doug Arthur from Huber Research. Please go ahead.

Thank you. Two questions. First on North America, in the fourth quarter, 0.5%, how much of that do you think was due just to the tough comp as opposed to perhaps some spending uncertainty around the election and any residual impact of the beginning of these account loss things? And then I've got a follow-up.

I think it was a mixture of all of the above. It was, I think, primarily the tough comparatives. Secondly, one account loss to AT&T was effective I think from November, not VW.

And I think if you look at the pattern, I think we often talk about, our competitors talk about project-related revenue in Q4. We don't look at it that way. It's not project. It's just the volume of our activity. Our profitability is one-third first half, two-thirds second half, and broadly 40% in the fourth quarter. That's the volume quarter.

I think what happened in 2016, for the first time for some time, and it was completely the reverse in 2015, we do get conservative forecasts. We outran our Q3 RF. I'll call it a three-year revised forecast, which is probably done in October. So, it's really into Q4 that we made the forecast. We outrun that in 2016 but we outran it very heavily in 2015.

So I think coming back to the mood for a minute, the mood probably is best be described as more cautious in relation to spending in the fourth quarter, for whatever reason, whether that was because people were looking at 2017 and curtailing spending in advance of 2017, or not growing as fast as they did in 2015. But I think the answer to your question is a mixture of all those things impacted Q4 in North America.

Okay. Great. And then just as a follow-up, you did an interesting affiliation deal in Iran in the fourth quarter. How does that position you there? And what do you see as the outlook in Iran?

It's very difficult because it's not clear what the approach of the new administration would be. The old administration was very keen. And, in fact, as late as August of 2016, late August, at the so-called Summit Davos meeting in Geneva, members of the old administration were very keen to stimulate investment and investment activity in Iran, the reason being that having come to the Iranian nuclear pact, I think the American government was keen to indicate that there had been investment activity by US corporations because people in Iran, the, let's say, extreme end of the spectrum are saying -- what was the point of having done the nuclear pact in the first place if there wasn't investment activity.

Now, I think companies were hesitant to make investments there because they didn't know what the implications and the banking sanctions or the banking procedures, as I understand it, for doing trade with Iran are still extremely strict and extremely difficult to navigate. So, levels of activity, my sense is that levels of activity are very few and far between.

The affiliations that we did are pure affiliations. There's no equity investment, just relationships. And I think the answer to your question is that where we're involved in pitches and presentations, where clients -- and there are current ones at the moment -- have Iranian operations -- and many Western corporations do have those operations -- where they are, it's a useful adjunct to our presentation. And the people we have affiliations with cover a broad range of areas in our advertising and marketing services.

So, the potential is there. But I think the fundamental point is, what is going to be the attitude not just of the US administration but the UK government, the EU, to trading with Iran, given political situation and other issues.

Great. Thank you.

The next question is coming from [Kunar Oshi] from Kepler Cheuvreux. Please go ahead.

Yes. Thank you. A couple questions from my side, as well. Just to go back to the fourth quarter in terms of your advertising media investment management business, on the gross revenue side I think, if I'm not wrong, organic growth slowed from 6.2% nine months to 2% in Q4, which implies high a single-digit decline for the fourth quarter. Is that -- I guess the biggest component of that is Xaxis principal billings. Are you seeing a pushback from clients in terms of that practice in the context of overall tense situation in the US media buying space? That's the first question.

It's not the biggest single component of what you referred to. And I think you've got to look at net sales rather than revenue. We've had that debate before as to the difference between revenue and net sales and the importance of looking at net sales.

The Xaxis component of it is relatively small. It refers to, it's the comparatives last year and it is also across a broad spread of the business. You can't point to it. I would say the expansion of Xaxis has been more international than US domestic. But I don't think you can point to that and say it's a function of Xaxis.

It's very dependent on the media mix at any one time that the clients buy with. Even split between the various digital mixes can affect whether we have to record it as billings and therefore revenue which has the inflated effect. The mix of clients we have and they work actually quite different in some of the programmatic areas in the tail end of 2015 and the tail end of 2016. So, that had an impact, as did the media.

We have really tried to urge you not to pay attention to the revenue line because of this volatility. And this is one of those areas where there is volatility and we urge you not to pay attention to it.

When you think of what we're trying to achieve, to be quite frank with you, we're trying to get efficiency through our platform. We're trying to do as much research as possible in-house rather than provide in from external sources, which is all really driving the net sales line and not really directly or so much impacting the revenue line or the billings line. The more efficient we are at trying to work with these platforms after the investments we've made, and the research that we can achieve from in-house sources, that is going to distort the relationship between revenue and net sales.

Okay. And a question on guidance -- your current budget's at 2% organic growth for 2017, slightly below your typical average, stemming from the known losses, which is perfectly understandable. But you're keeping your constant currency margin growth target. I'm just wondering, is there anything in the mix of what you're seeing in terms of your budgets in 2017 that would allow you to maintain margin growth at a lower organic growth level knowing that pressure, in theory, in US media buying where margins are structurally higher? And I think Paul you referenced the IT savings being more a factor for 2018.

You're automatically -- the implication of that question, you make a statement that margins are structurally higher. I'm not sure that's true. I can't speak for others but we give you the margins across all our businesses. You're looking at slide 21 at the minute, which we have margins that are higher in the US, 19.4%, but UK is 16.5%. The lowest is Western Continental Europe, 14.5%. And then Asia-Pacific, et cetera, is at 17.2%. So I'm not sure that I necessarily would agree with you or the implication that the structural margins in the US are more.

As far as the 2% versus the 3%, it's early in the year. That's number one. It's on the basis of budgets, which we said in the release, as usual, hopefully, are conservative. January you saw, although it was at a low level, against a stronger comparative last year, was better than budget.

So, I think what I would say is it's early in the year and you just have to wait and see. It's structurally in the budget. I don't see anything else other than if I look at the growth it's more second-half oriented. That's one thing. And secondly, it's more geared to, I recall, in the fast-growth markets of Asia and Latin America and Africa and the Middle East and Central and Eastern Europe.

That, I'd just refer pack to what we said before when you look at what's been happening, for example, in stock markets which are usually 12 to 18 months ahead of what's happening in the real markets or in real results. We're seeing a little bit of improvement.

The swing factor in relation to North America is what we discussed before, which is when does the new administration's policies, the pro growth, pro business policies, kick in. Atmospherically, as Adam mentioned, it's already made a difference, I think, even in a short period of time. And the atmosphere is very different. But, of course, in terms of results and hard figures it hasn't as yet kicked in.

I think we can deliver, to your point, at 2% in the margin improvement, 30 basis points. After all, at 3.1% on a reported basis we delivered 50 basis points. So, I think there is scope.

Part of what you're saying is -- are you prepared to go for revenue growth at any cost or do you want revenue growth which has levels of margin. And there's alternate strategies here, just like there is in relation to payment terms, for example. You can either say that's something you're not prepared to do or something you're prepared to do. And obviously if you do go along with it, there's a cost of doing it.

Understood. Just one final question, maybe for Adam. I think your comments about the percentage of online ad spend was big brands as opposed to long tail. Surprised that it was as low as 30% for big brands. That's understandable for Google search long tail, but would have thought Facebook was more big brand oriented. Is that not the case? I think you gave the number around GBP1.7 billion of spend going through Facebook from GroupM in 2016. So, again, is there fear that some of the agencies as an industry are missing out on some of the big brand spending on Facebook?

I think Facebook itself said that 25% of its revenue comes from the top 100 advertisers in the fourth quarter. WPP from time to time gives indications of what it's spending with these vendors and it's in the order of, I think, 6% Facebook and Google in 2016. So, just multiply that through, make an assumption about our market share, make an assumption about business done direct between clients and these larger vendors, and you're going to get to somewhere between 30%, or, as Rob Norman says, 40%.

Facebook itself talks about -- I can't remember precisely the statistics, but it talks about half of its business being with the long tail and it's a phenomenal number. I'm sure they'll give you the statistic if you ask them for it. I think Carolyn Everson has given the statistics out. There is an incredibly long tail there. And the same thing applies to Google. So, the pattern of clients of Google and Facebook are very different than the pattern of clients of ourselves or our competitors in relation to big brands.

Fair enough. Thank you.

We have no further questions at this time. I would like to turn the call back to the speakers.

All right. Thank you very much. I'm here in London with Paul Richardson. Fran Butera and Lisa Hau are available for any further questions. Thank you for joining us and we'll see you at the end of the first quarter. Thank you.