WPP : 2017 Interim Results

WPP (NASDAQ:WPPGY) today reported its 2017 Interim Results.

Key figures

First-half and Q2 highlights

• Reported billings increased by 6.3% to £26.906bn, down 4.7% in constant currency
• Reported revenue growth of 13.3%, with like-for-like down 0.3%, 2.2% growth from acquisitions and 11.4% from currency, primarily reflecting the weakness of sterling against the US dollar, the euro and other major currencies
• Reported net sales up 13.7% in sterling (flat in dollars, up 3.1% in euros and up 0.9% in yen), with like-for-like down 0.5%, 2.7% growth from acquisitions and 11.5% from currency
• Constant currency revenue growth in all regions and business sectors, except data investment management, characterised by strong growth geographically in the United Kingdom and Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe, and functionally in advertising and media investment management and public relations and public affairs
• Like-for-like net sales down 0.5%, slower than the first quarter, with the gap compared to revenue growth reversing in the second quarter, as the Group’s investment in technology enhanced the growth of advertising and media investment management net sales and as data investment management direct costs have been reduced
• Reported headline EBITDA up 14.2%, crossing £1 billion for the first time in a half-year, with constant currency growth up 1.7%, and reported headline operating costs up 14.0%
• Reported headline PBIT increased by 14.7%, up 1.9% in constant currency with the reported net sales margin, a more accurate competitive comparator, increasing by 0.2 margin points, and flat on a constant currency basis, behind the Group’s full year margin target of 0.3 margin points improvement
• Reported headline diluted EPS 45.4p, up 16.1%, up 2.4% in constant currency. Dividends increased 16.1% to 22.7p, a pay-out ratio of 50% in the first half, in line with target
• Average net debt increased by £421m (9.6%) to £4.811 billion compared to last year, at 2017 constant rates, an improvement over the first quarter of 2017 and continuing to reflect significant net acquisition spend and share repurchases of £1.232 billion in the twelve months to 30 June 2017, representing an increase in incremental spending of £401 million
• Return on equity⁹ for the 12 months to 30 June 2017 up strongly to 16.9% from 15.5% for the previous 12 months period, chiefly reflecting the post-Brexit impact of a considerable weaker pound sterling on the Group’s net assets. This includes a weighted average after-tax cost of capital of 6.3% at 30 June 2017, compared with 6.4% at 31 December 2016
• Creative and effectiveness domination recognised yet again in 2017 with the award of the Cannes Lion to WPP for most creative Holding Company for the seventh successive year since the award’s inception. Three WPP agency networks, Ogilvy & Mather Worldwide, Y&R and Grey finished in the top six networks at Cannes in 2017, in positions two, four and six. For the sixth consecutive year, WPP was also awarded the EFFIE as the most effective Holding Company
• Resumption of strong net new business performance and leadership of net new business league tables
• Continuing implementation of growth strategy with revenue ratios for fast growth markets and new media raised to 40-45% over next three to four years. Quantitative revenue target of 50% already achieved

Current trading and outlook

• July 2017 | July like-for-like revenue growth of -4.1% and net sales growth of -2.6% like-for-like, behind budget and the quarter 2 revised forecast. All regions, except the United Kingdom, Latin America and Central & Eastern Europe showed lower revenue than the prior year and all sectors were down, with advertising & media investment management and data investment management the most affected. Cumulative like-for-like revenue growth for the first seven months of 2017 is down 0.9% and net sales down 0.8%
• FY 2017 quarter 2 revised forecast | Following the pressure on client spending in the second quarter particularly in the fast moving consumer goods (fmcg) or packaged goods sector, the quarter 2 full year revised forecast has been revised down further, with both like-for-like revenue and net sales forecast to be between zero and 1.0% growth. Despite the forecast reduction from the quarter 1 forecast, the headline net sales operating margin target improvement remains, as previously, 0.3 margin points in constant currency
• Dual focus in 2017 | 1. Stronger than competitor revenue and net sales growth due to leading position in both faster growing geographic markets and digital, premier parent company creative position, new business, horizontality and strategically targeted acquisitions; 2. Continued emphasis on balancing revenue and net sales growth with headcount increases and improvement in staff costs to net sales ratio to enhance operating margins
• Long-term targets | Above industry revenue and net sales growth due to geographically superior position in new markets and functional strength in new media, in data investment management, including data analytics and the application of new technology, creativity, effectiveness and horizontality; improvement in staff costs to net sales ratio of 0.2 or more depending on net sales growth; net sales operating margin expansion of 0.3 margin points or more on a constant currency basis, with an ultimate goal of almost 20%; and headline diluted EPS growth of 10% to 15% p.a. from revenue and net sales growth, margin expansion, strategically targeted small and medium-sized acquisitions and share buy-backs

In this press release not all of the figures and ratios used are readily available from the unaudited interim results included in Appendix 1. These non-GAAP measures, including constant currency and like-for-like growth, and headline profit measures, management believes are both useful and necessary to better understand the Group’s results. Where required, details of how these have been arrived at are shown in the Appendices.

Review of Group results

Revenue and net sales

Revenue analysis

Net sales analysis

Reported billings were up 6.3% at £26.906 billion, and down 4.7% in constant currency. Estimated net new business billings of $4.246 billion were won in the first half of the year, a return to a strong performance, once again, against $2.992 billion in the same period last year. Generally, the Group continues to benefit from consolidation trends in the industry, winning assignments from existing and new clients, including several very large industry-leading advertising, media and digital assignments.

Reportable revenue was up 13.3% at £7.404 billion. Revenue on a constant currency basis was up 1.9% compared with last year, the difference to the reportable number reflecting the continuing weakness of the pound sterling against the US dollar, the euro and other major currencies. As a number of our competitors report in US dollars, in euros and in yen, appendices 2, 3 and 4 show WPP’s interim results in reportable US dollars, euros and yen respectively. This shows that US dollar reportable revenue was down 0.4% to $9.328 billion, which compares with the $7.378 billion of our closest current US-based competitor, euro reportable revenue was up 2.7% to €8.609 billion, which compares with €4.843 billion of our nearest current European-based competitor and yen reportable revenue was up 0.4% to ¥1.047 trillion, which compares with ¥439 billion of our nearest current Japanese-based competitor.

As outlined in the First Quarter Trading Statement and previous Preliminary Announcements for the last few years, due to the increasing scale of digital media purchases within the Group’s media investment management businesses and of direct costs in data investment management, net sales are the more meaningful and accurate reflection of top line growth, although currently none of our competitors report net sales. The differences are shown below in a table that compares the Group’s like-for-like revenue and net sales against our direct competitors’ like-for-like revenue only performance over the last two years.

On a like-for-like basis, which excludes the impact of acquisitions and currency, revenue was down 0.3% in the first half, with net sales down 0.5%, with the gap compared to revenue growth reversing in the second quarter, as the impact of the Group’s investment in technology had an increasingly positive impact on net sales and as data investment management direct costs reduced. In the second quarter, like-for-like revenue was down 0.8%, lower than the first quarter’s growth of 0.2%, giving -0.3% for the first half, with net sales weaker at -1.7%, following +0.8% in the first quarter, giving -0.5% for the first half, against strong comparatives of 4.3% and 3.8% for revenue and net sales respectively, in the first half of 2016.

Global GDP growth remains muted in the nominal range 3.0%-3.5%, impacted by global socio-political issues, with significant top-line like-for-like growth amongst the S&P 500, for example, being virtually confined to the technology sectors and some above trend growth amongst HMOs in the pharmaceutical sector. With little inflation and, therefore, limited pricing power there is considerable focus on cost by client financial and procurement functions. These trends, that have been in place for much of the period since the Lehman crisis in 2008, have been increasingly reinforced more recently by technological disruption, cheap money, activist investors and zero-based budgeting models, which focus incumbents on short-term profitability and cost control. As a result, for example, fmcg or consumer packaged goods have been under consistent pressure in particular, sectors which account for approximately one-third of the Group’s revenue. All this has resulted in spending cuts, which, in turn, have produced little if any volume gains. In the long-term, this has resulted or will result in a further reduction in numbers of consumers or users, a serious warning sign that we believe will be countered in due course through increased marketing investment spending.

Operating profitability

Reported headline EBITDA was up 14.2% to £1.016 billion, passing £1 billion for the first time in a half-year, up 1.7% in constant currency. Reported headline operating profit was up 14.7% to £882 million from £769 million, up 1.9% in constant currency. As has been noted before, our profitability tends to be more skewed to the second half of the year compared with some of our competitors.

Reported headline net sales operating margins were up 0.2 margin points at 13.9%, flat in constant currency, and up 0.1 margin points on a like-for-like basis. Continued client pressure on costs and spending, particularly amongst packaged goods clients, was a significant element in keeping the Group’s operating margin flat in constant currency in the first half, and below the Group’s full year margin objective of 0.3 margin points improvement on a constant currency basis.

Given the significance of data investment management revenue to the Group, with none of our direct parent company competitors significantly present in that sector, net sales remain a much more meaningful measure of competitive comparative top line and margin performance. Net sales is a more appropriate measure because data investment management revenue includes pass-through costs, principally for data collection, on which no margin is charged and with the growth of the internet, the process of data collection becomes more efficient. In addition, the Group’s media investment management sub-sector is increasingly buying digital media as principal and as a result, the subsequent billings to clients have to be accounted for as revenue, as well as billings. We know competitors do have significantly increasing barter, telesales, food broking and field marketing operations, where the same issue arises and which remain opaque and undisclosed. As a result, reporting practices should be standardised, although there is limited recognition of this to date. Thus, revenue and revenue growth rates will tend to increase, although net sales and net sales growth will remain unaffected and the latter will present a clearer picture of underlying performance. Because of these two significant factors, the Group, whilst continuing to report revenue and revenue growth, focuses even more on net sales and the net sales operating margin.

On a reported basis, net sales operating margins, before all incentives¹², were 15.5%, down 0.4 margin points, compared with 15.9% last year. The Group’s staff costs to net sales ratio, including incentives, rose by 0.3 margin points to 65.7% compared with 65.4% in the first half of 2016. As noted above, in part this reflects the net sales deterioration in quarter two, with limited ability to quickly adjust the fixed cost base, although staff numbers have been reasonably well controlled, with average headcount, including acquisitions, rising 2.4% compared with the increase in constant currency net sales of 2.2%.

Operating costs

In the first half of 2017, headline operating costs¹³ increased by 14.0% and were up by 2.5% in constant currency, compared with reported net sales up 13.7% and constant currency net sales growth of 2.2%. Reported staff costs, excluding all incentives, were up 0.8 margin points at 64.0% of net sales and up 0.9 margin points in constant currency. Incentive costs amounted to £104.4 million or 11.1% of headline operating profits before incentives and income from associates, compared to £121.6 million last year, or 14.0%, a decrease of £17.2 million or 14.1%. Target incentive funding is set at 15% of operating profit before bonus and taxes, maximum at 20% and in some instances super-maximum at 25%. Reportable severance costs were £34.5 million versus £29.7 million for the same period last year. Variable staff costs were 6.1% of revenue and 7.1% of net sales, at the higher end of historical ranges. Further improvement has been made in reducing the proportion of non-staff costs to net sales, including establishment, personal, commercial and office costs, with the non-staff costs ratio improving 0.2 margin points on a reportable basis and 0.1 margin points on a constant currency basis. Contribution from share of results of associates improved reportable margins by 0.4 margin points and 0.3 margin points in constant currency.

On a like-for-like basis, the average number of people in the Group, excluding associates, was 134,387 in the first half of the year, compared to 135,646 in the same period last year, a decrease of 0.9%. On the same basis, the total number of people in the Group, excluding associates, at 30 June 2017 was 133,931, down 1.8% compared to 136,406 at 30 June 2016. Since 1 January 2017, on a like-for-like basis, the number of people in the Group has decreased by 1.0% or over 1,400 at 30 June 2017, reflecting the continued caution by the Group’s operating companies in hiring and the usual seasonality of a relatively smaller absolute first half in comparison to the second half. On the same basis revenue decreased 0.3%, with net sales down 0.5%.

Exceptional gains and investment write-downs

In the first half of 2017, net exceptional losses amounted to £0.3 million, primarily relating to the Group’s share of net exceptional gains of associates, offset by restructuring costs. This compares with net exceptional losses in the first half of 2016 of £121.6 million, relating primarily to the write down of the Group’s investment in comScore.

Interest and taxes

Net finance costs (excluding the revaluation of financial instruments) were £88.6 million compared to £79.0 million in the first half of 2016, an increase of £9.6 million, or 12.2%, reflecting foreign exchange and higher levels of average net debt, partly offset by lower funding costs and more efficient management of cash pooling. The weighted average debt maturity is now 10 years, with a weighted average interest rate of 3.0% at 30 June 2017 versus 3.4% at 30 June 2016.

The headline tax rate rose by 1.0% to 22.0% (2016: 21.0%), reflecting the levels and mix of profits in the countries in which the Group operates. The tax rate on the reported profit before tax was 18.7% (2016: 33.7%), lower than the headline tax rate, largely because the revaluation of financial instruments were not taxable.

Earnings and dividend

Headline profit before tax was up 15.0% to £793 million from £690 million and up 1.8% in constant currency.

Reported profit before tax rose by 83.3% to £779 million from £425 million, or up 52.4% in constant currency. This reflected the significant difference between the net exceptional losses of £0.3 million in the first half of 2017, compared with the net exceptional losses of £121.6 million in the first half of last year. Reported profits attributable to share owners rose by 142.5% to £596 million from £246 million, again reflecting the impact of exceptional items in 2016. In constant currency, profits attributable to share owners rose by 92.1%.

Diluted headline earnings per share rose by 16.1% to 45.4p from 39.1p. In constant currency, diluted headline earnings per share rose by 2.4%. Diluted reported earnings per share rose by 146.6% to 46.6p from 18.9p and by 95.1% in constant currency, as a result of the net exceptional losses in the first half of 2016 compared with the first half of 2017.

As outlined in the 2015 Preliminary Announcement, the achievement of the previous targeted pay-out ratio of 45% one year ahead of schedule, raised the question of whether the pay-out ratio target should be increased further. Following that review, your Board decided to up the dividend pay-out ratio to a target of 50%, to be achieved by 2017, and as a result, dividends increased by an overall 17.0% in relation to 2015, and a dividend pay-out ratio of 47.7%. In 2016, dividends increased overall by a further 26.7% (including the proposed final dividend of 37.05p), reaching the recently targeted pay-out ratio of 50% one year ahead of schedule. Despite the modest improvement in constant currency operating profit and headline diluted earnings per share in the first half of 2017, your Board considers it appropriate to declare an interim dividend of 22.7p per share, an increase of 16.1%, in line with the increase in reported diluted earnings per share, and a pay-out ratio of 50% for the first half, in line with target. The record date for the interim dividend is 6 October 2017, payable on 6 November 2017. Further details of WPP’s financial performance are provided in Appendices 1-4.

Cyber-attack

On 27 June, the Group, together with several other multi-national companies who also had operating companies active in Ukraine using a piece of tax filing software, experienced a network cyber-attack, which led to a significant disruption of some of the Group’s operating companies, particularly at GroupM and the Y&R Group. However, despite the disruption, the majority of the Group’s systems were restored and operating normally within one week or so of the attack with the help of its IT partners led by IBM, with some remaining issues in a few locations, which are being worked through. Although there was some delay to certain financial processes, the Group did not experience any significant loss in revenue from clients or of data and believes that the cyber-attack cannot be blamed for the weaker performance in June and July. Whilst it is virtually impossible to prevent 100% of attacks of this nature, further measures are being taken to assess and strengthen our controls and recovery procedures.

Regional review

The pattern of revenue and net sales growth differed regionally. The tables below give details of revenue and net sales, revenue and net sales growth by region for the second quarter and first half of 2017, as well as the proportion of Group revenue and net sales and operating profit and operating margin by region;

Revenue analysis

Net sales analysis

Operating profit analysis (Headline PBIT)

North America like-for-like revenue decreased 3.0% in the second quarter, with like-for-like net sales down 3.3%, slightly worse than the first quarter, as parts of the Group’s advertising and media investment management, data investment management and healthcare businesses continued to come under pressure, together with a reduction in the pace of growth in the Group’s public relations and public affairs and digital, eCommerce and shopper marketing businesses. As a result, like-for-like revenue growth rates in the first half were the same as the first quarter at -3.0%, with like-for-like net sales -2.2%, compared with -1.1% in the first quarter.

United Kingdom like-for-like revenue, was up 5.8% in the second quarter, the strongest performing region, and a significant improvement on the first quarter growth of 3.2%, as the Group’s advertising and media investment management, branding & identity and digital, eCommerce and shopper marketing businesses improved over the first quarter.

Western Continental Europe, which remains uneven from a macro-economic point of view, slowed in the second quarter, following the strong growth in the first quarter, with like-for-like revenue down 3.2%, compared with growth of 5.3% in the first quarter. Austria, Finland, France, Germany, Italy, the Netherlands and Sweden all slowed in the second quarter, compared with the first quarter. Greece and Turkey were the only bright spots. Net sales showed a similar pattern to revenue, down 4.2% like-for-like, compared with growth of 4.3% in the first quarter.

In Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe, revenue growth showed some improvement over the first quarter, with like-for-like growth of 0.8%, compared with -0.1% in the first quarter. However, like-for-like net sales declined 0.4%, slightly worse than the -0.1% in the first quarter. Revenue growth in Asia Pacific and Latin America showed an improving trend, with Africa & the Middle East and Central & Eastern Europe slower. Net sales growth showed a similar trend to revenue, although Asia Pacific was weaker. In South East Asia, India, the Group’s second largest market in the region, remains a shining beacon, with like-for-like net sales growth of 4.0% in the second quarter. Indonesia, Pakistan, the Philippines, Thailand and Vietnam all grew net sales well above the average, but Greater China remains sluggish as it was in the first quarter. Net sales growth in the BRICs¹⁷ slowed in the second quarter, as Brazil and Russia were more difficult. The Next 11¹⁸ continued to grow more strongly, but slower than the first quarter. CIVETS and MIST also continued to grow more strongly, but more slowly in the second quarter.

In Central & Eastern Europe, like-for-like net sales in the second quarter were affected by the slowdown in Russia, with the Czech Republic and Poland also performing less well. The bright spots were Hungary, Romania and Ukraine.

Primarily reflecting the usually lower first-half seasonal pattern, the continued higher growth rates in some mature markets, and generally weaker foreign exchange rates in so called faster growth markets, only 30.0% of the Group’s net sales came from Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe, against the Group’s revised and strengthened strategic objective of 40-45% over the next three to four years. However, this was up over one percentage point compared with last year, reflecting in part the merger of most of the Group’s Australian and New Zealand assets with STW Communications Group Limited in Australia. The re-named WPP AUNZ became a listed subsidiary of the Group on 8 April 2016.

Business sector review

The pattern of revenue and net sales growth also varied by communications services sector and operating brand. The tables below give details of revenue and net sales, revenue and net sales growth by communications services sector, as well as the proportion of Group revenue and net sales for the second quarter and first half of 2017 and operating profit and operating margin by communications services sector;

Revenue analysis

Net sales analysis

Operating profit analysis (Headline PBIT)

Advertising and Media Investment Management

In constant currencies, advertising and media investment management revenue grew 5.2% in the second quarter, with like-for-like growth -0.2%, slightly down compared with the first quarter and continuing to reflect weaker trading conditions in the Group’s media investment management businesses in North America and the Middle East, together with slower growth in Western Continental Europe and the particularly strong comparative in the second quarter of last year of 5.4%. On the same basis net sales grew 2.8% and -2.9% respectively, with a reduction in the growth rate in the Group’s advertising businesses in most major markets, especially North America, Western Continental Europe and Asia Pacific, although the United Kingdom showed some improvement.

The Group gained a total of $4.246 billion in net new business wins (including all losses and excluding retentions) in the first half, a significant increase compared to $2.992 billion in the same period last year and which reflects improved net new business momentum and restored leadership in net new business league tables. Of this, J. Walter Thompson Company, Ogilvy & Mather Worldwide, Y&R and Grey generated net new business billings of $1.001 billion. Also, out of the Group total, GroupM, the Group’s media investment management company (which includes Mindshare, MEC/Maxus(Newco), MediaCom, GroupM Search, Xaxis and Essence), together with tenthavenue, generated net new business billings of $2.101 billion.

On a reportable basis, net sales margins were flat at 15.3%.

Data Investment Management

On a like-for-like basis, data investment management revenue fell 4.6% in the second quarter, compared with -3.4% in the first quarter, with Western Continental Europe, Asia Pacific and Africa & the Middle East slower than the first quarter. North America, the United Kingdom and Latin America improved over the first quarter. Like-for-like net sales were down 2.8% in the second quarter compared with -0.8% in the first quarter, with all regions, except Latin America slowing. Reportable net sales margins fell 0.5 margin points, to 13.0%, reflecting the difficult trading conditions in the first half and the strong improvement of 1.8 margin points in the comparative period last year, partly offset by the benefits of the restructuring actions taken in 2016.

Public Relations and Public Affairs

Public relations and public affairs like-for-like revenue increased 0.6% in the second quarter, compared with 4.4% in the first quarter, which was the strongest performing sector. Like-for-like net sales showed a similar pattern, down 0.1% in the second quarter, compared with growth of 3.9% in the first quarter, with North America, Western Continental Europe and Asia Pacific slower, but the United Kingdom continued the strong growth seen in the first quarter with growth over 7%, with the Middle East also improving. Cohn & Wolfe and parts of the specialist public relations and public affairs businesses in the United States and Germany performed particularly well. Reportable net sales margins fell slightly, down 0.1 margin points, although Ogilvy Public Relations, Cohn & Wolfe, and the specialist public relations companies, Glover Park and Ogilvy Government Relations, showed improved margins in the first half.

Branding and Identity, Healthcare and Specialist Communications

At the Group’s branding & identity, healthcare and specialist communications businesses (including digital, eCommerce and shopper marketing) like-for-like net sales grew 0.1% in the second quarter, compared with 2.2% in the first quarter. The Group’s healthcare businesses in the United States and digital, eCommerce and shopper marketing businesses in North America and Western Continental Europe performed less well, but the United Kingdom and Asia Pacific improved. Reportable net sales margins for this sector as a whole, were up 0.6 margin points, to 12.3%, with healthcare and specialist communications margins up strongly. Like-for-like, digital revenue now accounts for over 41% of Group revenue, up over 1 percentage point from the previous first half, and grew by 2.2% in the first half with net sales up 2.0%.

Associates, Investments, People, Countries, Clients, Horizontality

Including 100% of associates and investments, the Group has annual revenue of over $26 billion and over 200,000 full-time people in over 3,000 offices in 114 countries, now including Cuba and Iran (through an affiliation agreement). The Group, therefore, has access to an unparalleled breadth and depth of marketing communications resources. It services 354 of the Fortune Global 500 companies, 29 of the Dow Jones 30, 71 of the NASDAQ 100 and 813 national or multi-national clients in three or more disciplines. 545 clients are served in four disciplines and these clients account for over 52% of Group revenue. This reflects the increasing opportunities for coordination between activities, both nationally and internationally. The Group also works with 426 clients in 6 or more countries. The Group estimates that well over a third of new assignments in the first half of the year were generated through the joint development of opportunities by two or more Group companies. Horizontality, or making sure our people in different disciplines work together for the benefit of clients, is clearly becoming an increasingly important part of client strategies, particularly as they continue to invest in brand in slower-growth markets and both capacity and brand in faster-growth markets.

Cash flow highlights

In the first half of 2017, operating profit was £724 million, non-cash exceptional gains £6 million, depreciation, amortisation and impairment £232 million, non-cash share-based incentive charges £51 million, net interest paid £61 million, tax paid £254 million, capital expenditure £120 million and other net cash outflows £15 million. Free cash flow available for working capital requirements, debt repayment, acquisitions, share repurchases and dividends was, therefore, £551 million.

This free cash flow was absorbed by £241 million in net cash acquisition payments and investments (of which £62 million was for earnout payments with the balance of £179 million for investments and new acquisitions payments) and £290 million in share repurchases, a total outflow of £531 million. This resulted in a net cash inflow of £20 million, before any changes in working capital and also reflects our strategic objectives of investing approximately £300-£400 million annually in acquisitions and investments and executing share buy-backs of 2-3% of the issued share capital.

A summary of the Group’s unaudited cash flow statement and notes as at 30 June 2017 is provided in Appendix 1.

Acquisitions

In line with the Group’s strategic focus on new markets, new media and data investment management, the Group completed 23 transactions in the first six months; 9 acquisitions and investments were in new markets and 18 in quantitative and digital. Of these, 1 was driven by individual client or agency needs and 5 were in both new markets and quantitative and digital.

Specifically, in the first half of 2017, acquisitions and increased equity stakes have been completed in advertising and media investment management in the United States, Croatia, Russia, China and India; data investment management in the United Kingdom and Ireland; in digital, eCommerce & shopper marketing in the United States, the United Kingdom, Ireland, Spain and China.

A further 8 acquisitions and investments were made in July and August, with one in advertising and media investment management in Germany; one in branding & identity in Italy; and six in digital eCommerce & shopper marketing in the United States, France, the United Arab Emirates, China and Brazil.

Balance sheet highlights

Average net debt in the first six months of 2017 was £4.811 billion, compared to £4.390 billion in 2016, at 2017 exchange rates. This represents an increase of £421 million. Net debt at 30 June 2017 was £4.670 billion, compared to £4.249 billion on 30 June 2016, an increase of £421 million. The increased average and period end net debt figures, reflect the significant net acquisition spend, share buy-backs and dividends in the twelve months to 30 June 2017, a weakened pound sterling and the impact of the net debt acquired on the merger with STW in Australia.

Your Board continues to examine the allocation of its EBITDA of over £2.5 billion or over $3.2 billion, for the preceding twelve months and substantial free cash flow of almost £1.7 billion, or over $2.1 billion per annum, also for the previous twelve months, to enhance share owner value. The Group’s current market capitalisation of £20.3 billion ($26.0 billion) implies an EBITDA multiple of 8.0 times, on the basis of the trailing 12 months EBITDA to 30 June 2017. Including net debt at 30 June of £4.670 billion, the Group’s enterprise value to EBITDA multiple is 9.8 times. The average net debt to EBITDA ratio is under 1.9x, within the Group’s target range of 1.5-2.0x.

A summary of the Group’s unaudited balance sheet and notes as at 30 June 2017 is provided in Appendix 1.

Return of funds to share owners

As outlined in the 2015 Preliminary Announcement, the achievement of the previous targeted pay-out ratio of 45% one year ahead of schedule, raised the question of whether the pay-out ratio target should be increased further. Following that review, your Board decided to up the dividend pay-out ratio to a target of 50%, to be achieved by 2017, and as a result, dividends increased by an overall 17.0% in relation to 2015, and a dividend pay-out ratio of 47.7%. In 2016, dividends increased overall by a further 26.7% (including the proposed final dividend of 37.05p), reaching the recently targeted pay-out ratio of 50% one year ahead of schedule. Despite the modest improvement in constant currency operating profit and headline diluted earnings per share in the first half of 2017, your Board considers it appropriate to declare an interim dividend of 22.7p per share, an increase of 16.1%, in line with the increase in reported diluted earnings per share, and with the target pay-out ratio.

During the first six months of 2017, 16.5 million shares, or 1.3% of the issued share capital, were purchased at a cost of £290 million and an average price of £17.57 per share.

Current trading

In July, like-for-like revenue and net sales were down 4.1% and 2.6% respectively. All regions, except the United Kingdom, Latin America and Central & Eastern Europe showed lower revenue than the prior year and all sectors were down, with advertising & media investment management and data investment management the most affected. Cumulative like-for-like revenue and net sales growth for the first seven months of 2017 is now -0.9% and -0.8% respectively. The Group's quarter 2 revised forecast, having been reviewed at the parent company level in the first half of August, indicates full year like-for-like revenue and net sales growth of between zero to 1.0%, lower than previous forecasts of 2%, with a stronger second half, partly reflecting easier comparatives in the second half of 2016.

Outlook

Macroeconomic and industry context

After another record year in 2016, the Group’s performance in the first seven months of the new financial year has been much tougher, as worldwide GDP growth, both nominal and real, seems to have slowed in the second half of last year and into the new year. Profitability, however, improved slightly in constant currency, with like-for-like margins up 0.1 margin points, although constant currency margins were flat in the first half. Net sales growth in the second quarter was less than the first quarter, with forecast client spending in quarter two under considerable pressure. Like-for-like revenue and net sales were down 0.3% and 0.5% respectively in the first six months, compared with up 4.3% and 3.8% in the same period last year. As client spending appears, at least at this stage, to be less predictable, our operating companies are still hiring cautiously and responding to any geographic, functional and client changes in revenue – positive or negative.

For almost a decade since the Lehman crisis of 2008, worldwide GDP has been growing steadily in the 3.0-4.0% range. The faster growth markets of the BRICs and Next 11 and the smaller markets of the CIVETS and MIST, centred mainly in Asia, Latin America, Africa & the Middle East and Central & Eastern Europe, along with the accelerating penetration of digital media and ecommerce provided and continue to provide faster than the average growth opportunities. After all the next billion consumers are unlikely to come from North America or Western Europe, with or without the United Kingdom.

However, in the last year or so, growth has become even more difficult to find, perhaps due to increasing social, political and economic volatility, for example with the rise of populism typified by surprise election results in the United Kingdom and the United States and bumpy growth in three of the bigger BRIC countries of Brazil, Russia and China, although India continues to develop rapidly, despite introductions of demonetisation and a General Sales Tax. Even the growth of the digital marketplace has been dogged by issues such as measurability, viewability, fraud, and fake news, let alone the duopoly of Google and Facebook and the growing dominance of Amazon in so many spheres, including, but not exclusively, ecommerce, retail, cloud computing and content.

In a slower growth world, both more recently and post-Lehman, inflation has been negligible, perhaps also suppressed by digital deflation. As a result, clients have markedly less pricing power and finance and procurement departments are very focused on cost. In this world, it is, perhaps, not surprising that clients have reduced spending. If you look at the S&P 500 for example, significant like-for-like top line growth seems confined to the technology sector and ten or so HMOs in the pharmaceutical sector. Beyond these, top line growth is anaemic.

The effects of all this have been heightened by the more recent development of three significant forces. Firstly, digital disruption has demanded that incumbent or legacy businesses reboot their structures and reach their customers in new, primarily digitally driven ways. This can happen by driving their existing businesses to change, by establishing and developing new digital businesses and, finally, by making digital investments or through experimentation. Secondly, cheap money generated by central bank interest rate policy and bond buying to stimulate growth and counter austerity has lowered the cost of capital significantly enabling private equity and general investors to aggressively target investments. Many of our clients are being subjected to activist investment and pressure to reduce cost or restructure, which also reduces client spending. Finally, some investment groups are practiced in the art of zero-based budgeting, which also puts pressure on marketing costs, at least in the short-term.

Looking at our top 20 or so clients over the last two or three quarters, top line growth has been in the 2-3% range, with most if not all of it coming from pricing increases usually in Asia Pacific or Latin America. Volume gains have been hard to come by and in some cases volumes have fallen, which means less consumers or users, a big warning sign in any consumer focused business and which cannot be maintained in the long-run. As we know from our annual global 100 Top Brands BrandZ survey with the Financial Times over the last twelve years, like-for-like top line growth is the biggest driver of total share owner return and comes from investment in innovation and brand. Interestingly, a number of companies have already said they intend to ramp up spending in the second half of the year as sales volumes have weakened.

Not helping either in focusing on the long-term, is the average term life of S&P 500 and FTSE 100 CEOs at 6-7 years, CFOs at 4-5 years and CMOs at 2-3 years. As a result, it is not surprising that since Lehman at the end of 2008, the combined level of dividend payments and share buy-backs as a proportion of retained earnings at the S&P 500 has steadily risen from around 60 per cent of retained earnings to over 100%. In effect, managements are abrogating responsibility for reinvesting retained profits to their institutional investors. In fact, in seven of the last eight quarters the ratio has exceeded or almost reached 100%, tapering off in the last two quarters as stock market indices and share prices reached new highs and the relative attraction of buy-backs lessened.

Our industry is no different. Competition is fierce and as image in trade magazines, in particular, is crucial to many, account wins at any cost are paramount. There have been several examples recently of major groups being prepared to offer clients up-front discounts as an inducement to renew contracts, heavily reduced creative and media fees, extended payment terms (which are starting to show up on agency balance sheets), unlimited indirect liability for intellectual property liability and cash or pricing guarantees for media purchasing commitments, even though the latter are difficult for procurement departments to measure and monitor. As some say, you are only as strong as your weakest competitor. These practices cannot last and will only result eventually in poor financial performance and further consolidation, the premium being on long-term profitable growth. Our industry may be in danger of losing the plot. Once you accept benchmarking as a means of evaluation you become a cost and are viewed as a source of funding or insurance, rather than an investment or value added and recent industry results have reflected this increased pressure and inconsistencies. Some are storing up problems for the next generation of management.

Much has been made about the potential negative impact of the growth of digital marketing on our business model and the move by consultants, principally Accenture and Deloitte (our current auditors), into our industrial spaces. On the first, digital is now 41% of our revenues, representing the biggest industrial concentration of digital marketing firepower and Google and Facebook are our first and third largest media customers, with Facebook probably becoming our second largest this year. The consultants have certainly been mopping up some small, fragmented digital agencies, but there is little evidence so far of significant competitive penetration. The most significant pressures on client spending seems to be the impact of low growth and cheap money driving asset purchases, consolidation and zero-based budgeting. For the short-term, therefore, we have to weather the storm, focusing even more on our four core strategic objectives of horizontality, or providing clients with a seamlessly integrated effective and efficient marketing offer provided by our best people; on fast growth markets, where the new middle-class consumers will flourish; on digital as it becomes even more pervasive; and on technology, data and content, as they become even more integral to our clients’ marketing success. Considerable structural change has already taken place in 2017 beyond the creation of Teams and appointment of Country and Sub-Regional managers - including One Ogilvy; merger of MEC/Maxus to NewCo; Essence expansion; Kantar First; WPP Health & Wellness; B to D Group; Wunderman and POSSIBLE; Wunderman and Salmon.

Not surprising then that your Company's top line revenue and net sales organic growth continues to be under pressure. For this year, growth is now forecast to be zero to 1.0% with weaker comparatives in the second half of 2016 aiding growth this year. Later this year and next year should also be aided by the impact of recent net new business wins and increased client spending to stimulate volume growth, along with easier comparatives.

2018 is unlikely to be much different. There seems little reason for an upside breakout in growth in terms of worldwide GDP growth, or indeed a downside breakout, despite the possibility of an increase in interest rates in the short-term. Indeed, interest rates, although they are likely to rise, are likely to continue to remain at relatively low relative levels historically, longer than some think. Whilst Trumponomics may well have resulted in an increase in the United States GDP growth rate with the United States the biggest ($18 trillion) GDP engine out of a total of $74 trillion worldwide, the limitations of the new administration seem to be jeopardising the anti-regulatory, infrastructure and tax reduction programme that was promised. In addition, continued political uncertainties in Europe, West and East, the Middle East, the PyeongChang Peninsula, Chinese focus on qualitative growth and the longer-term recovery of Latin America, probably mean that stronger growth will be harder to find outside the United States. America First, if the new Administration’s plans are finally implemented, will almost definitely mean a stronger American economy, at least in the short- to medium-term.

2018 is also a mini-quadrennial year and will be stimulated by the Russian World Cup and the mid-term Congressional elections and, perhaps, the PyeongChang Winter Olympics. Nominal GDP growth should continue to grow in the 3.0-4.0% range, with advertising as a proportion remaining constant overall, with mature markets continuing at lower than pre-Lehman levels, counter-balanced by under-branded faster growth markets growing at faster rates.

Financial guidance

For 2017, reflecting the first half net sales growth and quarter 2 revised forecast:

• Like-for-like revenue and net sales growth of between zero and 1.0%
• Target operating margin to net sales improvement of 0.3 margin points on a constant currency basis in line with full year margin target

In 2017, our prime focus will remain on improving revenue and net sales, driven by our leading position in horizontality, faster growing geographic markets and digital, premier parent company creative and effectiveness position, new business and strategically targeted acquisitions. At the same time, we will concentrate on meeting our operating margin objectives by managing absolute levels of costs and increasing our flexibility in order to adapt our cost structure to significant market changes and by ensuring that the benefits of the restructuring investments taken in 2015 and 2016 continue to be realised. The initiatives taken by the parent company in the areas of human resources, property, procurement, information technology and practice development continue to improve the flexibility of the Group’s cost base. Flexible staff costs (including incentives, freelance and consultants) remain close to historical highs of around 8% of net sales and should position the Group well if current market conditions deteriorate.

The Group continues to improve co-operation and coordination among its operating companies in order to add value to our clients’ businesses and our people’s careers, an objective which has been specifically built into short-term incentive plans. We have decided that up to half of operating company incentive pools are funded and allocated on the basis of Group-wide performance in 2017 and beyond. Horizontality has been accelerated through the appointment of 50 global client leaders for our major clients, accounting for over one third of total revenue of almost $20 billion and 19 regional and country managers in a growing number of test markets and sub-regions, covering about half of the 113 countries in which we operate.

Focus has been laid on the areas of media investment management, healthcare, sustainability, government, new technologies, new markets, retailing, shopper marketing, internal communications, financial services and media and entertainment. The Group continues to lead the industry, in coordinating communications services geographically and functionally through parent company initiatives and winning Group pitches. Whilst talent and creativity (in the broadest sense) remain key potential differentiators between us and our competitors, increasingly differentiation can also be achieved in three additional ways – through application of technology, for example, Xaxis, AppNexus and Triad; through integration of data investment management, for example, Kantar and comScore (now merged with Rentrak); and through investment in content companies, for example, Imagine, Vice, Media Rights Capital, Fullscreen, Indigenous Media, China Media Capital, and Refinery29.

In addition, strong and considered points of view on the adequacy of online and, indeed, offline measurement, on viewability, on internet fraud and transparency, on online media placement and brand safety and, finally, on fake news are all examples where further differentiation is important and can be secured through considered initiatives. With its leadership position, as the world's largest media investment management operation, GroupM has developed a strong united point of view with its leading clients and associates, like AppNexus, in all these areas and has aligned with Kantar's data investment management capabilities, for example, through comScore, to provide better capabilities. These philosophical differences and operational capabilities are extremely effective in responding to the trade association and regulatory issues that have been raised recently.

Our business remains geographically and functionally well positioned to compete successfully and to deliver on our long-term targets:

• Revenue and net sales growth greater than the industry average
• Improvement in net sales margin of 0.3 margin points or more, excluding the impact of currency, depending on net sales growth and staff costs to net sales ratio improvement of 0.2 margin points or more
• Annual headline diluted EPS growth of 10% to 15% p.a. delivered through revenue growth, margin expansion, acquisitions and share buy-backs

To access WPP's 2017 interim results financial tables, please visit: www.wpp.com/investor

This announcement has been filed at the Company Announcements Office of the London Stock Exchange and is being distributed to all owners of Ordinary shares and American Depository Receipts. Copies are available to the public at the Company’s registered office.

The following cautionary statement is included for safe harbour purposes in connection with the Private Securities Litigation Reform Act of 1995 introduced in the United States of America. This announcement may contain forward-looking statements within the meaning of the US federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially including adjustments arising from the annual audit by management and the Company’s independent auditors. For further information on factors which could impact the Company and the statements contained herein, please refer to public filings by the Company with the Securities and Exchange Commission. The statements in this announcement should be considered in light of these risks and uncertainties.

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