WPP plc Q2 FY2024 Earnings Call

Good morning, everyone, and thank you for joining us. Welcome to the WPP 2024 Interim Results Conference Call and Webcast. All participants are currently in listen-only mode. Following the presentation, there will be a question-and-answer session. Today's conference is being recorded. I will now turn it over to WPP CEO, Mr. Mark Read. Please proceed, sir.

Thank you, and good morning, everyone, and welcome to WPP's 2024 interim results. I'm Mark Read. I'm here with Joanne Wilson, our CFO. We're going to take you through our results for the first six months of the year and then take your questions. We have been extremely busy in the first half of this year against the plan we outlined at the CMD, and I'm very pleased with the strategic progress we've made since then. I'm confident it's going to make us more competitive as an organization in the market. It is absolutely my focus and that of our leadership team. We're going to market with fewer, stronger brands. We're embracing AI and new technology at great speed and leading the way in how we're deploying this and how we work and how we better serve our clients. We're delivering excellent work to our clients. And at the same time, we are making the company strategy more efficient to improve our profitability. So while we have undoubtedly more work to do, we've made a lot of progress, as I'm sure you'll see with the FGS transaction. We are very focused on value creation for our shareholders. So before we start, please read the important cautionary statement on Page 2. And on Page 3, turning to the agenda for the call. I'll go through the financial and strategic highlights, the details of the FGS transaction before handing over to Joanne who'll take you through the financial performance. I'll then cover the significant strategic progress we've made in the last 6 months, and we can get then straight into questions. Turning to Page 5 and our financial performance. We did see net sales decline by 1% for the first half of the year, really due to a combination of factors. We had growth in 3 of our largest agencies, GroupM, Ogilvy, and Hogarth. At the same time, we were impacted by certain client losses in 2023, largely in the U.S. We had macro pressures on our project-related businesses around the world and challenges in China. That said, we did see a sequential improvement in performance from a decline of minus 1.6% in Q1 to minus 0.5% in Q2. We saw sequential improvement in our creative agencies from minus 3.3% to minus 2.4%, driven by VML, in our public relations agencies from 3.3% to plus 1.5%, and in our specialist agencies from minus 7.6% to minus 2%. These are all important parts of our business and in positive signs of significant work at VML and Burson. We've also seen stabilization in spending from our technology sector clients, which had a big impact on us for the past 12 months, from minus 9% in Q1 to minus 1% in Q2. It's important and in line with our expectations, we start to lap the spending cuts that started in Q2 2023. We continue to stand by what we've been saying since the sector came under pressure that these companies need to market, and there will be a point where their spend will stabilize in the second half. We do expect it to return to moderate growth. And with technology clients contributing to this, we returned to growth in North America at 2% compared to a decline in the first quarter of minus 5.2%. Now turning to new business. I describe our new business performance in the first half as satisfactory. We've had some major wins, including AstraZeneca and some important strategic wins, for example, with Colgate and Amazon media. We do have a very full new business pipeline with significant opportunities ahead of us and some major reviews outstanding that we're very focused on winning, but we do have to be more competitive in two areas in the U.S. and in GroupM, primarily in the U.S. And we believe the structural changes, technology investments, and people moves we've made and will continue to make will begin or continue to address this over the course of this year and going into next year. And last, in terms of financial performance, we did deliver 0.1% of constant currency margin improvement against the first half of last year, despite the top-line decline. This came from both the structural savings and strong cost discipline. Now as you'll see, we have moderated our guidance, bringing it down from zero to one to minus one to zero, which is largely because we see continued impact from China in the second half and the macro pressures weighing on our project-related businesses. Now turning to our strategic progress, and I said at the start of the call, since the CMD at the end of January, we have been very productive. And if I highlight three areas that we'll get into later. First, investments in AI and WPP Open that are critical to our future. Secondly, the work the teams are doing across Burson, GroupM, and VML to build simpler, stronger businesses. And these three brands cover 70% of WPP's business. And lastly, the quality of work that we're doing for clients across the company, resulting in our success at Cannes. And building on our strategic progress on Page 7, let's look at the sale of our shareholding in FGS Global. As I said at the start of the call, we've reached an agreement to sell our 15.1% stake in FGS Global to KKR at a headline valuation of $1.7 billion, representing about 19 times 2023 reported earnings. We view this as an excellent result for WPP shareholders. If I remind you, we embarked on a plan to create FGS Global back in 2020, bringing together 3 independent and separate companies in WPP, Finsbury in the U.K., Hering Schuppener in Germany and Glover Park in the U.S.A. And while there were pretty, very individually strong companies, they operated quite independently. And the ambition, together with the management led by Roland Rudd and Alex Geiser, was to curate the leading strategic advisory firm with the ultimate goal to bring the company to IPO. As part of this, we supported the company in making the acquisition of Sard Verbinnen in the U.S. in October 2021, and KKR came in as a minority investor in 2023. Today, we were able to announce we reached an agreement to sell our shareholding, which will see the net proceeds of GBP604 million. This transaction has a number of advantages for us. First, it allows us to crystallize value much more quickly than waiting for an IPO at an attractive valuation. Secondly, it allows us to reduce our debt and strengthen our balance sheet. It takes our pro forma leverage closer to the middle of the range at 1.6 times, putting us in a strong position to navigate the next few quarters and the broader macro environment. Finally, it allows us to focus on our core creative transformation offer. And I'd remind you, they're still very committed to public relations with both Burson and Ogilvy public relations having strong global positions with strength in those areas closer to our core business. So those are the highlights we'll come back to later. Joanne will now take you through the financial performance.

Thank you, Mark, and good morning, everyone. I will provide more detail on our financial results for the first half of 2024, starting with revenue less pass-through costs, which fell 3.6% on a reported basis. This decline included a 2.9 percentage point negative impact from foreign exchange due to the strengthening of sterling compared to last year and a 0.3 percentage point positive contribution from acquisitions. This performance is lower than in prior years since we have not made any significant acquisitions since acquiring the influencer agency Goat in early 2023. On a like-for-like basis, revenue less pass-through costs declined by 1%, with the second quarter showing a 0.5% decrease, an improvement from the 1.6% decline in the first quarter. Overall revenue less pass-through costs was GBP5.6 billion, a decrease of 3.6% year-on-year, with a headline operating profit of GBP646 million, down 3% from last year. This led to a reported operating profit margin of 11.5%, impacted negatively by foreign exchange by 10 basis points due to the stronger sterling. On a constant currency basis, our margin improved by 10 basis points year-on-year. We are continuing to manage costs carefully while also investing in our offerings and addressing macro pressures affecting our smaller agencies and overall business performance in China. Income from associates rose by GBP7 million, but in accordance with IAS 28, this does not include any contribution from Kantar due to its nil carrying value on our balance sheet. Net finance costs increased by 6.3% year-on-year, mainly due to refinancing bonds at higher rates, reflecting a tax rate of 28% for the half, which aligns with our guidance for the full year. The profit attributable to shareholders is GBP338 million, resulting in a headline diluted EPS of 30.9p, down 6.6% or 2.2p, with two-thirds of the decline attributed to foreign exchange. We have declared a 15p interim dividend, consistent with our 2023 interim dividend. Regarding the reconciliation between our headline and reported operating profit, the headline operating profit of GBP646 million was adjusted for amortization and impairment of intangibles amounting to GBP57 million, linked to accelerated amortization of certain brands due to the creation of Burson. Restructuring and transformation costs of GBP131 million and property-related restructuring costs of GBP22 million fall within our full-year guidance and involve costs related to our three strategic initiatives: the creation of VML and Burson, and the simplification of GroupM. Non-headline items decreased from GBP360 million in the first half of 2023 to GBP223 million in the first half of 2024, leading to a reported operating profit of GBP423 million compared to GBP306 million in the first half of 2023. In our global integrated agencies, there was a like-for-like decline of 0.7% in the first half, with GroupM growing by 1.9% while our creative agencies experienced a decline of 2.8%. GroupM's growth was somewhat hindered by client assignment losses in 2023 and a challenging performance in China, which negatively affected GroupM's overall like-for-like by 1.2%. GroupM's Q2 like-for-like growth was 1.4%, down from 2.4% in Q1, a result of weaker performance in China and macro pressures in Germany, countered by a positive sequential improvement in the U.S. Our global integrated creative agencies felt the full effects of the 2023 loss of a significant healthcare client and macro pressures impacting project-related client spending at AKQA. However, there were positive contributions from Ogilvy, which gained from new business wins, and Hogarth, which saw increased demand for its technology and AI services. Q2 showed a sequential improvement primarily driven by VML and Hogarth. The headline operating profit of GBP551 million saw marginal growth year-on-year, with a headline operating margin up 40 basis points due to disciplined cost management and structural cost savings. In the first half, the Public Relations segment experienced a 0.9% decline, although there was a sequential improvement in Q2 across FGS and Burson. FGS achieved double-digit growth in Q2, benefiting from a stronger corporate transaction market. Burson, despite improvements, saw net sales fall in the first half due to the loss of the Pfizer assignment in 2023 and ongoing macro pressures on client discretionary spending. The operating profit of GBP80 million resulted in a margin of 14.1%, which is a decline of 1 percentage point year-on-year due to softer top-line performance and cost phasing. In the Specialist Agencies sector, revenue less pass-through costs fell by 4.7% on a like-for-like basis. While CMI, our U.S. specialist healthcare media agency, achieved double-digit growth in Q2, this was offset by declines from our brand agencies, Landor and Design Bridge and Partners, as well as smaller agencies affected by cautious client spending, leading to a reduced level of project-based work and longer lead times for new assignments. The headline operating profit of GBP15 million produced an operating margin of 3.4%, down 2.6 percentage points year-on-year, reflecting revenue declines, higher severance costs, and the impact of operating leverage. In North America, the U.S. saw a 1.4% decline in H1 2024 due to decreased revenues from technology clients, which fell sharply in Q1 but stabilized in Q2, as well as losses in the retail and healthcare sectors from 2023. This was offset by growth in CPG, telecommunications, and automotive. The 2.6% growth in Q2 was a significant improvement compared to a 5.4% decline in Q1, thanks to better performance from GroupM and stabilization in technology client spending amidst easier year-ago comparisons. The United Kingdom declined by 2.6% in H1, with a 5.3% drop in Q2, influenced by strong comparators and timing issues. In Western Continental Europe, weaker quarter-on-quarter performance was driven by a 4.8% decline in Germany in the first half, impacted by unfavorable macro conditions. This was balanced by solid growth in Spain from new client onboardings. The rest of the world also experienced a decline in H1 2024, with a 2.2% drop in Q2, as high single-digit growth in India could not compensate for a significant 24.2% decline in China, driven by client assignment losses and ongoing macroeconomic pressures affecting both media and creative agencies. In terms of our client sectors, continued strength was noted in CPG, with clients in this area investing robustly. Telecom, media, and entertainment sectors benefited from client wins in 2023. Automotive growth improved in Q2 due to increased sales from our largest client, while growth in these sectors was countered by ongoing reduced spending from technology clients, which began to stabilize as we faced less challenging comparisons and the impact of significant prior assignment losses in healthcare and retail. The headline operating margin of 11.5% was up 10 basis points in constant currency, absorbing a small headwind from the stronger sterling. The staff costs, pre-incentives, were GBP132 million lower year-on-year, reflecting wage inflation offset by a reduction in headcount due to actions we have taken, along with structural cost savings. These measures mitigated pressures on margins caused by declines in China and smaller agencies, and investments in WPP Open and AI initiatives contributed to an overall 20 basis point drag on margins from staffing costs. Lower staff incentives due to business performance lagging in certain areas resulted in diminished accrued bonuses, which we expect to phase out in H2. Regarding structural cost savings from our strategic initiatives, we have made significant progress in implementing cost actions related to the creation of VML and Burson, as well as the simplification of GroupM. The restructuring actions for Burson and VML are mostly complete, with annualized savings on track and related costs aligned with our guidance. At VML, alongside cost synergies, we are integrating enterprise tech solutions and optimizing production and tech hubs. Progress is also being made in finance and HR transformation, as well as efficiencies in real estate and legal entity rationalization. For Burson, efforts have focused on broadening their offerings, retiring legacy brands, and integration across enterprise tech and real estate. GroupM has executed its new market operating model, simplifying support functions and aligning growth and marketing strategies under a single leadership. We are making strong strides in structural cost actions and our global media platform, Open Media Studio, consolidating key media tools and investment strategies. Implementation of the GroupM plan will continue into the second half, with all related cost actions planned for completion in 2024. Furthermore, we are advancing our back and front office efficiencies, successfully rolling out Maconomy in several markets and making progress in our cloud migration, which continues to yield cost savings and other benefits. The movement in net debt is down just under GBP100 million compared to June last year, primarily due to a lower level of M&A spending in the first half. The working capital outflow reflects traditional seasonal changes, and we are aiming for a flat working capital movement for the entire year. We expect underlying net debt at the end of 2024 to remain broadly flat compared to year-end 2023, excluding the effects of the sale of our majority stake in FGS Global, expected to complete in Q4. Our capital allocation policy remains the same, prioritizing targeted investments focused on WPP Open and our AI capabilities. We have announced a GBP15 interim dividend in line with our dividend policy and plan to use the net cash proceeds from the sale of our majority stake in FGS Global to reduce leverage, resulting in a pro forma average net debt to EBITDA of 1.6 times, comfortably within our target leverage range of 1.5 to 1.75 times. Looking at our guidance for the full year, while our performance in Q2 indicates a sequential improvement in net sales, ongoing weaknesses in China and macro pressures have led us to moderate our expectations for recovery in the second half. Therefore, we now anticipate like-for-like revenue less pass-through costs to range from minus 1% to flat for 2024. We are making significant progress on our strategic initiatives and efficiency programs, expecting an acceleration of realized savings in 2024, which will support our goal of a 20 to 40 basis point improvement in operating margin in 2024, before considering FX impacts. The current foreign exchange rates and our anticipated geographic mix suggest a headwind of 2.8% to like-for-like net sales and a 10 basis point headwind on margins. We have yet to make any significant acquisitions in 2024, and thus the contribution from M&A is likely to fall below our previous estimate of 0.5% to 1%. Our guidance for net finance costs, tax, CapEx, restructuring costs, and working capital remains consistent with our initial projections. Thank you, and I will now hand it back to Mark.

Thank you, Joanne. Let's discuss our strategic progress. In January, we outlined four strategic objectives, and I’m pleased to report that we have made significant advancements on all of them. Although it's still early to see these efforts reflected in our revenue, we can observe their impact on our costs and margins. Our first goal is to lead in AI, data, and technology, and we are witnessing widespread adoption of AI at WPP. While we believe we are just beginning to experience the effects of AI, it is becoming clear that it will be essential to WPP’s future and that of our clients. I’d like to highlight how WPP is evolving in three areas: our work processes, how we create for clients, and the diverse types of consumer experiences we can offer through AI. We are experiencing swift adoption of AI within our operations, with many use cases emerging across WPP. We are increasingly utilizing our creative and media studios throughout the organization. WPP Open's Creative Studio was the initial launch of our new AI platform, enabling quicker and better creative ideation. For example, it has helped clients conduct research for briefs and produce improved briefs at a faster pace. It also assists in bringing ideas to life and generating content almost instantly. In the past six months, we’ve added features like creating Instagram posts for any brand with just a few clicks. Additionally, WPP Open's Media Studio is being integrated with clients, combining the best tools from GroupM agencies into one cohesive media suite. Our objective is to plan, automate, and optimize media campaigns through a unified interface, with audience data readily accessible on planners' dashboards. We are introducing new features that enable automatic media planning based on real-time pricing and audience availability. This is driving rapid adoption of generative AI within our organization. Since the start of the year, we have seen a 74% increase in monthly active users of Creative Studio, a 177% rise in the use of large language models, and a remarkable 241% growth in image generation. WPP Open is also gaining power. One key advantage of the platform is its independence from any single foundational model. While Google Gemini is central to the platform, we are continually incorporating new large language and image models to provide our teams and clients the flexibility to select the most suitable models for specific tasks while enriching them with proprietary data. We have successfully implemented WPP Open across many of our largest clients, where it has been effective in standardizing and integrating complex marketing processes and aiding in their marketing transformations. Currently, we see AI making the most immediate impact in production. There are some point solutions available that utilize off-the-shelf generative AI image platforms for basic advertising images, although these models often lack brand accuracy and product fidelity, making them suitable only for brainstorming rather than finished work. Therefore, we sought alternative solutions. Our long-term partnership with NVIDIA is proving valuable in two key areas. First, it is enabling us to establish production pipelines within our Open Production Studio to create advertising materials that combine accurate product visualizations with generative AI backgrounds. Second, in collaboration with NVIDIA and Shutterstock, we have developed a large language model-based 3D design solution that offers clients like The Coca-Cola Company and Ford greater control and flexibility for producing high volumes of content variations. This innovative work was recently highlighted by Jensen Huang during his keynote at the esteemed SIGGRAPH visual effects conference. We continue investing in the next generation of creative technology talent to bring these advancements to our clients and have positioned our creative technology apprenticeship program at the core of our innovative efforts with NVIDIA and Shutterstock. Now, let’s hear from them on how AI is influencing their creative processes. Can we please play the first video? So you can see there some of the ways in which we're using AI to bring our ideas to life and some of the ways some of our people are embracing this technology. Now we're not just using AI to make us work more efficiently, we're using it to create new and different consumer experiences. We're producing a lot of work across the company that's doing this. There are many examples we can choose, and these are three of them. I work with Mars, I work with The Coca-Cola Company, and I work with Mondelez, three of our clients who are probably among the most forward-looking in embracing AI. And I thought we'd like to see how we're doing that work with Mars and their Sneaker brand. So could we play the second video, please? All right. So some of the more entertaining ways one can use AI. On Page 30, turning to creative transformation and the core of our business. We're very proud of our performance at Cannes. We continue to believe that creativity is critical to our business and to our clients. It's what makes clients come to WPP. And while awards are not a goal in themselves, they are a reflection of the policy of the work that we do for clients. Study after study is showing the link between creative success and the effectiveness of work and the ROI for clients. So we're very pleased that Ogilvy was named Network of the Year, and also that WPP was ranked as the Creative Company of the Year at Cannes this year. But more importantly, on Page 31, is the recognition of the work for our clients. Coca-Cola was Brand of the Year less than 3 years into their partnership with WPP. And Unilever, our longstanding client, was Market of the Year, with much of the work that they are recognized for coming from WPP agencies. As I said at the start of the call, this has been a busy year on multiple fronts. And while the teams are busy delivering world-class work for clients, we've also been tackling three major structural initiatives across WPP. Together, these three businesses represent about 70% of our net sales. I'd like to give you some color on what these businesses are and what they're doing. Starting with VML on Page 32. We launched VML in January this year. We are today the world's largest creative agency with a compelling and broad offer and the depth of resources to serve global clients across brand experience, customer experience, and commerce. Jon Cook, Mel Edwards, and the team have brought the teams from VML, Y&R, and Wunderman together with the ambition of building a strong and unified culture. They're tackling many of the areas you can see to create a single, more effective business, while the offer is also resonating with clients and new business wins like Perrigo and AstraZeneca are clear early indicators of success. Secondly, Burson on Page 33. Now Burson is formally launched in June this year. We believe it's now the number two PR firm ranked by size. Its branding speaks to Harold Burson's impact on the public relations industry and is reinventing his legacy in a modern way for today's clients and today's world. Corey, AnnaMaria, and the team have been hard at work for the last 6 months integrating leadership teams, merging offices, building home and culture, and getting into the market to win new business. You can see some of the prestigious clients that they're winning and the way this new offer is resonating in the market. Lastly, turning to GroupM on Page 34. GroupM today, remind everyone, is the world's largest media agency in an area where scale still does matter. Managing almost $63 billion in worldwide advertising spend, it remains the largest global agency by some distance. Its scale and capabilities are unrivaled, but our breadth and structure have sometimes made the offer and go to market overly complex, the changes that Christian led on building a simpler foundation on which to optimize that go-to-market. Our investment in WPP Open and the development of Open Media Studio build on that foundation. Integrated within the platform is WPP and third-party data, particularly Choreograph's global data graph that enables intelligent activation across more than 73 markets and 5 billion consumer profiles. The work has simplified GroupM's continued pace over the first half. The move to single country P&Ls is complete, with all media agency finance functions integrated into a single group function in each market. Last month, we announced that Christian would be moving to a new role at WPP, and Brian Lesser will be rejoining us as CEO of GroupM. I know Brian very well. I worked with him very closely when we acquired 24/7 Real Media back in 2012. He's a strong leader. He understands technology, and he's a builder of products. He's also extremely good with clients and people. So I'm looking forward to him starting next month and working with him on GroupM. We know that GroupM had a tougher time in new business, particularly in the U.S., for the past 18 months, but we do expect the combined effect of these initiatives to reverse this and for us to start winning again in this critical market. Together, you can see how we're taking action across the company, investing in critical areas while continuing to do excellent work for our clients. All of that on Page 35 gives us the confidence to deliver our medium-term financial framework, which I'll remind you is 3% or more organic growth in revenue less pass-through costs, a 16% to 17% headline operating margin, 85% adjusted operating cash flow conversion, and a net debt to EBITDA ratio of 1.5 to 1.75, supported by a disciplined capital allocation program. So that concludes the formal elements of our presentation. We're now open to taking questions. Thank you.

Thank you, sir. Our first question comes from Laura Metayer of Morgan Stanley. Laura, your line is now open.

Hi, Mark. Hi, Joanne. Two questions for me, please. The first one is on the phasing of growth for H2. Could you please give us a little bit of color on what your expectations are? And then secondly, could you please talk about China? Obviously, you've seen a weak performance in Q2. Could you tell us a bit more about the actions you're taking there to improve performance and to win new business?

Right. Thanks, Laura. Joanne, do you want to talk about sort of the phasing of growth and expectations in China, and I will add anything on the end of that?

Yes, of course. Thanks, Laura. So just in terms of the phasing of Q3 and Q4, now we don't guide by quarters, but I'll just give you a sense of some of the things that we're seeing and what we've built into our plan. So obviously, the macro pressure still exists. We've seen that through Q2. We'd expect that to continue into Q3. At the upper end of our guidance, we would expect to probably see those perhaps lift somewhere in Q4 versus what we have seen more recently in China. We saw a deterioration in Q2. I'm expecting the second half to remain very challenging in China. I expect for the full year that we will be down double digits. To what extent we'll be down will be determined by what we see in the macro really in that market. So I'd expect Q3 and Q4 to be fairly balanced from a China perspective. And then, of course, other levers to consider are our comps. So our comps obviously get easier in the second half. Q3 is our softest comp. It was minus 0.6% last year. And then on the tech sector, we talked about the stabilization that we have seen in Q2. And we would expect to see a movement into growth in the second half. But for the full year, we are expecting to be broadly neutral in tech, but those comps get easier again in Q3 and in Q4, a little bit harder than Q3. So those are some of the dynamics if you think about the phasing.

I think on China, we have made a number of changes to the business. I don't think we expect to see it improving in 2024. But I think we probably expect to see distribution stabilizing somewhat in 2025. We've appointed a new President of WPP in China from inside the business and a new leadership team at GroupM. I think that team are working in a more integrated way. One of the actually interesting changes we're making is we've opened a facility in Wuxi, which is a city of about two hours from Shanghai, to enable us to produce work in lower-cost locations. So we're moving to a more dynamic and flexible model. I would say the team in China are very focused on a competitive offer, but we have had our challenges in the market. I would say that they're compounded by the Western multi-national nature of much of our client base and the presence we have in luxury and FMCG and automotive in that market as well.

Thank you.

Thank you. Our next question comes from Adam Berlin of UBS. Adam, your line is opened.

Hi. Good morning, everyone. Yes, Adam Berlin from UBS. I also got three questions. The first question is, can you give us an update on some of the key reviews, I think, of Unilever, Sky, Amazon? Mark, I think in your opening comments, you mentioned something about a win in Amazon media. I'm not sure that was related to the Colgate account or if there's something that I missed around Amazon. Could you just clarify what you meant by that Amazon media comment you made in the opening remarks? Second question is, can you just talk a little bit through what the moving parts are in H2 to be at either the top or the bottom end of the guidance range you've now provided for the full year? And thirdly, do you still expect adjusted free cash flow to be flat year-on-year? I think it was down about GBP90 million in H1. And if so, can you just talk about why you catch up in H2? What are the drivers of that catch-up?

We are highly focused on all three reviews. You are correct that the Amazon review involved Colgate appointing us to manage their Amazon expenditures, which is a significant win. At this moment, I don't have any additional information to provide, Adam. Unfortunately, decisions regarding these reviews will depend on the clients' timing. I believe we've performed exceptionally well in all three cases, but they are highly competitive scenarios. Joanne, would you like to discuss H2 and the cash flow?

Let me discuss the various factors involved. The range from minus 1% to flat indicates that for the second half of the year, we anticipate a decrease of 1% at the lower end and an increase of 1% at the higher end. The lower end aligns with our like-for-like performance in the first half, but we are facing softer comparisons, making it appear more challenging when viewed over two years. The main contributing factors are the macroeconomic environment and the situation in China. We are experiencing a consistently tough macro environment, which particularly impacts our smaller agencies and project-related work. In China, we observed a notable decline in the second quarter, which is expected to persist into the latter half of the year. Another factor to consider is the recovery in the tech sector. We anticipate a sequential improvement in tech during the third and fourth quarters, but the recovery at the lower end will likely be gradual. Conversely, at the higher end, we expect a significant increase, which is again influenced by the comparisons. This assumes that some macroeconomic pressures begin to ease toward the end of the year. Now, could you please repeat your question regarding cash? It was about the adjusted free cash flow.

Yes. Just the question was I think you've guided in the past for free cash flow to be broadly flat this year with last year overall. And obviously, it was down about GBP90 million, I think, in the first half. So I'm just wondering what makes it catch up in the second half.

Yes. So obviously, we'll have a little bit more profit coming through in the second half. We are still holding our guidance to flat on adjusted free cash flow. That's still the expectation. Working capital has been an outflow to the full year. We're expecting that to be flat. We've seen some of those restructuring costs taken in the first half, but we're very much in line with our guidance on this for the second half. Our cash and tax, everything is very much in line. So it will really just be phased in between the first half and the second half.

Can I just follow up? Are you factoring in, in the downside case at the bottom end of the guidance, any kind of slowdown in the U.S. macro environment?

Yes. I think what we have seen, as we've talked about, I'm encouraged by the improved performance that we saw in Q2. Much of that for us was tech-driven, and we expect that to continue. So that will continue to support U.S. growth in the second half. We've also seen good growth across CPG, auto, telcos, and as well as a stabilization in tech. Our H2 forecast, as you'd expect, is balanced and it really reflects just the macro and the election uncertainty that we're seeing. Of course, we'll continue to have headwinds from some of those client losses in the U.S. So I would say, yes, they're taken into account in our forecast, but it's a balanced forecast for the second half.

Thank you so much.

Thank you. Our next question comes from Julien Roch of Barclays. Julien, your line is now open.

Good morning. I'm trying to understand how much of your full-year organic downgrade is associated with China. Can you provide an indication of the extent of the downgrade in your organic expectations for China in the second half? Additionally, regarding Kantar, you achieved a good sale price for FGS. What is the status of Kantar and the progress on the disposal of Kantar Media? Lastly, are there any other non-core assets you could potentially monetize? I understand you still have a stake in Imagina. What other items in the associated line or fully consolidated entities could generate value? Thank you.

Yes. Thanks, Julien. So look, I think sort of starting at the end, there are a number of investments that we would have, that we would look at. I don't think there's anything in the fully consolidated line. But if I look at the investments in associates, there are a number of things that are at the right price we would look at. That includes Kantar. I think on Kantar, we're very aligned with Bain Capital, and the likely outcome is we will exit it at the same time as them. We do view it as a financial investment and we'd exit at the same time as them. We hope for an attractive evaluation as FGS Global. I think on Kantar Media, it is not really best to comment on this call on that. So I think we're sort of focused on the balance sheet and the realization, I'd say, where we can and continue to be. Joanne, do you want to tackle the China question?

Yes. Julien, China in the first half, I talked about it being a 120 basis point drag on GroupM's like-for-like. For WPP overall, it was an 80 basis point drag in the first half. It was significant. I've talked about expectations for the second half to be a double-digit decline. Therefore, it could be up to 80 basis points for the full year as well. It is really hard to think about it.

Okay. And then maybe, Mark, you said a number of investments that we have. Can you highlight what are your biggest investment that are non-core apart from Imagina?

I don't want to detail the entire list, but I believe we have consistently kept these investments under review. Over the years, we've made a few changes, including selling our investment in Two Circles earlier this year. It's an ongoing process of assessment, and at the appropriate time, we aim to realize value from those balance sheet investments.

Great. Thank you.

Thank you. Our next question comes from Adrien de Saint Hilaire of Bank of America. Adrien, your line is now open.

Thank you. Good morning, everyone. I've got a few questions, please. So how much of the second-half weakness do you think spills over into 2025, number one? And number two, you're doing well to keep the margin steady for 2024, despite the revenue shortfall. So perhaps, can you explain a bit what extra initiatives you've taken to keep the margin where they are, despite the revenue shortfall? And maybe related to this, I know it's a bit of a theoretical and early question. But if we assume that next year is another challenging year of low to no growth, would you still be in a position to keep the margins steady or even up versus 2024, again theoretically?

Joanne, do you want to tackle that?

It's too early to provide guidance on 2025, but looking ahead to 2024, we've faced several challenges. The losses we've experienced with clients in 2023 will only affect us this year. China has also presented significant challenges in 2024. However, we anticipate that the tech sector will be neutral after being a major negative factor in 2023. Our smaller agencies are feeling a considerable impact, with some potentially stabilizing and even turning into a positive factor by 2025. We are actively pursuing strategic initiatives to enhance our offerings through VML, Burson, and GroupM, all focusing on driving growth. We're seeing encouraging growth from our largest clients, but we'll need to evaluate our performance at the end of 2024 before providing a clearer picture for 2025. Regarding margins this year, we're pleased with how our teams are executing their strategies. We're on track to achieve annualized cost savings of GBP125 million, with savings expected to accelerate in 2024—likely closer to 60% instead of the previously mentioned 40% to 50%. This will help us manage structural cost savings and improve margins during a year with flat or slightly declining revenue. In the first half of the year, we've been disciplined in managing costs for agencies facing softer revenue, promptly adjusting headcount and discretionary spending, which has been beneficial due to our high variable cost structure. These strategies will drive our performance for 2024, and it's premature to discuss margins for 2025.

Thank you. Our next question comes from Joe Thomas of HSBC. Joe, your line is now open.

Good morning. Thank you for the question. I have a couple of points, one of which relates to the last question regarding your views on operational gearing in the business at this time. You've advanced the cost savings for this year, but the margin guidance remains the same. I'm curious about the relationship between the two. You also mentioned a reduction in bonuses or the bonus pool, and I'm interested in how long you expect that to last. Additionally, I want to ask about GroupM. Mark, I found your comments on the various measures you've implemented there intriguing. It would be helpful if you could explain those measures and the underlying issues you identified in GroupM, as well as how these measures aim to address those problems and promote growth in the future. Thank you.

Yes. Let me begin with GroupM. We haven't been as successful in acquiring new business in North America as we would like, and this is due to several factors. Some relate to leadership, but more significantly, the complexity of the organization has created challenges. There's a lot happening behind the scenes. A considerable part of the issue relates to our leadership and the intricate structure that has prevented us from effectively showcasing our top talent for major opportunities. Additionally, our technology platform has been fragmented, which hasn't always resonated well with clients. However, over the past year, we've made significant strides. We have appointed a new CEO for GroupM in North America, restructured and revamped our new business team, and integrated our technology through the launch of WPP Open Media Studio, which has been well received. These changes have made us more competitive, bringing us to a level playing field. The next step is to demonstrate our success in the market and secure new business. There's also a conversation to be had about proprietary media. There are several media models in the market that could be described as black boxes, which WPP has not fully utilized. I believe some of these models lack transparency and may not be sustainable in a transparent market like America. We are currently reviewing our proprietary media products and exploring ways to innovate for greater competitiveness. We do offer some proprietary media options in the U.S., but they are fewer compared to many of our competitors. Joanne, would you like to address the other questions?

Yes. Let me begin with the bonus pool and the incentives. In the first half, we observed a decline in incentives compared to the previous year, affecting both our annual bonuses and long-term plans, which is largely due to performance. I anticipate that we will restore the annual incentives by the end of the year, as this is related to the timing of our target delivery for this year. Regarding the previous years of incentives, we experienced strong performance in the past, but there was a slight reduction last year. In agencies facing more challenges, the incentives are decreasing again. However, I expect the full year to be stable or slightly increasing. As for operational gearing, we have a high proportion of variable costs, allowing us some flexibility when our top line weakens, though this varies by market. In the first half of this year, we have seen a more significant impact from weaker performance in China and the smaller agencies, affecting profit margins. Nonetheless, we are mitigating this with structural cost savings that are becoming apparent in the first half and will continue into the second half. The gearing is favorable overall, although more difficult for the smaller agencies and in China this year, but we aim to counterbalance this with our cost-saving initiatives.

Thanks very much.

Our next question comes from Steve Liechti of Deutsche Numis. Steve, your line is now open.

Thank you, Steve Liechti from Deutsche Numis. I have three questions. First, regarding the FGS sale, could you explain why you're not returning any cash to shareholders and instead choosing to pay down debt? I understand your debt strategy, but I'm interested in your thoughts on even a partial return. Second, about the media business, you mentioned Brian Lesser's appointment. Could you elaborate on what he brings to the team and whether you feel there may have been shortcomings in the past that he could address? Lastly, on the technology side, do you see any signs of growth? There's been much discussion about major tech companies investing heavily in AI without substantial returns. Does this indicate that new products are not materializing as expected? Any insights on the future pipeline would be appreciated.

We plan to use the proceeds from FGS to pay down debt, which will bring our leverage for this year to the middle of our target range. Given this, we feel it's appropriate to maintain that position as we move through this year and into the next. Regarding Brian, he has a decade of experience with WPP and has worked closely with me on initiatives like the media innovation group and Xaxis, which was the first proprietary media business led by agencies in our industry. He has a strong grasp of technology and product management, having most recently led GroupM in North America, where he is well-acquainted with the organization and many of its members from his previous tenure. After that, he headed Xandr at AT&T, focusing on merging advertising, technology, and media, and most recently worked at InfoSum, specializing in data-driven technology. His background aligns well with what GroupM currently needs. This isn’t to diminish Christian’s contributions, but Brian brings valuable expertise in product development, technology, and client relationships, along with proven leadership skills. I am optimistic about his potential impact on the business. On the topic of AI, we mentioned in our statement that while we recognize its current influence, it’s still too early for many of the products to be fully integrated into finalized work, which is a sentiment echoed across the industry. At a recent gathering with various CEOs, many discussed their unique implementations of AI, but it appears we haven’t fully realized its potential yet. There aren't many consumer models generating substantial revenue for technology companies. These companies seem to be hesitant in their investments, though we recently secured a project to promote a technology firm’s AI services to consumers, indicating that market activity is starting to emerge. Thank you for your questions.

Our next question comes from Thomas Singlehurst of Citi. Tom, your line is now open.

Thank you. It's Tom from Citi. I have a couple of questions, if that's alright. First, Joanne, you mentioned structural cost savings regarding China. I want to confirm that this means you will be more stringent on margins in China moving forward, as I know this has previously been an area where you've accepted some drag while waiting for an upturn. A clarification on this would be helpful. Secondly, regarding the sale of FGS, when it was established, you indicated that the margins for that asset were significantly higher than the peer group or at least the segmental average. Does this sale require any adjustments to the medium-term margin guidance?

Regarding the situation in China, we are actively reviewing our operations across all markets to optimize our profit and loss. This year, we appointed a President for China who is collaborating with the CEOs of our agencies to enhance our capabilities in that region. We are also evaluating our cost structure, which included reducing headcount in China this year. Additionally, we are establishing a lower-cost hub in Wuxi, near Shanghai, and will pursue similar initiatives in the coming months. China remains a key market for us, and we are taking necessary steps, though it will continue to be challenging this year. We anticipate some stabilization by 2025. Concerning the FGS sale, it will not alter our medium-term guidance. FGS was a strong and rapidly growing business with good margins, but its sale will not have a significant effect, and we remain confident in achieving the medium-term targets we outlined in January.

That’s great. Thank you.

Thank you. We currently have no further questions at this time.

All right. Well, thank you very much, everybody, and thank you for your questions. As I said at the start of the call, it's been a busy first half of the year. We took you through much of what's going on across the company. This can be a busy second half. There's a lot to go for in terms of new business to convert there. So we're very focused on that. So thank you all for your questions, and we'll talk to you later.

This concludes today's call. Thank you to everyone for joining. You may now disconnect your lines.