WPP PLC (WPP) 2023 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to WPP 2023 First Half Results Conference Call and Webcast. (Operator Instructions) Today's conference is being recorded.

Now I would like to hand the conference over to WPP CEO, Mr. Mark Read. Please go ahead, sir.

Thank you very much, and welcome, everyone, to WPP's first half results. I'm here in London with Joanne Wilson, our CFO, at her first set of results; and Tom Waldron, who leads our Investor Relations team.

So please do read the statement on Page 2 of the presentation. It's important.

Now in terms of the presentation on Page 3, I'll cover the highlights for the year, then Joanne will take us through the financial performance and I'll come back at the end on our strategic progress and the opportunities ahead of us before we take everyone's question.

So turning to the highlights on Page 4. I'd say we had resilient growth in the first half overall with growth of 2%. And it's important to understand the breakdown of this growth so we can evaluate really what happened. To start with, we did see growth slow from 2.9% in Q1 to 1.3% in Q2. And the world outside the U.S. represents around 63% of our business. We actually saw growth accelerate from 3.2% in the first quarter to 5% in the second quarter, and this reflected a pretty strong performance in the second quarter in the U.K.; in Germany at 6.6%; we saw a recovery in China from negative to 4.8%, having been down 13% in the first quarter. All of this suggests actually a pretty robust client spending environment.

Similarly, we saw continued growth in GroupM at 6.1% in both Q1 and Q2 globally, reflecting strong client spending. And our Public Relations business grew and perhaps somewhat more slowly, but actually fairly consistently at around 2% in both the first and the second quarter. Ogilvy particularly had a strong performance in the first half on the back of good client wins at the end of last year and really a recovery in performance of that business after perhaps a couple of disappointing years.

The part of our business that we have seen a shortfall has been in the United States with the gap versus our expectations in the prior year really been focused on technology clients and technology-related projects. We did flag earlier this year that we've seen some slowdown in spending from technology clients on marketing, but this accelerated in the second quarter. Perhaps it took us maybe a little bit by surprise. The reasons differ by clients, and actually not all clients are down, but the general trends are, one, I think cost control; a focus on margins after a significant slowdown in their own rapid rates of growth; and perhaps a different stage of the innovation cycle.

As others have mentioned, we've also seen delays in decision-making on some technology-related projects, primarily in our creative agencies, that is Wunderman Thompson, VMLY&R and AKQA. We saw work being pushed out and lower revenue in technology, consulting and development parts of these companies.

In this context, it's worth reminding ourselves that our creative agencies have a broad service offer and an increasing amount of their work comes from outside of the traditional agency remittance areas such as marketing technology, e-commerce, data consulting and other technology-related services.

Together, this meant that our revenues in North America declined by 4.1% in Q2, having grown in Q1. There are some other minor elements impacting this from some weakness in the telco sector linked to technology delays on a client -- and also a client loss in the retail sector. But the primary explanation is the reduction of technology in telco spend. If you look at it overall, it had around a 1.9% impact on WPP's revenues in Q2, but obviously a significantly bigger impact if you look at it just in the United States.

Now it's fair to say that we do see our technology clients as important long-term partners and drivers of our growth. It's not the case, as I mentioned, that revenues at all of them have declined and we're not going to call them out one by one, but we are confident that our relationships are in a good place. This doesn't reflect the loss of assignments, but we don't see any reason why their spend should not recover in the future.

Our clients [intersect] some of the world's largest companies by market capitalization. They're growing and investing in exciting new areas, but we do believe that they need to put significant investments behind their brands and into their customer relationships in the future.

So with that as background, at the same time, we have continued to strengthen our offer to clients and to invest in the future. We had a very strong performance at Cannes Lions winning 5 Grand Prix and a total of 165 Lions. Mindshare were named Media Agency of the Year. As importantly, the Effie awards, which recognize effectiveness in marketing, WPP was named the most effective communications company in the world with Ogilvy leading as well.

There [was little] talk in our industry partnerships around AI, we're doing an increasing amount of work in this area. Every week, I see strong examples of work we're doing for clients and we'll share some of that later on in the presentation.

We've also made a number of acquisitions. I'd like to highlight, too, particularly in the area of influencer marketing, Goat and Obviously.

So turning to our profitability. Given our revenue performance, we saw disciplined cost control. It's been important. And as a result, we delivered an operating margin of 11.5%, which is up 1.1% on a like-for-like basis, albeit down 0.1% on last year due to FX effects. Our margin benefit from good control of staff costs, it was achieved despite higher IT costs from further investment in modernizing our platforms and higher severance costs.

Taking that all together, for the full year, we considered our guidance, as you can imagine, very carefully and have decided to revise it to 1.5% to 3% for the year overall while holding our margin guidance at around 15% for the year at '22 exchange rates. I'm sure we'll get into a discussion of our guidance in the Q&A, but it's worth saying that some of the reduction is due to the softness that we saw in Q2.

We've really taken 3 factors into account. First, I think we're being rightly cautious about the pattern of spending by technology clients and on technology projects in the second half. Secondly, we have seen continued growth, as I pointed out, actually an acceleration in the rest of the world and the issues we've seen have been largely concentrated in the United States. But it's fair to say the economic environment does remain uncertain. And while there's more positive signs in the U.S. regarding the control of inflation, there are also issues around consumer spending as COVID savings get spent. And then the third area that we are aware are that comparatives in the second half of the year are somewhat easier [than in] the first half of the year.

So taking these sort of pluses and minuses together, we think a range of 1.5% to 3%, while wider than we may like, is probably the right place to guide you at this point in the year.

So with that as sort of introduction, Joanne, why don't you take us through the financial performance.

So thank you, Mark, and good morning, everyone. So let me take you through the financial results for the first half of 2023.

And I'll start on Slide 6. First half revenue less pass-through costs was up 5.5% on a reported basis and 2% on a like-for-like basis. Our reported growth includes a 2.6 percentage point tailwind from FX due to sterling weakness and a 0.9 percentage point contribution from M&A. As Mark mentioned, this is a softer like-for-like growth than we had anticipated, impacted primarily by a slowdown in spending of our technology clients in the U.S. and delays in technology-related projects.

Turning to the headline income statement on Slide 7. Overall revenue less pass-through costs was GBP 5.8 billion, an increase of 5.5% year-on-year with headline operating profit of GBP 666 million, up 4.3% year-on-year. This resulted in a reported operating profit margin of 11.5%, down 10 basis points year-on-year. We have seen an adverse FX impact on margin of 20 basis points as a result of the recent strengthening of sterling. On a constant currency basis, our margin improved 10 basis points year-on-year, reflecting improved staff and other costs offset by planned higher IT investment and higher severance costs.

Moving down the P&L. As shared at prelims, income from associates excludes any contribution from Kantar in 2023 under IAS 28 due to its no carrying value on our balance sheet.

Net finance costs increased during the year due to higher levels of debt and lower investment income as a result of a disposal in 2022, and that was partially offset by higher interest income.

Reflecting the tax rate of 27% for the half and noncontrolling interest of GBP 37 million, the profit attributable to shareholders is GBP 361 million resulting in a headline diluted EPS of 33.1p, which is broadly flat year-on-year.

Moving to Slide 8 and the reconciliation between our headline and reported profit. As well as the usual amortization and impairment of intangibles, our headline operating profit of GBP 666 million is adjusted for goodwill impairment totaling GBP 53 million, which relates to 2 of our smaller businesses within Specialist Agencies.

In the half, we incurred restructuring and IT-related transformation costs of GBP 54 million and ERP costs of GBP 24 million, consistent with our full year guidance of GBP 180 million.

As indicated at prelims, we have conducted a review of our property portfolio, and as a result, we are consolidating our office space in the U.S. and in small number of other markets. The full year 2023 impairment costs related to this review are primarily noncash and are expected to be GBP 220 million with GBP 180 million in the first half. The expected cash impact of GBP 20 million will be incurred as leases expire.

The above, together with some smaller items, results in an overall adjustment of GBP 360 million and reported operating profit of GBP 306 million.

Moving on to Slide 9. Our Global Integrated Agencies grew 2.2% on a like-for-like basis. GroupM, our media planning and buying business, grew 6.1% with consistent performance across Q1 and Q2. This is offset by a weaker performance from our integrated creative agencies, which saw an overall decline of 0.8% in the half with growth in Q1 being more than offset by a decline in Q2.

GroupM benefited from growth across all regions, and we saw the ramp-up of some good assignment wins, including Discovery in the U.S., Flutter in the U.K. and Maruti Suzuki and Reckitt in India. We also saw continued strong growth in programmatic and connected TV advertising driving double-digit growth in GroupM Nexus. Digital is now 49% of GroupM billings, up from 48% in full year 2022.

Across our integrated creative agencies, Ogilvy grew well, supported by recent new business wins, including Verizon and SC Johnson. Hogarth, our creative production agency, also enjoyed strong growth and expanded its collaboration with other WPP agencies. Our other global integrated agencies, Wunderman Thompson, VMLY&R and AKQA Group, were adversely impacted in the first half by reduced spend across tech sector clients, predominantly in the U.S., longer lead times on technology-related projects and expected client losses in the U.S. retail sector.

For the Global Integrated Agencies as a whole, headline operating profit was GBP 540 million, up 6.6%, and the margin was broadly flat year-on-year at 11.3%.

Moving on now to Public Relations on Slide 10, where we see continued demand for strategic communications with like-for-like sales up 2.1% overall. FGS Global, our leading strategic advisory and communications consultancy, grew high single digits. KKR completed their minority investment in FGS Global last month, becoming a 29% shareholder in a transaction which valued the business at over $1.4 billion. H&K also continued to grow, while BCW saw a small decline in the first half.

Headline operating profit of GBP 88 million represented a margin of 15% and was slightly down year-on-year.

And now turning to Specialist Agencies on Page 11. Revenue less pass-through costs was up 0.2% on a like-for-like basis. CMI, our U.S. specialist health care media agency, delivered strong double-digit growth. And Landor & Fitch saw an acceleration of growth. The performance of the longer tail of smaller agencies in this segment was impacted by tougher comps and clients delaying projects.

Operating margin of 8.6% was 2.8 percentage points lower year-on-year, primarily reflecting the runoff of a COVID-19-related contract in Germany.

Turning now to trends across our key client sectors on Slide 12. We delivered strong growth in consumer packaged goods, driven by our work with The Coca-Cola Company. And we also saw good growth in the health care and pharma, financial services and travel and leisure sectors. Against that, we saw declines in retail, as expected, given the loss of a couple of clients in the U.S., 1 competitive and the other related to supermarket consolidation. Less anticipated was the reduction in spend from clients in the tech and digital services sector, which was down almost 5% with most of the decline coming in Q2.

In terms of our performance by market on Slide 13. The U.S., our largest market, saw a decline in net sales of 1.2% in the half with a 4.5% decline in Q2. This is primarily driven by reduced spend from technology clients and known losses in the retail sector, together with delays in technology-related project spend which primarily impacted our integrated creative agencies. Excluding the U.S., we saw good growth in the first half and an acceleration of growth in Q2.

The U.K. continued to show strong performance with 8.2% growth in the half and faster growth in the second quarter, with particularly good performance in CPG and health care clients and across our media business, which grew double digits.

Germany grew by 5.4% in the half with strong performance in travel and leisure boosting our media business.

And in China, we saw a 4% decline in the first half with growth recovering in Q2 to 4.8%, albeit slightly slower than we anticipated. We expect China's growth to accelerate in the second half, reflecting easier comps and new business wins, including Estee Lauder.

Finally, India grew 0.8% in H1 with a tough comp of 37% growth last year. Like-for-like performance improved in Q2 to 2.5%, driven by CPG clients and media wins. And we expect a further acceleration in the second half, reflecting softer comps and recent new business.

As mentioned, first half operating margin reduced 10 basis points to 11.5%. Our head count-related actions drove a 30 basis points improvement to margin. Our average head count for the period was slightly lower year-on-year with freelances over 20% lower, improving our overall mix. These savings were in part offset by higher severance payments as we move to adjust our cost base in response to a more cautious client spending environment.

Personnel costs were higher driven by more in-person client meetings increasing travel spend. Additional G&A savings came from operating efficiencies in part relating to our transformation program. And establishment costs fell as more of our people moved into campuses.

IT costs rose, as we previously flagged, reflecting investment in our IT infrastructure, cyber capability and our move to the cloud, partly offset by offshoring savings.

And finally, we saw an FX headwind of 20 basis points.

Turning now to our transformation program on Slide 15. Overall transformation savings are on track to deliver at least GBP 450 million of annualized savings in 2023 versus the 2019 base by the end of this year, and we remain on track to achieve the targeted GBP 600 million by 2025. We are seeing further efficiency improvements driven primarily from a consolidation of our office footprint. As mentioned, we continued to rightsize our properties and we'll see further savings from actions taken this year to consolidate our offices in the U.S. and elsewhere.

In procurement, we are starting to see benefits from our category-driven model, which is helping to consolidate our supplier base and better leverage our global scale. The secondary savings focuses on improving our operating model from simplifying our ways of working. And the final area is from our functional spend, including shared services.

In addition to the IT offshoring that I referenced, we continued to make progress with our ERP consolidation. Maconomy has now rolled out in 17 Latin American and APAC markets, and we continue to deploy Workday in North America.

Moving to Slide 16 and cash generation and uses over the last 12 months. In June last year, our net debt was just over GBP 3 billion. And since then, we generated GBP 2.1 billion of operating cash and saw a benefit from trade working capital of GBP 165 million with much of that coming through in the quarter just gone. Our non-trade working capital was an outflow of GBP 316 million with the largest drivers being landlord incentives relating to our campus program, sales and other taxes and bonus accruals. Interest, lease payments and corporate tax outflows were as normal. And CapEx was GBP 210 million with investment primarily in our tech capability and campuses.

Total cash returned to shareholders was GBP 584 million in the form of dividends and share purchases, and we saw acquisitions and disposals of a net GBP 433 million. Other movements primarily include the impact of FX on our operating cash flows and earn-outs.

Together, these increased our net debt by around GBP 300 million and our average adjusted net debt-to-EBITDA ratio of 1.68x.

And now turning to a reminder of our capital allocation policy on Page 17. Our first priority is organic investment to support growth, which includes investment in Choreograph, our data company; and WPP OPEN, our AI-powered agency operating system, as well as our IT infrastructure and campuses.

Our dividend policy targets a payout of 40% of EPS, and we've declared an interim dividend of 15p. We will also invest in acquisitions in attractive growth areas, which accelerate our capabilities as recent examples being in the influencer marketing, PR and branding.

And finally, we will seek to return any excess capital to shareholders. With our leverage ratio currently within our target range, we will limit the buyback of shares to cover the dilutive impact of our employee share program, which will be around GBP 37 million in the first half.

And finally for me, just to take you through the guidance for 2023 in Slide 18. As Mark has already said, we expect like-for-like revenue less pass-through cost growth of 1.5% to 3% for the full year. This compares to previous guidance of 3% to 5% growth for the year. Our expected M&A contribution remains at 0.5% to 1%.

And we now expect a 2 percentage point headwind to net sales from FX over the full year. Previously, that was a 1% tailwind. FX is also expected to have an adverse impact of 25 basis points from the full year margin based on July 31 rates.

Guidance for headline income from associates of circa GBP 40 million is unchanged with no contribution from Kantar included in that figure.

Headline tax rate of 27% is also unchanged. And we now expect CapEx to be GBP 250 million, down from previous guidance of GBP 300 million.

Restructuring costs, including property impairments, are now expected to be around GBP 400 million with restructuring and transformation-related spend of GBP 180 million, as previously guided, and approximately GBP 220 million of costs relating to the impairment of right-of-use property assets, of which GBP 200 million is noncash.

Trade working capital is expected to remain flat with the non-trade working capital outflow of approximately GBP 150 million, consistent with previous guidance.

And finally, on net debt, we expect our average leverage ratio to within our target range of 1.5x to 1.75x. The forecast net debt at the year-end expected to be GBP 2.5 billion, consistent with the year-end 2022.

So thank you, and I will now hand you back to Mark to update you on our strategic progress.

Thanks very much, Joanne. So turning to our strategic progress. I wanted to update you on what we're seeing in the market, what we're hearing from our clients and also share some more progress on our investments in AI.

So on Page 20, it is clear that our clients are facing an ever more complex environment. Leave aside the macro uncertainty and the need to spend behind their brands to support price increases driven by inflation, the market environment just continues to post more opportunities and challenges.

To name just three. First, there are many new ways to reach consumers from Netflix taking advertising to Uber also building an advertising business. These present new opportunities to advertise, but also more fragmentation and complexity for clients. It is also a more political environment where positions taken a year ago on social issues that may have felt right are now coming under question. And thirdly, there's a whole topic of AI and how that may impact marketing and where clients need to invest.

Faced with this, on Slide 21, we highlight what we see as our clients' priorities, and let's take each one of these 5 priorities in turn. First, on Slide 22, it is evident that clients continue to invest in brands. Whether you look at the GroupM advertising spend forecast or the recent Citi CMO survey, you can see the advertising expenditure paid media is continuing to hold up well. We're seeing this in group where we achieved 6.1% growth in both the first and second quarters.

And what -- as we covered, we've seen some softness in Q2 in technology clients and technology-related projects. We don't see this as a broader pullback. These clients understand the importance of supporting their brands.

And on Slide 23, we continued to do well in new business, winning assignments from many of the world's leading companies and brand owners. In the first half, this included new assignments from existing clients such as Ford; new clients such as easyJet, where we won the European media; and Maruti Suzuki, India's second largest advertiser, now takes us to work with, I believe, 48 of India's top 50 advertisers and marketers.

The second priority to highlight on Slide 24 is creativity and effectiveness, which both remain probably our client's #1 priority. Cannes Lions, WPP did very well, as I mentioned, winning 5 Grand Prix and 165 Lions in total with Mindshare being named Media Network of the Year.

But the other half of marketing is effectiveness because we do great creative work for clients, it will be reflected in the effectiveness of the work and results that clients see. And here, we also did well with WPP being recognized as the most effective communications company globally and Ogilvy taking Network of the Year at the most recent Effie Awards.

Thirdly, on Slide 25. In the face of this complexity and the need for big, creative ideas to deliver effective marketing, clients are looking at their marketing partnerships and seeking simplicity transformation. Perhaps the most ambitious examples around the world is our relationship with The Coca-Cola Company, which we believe is the first of its kind model, and in our view, not the last.

At its heart, it's creative excellence, powerful creative platforms that leverage one data and technology platform but also provide local intimacy with the benefits of global scale. This will focus on driving revenue growth and consumption growth to top line growth for the client.

But at the same time, there are 2 important principles. The first is to deliver efficiency. The company consolidated from really 7,000 agencies to 1 global marketing partner. And at the heart of it is also transformation where simple model allows The Coca-Cola Company to transform how it's marketing while it's marketing, not as a separate exercise, but part of how it approaches the future.

And we're now seeing nearly 2 years into this partnership is delivering great results, which you can see in this quote, but more importantly, in their financial results.

The fourth priority is technology and data on Slide 26 as these 2 elements really underpin modern marketing. Here, you've seen news today our partnership with Spotify as well as other recent partnerships with leading data and technology partnerships. The Spotify partnership gives us access to the rich insights into music consumption and consumer trends. It also allows us to access their audiences without the use of cookies and to build innovative new products and creative platforms with them. It's a very broad and very deep partnership with one of the most important new platforms or fast-growing platforms.

That takes us to Slide 27, and last but not least, the topic of AI. We thought it would be helpful to look at some data on the impact of AI on marketing. There isn't much, but this data taken from research by Citi we think is the first of its kind. And we do think there is some consideration given the debate about the impact of AI on marketing and on the agency business.

And what this data shows is that whether it's overall advertising spend or marketing intentions or the amounts that CMOs believe they will spend on agency services, they don't see these amounts going down. In fact, 85% expect the amount spent on advertising to go up significantly more or somewhat more and 78% expect the same to be true of agency services. And only a tiny number of clients expect their spend to be down somewhat less or significantly less.

Now it's early days, but I do believe that the survey points to the understanding by the CMOs that a lot of what we'll use AI for is to deal with complexity in their business to help them overcome this complexity and produce the volume of assets they need more cost effectively, to target their media and marketing more effectively and to power their creative ideas.

This investment in the AI will allow them to succeed in this new environment, not allow them to significantly reduce their spend. And this really tallies with our experience to date with technology where the parts of our business the most impacted by it, media production, have for some time been the fastest-growing part of the business.

On Slide 28, we do have broad capabilities across our client -- across WPP. If you look at what we're doing with clients today creatively, we've been using AI to power creative work for some time. The example, The Next Rembrandt from Wunderman Thompson for ING was back in 2016 so some 7 years ago. In production, we'll talk later about our unique partnership with NVIDIA, but this really highlights the opportunities AI to create more personalized and relevant work also much more cost effectively.

And lastly, in media, as you'd expect, given the amounts that we're investing, AI is an extremely important lever driving up returns in a much more complex digital environment.

So on Page 29, rather than announcements, let's talk about some of the work that we're doing today for our clients. And the work really spans 3 areas of our business: first, supercharging our creative work; secondly, scaling personalization; and thirdly, maximizing performance.

And taking each of these in turn. We shared many examples with you or a few examples with you over the last few calls of how we're using AI to power our work, from the Nike work featuring Serena Williams to the Nestle work for La Laitière. This time, we'll share some work for Virgin Cruises starring JLo. And you can see how AI brings this idea to life. So please, would you play the film?

(presentation)

Okay. So that's a fun example of using AI. I think what's important is it indicates how our creative teams are really embracing this technology to bring their ideas and I think that's a pattern that we see really across the business.

The second area of our work is really around scaling personalization. The personalization we found is really one of the greatest drivers of production complexity and cost. And this example relating the work we've been running for Cadbury's in India shows how we can use technology to produce highly scaled personalized work to reach millions of people. It uses AI to create personalized birthday songs for individuals, uses some key AI technology, say, text to script to write the script, machine-generated generative AI to write the music, but also gen AI-based images for the video. We're not going to play it today, but you can click on the link and see how we use these 3 different AI technologies to bring the idea to life.

And the last area of work we're delivering to clients is this creative lift -- CreateLift product that's come out of our partnership with Google. This uses the Google Vision API to understand video, to understand the elements of the video and really to figure out how to optimize those to drive performance. It's based on a benchmark database of 3,500 videos. And rather than using A/B testing, really evaluate -- uses AI to evaluate the elements of the video against previous work, allows us to drive the creative work to optimize the various creative elements of the video and drive performance.

So I touched on Page 30 earlier about our partnership with NVIDIA. This is something that we announced back in May. Actually, Jensen Huang announced at their COMPUTEX event back in May. There's been a source of a lot of interest from our clients who are looking to use the power of generative AI, but are concerned around copyright and using brand-safe assets.

At the heart of this partnership, and the video will do a better job than me of explaining it, is the ability to combine generative AI images with brand-safe and product-compliant content that comes directly from the client's systems. It really brings us the best of both worlds that the film would highlight. And as you watch the film, please bear in mind that all of the video in it was generated by AI. So please, if you could play the film on Page 31.

(presentation)

Thank you very much. So as you can see, we're really bringing this type of technology used to create Hollywood movies to the advertising business. It solves a number of issues facing our clients, and we're starting to use that to produce work for clients.

So last, it'll be worth highlighting amp, an acquisition of a sonic brand that we made in April last year. It's an excellent example of how generative AI can be used to build a business and strengthen one's relationship with the client ensuring that we can build an enduring relationship rather than somehow being disintermediated by the technology.

As a leading branding agency, amp decided to approach the opportunity to sonic branding from an AI perspective, and they use AI to understand a brand sonic identity, and our client have been then able to use this to produce new sonic branding elements like ring tones or jingles or background music or music for adverts themselves. The platform provides both governance of the brand and the branding, but also very low cost assets. We license this platform to brands and then charge them the use of the platform to create new sonic elements.

Now at the heart is obviously the creative work, but amp also generating ongoing license fees, and using their technology platform is one of the models, I think, that's likely to proceed in the future.

So I hope you can see we've got a very comprehensive approach to AI. These are many of the products and services that we're deploying today and we have further products in development that we'll be able to talk to you about when they're ready.

So in summary on Page 31. It's fair to say we're facing a mixed market environment. GroupM continues to perform well. The regions of the world outside of the U.S. saw a good Q2 with growth accelerating, and China recovering will be maybe a little bit slower than we had anticipated.

At the same time, lower spending by technology clients and non-technology-related projects has impacted our business, primarily really in the United States.

We continue to make good strategic progress, and I think we have a particularly strong approach to the opportunity of AI, but we are continuing to invest in data and technology to grow the capabilities in the business via bolt-on M&A. And our transformation program remains on track to deliver savings.

Through disciplined cost control, we've been able to improve the margin by 10 basis points, excluding FX.

And as we said at the start of the call, we are revising our guidance for the year from a revenue perspective to 1.5% to 3% and maintaining our margin -- headline margin at around 15%, excluding the impact of FX.

So those are our sort of formal remarks. We can now take questions. So if -- we'd like to invite the first question, then Joanne and I will see how we can help.

(Operator Instructions) Our first question today comes from Lisa Yang from Goldman Sachs.

I've got 3. The first one is on the weakness you're seeing from tech clients. I'm just wondering what has really changed in the last sort of 1 to 2 months that sort of caught you by surprise? What message were you getting from your tech clients in terms of when they would intend to basically resume spending?

And I was just wondering like how much of that weakness is sort of more temporary and just a pure [company growth] spending as opposed to like a post-COVID reset and something a bit more structural. So any color on that would be really, really helpful.

The second question is on margin. Obviously, you've done a great job at protecting the margin despite weaker growth. But just thinking longer term, I think, a question for Joanne, what makes you confident that you will still be able to achieve that sort of 15.5% to 16%? I think previously, you said this could be achievable in 2024, 2025. So just wondering like based on your observations so far, what makes you confident you'll be able to get there? And what are the actions [or sort of your vehicle] you're taking to improve your margin going forward?

And the third question is on net new business. Obviously, there's always some wins and losses. But could you maybe just help us quantify the potential impact on the net new business on the organic growth in H2 and also in 2024 based obviously on what has been announced so far. And you also said there's a larger pipeline of potential new business activity. So how well -- how big of an opportunity you think this is for WPP?

Okay. So I'll take the first and the third question, and Joanne will add anything and then discuss the margin.

I think on tech clients, we had flagged that we've seen a little bit of weakness earlier in the year, but I think it really accelerated in the second quarter. And you can see that both in the numbers and also the impact really in the U.S.

I'd say as to -- I don't believe that it's a reset. I think others have said the same thing. I think that those companies are some of the world's largest advertisers. And the impact on us is greater given that we have, I think, 18% of our revenues from technology companies. So by implication, we'd probably be a little bit more impacted than others.

Again, I don't think that it's -- that we see it as a reset. I think that they faced both 2 or 3 years of strong growth. They had their own cutbacks to make. And then at the same time, I think we're in an interesting point in the innovation cycle where they've got a lot of products ready to market, but the business models are not necessarily entirely clear for them. And I think if they've become clearer, I think that we'll see a greater volume of marketing around many of these new products.

On the net new business number, it is -- much as we'd like to win everything, that's impossible. And there are some things that we win and do well on like Coca-Cola and there are other things that where we do less well on. I'd say it has been a little bit, being open with you, a little bit disappointing in the first 6 months of the year. We did have 1 loss in the health care sector. So we'll have to see how that plays out over the balance of the year and into next year. It will be a little bit of a drag. So we're expecting towards sort of the fourth quarter and into next year.

But as I said, we have a very strong pipeline. Perhaps some of that pipeline is built up because of the length of decision-making in people. But we have got a strong pipeline. And we continue to have a strong offer, I think, lead in many areas. There's many strengths in WPP's business that I think will be reflected in our new business in the future.

Joanne, you want to take the margin question?

Yes. Thanks for the question. So look, just in terms of the medium term, 15.5% to 16%, look, I'd say 3 months in, there's nothing that I see and no reason why we won't get there within that time frame. And what I would say is more than that, we are incredibly focused as a business on delivering our medium-term margin target. So yes, for now, we're absolutely focused on that.

In the first 3 months, reflection is it is a flexible operating model and we've shown that in the first half in how quickly we've been able to respond to some of the cautious spending signals that we have seen from clients. We ended June with our permanent head count down year-on-year and our freelance is actually down 20%. So a mixed benefit as well as an overall quantum. And that really helps as we think about the cyclical business, how we manage the margin around that.

But looking more medium term, there are a number of areas where I see opportunities and it's probably worth just giving you a little bit of flavor on that. Back-office efficiencies, if I look at what the business has done in the last few years, I think a really great job in simplifying and driving efficiency across mostly at front office including some of our long tail of smaller markets. And we have done work on our back office as well, including some off-shoring.

And we are on a program, as you know, the ERP consolidation, which will be a key enabler to standardize, automate and then drive further efficiencies. So that is going to be an unlock for us. But that is a multiyear program, as I think you know. And we always said that, that would be towards the back end of our program through 2025.

And the other area, we talked about the flexible operating model. I think, as well, there's more that we could probably do on utilization and pricing across all of our markets. So that will be another area for us to continue to work on.

And we have done some country simplification, as I talked about, but there is more that we can do. So continuing on that country simplification will also help drive profitability.

In our front and [medium] office, if you like, we have done some off-shoring so primarily around production in Hograth and Wunderman Thompson and our commerce business in GroupM around ad ops and other areas, just to give you a flavor of what we've done. But there is more opportunity.

We have now got scale across our off-shoring hubs. And certainly, we'll be able to do more of that and look to consolidation -- to consolidate more of our production.

And finally, a big opportunity for us is just really leveraging our scale better. So we've started to do that with procurement and our category management approach. We've had some quick wins and we'll continue to focus on that across both our IT, contract spend, travel and other areas of the business.

So hopefully that gives you a flavor of how we're thinking about it. But I'll just leave you with we are incredibly focused on it as a business and looking to deliver that by '24 to '25.

Our next question is from Julien Roch from Barclays.

Yes. And welcome, Joanne, to your first results call. Proper baptism of fire, I suppose.

Now for my scene, WPP has been one of my top picks. And today, I'm not getting much love. So apparently, your P&L are made up because you are more addicted to constant restructuring that I am to Grand Cru Burgundy. Believe you me, that's not a good thing. And you generate poor cash flow because of working capital, ouch.

So that brings me to my first 2 questions. Joanne, can you tell us how do you feel about restructuring charges and your view of a normalized level of restructuring by 2025 once the heavy lifting is done? I'm hoping for 0 as an answer.

And two, can you tell us what you can do to your working capital [about] 0 like most of the agencies. You are the only one splitting working capital between trade and non-trade with only one of the 2 at 0.

And then third unrelated question. What was the organic in the first half '23 of your [offer] in experience, commerce and technology?

Okay. Thank you, Julien, for that introduction. And let me just take your first question on restructuring. As we embarked on this program, I guess, when Mark took over, we talked about the complex nature of WPP and the fragmentation across the business and it would be a multiyear program to unlock some of that. As I said, I think we've made good progress on our front office, more to do in our back office.

And in answer to the question of what should normalized restructuring be, I agree that it should be 0 in any business. And we have elevated restructuring costs this year, most of which or a large chunk of which are noncash relating to the property impairments. The restructuring costs relating to really 2 buckets, our IT transformation -- IT infrastructure transformation and our ERP program is GBP 180 million and that is cash. So through to 2025, I think we'll continue to see a restructuring cost around IT and ERP program. I think most of the IT restructuring cost will finish in 2024 and the ERP ones will certainly go on to 2025. So we'll see them for the next couple of years.

But I mean, looking at our cash more generally, we are also focused on how do we improve our cash conversion. I think our CapEx as well has been elevated in the last few years as we have embarked on our campus strategy, which has been a positive for the business. We've had to pivot a little bit with changes in ways of working post COVID, but that is a much more efficient way of working for our people. And that CapEx will start to come down from 2024 onwards. So we'll see CapEx nudge down a bit.

In terms of working capital, so just starting with trade working capital. We saw a big outflow last year in 2022, which we talked about. But if you look at performance since 2019, actually our trade working capital has improved by about GBP 1 billion. Now we won't stop there. We had a better performance in Q2 this year with a business that's very, very focused on it and we'll continue to be focused on that trade working capital in the back end of the year.

As a reminder, media business has billings of over $60 billion a year. So it is incredibly volatile and can be volatile quarter-to-quarter, but we need to be focused on our trade working capital to make sure that, that's optimized. We continue to make progress on it.

Just on our non-trade working capital, I touched on some of the buckets that's within that. It's really as our bonus accruals move year-on-year, our landlord incentives, which hopefully we run off as we come to the end of our campus program or it reduces slightly. And those incentives are where landlords pass back cash for building campuses. So that's a big number within that. And then we have some sales and taxes relating to GroupM, and that can fluctuate in a year-to-year. And the final one is the rig IT contracts where we have more prepayments.

So that will just give you a flavor of what's on -- in non-trade working capital and that has been elevated in recent years. This year, we are forecasting GBP 150 million outflow. And again, that will be an area of focus for the business.

So overall, working capital, an improvement this year versus last year, but still more to go and a big focus area for us as well, as is our overall cash conversion.

On ECT, Julien, I mean I think that it's basically flat in the first 6 months of this year. I think that probably shouldn't be surprising given what we talked about in terms of technology-related projects. And I think that, that -- the progress will return as that part of the business returns to growth as well. We continue to see it as a long-term driver of growth.

I think what you've seen this year -- actually maybe the last 18 months is perhaps stronger growth in communications, in the more traditional part of our business than people expected. So the ECT sector has not progressed perhaps as we would have expected, but I think that it continues to be a long-term, faster growth part of our business. And we shouldn't forget that there's many parts of our communications business that are increasingly [deeply] driven as well.

Just to clarify, Julien. When Mark said flat, so it's flat as a percentage of our overall creative agencies revenue, so around 39%. So we have seen some growth, but it's flat as a share of that revenue.

Yes.

Our next question is from Matthew Walker from Credit Suisse.

The first question is on tech. Obviously, you don't have a crystal ball, but the tech actual advertising numbers are getting better in terms of their revenues. So when do you think that they will start marketing again? Is it related to product innovation? Or is it going to be related to their revenue growth? So could we see some in the second half of '23? Or do you think it's more likely that they rebound from a marketing point of view in 2024?

Second question was you mentioned margin and staff utilization hopefully getting better. Do you have something like Marcel, which can increase utilization? Are you working on anything like that? Or what is the sort of WPP solution to utilization?

And then the final question was on the property. Are you going to increase the GBP 600 million savings target as a result of the charges taken against property?

Okay. So if I tackle technology clients, I mean, as you say, I don't have a crystal ball. I do think that there's a -- we're sort of at a unique point where growth has slowed. The companies have driven their share price by rebuilding margins. And we're at a point in the innovation cycle where there's an article in the FT today that talks about the number of new products being launched, but clients not -- but technology companies not entirely clear on what the business model is associated with that. And that very much bears in line the conversations I've had with these companies around the product innovation.

So I would expect that to revert. But I think that we're rightly being cautious about the likelihood of that happening in the course of this year, and that's reflected in perhaps the range of the guidance. If you think about our guidance on a second half basis, it's sort of 1% to 4% in the second half and that's a fact reflected in that range.

These clients haven't totally stopped spending. It's really that they pulled back and I don't think that, that will continue forever.

On the topic of sort of Marcel and staff allocation, we do have systems in each of our businesses that help us identify staff. We are using AI to pull staff from our systems to put on projects.

Actually, interesting, Satalia, the AI company, is used by one of the big 4 accounting service firms to allocate their staff to projects. And we have had a lot of success. And you will see some of the success we've had in reducing our freelance cost by better utilizing staff across the business, both within our agencies and across our agencies. And that is something, I think, that we will continue to implement. Joanne, do you want take the...

Yes. Yes, so just on the -- and hi, Matthew. Just on the property savings. So this year certainly underpins the GBP 450 million, which gives us confidence we'll deliver at least the GBP 450 million this year.

But I mean, looking at real estate as a whole, there are other areas of inflation. Energy is higher. As we open campuses, we see higher facilities costs associated with that. So all of that savings this year, which we estimate to around GBP 30 million doesn't necessarily flow to the bottom line.

And in terms of the GBP 600 million, the way I think you should consider it is it accelerates us towards the GBP 600 million rather than [we'll now] overlay the GBP 600 million savings. GBP 600 million is a bigger number, but certainly it will help us accelerate to that target.

(Operator Instructions) Our next question is from Tom Singlehurst from Citi.

It's Tom here from Citi. I've got 2 broad questions, although the first one is a 2-parter, so I'll just warn you on that.

It sounds like 4, Tom.

Yes, yes, exactly. It's 3 questions, really. First group of questions. If we characterize it as being sort of spend that is quasi-CapEx that's being delayed and spend that is cost of goods sold that's continuing, I think that's possibly the way we interpret GroupM chunking along at [6%] and some of the project-based work coming under pressure.

I suppose the first question is are you more exposed to CapEx style work in the U.S. and COGS like work internationally? Is there a sort of structural exposure issue that explains the growth differential? Or do you think it's macro? That was the first question.

And then the second one is linked to that. When you speak to your fellow CEOs, what is the fact they're looking for to help get the confidence to turn the CapEx style spend back on? So that's -- those are the first 2 questions.

And then the second one is -- or the third one is you're guiding to 1.5% to 3%, which is for the second half, 1% to 4%. But given what's happening in the rest of the world, and that's quite robust and possibly gets better, are you really just saying that the U.S. could be anywhere between minus 5% and plus 1% in the second half? Is all of that variance in the U.S. essentially?

I don't even know where to begin, Tom. I think the answer to your first question, I think that's a good way of thinking about it in terms of sort of quality CapEx and quality cost of goods sold and it kind of explains why GroupM has continued to grow.

I think the reason the impact is in the U.S. and in our integrated creative agencies is more to do with where those clients spend most money and where we do most work for them. And also we happen to be probably stronger in our creative agencies and we probably do -- we do some media for those technology companies, but not media for all of those technology companies. So it's really a question of where the balance of work has fallen.

I think if I talk about client confidence as at the CEO event earlier this week, I think the confidence is not bad, but not good. I think it's probably pretty much where it was 3 months ago. You will have seen your peer, Goldman, reduce their recession risk. I mean there's a sense that U.S. inflation is a bit back under control, but some nervousness [as they start] thinking about consumer spending.

So I think we're really seeing -- trying to evaluate what would happen to technology spend and technology-related projects and how clients will start to sort of reinvest in the more, as you call it, CapEx-intensive parts of the business.

I'll let Joanne sort of talk to the guidance for consistency.

Yes. So Tom, if you think about 1% to 4% in the second half, maybe let me start at the bottom end of that. So in Q2, we saw our like-for-like drop to 1.3%. And as we roll forward, I mean, what are we seeing today?

I think we'd say things feel like they're stabilizing, so they're not getting any worse, they're not getting any better. And if that like-for-like performance continued through the second half with a little bit more caution, would that be about 1%. So that's really how we think about that bottom end, albeit we do have softer comps in the second half. So it does assume a further deterioration and it's probably a cautious bottom end of our range, as you'd expect.

In terms of the top end, the 4%, that reflects really the softer comps that we see in the second half. So if you look at last year in H1, we grew at 0.9%. In H2, we grew 5.1%. So that should be a tailwind in the second half.

And we have visibility of new business, some new business that we won only at 2022 that's ramping up and we'll start to see more of a benefit from that as we go through the back half of Q3 and into Q4 and also some more recent new business wins in the last 4 to 6 weeks that we will ramp up, again sort of in that time period to the end of Q3 and through Q4. So good visibility on that.

I think what is unknown, of course, is what stops. So in the tech space in Q2, we haven't lost clients. It's clients choosing to either reduce spend or delay projects across mostly ECT. And what happens to that in the second half, that's really the unknown. And then, of course, as Mark talked of the macro, it is still very uncertain business looking like that. And that's really resulting in the caution that we're seeing across our client base, which our peers have talked about as well. So that's really how we're thinking about the 1% to 4% in the second half.

We have no further questions. So I'd like to hand back the call to Mr. Mark Read for further closing remarks.

Very good. Well, thank you very much, everybody, for listening. And as you can see, we did -- we had a mixed first half of the year. But I think we should take some comfort from the performance outside the United States. No doubt the United States was impacted, as we talked about, by the impact of technology companies.

I think we should be pleased as well with the disciplined cost control and the improvement we made in the margin on a like-for-like basis in the first half of the year.

We'll continue to focus on those elements in the rest of the year. So thank you, everybody, for joining us.