WPP :  2015 Interim Results

WPP (NASDAQ:WPPGY) today reported its 2015 Interim Results.

First-half and Q2 highlights

• Reported billings increased by 5.0% to £23.156bn, also up 5.0% in constant currency
• Reported revenue growth of 6.8%, with like-for-like growth of 4.9%, 1.5% growth from acquisitions and 0.4% from currency, reflecting the weakness of sterling against the dollar, partly offset by the strength of sterling, primarily against the euro
• Reported net sales up 5.2% in sterling (down 4.0% in dollars, up 18.1% in euros and up 12.9% in yen), with like-for-like growth of 2.3%, 2.4% growth from acquisitions and 0.5% from currency
• Constant currency revenue growth in all regions and business sectors, characterised by particularly strong growth geographically in North America, 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 sub-sectors direct, digital and interactive and specialist communications
• Like-for-like net sales growth of 2.3%, a slight reduction over the first quarter growth rate, with the gap compared to revenue growth less in the second quarter, as the scale of digital media purchases in media investment management and data investment management direct costs continued at a similar level to the first quarter
• Reported headline EBITDA up 6.7%, with constant currency growth also 6.7%, delivered through strong like-for-like net sales growth and by margin improvement, with headline operating costs up 4.7%, rising less than revenue and net sales
• Reported headline PBIT increased by 7.6%, and up 7.9% in constant currency with the reported net sales margin, a more accurate competitive comparator, increasing by 0.3 margin points, and by 0.4 margin points on a constant currency basis, well ahead of the Group’s full year target
• Reported headline diluted EPS 33.5p, up 14.7%, and up 15.2% in constant currency. Dividends increased 36.9% to 15.91p, giving a pay-out ratio of 47.5% in the first half, compared with the traditionally lower first-half pay-out ratio of 40% last year and mid-way between the 45% pay-out ratio in 2014 and the target of 50% originally targeted to be reached over two to three years
• Average net debt increased by £261m (+9%) to £3.131 billion compared to last year, at 2015 constant rates, continuing to reflect significant incremental net acquisition spend and share repurchases of £468 million in the twelve months to 30 June 2015, compared with the previous twelve months, more than offsetting the improvements in working capital in the same period
• Return on equity for the 12 month period to 30 June 2015 increased to 15.9% from 15.2% for the previous 12 month period. The return was also up on the 15.0% achieved in the calendar year 2014, from 14.4% in 2013. This compares to a weighted average cost of capital of over 6%, also after tax
• Creative and effectiveness domination recognised yet again in 2015 with the award of the Cannes Lion to WPP for the most creative Holding Company for the fifth successive year since the award’s inception and another to Ogilvy & Mather Worldwide for the fourth consecutive year as the most creative agency network. Three WPP agency networks, Ogilvy & Mather Worldwide, Grey and Y&R finished amongst the top four networks at Cannes in 2015, in positions one, three and four respectively, an outstanding achievement. Grey New York and Ogilvy Sao Paulo were also voted the second and third most creative agencies in the world. For the fourth consecutive year, WPP was awarded the EFFIE as the most effective Holding Company
• Continued strong performance in all net new business tables and in current tsunami of primarily media new business reviews
• Accelerated growth strategy continues with revenue ratios for fast growth markets and new media raised from 35-40% to 40-45% over next five years. Quantitative revenue target of 50% already achieved

Current trading and outlook

• July 2015 | Strong July like-for-like revenue growth of 5.0% and net sales growth, up 3.7% like-for-like, indicating a likely stronger third quarter, as budgeted and forecast. All regions and sectors (except data investment management) were positive, and showed a similar relative pattern to the first half, with advertising, media investment management, public relations and public affairs and specialist communications (including direct, digital and interactive) up strongly. Cumulative like-for-like revenue growth for the first seven months of 2015 is 4.9% and net sales growth 2.5%
• FY 2015 quarter 2 revised forecast | Slight increase in like-for-like revenue growth from the quarter 1 revised forecast, as the scale of digital media purchases increased, with revenue and net sales growth similar at over 3% and a stronger second half, partly reflecting easier comparatives in the second half of 2014. Headline net sales operating margin target improvement, as previously, of 0.3 margin points in constant currency
• Dual Focus in 2015 | 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; 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. Where required, details of how these have been arrived at are shown in the Appendices.

Review of Group results

Revenue

Reported billings were up 5.0% at £23.156 billion, and up 5.0% in constant currency. Estimated net new business billings of £1.301 billion ($2.082 billion) were won in the first half of the year, resulting in the Group performing strongly in all net new business tables, once again. 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, the full benefit of which will be seen reflected in Group revenue later in 2015 and into 2016. The Group is actively engaged in the tsunami of mainly media investment management reviews, chiefly in the United States, totalling approximately $20 billion, which are on-going. The earlier results of these reviews have been good and further results will be announced towards the end of 2015 and into 2016.

This surge in attention to media investment management seems primarily to be procurement led and cost-driven, because of the relative size of media spending as a line item in the client P&L. It also reflects concern and uncertainty around the impact of changing screen-based media consumption habits, particularly amongst the younger age groups, like millennials and centennials, as we have seen with legacy print. In addition, weaknesses in the coverage of traditional media measurement systems, which, for example, exclude significant parts of out-of-home viewing and multi-screen viewing and in new media measurement systems, that set too low a standard or hurdle for video viewability, add to the confusion. Finally, there is some debate about lack of transparency in new media buying, which is perhaps unfair, given the openness of market pricing and the opacity of Double-click and Atlas page-ranking methods, for example, along with their high margins and some cases of anti-competitive bundling.

Reportable revenue was up 6.8% at £5.839 billion. Revenue on a constant currency basis was up 6.4% compared with last year, the difference to the reportable number reflecting the continuing weakness of the pound sterling against the US dollar, partly offset by the strength of sterling, primarily against the euro. As a number of our current 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 2.6% to $8.901 billion, which compares with the $7.275 billion of our closest current US-based competitor, euro reportable revenue was up 19.9% to €7.990 billion, which compares with €4.542 billion of our nearest current European-based competitor and yen reportable revenue was up 14.6% to ¥1.072 trillion, which compares with ¥407¹¹ billion of our nearest current Japanese-based competitor.

On a like-for-like basis, which excludes the impact of acquisitions and currency, revenue was up 4.9% in the first half, with net sales up 2.3%, with the gap compared to revenue growth slightly less in the second quarter, as the scale of digital media purchases in media investment management and data investment management direct costs continued at a similar level to the first quarter. In the second quarter, like-for-like revenue was up 4.5%, lower than the first quarter’s 5.2%, giving 4.9% for the first half, with net sales also slightly lower at 2.1%, following 2.5% in the first quarter, giving 2.3% for the first half, against stronger comparatives of 8.7% and 4.1% for revenue and net sales respectively, in 2014. Despite tepid GDP growth, low or no inflation and consequent lack of pricing power, client data continues to reflect some increase in advertising and promotional spending – with the former tending to grow faster than the latter, which from our point of view is more positive – across most of the Group’s major geographic and functional sectors. Quarter two saw a continuation of the relative strength of advertising spending in fast moving consumer goods, especially. Nonetheless, clients understandably continue to demand increased effectiveness and efficiency, i.e. better value for money. Although corporate balance sheets are much stronger than pre-Lehman and confidence is higher as a result, the Eurozone, Middle East, BRICs hard or soft landing (particularly now China) and US deficit uncertainties still demand caution. The over $7 trillion net cash lying virtually idle in those balance sheets, still seems destined to remain so, with companies, even after the recent upturn in merger activity, unwilling to attempt excessive acquisition risk (except perhaps in our own industry) or expand capacity, particularly in mature markets, despite the Eurozone showing some signs of life.

Operating profitability

Reported headline EBITDA was up 6.7% to £782 million, up 6.7% in constant currency. Reported headline operating profit was up 7.6% to £669 million from £622 million, up 7.9% 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, for reasons which we still do not yet understand.

Reported headline net sales operating margins were up 0.3 margin points at 13.3%, up 0.4 margin points in constant currency, well ahead of the Group’s full year margin target of a 0.3 margin points improvement, on a constant currency basis. On a like-for-like basis, operating margins were also up more than target at 0.4 margin points.

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 for its own account 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 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, will focus even more on net sales and the net sales operating margin, in the future. In the first half, as noted above, the reportable headline net sales margin was up 0.3 margin points and up an even stronger 0.4 margin points in constant currency and like-for-like.

On a reported basis, net sales operating margins, before all incentives¹², were 15.5%, up 0.2 margin points, compared with 15.3% last year. The Group’s staff costs to net sales ratio, including incentives, fell by 1.1 margin points to 65.5% compared with 66.6% in the first half of 2014. On a constant currency basis, net sales margins, before all incentives, were also 15.5%, 0.1 margin points higher than the first half of 2014, and the staff costs to net sales ratio, including incentives, was down 1.1 margin points to 65.5% compared with 66.6% in the first half of 2014. This reflected better staff costs to net sales ratio management, through better control of the growth of staff numbers and salary and related costs, as compared to net sales, than in the first half of 2014.

Operating costs

In the first half of 2015, headline operating costs¹³ increased by 4.7% and were up by 4.1% in constant currency, compared with reported net sales up 5.2% and constant currency net sales growth of 4.7%. Reported staff costs, excluding all incentives, were down 1.0 margin point at 63.3% of net sales and down 0.9 margin points in constant currency. Incentive costs amounted to £111.6 million or 14.8% of headline operating profits before incentives and income from associates, compared to £113.0 million last year, or 16.0%, a decrease of £1.4 million or 1.2%. 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%. Variable staff costs were 6.3% of revenue and 7.3% of net sales, at the higher end of historical ranges and, again, reflecting good staff cost management and continued flexibility in the cost structure.

On a like-for-like basis, the average number of people in the Group, excluding associates, was 123,203 in the first half of the year, compared to 125,266 in the same period last year, a decrease of 1.6%. On the same basis, the total number of people in the Group, excluding associates, at 30 June 2015 was 125,970, down 2.1% compared to 128,697 at 30 June 2014. This reflected, partly, the transfer of 1,445 staff to IBM in the first half of 2015, as part of the strategic partnership agreement and IT transformation programme. Since 1 January 2015, on a like-for-like basis, the number of people in the Group has decreased by 1.5% or 1,854 at 30 June 2015 (including the 1,445 staff transferred to IBM), and also 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 increased 4.9%, with net sales up 2.3%.

Interest and taxes

Net finance costs (excluding the revaluation of financial instruments) were £73.4 million compared to £90.4 million in the first half of 2014, a decrease of £17.0 million, or 19%, reflecting higher levels of average net debt, more than offset by lower funding costs and more efficient management of cash pooling. The weighted average debt maturity is now almost 10 years compared to 5 years in 2013, with a weighted average interest rate of 4.0% versus 5.6% two years ago.

The headline tax rate remained constant at 20.0% (2014 20.0%), although we do anticipate the tax rate will rise slightly, due to recent changes in United Kingdom tax legislation. The tax rate on the reported profit before tax was 15.3% (2014 19.3%), largely because the tax charges on the net exceptional gains were minimal.

Earnings and dividend

Headline profit before tax was up 12.1% to £596 million from £532 million and up 13.2% in constant currency.

Reported profit before tax rose by 44.5% to £710 million from £491 million, or up 45.6% in constant currency, reflecting the Group’s improved operating performance, as well as net exceptional gains on the sale and revaluation of some of the Group’s associates and investments. Reported profits attributable to share owners rose by 55.2% to £566 million from £365 million. In constant currency, profits attributable to share owners rose by 55.0%.

Diluted headline earnings per share rose by 14.7% to 33.5p from 29.2p. In constant currency, diluted headline earnings per share rose by 15.2%. Diluted reported earnings per share rose by 59.3% to 43.0p from 27.0p and by 58.8% in constant currency.

As outlined in the June 2015 AGM statement, 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 has decided to up the dividend pay-out ratio to a target of 50%, to be achieved by 2017, and, as a result, declares an increase of almost 37% in the 2015 interim dividend to 15.91p per share, representing a pay-out ratio of 47.5% for the first half, against the traditionally lower first-half pay-out of 40% last year. This has the effect of evening out the pay-out ratio between the two half-year periods and consequently balancing out the dividend payments more themselves, although the pattern of profitability and hence dividend payments seems likely to remain one-third in the first half and two-thirds in the second half. The record date for the interim dividend is 9 October 2015, payable on 9 November 2015. Further details of WPP’s financial performance are provided in Appendices 1 to 4. It now seems likely that the newly targeted pay-out ratio of 50% will be achieved by the end of 2016, one year ahead of target.

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 2015, as well as the proportion of Group revenue and net sales and operating profit and operating margin by region;

North America like-for-like revenue increased 7.3% in the second quarter, up strongly compared with the first quarter growth of 4.4%, with significantly higher growth in the Group’s advertising, media investment management businesses in the USA and Canada and in healthcare communications and direct, digital and interactive businesses in the USA. Net sales followed a similar pattern, with like-for-like growth 3.5% in the second quarter compared with 2.1% in the first quarter. Parts of the Group’s data investment management, public relations and public affairs and branding & identity businesses were tougher.

United Kingdom like-for-like revenue was up 4.6%, slower than the first quarter growth of 8.1%, as the Group’s media investment management businesses grew less strongly, although still double digit, together with parts of the Group’s public relations and public affairs businesses, which were slower. Data investment management, however, performed better than the first quarter. Net sales overall showed a similar pattern to revenue, up 2.2% like-for-like in the second quarter, compared with 3.6% in the first quarter, but was more difficult as data investment management net sales slowed.

Western Continental Europe, which remains patchy from a macro-economic point of view, showed improved revenue growth in the second quarter, up 4.6% like-for-like, compared with 2.7% in the first quarter. Germany, Italy, Spain, Sweden, the Netherlands and Switzerland remained bright spots, with strong growth, as they were in the first quarter, but Greece, reflecting its political and economic volte-face, saw a sharp decline. Austria, Belgium, France and Turkey performed less well. Net sales also improved over the first quarter, with like-for-like growth of 2.0%, compared with 0.3% in the first quarter, following a similar pattern to the growth in revenue.

In Asia Pacific, Latin America, Africa & the Middle East and Central & Eastern Europe, both revenue and net sales growth slipped back in the second quarter, with like-for-like growth of 1.1% and 0.7%, compared with 6.8% and 4.0% respectively in the first quarter. Latin America, Africa and the Middle East showed improved performance compared with the first quarter, but South East Asia, Australia and Central & Eastern Europe (particularly Russia, Poland and the Czech Republic) slowed. In South East Asia, Greater China and Singapore were tougher, but India and some of the Next 11¹⁷ grew strongly. Net sales growth in the BRICs¹⁸ slowed in the second quarter, as China and Russia, in particular, came under pressure.

As mentioned above, in Central & Eastern Europe, like-for-like net sales were very tough in the second quarter, slipping into negative territory, compared with growth in the first quarter, reflecting difficult conditions in Russia and Poland and the Czech Republic.

Primarily reflecting both the usually lower first-half seasonal pattern and sterling’s relative strength, only 29.4% of the Group’s net sales came from Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe, slightly up on the same period last year, and up almost one percentage point compared with the first quarter. This is against the Group’s revised strengthened strategic objective of 40-45% over the next five years.

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 2015 and operating profit and operating margin by communications services sector;

Advertising and Media Investment Management

As in the first quarter, advertising and media investment management remains the strongest performing sector. Like-for-like revenue grew by 7.9% in the second quarter, slower than the 10.7% seen in the first quarter, with some softening in media investment management in the UK, the Middle East, Australia, Greater China, India and Singapore, partly offset by improved performance in North America, South Korea, Indonesia, Thailand and Malaysia. Like-for-like net sales grew 2.7% in the second quarter, compared with 3.8% in the first quarter. The rate of growth in the Group’s advertising businesses improved slightly in the second quarter, but most regions except the UK, Africa and Asia Pacific remain challenging.

The Group gained a total of £1.301 billion ($2.082 billion) in net new business wins (including all losses and excluding retentions) in the first half, compared to £2.556 billion ($4.089 billion) in the same period last year. Of this, J. Walter Thompson Company, Ogilvy & Mather Worldwide, Y&R and Grey generated net new business billings of £553 million ($885 million). Also, out of the Group total, GroupM, the Group’s media investment management company (which includes Mindshare, MEC, MediaCom, Maxus, GroupM Search and Xaxis), together with tenthavenue, generated net new business billings of £400 million ($640 million). This strong net new business performance continues to ensure strong rankings in all net new business tables.

On a reportable basis and constant currency, net sales margins continued to improve, up 0.2 margin points to 14.9%.

Data Investment Management

On a constant currency basis, data investment management revenue grew 3.5% in the second quarter, compared with 0.3% in the first quarter, partly driven by the acquisition of a controlling interest in IBOPE in Latin America in the second quarter. Like-for-like revenue was down 1.4% in the second quarter, with net sales down 1.0% on the same basis, as both the custom and panel parts of the business came under pressure in the United States, the United Kingdom and Asia Pacific. Latin America grew strongly in the second quarter, with IBOPE having an impact on the top-line, together with Africa, which also showed good growth. Reportable net sales margins improved strongly by 1.2 margin points, up 1.6 margin points in constant currency, reflecting both good cost control and the benefit of the restructuring actions taken in 2014.

Public Relations and Public Affairs

In constant currency, public relations and public affairs net sales increased 2.1% in the second quarter, compared with 1.6% in the first quarter. Like-for-like net sales were up 1.9%, an improvement over the first quarter growth of 1.2%, with all regions, except the United Kingdom, showing growth, particularly in Asia Pacific, Latin America, Africa & the Middle East. Burson-Marsteller, 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 0.3 margin points, (down 0.2 margin points in constant currency), although Cohn & Wolfe showed improved margins in the first half.

Branding and Identity, Healthcare and Specialist Communications

At the Group’s branding and identity, healthcare and specialist communications businesses (including direct, digital and interactive) constant currency net sales grew strongly at 4.8% in the second quarter, with like-for-like growth of 3.2%, a significant improvement over the first quarter net sales growth of 1.6%. The Group’s healthcare communications, specialist communications and direct, digital and interactive businesses grew strongly in the second quarter, with parts of the branding and identity businesses slower. Reportable net sales margins for this sector, as a whole, were up 0.2 margin points, up 0.3 margin points in constant currency, with direct, digital and interactive and healthcare margins up strongly, but with pressure in branding and identity. Like-for-like, digital revenue now accounts for almost 37% of Group revenue and grew by 5.5% in the first half with net sales up 4.2%.

Associates, Investments, People, Countries, Clients, Horizontality

Including 100% of associates and investments, the Group has annual revenue of over $26 billion and over 190,000 full-time people in over 3,000 offices in 112 countries, now including Cuba. The Group, therefore, has access to an unparalleled breadth and depth of marketing communications resources. It services 344 of the Fortune Global 500 companies, all 30 of the Dow Jones 30, 69 of the NASDAQ 100 and 745 national or multi-national clients in three or more disciplines. 478 clients are served in four disciplines and these clients account for almost 52% of Group revenue. This reflects the increasing opportunities for co-ordination between activities, both nationally and internationally. The Group also works with 385 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 2015, operating profit was £789 million, non-cash exceptional gains £232 million, depreciation, amortisation and impairment £180 million, non-cash share-based incentive charges £48 million, net interest paid £81 million, tax paid £165 million, capital expenditure £90 million and other net cash inflows £43 million. Free cash flow available for working capital requirements, debt repayment, acquisitions, share re-purchases and dividends was, therefore, £492 million.

This free cash flow was absorbed by £467 million in net cash acquisition payments and investments (of which £11 million was for earnout payments with the balance of £456 million for investments and new acquisitions payments) and £405 million in share re-purchases, a total outflow of £872 million. This resulted in a net cash outflow of £380 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 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 2015 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 25 transactions in the first half; 6 acquisitions and investments were in new markets and 19 in quantitative and digital. Out of all these transactions, 3 were in both new markets and quantitative and digital and 3 were driven by individual client or agency needs.

Specifically, in the first six months of 2015, acquisitions and increased equity stakes have been completed in advertising and media investment management in the United States, the United Kingdom, France, Germany, the Netherlands, Turkey, Singapore and New Zealand; in data investment management in the United States and Brazil; in branding & identity in the United States; in direct, digital and interactive in the United States, Sweden, South Africa, Peru and China; in healthcare in Australia.

A further 5 acquisitions and investments were made in July and August, with two in advertising and media investment management in Australia and Turkey; one in data investment management in the United States and Israel; one in public relations and public affairs in Germany; and one in direct, digital and interactive in Belgium.

Balance sheet highlights

Average net debt in the first six months of 2015 was £3.131 billion, compared to £2.870 billion in 2014, at 2015 exchange rates. This represents an increase of £261 million. Net debt at 30 June 2015 was £3.383 billion, compared to £2.957 billion on 30 June 2014, an increase of £426 million. The increased average and period end net debt figures reflect significant incremental net acquisition payments and share repurchases of £260 million, offsetting a relative improvement in working capital.

Your Board continues to examine the allocation of its EBITDA of over £1.9 billion or over $3.0 billion, for the preceding twelve months and substantial free cash flow of over £1.2 billion, or approximately $1.9 billion per annum, also for the previous twelve months, to enhance share owner value. The Group’s current market capitalisation of £17.7 billion ($27.8 billion) implies an EBITDA multiple of 9.0 times, on the basis of the trailing 12 months EBITDA to 30 June 2015. Including net debt at 30 June of £3.383 billion, the Group’s enterprise value to EBITDA multiple is 10.7 times. The average net debt to EBITDA ratio remains at 1.6x, at the low end of the Group’s target range of 1.5-2.0x. Clearly, there is scope for more leverage.

A summary of the Group’s unaudited balance sheet and notes as at 30 June 2015 is provided in Appendix 1.

Return of funds to share owners

As outlined in the June 2015 AGM statement, following 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 raised further. Following that review, your Board decided to increase the dividend pay-out ratio to a target of 50%, to be achieved by 2017, and, as a result, declares an increase of almost 37% in the 2015 interim dividend to 15.91p per share, representing a pay-out ratio of 47.5% for the first half, against the traditionally lower first-half pay-out ratio of 40% last year. Again, this seems to indicate that the newly targeted pay-out ratio of 50% will be achieved by the end of 2016, one year ahead of target.

During the first six months of 2015, 26.8 million shares, or 2.0% of the issued share capital, were purchased at a cost of £405 million and an average price of £15.13 per share.

Current trading

In July, like-for-like revenue and net sales were up strongly at 5.0% and 3.7% respectively, reflecting the stronger budgeted and forecast growth in the third quarter. All regions and sectors (except data investment management) were positive, and showed a similar pattern to the first half, with advertising, media investment management, public relations and public affairs and specialist communications (including direct, digital and interactive) up strongly. Cumulative like-for-like revenue and net sales growth for the first seven months of 2015 is now 4.9% and 2.5% 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 net sales growth of over 3%, and a stronger second half, partly the result of easier comparatives in 2014.

Outlook

Parallel universes

After another record year in 2014, the Group’s performance in the first seven months of the new financial year has been particularly creditable, as worldwide GDP growth, both nominal and real, seems to have slowed in the second half of last year and into the new year. Pleasingly, bottom-line growth and operating margin improvement has been particularly strong, beyond budget, target and last year. Revenue and net sales growth was also better than the final quarter of 2014, with all geographies and sectors (except data investment management) growing revenue and net sales on both a constant currency and like-for-like basis. Like-for-like revenue and net sales were up 4.9% and 2.3% respectively in the first six months and up 4.9% and 2.5% for the first seven, compared with 8.4% and 4.0% in the same seven month period last year, with quarters one and two being the strongest quarters in 2014 and with net sales growth of 2.1% in the fourth quarter. Our operating companies are still hiring cautiously and responding to any geographic, functional and client changes in revenue – positive or negative. On a constant currency basis, operating profit is above budget and well ahead of last year and the increase in the net sales margin is well above the Group’s full year target of a 0.3 margin points improvement.

Despite this strong performance, the apparent general industry optimism seems misplaced. To survive in the advertising and marketing services sector, you have to remain positive, indeed optimistic, seeing the glass half-full and industry and company reports generally continue, understandably, to reflect that attitude. However, general client behaviour does not reflect that state of mind as tepid GDP growth, low or no inflation and consequent lack of pricing power encourage a focus on cutting costs to reach profit targets, rather than revenue growth. In addition, there seem to be little, if any, reasons for an upside breakout from the current levels of real or nominal GDP growth, which, previously, remained stuck around 3% and 5% respectively and below the pre-Lehman trend rate, which by definition was unsustainable. In fact, in recent months, whilst real GDP forecasts have remained steady, nominal forecasts have deteriorated significantly to around 3.5%, although the same pundits expect inflation to increase next year. In this respect, oil price reductions, the Iranian nuclear “armistice” and the international currency wars have not been helpful black or grey swans. The faster growth markets of the BRICs and Next 11, located in Asia, Latin America, Africa & the Middle East and Central & Eastern Europe continue to grow faster than the slower markets of North America and Western Europe, although the growth gap has narrowed significantly as Brazil, Russia and China have slowed and the United States and United Kingdom and, even Western Continental Europe, have quickened.

Geopolitical issues remain top of business leaders’ concerns. The continuing crisis in the Ukraine and consequent bilateral sanctions, continued tensions in the Middle East and North Africa and the continuing risk, despite the negotiated agreement, of a “Grexit”, or even a “Brexit” from the European Community top the agenda. Lower oil prices and first time quantitative easing in Europe and continued easing in Japan may seem to bottom or underpin the recovery and a continued, but somewhat patchy, United States recovery and United Kingdom and Indian strength may help confidence. But concerns about China, aggravated by the recent RMB devaluation and stock market decline, and Brazil remain, although we remain unabashed bulls of both. Countries and opportunities like Indonesia, the Philippines, Vietnam, Egypt, Nigeria, Mexico, Colombia and Peru add to confidence (and maybe even Cuba and Iran will), along with a mild recovery in Western Continental Europe, chiefly in Germany, Spain and Italy. France remains soft, although there are some small signs of improvement. But there are other "grey swans", chiefly two, although one has now whitened. First, what impact will the much anticipated Federal Reserve tightening have on bond and equity markets? Although interest rates are likely to remain lower, longer than many anticipate, due to mediocre growth rates, when the tightening comes, as it inevitably will, it may have a dramatic impact on bond and equity valuations, as recent gyrations in the markets indicate. Will the RMB weakness, for example, blow the Federal Reserve Bank off course from a 2015 tightening? Secondly, the somewhat surprising result of the United Kingdom General Election (at least to the pollsters), with the Conservatives winning an overall majority, has resulted in an uncertainty-stimulating European Union referendum. In addition, the reduction of the still remaining, substantial, United Kingdom budget deficit, is being re-addressed in the context of a new fixed five year political cycle.

So all in all, whilst clients are certainly more confident than they were in September 2008 post-Lehman, with stronger balance sheets (over $7 trillion in net cash and limited leverage), sub-trend long-term global GDP growth at around 3.0-3.5% real and 5.0-5.5% nominal, combined with these levels of geopolitical uncertainty, with low inflation or fears of deflation resulting in limited pricing power, with short-term focused activist investors and strengthened corporate governance scrutiny, make them unwilling to take further risks.

They, therefore, focus on costs, rather than revenue growth. If you are trying to run a legacy business, at one end of the spectrum you have the disrupters like Uber and Airbnb and at the other end you have the cost-focused models like 3G in fast moving consumer goods and Valeant and Endo in pharmaceuticals, whilst in the middle, towering above you, you have the activists led by such as Nelson Peltz, Bill Ackman and Dan Loeb, stressing short-term performance. Not surprising then, that corporate leaders tend to be risk averse. Procurement and finance take the lead over marketing and investment and suppliers are encouraged to play the additional roles of banks and/or insurance companies. At best, clients focus on a strategy of adding capacity and brand building in both fast growth geographic markets and functional markets, like digital, and containing or reducing capacity, perhaps with brand building to maintain or increase market share, in the mature, slow growth markets. This approach also has the apparent virtue of limiting fixed cost increases and increasing variable costs, although we naturally believe that marketing is an investment, not a cost. We see little reason, if any, for this pattern of behaviour to change in 2015, with continued caution being the watchword. There is certainly no evidence to suggest any such change in behaviour so far in 2015, although one or two institutional investors, including Legal & General and the United Kingdom Government, are saying that they are tiring with some companies’ total focus on short-term cost cutting and would favour strategies based more on the long-term and top line growth and the end to quarterly reporting.

The pattern for 2015 looks very similar to 2014, but with no maxi- or mini-quadrennial events like the Olympics, FIFA World Cup or United States Presidential Election (as there will be in 2016) to boost marketing investments. Forecasts of worldwide real GDP growth still hover around 3.0- 3.5%, with recently reduced inflation estimates of 0.5% giving nominal GDP growth of around 3.5-4.0% for 2015. Advertising as a proportion of GDP should at least remain constant overall. Although it is still at relatively depressed historical levels, particularly in mature markets, post-Lehman, it should be buoyed by incremental branding investments in the under-branded faster growing markets.

Although consumers and corporates both seem to be increasingly cautious and risk averse, the latter should continue to purchase or invest in brands in both fast and slow growth markets to stimulate top line sales growth. Merger and acquisition activity may be regarded as an alternative way of doing this, particularly funded by cheap long-term debt, but we believe clients may regard this as a more risky way than investing in marketing and brand and hence growing market share, particularly as equity valuations have been, at least until recently, strong. The recent, potentially record, spike in merger and acquisition activity may be driven more by companies running out of cost-reduction opportunities, rather than trying to find revenue growth opportunities or synergies.

All in all, 2015 looks to be another demanding year, although a weaker UK pound against a stronger US dollar may continue to provide some modest currency tailwind, which may be now more than offset by a stronger pound against the euro and the fast growth market currencies.

2016, however, may provide a little further lift to the industry, of say one percentage point more of growth, given its maxi-quadrennial status – enlivened by the visually-stunning Rio Olympics and Paralympics, by the less visually-stunning United States Presidential Election and, last but not least, the UEFA EURO 2016 Football Championships.

Financial guidance

For 2015, reflecting the first half net sales growth and quarter 2 revised forecast:

• Like-for-like revenue and net sales growth of over 3.0%
• 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 2015, our prime focus will remain on growing revenue and net sales faster than the industry average, driven by our leading position in the new markets, in new media, in data investment management, including data analytics and the application of technology, creativity, effectiveness and horizontality. 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 2014 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 7% of revenue and net sales and continue to position the Group extremely well should current market conditions deteriorate.

The Group continues to improve co-operation and co-ordination 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, in addition, decided that an even more significant proportion, one-third, of operating company incentive pools are funded and allocated on the basis of Group-wide performance in 2015. This may be increased to one-half in 2016. Horizontality has been accelerated through the appointment of 45 global client leaders for our major clients, accounting for approaching one third of total revenue of almost $19 billion and 17 country and regional managers in a growing number of test markets and sub-regions, amounting to about half of the 112 countries in which we operate. Emphasis has been laid on knowledge-sharing in the areas of media investment management, healthcare, sustainability, government, new technologies, new markets, retailing, shopper marketing, internal communications, financial services and media, sport and entertainment. The Group continues to lead the industry, in co-ordinating investment geographically and functionally through parent company initiatives and winning Group pitches. For example, the Group has been very successful in the recent wave of consolidation in the fast-moving consumer goods, travel, pharmaceutical and shopper marketing industries and the resulting "team" pitches. Whilst talent and creativity (in its broadest sense) remain the 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 and AppNexus; through integration of data investment management, for example, Kantar, Rentrak and comScore; and lastly investment in content, for example, Imagina, Vice, Refinery 29, Truffle Pig, Media Rights Capital, Fullscreen, Indigenous Media, China Media Capital, Chime and Bruin.

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 cost 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 2015 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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