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Q2 2011 Earnings Call

August 24, 2011 9:00 am ET


Paul Richardson - Group Finance Director, Executive Director and Chairman of Corporate Responsibility Committee

Martin Sorrell - Group Chief Executive Officer and Executive Director


Daniel Salmon - BMO Capital Markets U.S.

Michael Corty - Morningstar Inc.

Peter Stabler - Wells Fargo Securities, LLC

Alexia Quadrani - JP Morgan Chase & Co

Unknown Analyst -

James Dix - Wedbush Securities Inc.



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Ladies and gentlemen, welcome to the WPP 2011 Interim Results Conference Call on the 24th of August 2011. [Operator Instructions] I'll now hand the conference to Mr. Paul Richardson and sir Martin Sorrell. Please go ahead, sir.

Martin Sorrell

Thank you, operator. This Martin Sorrell here with Paul in London. We're here to discuss our first 6 months results for 2011. We had a meeting with analysts, which was webcast this morning here in London and was transmitted with the Q&A and the film of that will be available, the video of that will be available shortly. In addition, we'll be producing a transcript of this conversation, which will be unchanged. There will be no editing of it, just so we're clear, and we propose the presentation is in our website and we split it as usual into 3 areas. Paul will talk a little bit about the financial results and key figures for the first half 2011. I'll talk a little bit about priorities, objectives and strategy and then conclusions. Apologies, the press statement today, we hope you've seen and read. It's on our website as well. It's fairly long. It's long because there are a lot of uncertainties at the moment, macro uncertainties, which don't seem to have affected our micro performance IDB significantly or the performance of most of our clients and results in Q2, whilst perhaps not beating your estimates or analyst estimates as much as in Q1 do seem to have been pretty strong.

So we've got into some depth in the press release. The presentation is quite a long one, probably take us about an hour to do. There's a fairly significant section on digital as well as the BRICs. Our business is driven by twin pillars of geography and technology. And that, as you saw, was even more important, the context of the first 6 months.

So Paul will kick off on the first section, and then I'll come back later. Paul?

Paul Richardson

Okay. Thank you, Martin. So turning to Slide 4, some of the interim results. Billings are up strongly at 5.2% to GBP 21.4 billion. Reported revenues were up 6.1%. On a constant currency basis, which includes acquisitions, revenues were up 8.1%. Acquisitions added 2%. Foreign exchange went the other way and took 2% off the revenues. And then, like-for-like revenues grew at 6.1%, and on a gross margin basis, the gross margins grew at 6.8% on like-for-like basis.

Headline PBIT was up just under 14% at GBP 517.9 million the half year compared to GBP 455 million the year before. The headline operating margin was up 0.7 margin points to 11% and up 0.8 margin points on a pre-incentive basis to 13.9%. On a gross margin basis, the headline operating margin is up 0.7 basis points to 11.9%. Diluted headline earnings per share were up 19.4% to 22.8p and the first interim ordinary dividend was increased by 25% at 7.46p per share.

The average net debt was down GBP 513 million on a constant currency basis to GBP 2.6 billion in the first half and the average net debt to headline EBITDA for the 12 months ending June 2011 ran at 1.8x. So on a reported basis from Slide 5, the numbers have pretty been shown to you. There was good conversion in the figures and revenues up 6.1%. Gross margin, which is probably a better indication of our true top line performance plus the direct cost, we're growing at 6.7%. Staff costs growing at 6.6%, other expenses growing at 3.6% and profit pre bonus growing at 12.7% and post bonus profit is growing at 13.7%.

Continuing the summary on Slide 6, the margin as a percentage of revenues grew 0.7 margin points from 10.3% to 11%, and on the gross margin basis, also grew 0.7 margin points from 11.2% to 11.9%. Diluted earnings per share were at 22.8p this half year, up 19% as mentioned earlier. And I've also shown here the debt on a reported basis, which was down 20%, up from GBP 3,168,000,000 just over GBP 2.5 billion, and the improvement in the coverage ratio from net debt-to-EBITDA from this time a year ago at 2.4x to today at 1.8x. Average headcount for the half year on a like-for-like basis grew 4.5% comparing that to the gross margin growth of 6.7%.

On the statutory reported basis on Slide 7, we see the results even stronger with the reported earnings per share, up 50% from 12p last half year. This is after goodwill intangibles and other charges to 18p for this current half year. Although amortization was about the same, there was a re-measurement gain in this half year. In that, was a credit of GBP 25 million in the previous half year, the GBP 7.5 million, that's the principal difference in the reported statutory number half year on half year.

The growth is broken out on Slide 8. This shows that on a like-for-like basis, we grew 6.1%. Acquisitions added 2% to 8.1%. Foreign currency took off 2% to show report with sterling growth in the first half of 6.1% and EPS growth of 19.4%. If we were a dollar reporting company, the revenue growth would have been 12.8% and EPS growth would have been 32%, and if we were a euro reporting company, our euro -- our top line would have grown 6% and our reported EPS will be around 15%.

Versus consensus on Slide 9, you can see that we basically achieved, if not beat, that in all cases the consensus, with one exception, on finance cost, which were running higher and consensus estimates. Again, this was principally caused once we have strong cash generation, the monies on deposit were earning very little relative interest compared to the cost of borrowing on the bonds that should be principally fixed. Otherwise, we met or exceeded consensus across all lines in the P&L. Including that the operating margin where we had given guidance for the first half of 12.5 margin points for the year, we've improved that to 0.7 in the first half year and certainly we hope that in the full year basis we should meet or exceed that in the Q2 forecast that we have received and reviewed.

On the statutory reported results of the year on Slide 10, the one additional piece of information is in terms of tax rate, which for half year fell from half year '10 at 23.9% to half year '11 at 22%. That was consistent, that is consistent with the full year '10 tax rate, and is more than likely to be the tax rate we will end the year in '11. We won't be going to any of those [indiscernible] In my view as of today.

In terms of revenues by discipline, I'll tell you in Slide 11. Remind you that advertising, media investment management, 41% revenues today, grew in this first half by 8.1% while compared to quarterly split to give you a sense of how we're trending. So in quarter 1 in this discipline, we grew at 9.3% in quarter 2 at 7%. On consumer insight, which is 25% of our business, on revenues, we grew at 2.3%, but on a gross margin basis, it is more -- the better measure for our Consumer Insight is because of the direct cost playing through, our gross margin growth was 3.2%, I foot noted, and comparing that half on half, the GM growth in quarter 1 was 3.8% and in quarter 2 was 2.7%. The Public Relations and Public Affairs business, which is 9% of our revenues grew at 5% in the half year growing at 5.2% in the first quarter and 4.7% in the second quarter. The Branding and Identity, Healthcare and Specialist Communications businesses, representing 25% of the group, grew at 7.3% in the first half having grown at 6.8% in quarter 1 accelerating through the 7.9% in quarter 2. So overall, the group grew at 6.1% on revenues or 6.8% on GM. The first half was fairly even with quarter 1 on the revenue basis growing at 6.7% in quarter 1 and quarter 2 at 5.6%.

Turning now to the graph on Slide 12. You can see quarter-by-quarter since the second quarter 2009, the individual disciplines and how they're performing and what you can see here is we reached a peak in terms of the fourth quarter in '10 on the Advertising, Media Investment Management of around 12% and currently are running at around 7% in quarter 2. The Branding and Identity, Healthcare and Specialist businesses have continued to improve the highest they've seen for some time at 8% in the second quarter this year.

By geography, similar analysis, so North America representing 35% of our business, have like-for-like revenue growth of 5.4% split 6.9% in quarter 1 and 3.9% in the second quarter. U.K., which was strong represent 12% of our business grew at 5.1% in the first half, having been at 5.4% in quarter 1 and 4.9% in quarter 2. Western Continental Europe, representing 25% of our business, grew at 2.9% overall for the half year having grown 1.8% on a like-for-like basis in quarter 1 and 3.9% in quarter 2.

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