WPP PLC (WPP) 2018 Q2 法說會逐字稿

Good day, and welcome to the 2018 WPP Interim Results Teleconference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mark Read, WPP's CEO. Please go ahead, sir.

Hi, and good morning to everyone in the U.S. It's Mark here, and I'm here with Paul Richardson, our CFO; and Andrew Scott, our Chief Operating Officer.

I think what we'd like to do today is to talk quickly through the results for the first half, a little bit about how we see the future. The presentation this morning is online and then really give you the chance in the U.S. where most of you are to ask any questions that you have. So we'll try and keep the front bit shorter rather than longer.

I think before Paul takes you through the numbers quickly, just to put the results in context and how we think about them, I think the good news is that it's the first quarter of positive growth in WPP in 4 quarters. Our last quarter was Q1 2017 at 0.7%, so we made 0.3% for the first half. I think that's positive. We're not declaring victory. I think we have the July number in the statement, which takes us again to 0.3% for the year, but we are expecting to hit that number -- well, not hit that number, we are expecting to raise our net sales revenues, less pass-through cost growth slightly in the full year to a similar with first half.

I think the second relevant metric is the headline PBIT operating margin. It's slightly lower from 13.7% to 13.3%, and Paul, I think, will go into that piece of it in a little bit more detail in his presentation. To put that in context, it's around GBP 20 million out of a cost base of GBP 5.3 billion. I think if you look at the control of the cost, we had good control of our staff cost. We invested some of the margin back into incentives. And we saw some slippage in G&A and establishment and bank debt, largely as a result of the mix of the growing and more challenged parts of the business. And we're saying that we expect a similar operating margin for the full year.

And then the third number to think about is proceeds from disposals of GBP 676 million against the target we set of GBP 750 million in April. And Andrew has really been leading this. He has done a fantastic job of raising money through largely minority investments in associates that no loss of revenue associated with those and at a minimal loss of earnings. And that helps move our leverage ratio that much closer to the target that we reset in April of 1.5x to 1.75x.

And at the same time, the dividend is being maintained at a strong level. The payout ratio at 53%, somewhat above our 50% target.

So I think on balance, we have returned to top line growth and we've made progress doing that in a -- on a sustainable basis, and that's really going to be our focus.

I think you ask how we're doing when you go back to where we were in April, we said our task was making sure we focused on clients and our people. And I think the key metric looking back is how competitive we are in reviews. I think of the 8 major client wins, we won 6 of the 8. I know some attention on reviews where we're the incumbent, based on 3 out of those 4 reviews, we've been successful.

And we've really focused on bringing new people in, new approaches to client pitches, making sure that we really embed the best WPP talent in those reviews and all of our data and technology assets in a simpler structure with more effective cooperation across the group. I think we've had some success in that. So I think, while the nature of our business is there are always reviews, I think we've demonstrated that -- and it was a transitional phase, to some extent -- the company is competitive, and WPP has a very strong set of assets that clients want.

So I'll come back a little bit more to how we see the future, but I think it's important to put the results in that context. Maybe Paul can take us through them quickly.

So I've got work with the slides on the screen. Yes, Mark has really covered a lot of the highlights on the first slide, Slide 3. The key points, as he mentioned, obviously, was the like-for-like revenue less pass-through cost growth of 0.7% in quarter 2, making 0.3% for the half year. We've also made it clear that North America is our -- still our most challenging market. And actually, the decline in North America was greater in the second quarter at minus 3.3% compared to quarter 1 at minus 2.4%. It was challenging in the advertising, data investment management and brand consulting areas, but good improvement came through in North America in our media investment management business. But it remains a very high priority if we are to improve the overall group's performance.

We've talked about and there's a very detailed, which is kind of helpful waterfall chart, as we call it, on the margin difference, which basically shows that the staff costs remained flat. The staff costs before incentives is slightly better. Incentives, however, were slightly higher, which actually netted out to the staff cost ratio being flat. The other elements of change were some property costs of 0.1 and other operating costs of 0.2, making an overall change of 0.4 margin points in the half year, which is likely to be the expectation on a full year basis compared to last year's margin. So basically down 0.4 on a full year basis as well as a half year basis. Had we had kept staff under good control and headcount, on average, would be reduced by 2,000 staff or about 1.7%.

As we mentioned, very good progress on the cash proceeds from disposals with no loss of revenues to group and minimal impact on profit, so far, of which at the half year, asset disposals had just actually come into the June balance sheet on the 29th, in most cases, of GBP 469 million. And the net debt at June to June was GBP 84 million better. We'd hoped for slightly better position as at June, but we didn't have a particularly good working capital position at the end of June.

However, one month later, looking at the July-to-July position compared to a year ago we're GBP 508 million better, reflecting most of the disposal proceeds that are in, i.e., the GBP 469 million, with the remaining GBP 207 million from AppNexus and oOh!media actually coming in in late August and early September. So those are still to hit the benefit of our day-to-day cash position.

Dividends, we maintain, as I mentioned, flat with last year at a 53% payout ratio for the half year, and full year guidance updated to reflect the performance in the first half.

So with that, I'm going to move on to Slide 4 on the IFRS statement. And really, the key difference here is that we did have some exceptional gains in accounting terms around GBP 190 million. They show up in the operating profit line where we had a net gain of GBP 143 million and, hence, the constant currency growth in operating profit from GBP 724 million to GBP 842 million, benefiting from that net gain in the strategy numbers and, likewise, in the PBIT, or profits before interest and tax. The net gain impact there was GBP 114 million. Again, so improving the constant currency rate of growth. So actually, in the reported diluted EPS, we are 20% stronger than a year ago at 53.4p.

The analysis on Slide 5, the headline results, we've broken out for you in the reported impact, which obviously is with the impact of foreign exchange, which, on average, the first half has been 5% negative the constant currency basis by removing the impact of foreign exchange, but does include the organic and acquisition growth. And we've also, for both revenues and margin, show the like-for-like performance of the business. So on revenues, on a constant currency basis, we're up 2.9%. And on revenue, less pass-through costs, on a constant currency basis up 1.4%. And then we show the like-for-like equivalents.

As Mark mentioned, in the PBIT, the difference between the GBP 882 million last year and the GBP 821 million this year, which is GBP 61 million, of that, foreign exchange is GBP 41 million. And actually, underlying operating performance is GBP 20 million. We show you the margin at 13.3%, which, on a like-for-like basis, is a 0.4 change and on a constant currency basis is 0.5. That has resulted in earnings diluted EPS down 1.3% on a constant currency basis to 42.60p. As I mentioned, dividend was held flat on the first half. I'll come onto net debt later in the presentation.

On Slide 6, we just basically show in graphic form the modest improvement in -- from quarter 1 organic decline of revenues at 0.1, with slightly easier comparisons, it's fair to say, in quarter 2. But like-for-like growth in revenue less pass-through costs of 0.7%, making 0.3% for the half year. Acquisitions remaining constant at just over 1% in the first half.

Slide 7 shows you the currency impact, which is beneficial, around 4.6% in 2017 is a headwind and against us in the first half of this year by minus 5%. And on a full year, we're expecting it to be a headwind of minus 3% on full year 2018 basis.

Turning now to Slide 8, which is revenue less pass-through costs by region. We do show the break of the group in terms of North America, representing 35% of our business and has a like-for-like decline, as I mentioned, in the first half of minus 2.9% being slightly worse in quarter 2, where it was down 3.3% compared to 2.4% in the first quarter. United Kingdom, around 13.5% of the group, pretty constant, 1.5% for the half year, growing at 1.6% in quarter 1 and 1.4% in quarter 2.

Western Continental Europe has had a good turnaround at 21.5% to the business, overall. It grew in the half year basis 1.9%, having been actually flat or down 0.2% in quarter 1 and up nearly 4% in the second quarter. That was partly because we had a very weak quarter 1 in Germany, followed by a very strong quarter 2 in Germany, almost up 6%. And then other markets that were strong in the second quarter, in particular, included Italy, Spain, Holland, France and Denmark.

In Asia Pacific, Latin America, Africa and Middle East, Central and Eastern Europe, it's a better story this year for us with 30% of the business in that region growing overall at 2.6%, having grown at 2.3% in quarter 1 and 2.9% in quarter 2. China, we saw a strong improvement in mainland China, good improvement in Japan, Korea, Malaysia and Philippines as well and a very strong business in Latin America, overall, up 8% with Brazil up 6%.

So good performance in our faster-growing markets this year. That is shown graphically for you, optically for you on Slide 9, where down below, we show the overall growth for the group in the first half being 0.3%. And the faster-growing markets combined growth of 2.6%, and mature markets decline of minus 0.6%. We then break out for you by subregions within Asia Pacific, Latin America, the growth you can see there, Q2 growth in Asia Pacific, 1.8%. Q2 growth in Continental Europe was 3.9%. And Q2 growth in Latin America, 8.6%, all shown there for you to digest.

When I look at the major markets as they are our concern because it is such a large market for us remains the U.S.A., which was down 3.2% last year and is down 2.8% this year. U.K. has had a good year last year at plus 4.8% and is growing at 1.5% this year. Germany is a story of 2 quarters, being almost down 6% in the first quarter, up 6% in the second quarter, so flat half year-to-date. Greater China, as I mentioned, a good second quarter growing at 6.5% and 5 -- almost 5% for the half year. And France has been steady at around 0.3%, 0.4% last year and this.

Breaking China out into mainland China on Slide 11 is even stronger with first half growth of 6.6% with a very strong quarter 2 growing at 9%. Brazil, as I mentioned, solid growth at 6% this year. India is still slightly disappointing, having grown at 1% last year, still only growing at 1%, but is expected to be very good in the second half of the year. It was the country that was most impacted, obviously, by the goods and services tax last year. And it did seem to have an impact on business volumes in the second half of '17. Russia still remains choppy, basically down 5% year-to-date.

If I go through on revenue less pass-through costs by sector. Taking firstly advertising and media investment management business, which is 43% of the business, it's trending overall down 0.8% in the half year, a very similar picture in quarter 1 and quarter 2. Quarter 1 it was minus 0.9%. Quarter 2, minus 0.7%. The data investment management business, which is 15% of the group today, overall, was down 1.5%, a slightly better performance in the second quarter, where it was down 1.3% compared to down 1.7%. Improvements we saw in the second quarter were in the U.K. and good growth continues in Latin America and Asia Pacific, whilst U.S.A. remains challenging.

In public relations and public affairs, which is 9% of the business, a very good performance in the second quarter, having grown at 1.1% in quarter 1, growing nearly 6% in the second quarter to average 3.5% for the year. Good growth in financial public relations in the U.K. and Germany and good network growth in Latin America and Middle East, in particular. The brand consulting, health and wellness and specialist communications business, which, in total, represents 33% of the business, has had solid growth in the first half, 1.9% in the half year, having grown at 1.5% from quarter 1 and 2.2% in quarter 2.

Slide 13 lays out that waterfall chart, which I explained in the highlights in some color makes it a bit easier to digest.

Slide 14 looks at the margins and obviously this is impacted by the business performance and the geographic performance in the top line and any restructuring charges we are taking through the business. Turning to North America, challenging environment on revenues. Margins are down half a margin point, but still a good margin at 16.2% in the first half. United Kingdom, margins are down 0.6 margin points to 13.2%. In Western Continental Europe, a slight good growth in quarter 2. We did take a lot of actions in the first quarter, and the profit is impacted by that. The margins overall are down 1.9%, and it was tougher in our profit performance in the first half in Germany, France and Italy.

In Asia Pacific, Latin America, Africa and Middle East and Central and Eastern Europe, good top line performance overall and improving performance coming through in some of our major markets with margins up 1.1% to 12.3% at the half year.

Doing the same by margin on -- by discipline. So in advertising and media investment management margins overall are down 0.8 margin points from 15.2% to 14.4%. Our data investment management margins are down from 13% last year to 11.9% this year. Our public relations business, margins are stronger, going up from 14% this year to 15 point -- by 14% last year to 15.5% this year. And the brand consulting, health and wellness and specialist communications margins are broadly flat, being at 12.1% this year compared to 12.3% last year.

If I look at the trade estimates of major client wins, they tend to be reporting mostly media, mostly U.S. and U.K. You can see a good volume of growth. So everything that is shaded, that's happened since the 1st of April, both in quarter 2 and subsequent to that. I think Mark will speak in a bit more detail about some of the wins and retentions we've had, but a healthy clip of new business momentum coming through to the group since the 1st of April. Likewise, obviously, some regretted losses on Slide 17 also shown.

And when I look at our internal estimates of net new business wins, I'm at $3.2 billion for the year-to-date, being $1.5 billion in quarter 2 and $1.6 billion in quarter 1. It was slightly less than last year where we were strong at over $4 billion, having picked up in the first half of last year, the PSA business at about $1 billion and $600 million at WBA and $500 million at LVMH media wins coming through in the first half last year, which are pretty strong in our billings internal estimates.

In terms of cash flow, showing you that these businesses have very good cash generations. In our case, after interest and tax, we generated GBP 605 million of cash for various uses. The GBP 605 million was spent as follows. So GBP 178 million was spent on capital expenditure. The increase year-on-year has been on the property and partly the co-locations. And significantly, we kind of just moved in -- or are moving in 4,300 people into -- close to 700 -- 7 -- or 600,000 square feet in 3 World Trade Center on a 20-year lease, which should be fantastic for the businesses concerned.

In terms of acquisition and disposals, you can see here that disposal proceeds of GBP 469 million have come in just -- or the vast majority at the end of June. The initial payments paid for new acquisitions throughout the first 6 months was GBP 136 million. And earnout paid to continuing acquisitions was GBP 38 million, so net-net, a cash inflow of GBP 295 million. And then with share buybacks running at 1.3%, both last year and this year, we have cash generation of GBP 494 million in the first half.

Disposal proceeds are listed out on Page 21 for you. So GBP 469 million in, in the first half and a further GBP 207 million to come in, in August and September, making the GBP 676 million year-to-date.

And then on Slide 22, the metrics we give you now, we give you both constant currency and reported, although the differences are not that material at the half-year stage. So on the year-to-date average net debt, we are still worse than last year at GBP 4.9 billion compared to GBP 4.7 billion or GBP 273 million worse. That position at the end of July had improved to a deficit or being worse by GBP 208 million. What was disappointing for us was a net debt at the 1st of June. Whilst it was better than a year ago, it was only better by GBP 84 million because we did have a slightly worse working capital position at June compared to June '17. However, in the first half of this year, the outflow from December last year to June this year was more modest at GBP 192 million compared to the previous year, where it was GBP 258 million.

And pleasingly, by the end of July, where the working capital position had reversed, we are GBP 508 million better in July than we were last year. The reason why the July point-to-point is higher than the June point-to-point is we pay our final dividend from the previous year in July and, in fact, the amount this year was around GBP 465 million. So the interest cover remained strong. Leverage is still running higher than we would like at 2.1x. And on a pro forma basis, at the end of this year, on the full year effect of the disposals made to date, we'd be running at about a 1.9x net -- average net debt to EBITDA basis.

So on our targets on a full year basis on Slide 23, we're still aiming to acquire new businesses in the range of GBP 300 million to GBP 400 million of new initial considerations, having spent GBP 136 million in the first half. Share buybacks will range between 2% to 3%, having bought 2.5% last year and year-to-date purchasing 1.3%. Headroom remains strong at around GBP 3.6 billion in undrawn facilities and surplus cash. And we are still targeting to achieve the 1.5 to 1.75 average net debt to EBITDA over the next 12 to 18 months in the group.

So finally, on outlook, the financial guidance for the full year reflects what was achieved in the first half revenue, less pass-through costs growth and our second quarter reforecast. And our like-for-like revenue and revenue less pass-through costs growth will be similar to that of the first half, i.e., around the 0.3%. The target for full year headline PBIT margin is similar to the first half, i.e., a decline of 0.4 margin points on a like-for-like basis compared to last year.

And with that, I'd like to hand over to Mark.

Thanks, Paul. So I'll just talk briefly on kind of how we see the strategy evolving. It's early days. I mean, to some extent, it's my second day on the job, though Andrew and I have been working on this for the last, I think, 4.5 months. And we haven't been standing still. We've been getting on developing the thinking, there's work underway within the company to implement what we're doing. I think the starting point is that I'm optimistic about the future for WPP and for our industry. When I talk to clients, and I talked to lots of clients and listened to lots of clients over the last 3 or 4 months, they value what we do, but they want us to do some things differently.

They value the strong set of assets we have. The 130,000 people in 112 countries around the world help them build their businesses. We are, in most cases, one of their most important partners, if not their most important partner in their business. And they want us to succeed and prosper. They value the technology and data capabilities that we bring. And they want to have easier access to them. And when I listen to clients and if our task is to return WPP to sustained growth, I think we need to start by focusing on what our clients want. They want us, in simplistic terms, to be easier to navigate, have fewer silos within our organization, have more resources placed on the things that they value, creativity, technology, data. Then fewer of the things that they don't value, back offices, finance functions.

They want us to continue to have a broad geographic spread, but make it easier to organize our resources in far-flung markets to help them succeed in local markets. And many of them think about individual local markets in much the way we're increasingly thinking about. So I think that we inherit a tremendous set of assets and capabilities inside the group, and the goal now is to return to growth.

On Page 26, the page on how we see the world, I've left this unchanged from April because I think we see the world in an unchanged way, this continued demand for clients for what we do. The fact that consulting companies want to enter our market, I would say, makes it an attractive market, so I'm optimistic about the opportunity, but we need to recognize the challenges facing the industry. The changes are structural and not cyclical. When -- and we're not going to go back to doing things in the old way, so it means WPP changes the way it operates.

We are increasingly competing with the consulting firms, though, that is in the fast-growing segments. And I'd say, it's still at the margin rather than in the heart of our business. And in terms of absolute dollars impacted, it's not large -- probably not large enough to impact our organic growth at this point. But I think it's increasingly to recognize that. And it is the case that Amazon, Facebook, Google and Tencent and Alibaba are competing for talent, competing for attention from clients, seeking more direct relationships and disrupting our market.

And that puts implications for us in terms of how we understand those platforms and work with them and do that more -- most effectively. So I think you see a world where there's continued strong demand for what we do, but where we need to change how we operate if we want to grow in that world.

So that on Page 27 what we call the path to growth, how do we get WPP back growing. And we've had one quarter of growth, so it's too early to declare victory, though it is a positive step. It starts with the vision for the group, where we'll invest and where we will grow and how we have to focus our portfolio on the faster-growing parts of the business which really are in that area around the intersection of marketing and technology.

We need to focus on our clients. And if we do, I think we're headed in the right direction, giving them faster, more agile, more effectively integrated solutions from across the group. And I think, in some of our new business where we've been successful, we've done that. But we need to simplify our organization to better position it for growth. And I think about that in 3 terms: clients and how we have a simpler organization that clients can access; companies, how do we have fewer, bigger companies, each of which is structurally positioned to grow; and countries, how do we organize the individual local markets to bring our strengths together, so that the example I use is Portugal, the 600 people in Portugal, they're no longer in -- 20 people in 30 offices. They're in one fantastic office, overlooking the waterfront with one country manager. The brands are still there. But I think in terms of the key audiences, we need to attract to our company of clients and people, and that's an attractive solution.

If clients look at it and say there's a talent base of 600 people. And I think people that come and work there say, there's 599 other like-minded colleagues from whom I can learn, a company that can provide them with a career. So I do think that people in our business a few years ago were skeptical about colocation. But I think, if we provide attractive locations in the U.K., Sea Containers where WPP will be moving soon, it was voted, I think, one of the top 3 office buildings in the world. I think we provide attractive locations. I think it's good for our people, it's good for our clients and it's good for efficiency.

The next area we'd focus on is how we embed data and technology in our offer from a data perspective. We'll be most focused on how we use data to power our work, so how we use data to surface insights, target our messages, measure the return. I had an interesting conversation with someone from Google about the application of AI to creativity and how AI can improve the creative process.

And from a technology perspective, how we embed that much more deeply in our offer, and that doesn't mean buying technology or developing technology. I think, increasingly, it means integrating other people's technology, leveraging the investment that others are making between them, Google, Adobe, Microsoft, IBM, Salesforce, Oracle, to name a few, probably spending $10 billion on advertising and marketing technology. We can't compete with that. But I think, by being experts and neutral experts and having a really deep understanding of those platforms, we can bring tremendous value to the client.

And we've really leant in at Wunderman. In particular, we've leant into the relationship with Adobe, and they've been a fantastic partner for us. We were their partner of the year last year. I think that meant we did more business with Adobe than any other company, which would include Accenture and Deloitte Digital and others. And it demonstrates what we can do if we really put our mind to it.

And then talent, because our business is all about people. That's what makes it fun to come to work and that's what makes clients want to work with us. Great ideas come from great people. Great strategies come from great people. And so while technology is probably part of our offer, even great technology is designed by great people. So I think we really need to make WPP, more than ever, a destination for the best talents in the world to develop the talent. And there's a lot of it that exists inside our operation and to provide people with increasingly careers within WPP, not with an individual operating company to make the group more attractive.

And then lastly, we need to look at the overall shape of the portfolio. We've made a lot of progress, adding a little progress on the disposal and divestment front in the last 4 months. And we need to look at that and make sure that we have discipline in terms of how we add to the group and how we look at our balance sheet.

So that sort of sums up to a strategy review by year-end. So we'll come back to you before the end of the year and look at the actions we're taking to return the business or better position the business for growth and to address the underperforming parts of our business, primarily in North America, in the creative agencies within the data investment management part of the company as well as any restructuring costs that may be needed and the associated benefits with them.

That's kind of a little bit about how we see the world where we will come back to you. I think, a couple of observations on what we've done the last 4, 5 months. First, on clients, we have won 6 of the 8 major pitches we've been part of and defended successfully 3 of the 4 reviews. The nature of our business is there are always ongoing reviews, and we need to be competitive.

I think what we try to do, in particular, is make sure that when a client comes to us, they have the best resources for their problem, regardless of what company they come from. And often, there's one company in the lead. But increasingly, it's a number of different WPP companies. And clients are looking for the best resource, no matter where they come from. So in the case of Mars, MediaCom led it, but there were important resources from Wunderman and POSSIBLE and Wunderman Commerce on the data and e-commerce front that were part of that review.

On Office Depot, it was an important WPP win that if we used resources from Y&R, from VML and, again, I think from MediaCom for one of our media networks.

On T-Mobile, that's really a programmatic media win, and T-Mobile is a top 3 advertiser in the U.S. And we are managing their programmatic digital media for them through Essence, and it's a fantastic win for Essence.

And then lastly, Shell, where JWT were the incumbent on the business. And we really went back with a slightly different offer going in through the Wunderman door. Mirum, which is part of JWT, was part of the solution. And Shell chosen 4 WPP agents to be part of their overall agency of the future structure. So Wunderman, Mirum, Geometry and Hill+ Knowlton, alongside MediaCom, who was part of the separate review, also retained the media business.

So as you can see that by combining our efforts, working seamlessly across the group, embedding some of the newer capabilities in e-commerce or data or customer experience thinking, we can really come up with a strongly differentiated offer and win.

Turning to the balance sheet and the portfolio on Page 29, we've laid out some of the disposals and realignments that we've made as well as some of the acquisitions. We've had 2 acquisitions: one, Gorilla, in the U.S., which is an e-commerce business in the U.S.; and the other, HZ, which is also in the U.S., Burson Cohn & Wolfe. I think in both cases, they are in the sort of digital technology area. Gorilla is just short of 400-person e-commerce business. It integrates well into Wunderman Commerce. They have Magenta experience, which complements our existing technology experience. And they have set up a strong creative digital agency that expands what BTW can do in terms of web development. I think, increasingly, we need to think about sort of technology rather than the word digital and how we use technology in our work rather than thinking the world as being sort of a digital world and a nondigital world.

And on the disposal front, we have made 15 disposals. I think the goal is both to tidy up the sort of portfolio around the edges, some of them are relatively small. But they are -- eliminating them or disposing of them makes the group easier to manage. And some of them, like AppNexus, Globant, raise significant amounts of money that helps us on the reducing our debt to EBITDA.

So in conclusion, on Page 30, before we take questions, I think we're seeing business momentum continue to improve slowly. As I said, it's our first quarter of like-for-like revenue, less pass-through costs growth in a year. It's too early to declare victory, but I think that is a positive. We've said that the back half of the year, we expect to be in line with the first half of the year. And we are being cautious about the revenue outlook for the company, which, I think, is the right thing to do at this point. We are listening to clients and our people on how best to evolve the strategy. We're coming back to you by year-end. And we are seeing progress in improving the win rates and really focusing our best people and efforts on creative reviews.

I think the priorities that remain is understand that we know the focus of our creative agencies. We need to have stronger creative agencies. The challenge there I think is both we need to have stronger businesses with better work, better strategy, better reputations as well as ensure that those companies have the capability that they need to grow.

Data investment management, particularly in the United States, has been challenged. The insight part of the business remains under pressure, where, I think, it's being disrupted by different ways of getting to the same answer using technology. And North America -- and I think in North America, sort of the intersection of those 2 trends where they're most pronounced. So that's the focus. We'll come back to you by year-end.

I think time to take questions. Operator?

(Operator Instructions) We'll now take our first question from Dan Salmon from BMO Capital Markets.

And welcome, Mark, to the CEO position. I think, versus your predecessor, one of the key themes that I've heard is certainly more focus on competition from the consultants and in your prior role, in particular, I think you got to see it up close. On the earlier call today and meeting in London, you talked a little bit about at Wunderman putting teams inside on site at your clients a little bit more. I know that's not new for agencies, but it does sound to me like something, I think, is associated a little bit more with how a consultant often works. But what I'm really asking about is if there are 2 or 3 things that you would highlight that are most important to competing with that group that you'd like to see go forward at a high level.

And then just a second one, in-housing continues to be a regular conversation and it does seem that it's shifting a little bit from certain capabilities around social and programmatic that we were talking about a few years ago to things being a little bit more orientated to some services like creative. I'd love to hear your high-level view, Mark, on where you see CMOs looking to do things themselves more and maybe loop that back to how going to market can change for your agencies to help them with those changing needs.

Okay. Thanks, Dan. So I think that probably, that's right. I saw the competition more acutely at Wunderman than, perhaps, we see in other parts of the business. I think that someone asked a question this morning and it's true, the competition is in part because the consultants are doing some of the things we historically did and in part because we're doing new things that we didn't use to do that the consultants did. So I would look at it in both directions.

And within that, I think, lies what we need to do to be successful. I think we have to understand how to implement marketing technology in our company and help -- to help clients develop programs that run through from strategy, to creative, to the execution of technology and where we were successful at Wunderman with where we can put big programs like that in place with clients.

I think the second thing we need to do is hire a somewhat different mix of talent. Probably, we need to hire some talent from the consulting companies, and we are doing that. The new Head of Wunderman in Singapore came from Accenture. The person that ran our Shell pitch came from Deloitte Digital. But though interestingly, these persons haven't had agency backgrounds before. So I think that there's a sort of hybrid individual that we're heading towards. So I think there's new and different types of talent that understand technology, but also understand how agency businesses work and like working in agencies. So the traffic is not all one way.

And then I think the last thing we need to remember is creativity. I mean, the value of our business is the ability to generate ideas, to inspire consumers, to develop visions around how companies can grow. And I do think that agencies are better qualified to do that than consultancies that tend to write hypotheses at the beginning of the project and then spend the next 3 months proving the conclusions they'd come to at the start of the process, either by sort of analysis or by analogy.

So I think the leap of faith and innovation and inspiration and creativity that our business brings is very valuable to clients because, ultimately, clients are interested in growth, and growth comes from [connecting] consumers.

On the second -- and [secondly], emotionally, it's not just through price or other areas, on the second question of in-housing, I think we need to sort of change the debate from sort of around in-housing to being on-site. Again, at Wunderman, we ultimately put Wunderman inside which was an initiative to help clients bring resources on site. We just sold a project last week to a client in Chertsey to put some people up in their office to generate content.

And I think that, again, if it's something where, I think, historically agencies have been reluctant to let people work outside their operations and the consulting firms have been more familiar to do that. And I'd like to say to any of our clients that are looking to sort of outsource anything to consultants or bring them in-house, they should have a conversation with us. And I think we can very effectively develop solutions with them as we have done at Best Buy in Minneapolis or News in the U.K. and other clients to do that. So that's how I think about that. I think it's an opportunity for us if we do it correctly.

We'll take our next question from Peter Stabler from Wells Fargo Securities.

One for Mark and one for Paul. Mark, we've long believed that the migration to digital has been a tailwind due to higher labor intensity associated with execution and measurement and, particularly, on the media side. Wondering if the industry has reached a sort of tipping point on the creative -- in the creative agencies where an accelerating reduction in the number of nondigital creative assets as combined with an efficiency gains in digital to now present a headwind where, overall, the nonworking spend as a total percent of spending is now structurally lower.

And if so, could we see additional pressure? Or do you see an equilibrium being reached at some point? And then secondly, for Paul, on Slide 14 where you break out the margin by region, just wondering how we should think about that longer term given the pretty significant disparity and advantage in the U.S. Would you expect the U.S. to -- even with a small amount of growth to trend towards the rest of the group or for this relationship to stay intact? Any insight there would be appreciated.

Yes. I mean, I sort of understand your analysis. I don't entirely get to the same conclusion that you did, I see how you're getting there. I mean, I think that the -- there is definitely pressure on the traditional parts, and I think that has been more intense the last couple of years. I do think there's continued growth in the digital parts, and they are more labor intensive, as you point out, because of the increased execution and the volume of data ironically means they are sort of overanalyzed, certainly more analyzed.

But I think it's really more that, in part because of the way we're structured, we are having pressure on the traditional without being structured to capture the new and, in some ways, the trick that we need to do through better [niche] with our clients and better realignment of our resources and greater use of common production and technology platforms is capture the new areas of growth from clients.

I think if you talk to clients, whilst they're -- whilst they are sort of some parts of traditional market budget that have been cut, I think, overall, what they're spending is increasing, particularly when you include the newer clients. So I think there's a number of factors. It's capturing the new work from existing clients and also growing and being relevant -- to capture from existing clients and then being relevant and competitive with the new clients.

So Peter, on margins, I think -- I mean, the way I sort of think about it a little bit is traditionally, we have had our best margins in North America, pretty closely followed by some of the margins in Asia Pacific and Latin America, Africa and Middle East combined with our weakest margins traditionally being in sort of European markets.

And I think it really comes down to some pretty simple sort of economics in terms of, firstly, it's a scale of the budgets that we operate with. And clearly, the budgets in North America are bigger and the opportunities are greater in many sense in a sort of a more homogenous market than many. So that will, by trend, often give you the biggest opportunity. It's where we can chart our skills between offices and between businesses more easily compared to, say, some of the European markets. So obviously, language does play a factor.

And then the second element to this, I suppose, is the sort of the frictional cost of change. And obviously, in a changing revenue environment, it's really how you adapt to that opportunity in the U.S.A. You can, as we call it, turn on a sixpence; you can ameliorate your costs very rapidly with a change of revenue outlook where it's so much harder to do in certain Asian and certain European markets.

And finally, I think the social cost in some of the European markets are quite high. So I think all those factors tend to give you the belief that America will, with its current sort of labor structure, still be a very strong market in terms of performance. And again, labor is sort of 60% of our cost. Our market share -- our market positioning, I think, gives us very good scale and presence in some of the Asian and Latin America markets. I think that should be good. And I -- so I think the order of ranges of property will remain pretty similar going forward.

We'll now take our next question from Doug Arthur from Huber Research.

When you look at the second quarter, in particular, you really had pretty good growth in an awful lot of major markets, U.S., North America. And then by sector, data, investment management being the laggards and ongoing laggards. So I guess, as you look at your operations over the next 6 months, is there anything you can do from a structural point of view in North America in the data investment management sector to change the growth trajectory? Or do you think it's mostly cyclical?

Well, I don't want to focus on the data investment management, but as it happens, its big core markets are the U.K., U.S., Germany, France and, a certain degree, Spain. So -- and insights business is still finding it challenging there in those markets where, as we've often said, the insights business in the fast-growing markets -- Latin America, Asia Pacific -- actually doing very well. So I think that there are competitors to how we carry out that business not all with the same economic model. But we are, to a certain degree, hostage to where the -- their major markets are.

And whilst we are making investments in the fast-growth markets, they don't scale at the same pace as the business we have in North America, U.K. and Europe. So that will be -- it needs the industry to perform better on our own businesses sort of just to keep up with that. And I think some of our businesses within the counter operations are very strong. They're making investments. The panel business is doing really well. Some of the consulting businesses are doing very well. So it is, again, like always, a mixed bag of how we're doing.

So that sense, I don't see any major change. The U.S., as you mentioned, it's been really 4 quarters now, slightly more, of disappointment. And firstly, it was sort of triggered by, I think, some quite major account losses. If you recall back until the AT&T days, it's actually principally affected the U.S.A. The Volkswagen, which had some effect, but obviously more in Europe as well. And I think we've regained momentum strongly in the media business and seen that come back. But other businesses haven't yet, I think, recovered the strength that we -- that they should have in the major American markets. And I think that's the work we've got, that's the challenge we've got to take on to try and get that momentum back in some of the other businesses that haven't been as successful in North America over the last 12 months.

It appears there are no further question at this time. Mr. Read, I'd like to turn the conference back to you for any additional or closing remarks.

Well, thank you very much, everyone. I haven't got anything else to add at this point. And we'll see you in a few months, if not before. Thank you.

Thank you. Thank you, operator.

This concludes today's call. Thank you for your participation, you may now disconnect.