WPP plc (WPP) Q2 2024 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the WPP 2024 Interim Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] Today's conference is being recorded. I would now like to hand over to WPP CEO, Mr. Mark Read. Please go ahead, 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 who has 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 move 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 was 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 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 some 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. So let me take you through some more detail on our financial results for the first half of 2024, and I'll start on Slide 9. Revenue less pass-through costs fell 3.6% on a reported basis. This included 2.9 percentage point headwind from FX due to sterling strengthening relative to last year and a 0.3 percentage point contribution from acquisitions. This is lower than prior years as we have not made any sizable acquisitions since acquiring the influencer agency Goat in -- obviously, in the early part of 2023. On a like-for-like basis, revenue less pass-through costs declined 1% with like-for-like in the second quarter down 0.5%, a sequential improvement versus Q1 like-for-like, which was down 1.6%. Turning to the headline income stated on Slide 10. Overall revenue less pass-through costs was GBP5.6 billion, a decrease of 3.6% year-on-year, with headline operating profit of GBP646 million, down 3% year-on-year. This resulted in reported operating profit margin of 11.5%, which reflects an adverse FX impact on margin of 10 basis points as a result of the strengthening of sterling. On a constant currency basis, our margin improved 10 basis points year-on-year. We continue to take a disciplined approach to cost management, balanced against investing in our proposition and absorbing the macro pressures impacting our smaller agencies and our overall business performance in China. Moving down the P&L. Income from associates is GBP7 million higher. And again, in compliance with IAS 28, this excludes any contribution from Kantar due to nil carrying value on our balance sheet. Net finance costs increased 6.3% year-on-year, and that was primarily due to the impact of refinancing bonds at higher rates, reflecting the tax rate of 28% for the half, which is in line with our guidance for the full year. And noncontrolling interest of GBP41 million, the profit attributable to shareholders is GBP338 million. This resulted in a headline diluted EPS of 30.9p, down 6.6% or 2.2p, with two-third of this decline due to FX. And finally, we have declared a 15p interim dividend, in line with our 2023 interim dividend. Moving to Slide 11 and the reconciliation between our headline and reported operating profit. Headline operating profit of GBP646 million is adjusted for amortization and impairment of intangibles of GBP57 million, which relates to an accelerated amortization of certain brands as a result of the creation of Burson. Restructuring and transformation costs of GBP131 million and property-related restructuring costs of GBP22 million are consistent with our full year guidance and include costs associated with our 3 strategic initiatives: the creation of VML and Burson and the simplification of GroupM. Overall, non-headline items declined from GBP360 million in H1 2023 to GBP223 million in H1 2024, with reported operating profit of GBP423 million compared to GBP306 million in the first half of 2023. And moving on to Slide 12 and the performance of our global integrated agencies, which saw a like-for-like decline of 0.7% in the half, with GroupM growing 1.9% and our creative agencies declining 2.8%. GroupM's growth in the half was held back somewhat by 2023 client assignment losses and a challenging performance in China, the latter adversely impacting GroupM's overall like-for-like in H1 by 1.2%. GroupM Q2 like-for-like of 1.4% was lower than Q1 of 2.4%, driven by weaker performance in China and macro pressures in Germany. These offset an encouraging sequential improvement in the U.S., with GroupM saw mid-single-digit growth compared to a decline in Q1 with a broad-based recovery, including across key technology clients. Our global integrated creative agencies felt the full impacts from the 2023 loss of a significant health care client and macro pressures weighing on project-related client spend at AKQA. These are partially offset by continued growth at Ogilvy benefiting from new business wins and as Hogarth benefiting from growing demand for its technology and AI capabilities. Q2 showed a sequential improvement in Q1, driven by VML and Hogarth. Headline operating profit of GBP551 million was marginally up year-on-year, with headline operating margin up 40 basis points, reflecting disciplined cost management and structural cost savings. Moving now to Public Relations on Slide 13. We saw a 0.9% decline in the first half, which reflected a sequential improvement in Q2 across both FGS and Burson. FGS delivered double-digit growth in Q2, benefiting from a stronger corporate transaction market. Whilst Burson improved sequentially, net sales fell in the first half due to the 2023 loss of the Pfizer assignment and macro pressure on client discretionary spend. Operating profit of GBP80 million represented a margin of 14.1%, down 1 percentage point year-on-year, reflecting the softer top line and cost phasing. And now turning to Page 14 and Specialist Agencies, where revenue less pass-through costs was down 4.7% on a like-for-like basis. CMI, our U.S. specialist health care media agency, delivered double-digit growth in Q2, but this is more than offset by our brand agencies, Landor and Design Bridge and Partners, and the tail of smaller agencies, which were impacted by continued cautious client spending. This has resulted in a lower level of project-based work and longer lead times in ramping up new assignments. Headline operating profit of GBP15 million resulted in operating margin of 3.4%, down 2.6 percentage points year-on-year, reflecting the decline in revenue, higher severance costs and the impact of operating leverage. I'll turn now to Slide 15 and our performance by region. In North America, the U.S. declined by 1.4% in H1 2024, reflecting lower revenues from technology clients, which were down double-digit in Q1, but improved to broadly flat in Q2; and from retail and health care sectors, reflecting 2023 client losses. This was partially offset by growth in CPG, telecommunications and automotive. Q2 growth of 2.6% was a marked improvement over Q1 decline of 5.4%, driven by an improved performance in GroupM and the stabilization of technology client spend against easier comparisons. United Kingdom declined 2.6% in H1 with a Q2 decline of 5.3%, reflecting a strong comparator and timing factors. Ogilvy, GroupM and Hogarth grew, and these were offset by declines in other agencies, which are more exposed to project-related work. In Western Continental Europe, we saw weaker quarter-on-quarter performance, really, driven by Germany, which declined 4.8% in the first half, impacted by a weak macro environment. This is offset by good growth in Spain as new clients were on-boarded. The rest of world declined in H1 2024 with a Q2 decline of 2.2% as high single-digit growth in India was offset by a decline of 24.2% in China on client assignment losses and persistent macroeconomic pressures impacting both our media and creative agencies. Slide 16 shows Q2 and H1 performance across our client sectors with continued strength in CPG, as we see clients in this sector continuing to invest strongly behind our brands and telecom, media and entertainment, which benefited from client wins in 2023. Automotive growth improved in Q2, driven by growth at our largest client. Growth in these sectors was offset by continued lower spend from technology clients, which began to stabilize in Q2 as we lapped weaker comps and the impact of previously disclosed assignment losses in health care and retail. Slide 17 shows the development of our headline operating margin against last year. Margin of 11.5% was up 10 basis points in constant currency as we absorbed a small headwind from stronger sterling. In the bridge, you can see the staff cost pre incentive were GBP132 million lower year-on-year. This reflects wage inflation, offset by lower headcount as a result of actions we have taken, along with benefits from structural cost savings. These cost actions offset top line pressure in China and in some of our smaller agencies, and together with investments in WPP Open and AI teams led to an overall 20 basis point drag on margins from staff costs. Staff incentives were lower as the business performance lagged internal targets in some areas, leading to a lower level of accrued annual and longer-term bonuses. We expect much of this to be due to phasing, which should unwind in H2. Savings and personal costs and establishment and other G&A made a small positive contribution, offset by IT costs, where spending was broadly flat year-on-year against a weaker top line. And turning now to Slide 18 on the structural cost savings from our strategic initiatives. We have made very strong progress implementing the cost actions as part of the creation of VML and Burson and the simplification of GroupM. And I would like to recognize all three teams for the significant work they have done at speed to deliver against their plans. Restructuring actions at Burson and VML are now broadly complete, with annualized savings on track and associated restructuring costs to deliver the savings in line with guidance. At VML as well as delivering cost synergies, we are integrating our enterprise tech solutions and optimizing our production and tech hubs. We are also making good progress across our finance and HR transformation and delivering efficiencies from real estate and legal entity rationalization. Similarly, at Burson, the teams have been busy expanding the breadth of their offer, retiring legacy brands, integrating across enterprise tech and real estate. Having now broadly executed all of their cost actions, VML and Burson are shifting their focus from integration to continuous business improvement. GroupM has implemented its new market operating model, simplifying support functions and integrating growth and marketing efforts as well as GroupM's go-to-market strategy under one leader. Strong progress has been made on both structural cost actions and our global media platform, Open Media Studio, which brings together key media tools, simplifying our global property position and consolidating our investment. Execution of the GroupM plan will continue through the second half, with all related cost actions completed in 2024. We also continue to make good progress on our back and front office efficiency. Across enterprise IT, we successfully rolled out Maconomy in several markets in EMEA and South America. Our cloud migration continues to deliver cost savings and other benefits, including decommissioning legacy equipment and capacity. And we've continued building our finance shared service centers, including migrating teams on VML in North America and Brazil on WPP HQ. Across procurement, we continue to drive further savings and consolidate our supplier base. And in real estate, we continue to optimize across our property portfolio, recently opening a new operation and delivery hub in Wuxi, China as part of an ongoing optimization of our cost base in that market. Slide 19 shows the movement in net debt, which is down just under GBP100 million versus June last year. This is primarily driven by a lower level of M&A spend in our first half. The working capital outflow reflects the usual seasonal movement, and we continue to work towards a flat working capital movement for the full year. We continue to expect underlying net debt at the end of 2024 to be broadly flat versus year-end 2023, and this excludes the impact of the sale of our majority stake at FGS Global, which is expected to complete in Q4. And turning to Slide 20 on our capital allocation policy, which remains unchanged. We continue to prioritize targeted investment in our business with a focus on WPP Open and our AI capability. Today, we have announced the GBP15 interim dividend consistent with our dividend policy. We intend to use the cash -- the net cash proceeds of GBP604 million from the sale of our majority stake in FGS Global to reduce our leverage, implying a pro forma average net debt to EBITDA of 1.6x, well within our target average leverage range of 1.5 to 1.75 times. And finally, turning to Slide 21 and our guidance for the full year. While our performance in the second quarter delivered sequential improvement in net sales, further weaknesses in China and ongoing macro pressures have led us to moderate our expectations for the pace of recovery in the second half. As a result, we now expect like-for-like revenue less pass-through costs of minus 1% to flat for 2024. We are making good progress on our strategic initiatives and efficiency programs and expect to see an acceleration of savings realized in 2024, which supports full margin guidance of 20 to 40 basis point improvement in operating margin in 2024. This is before any impact from FX, which at current rates and based on our expected geographic mix in the balance of the year, we expect to be a headwind of 2.8% to like-for-like net sales and a 10 basis point headwind on margin. On M&A, we have not made any significant acquisition so far in 2024. And as a result, the contribution of M&A in 2024 is likely to be below the previously indicated range of 0.5% to 1%. Our guidance for the remaining metrics, net finance costs, tax, CapEx, restructuring costs and working capital is consistent with that at the start of the year. So thank you, and I will now hand you back to Mark.

Thanks very much, Joanne. So turning to our strategic progress. And on Page 23, back in January, we set out these four strategic objectives. And I'm pleased to say that we've made very good progress against each of them. While it's too early to see the impact of these actions directly in our top line performance, we do see them in our cost base and margin. On Page 24, our first objective is to lead through AI, data and technology, and we are seeing widespread AI adoption across WPP. While we believe that we're still in the early days of AI's impact, we have seen enough to be sure that AI is going to be fundamental to WPP's future as well as that of our clients. I'd like to spend that by looking at how as changing WPP is changing first how we work; secondly, how we produce work for clients; and lastly, the type of work that we produce, the different types of consumer experiences that we can create with AI. On Page 25, we are seeing rapid adoption in terms of how we work. We're seeing rapid adoption of AI use cases across WPP, and we're increasingly deploying our creative studio and media studio across the organization. WPP Open's Creative Studio was the first part of our new AI platform launch. It allows us to get to better creative ideas more quickly. For instance, it allowed clients to do research for briefs and write better briefs more quickly. It gives creative help in bringing our ideas to life and content instantaneously. We've added new functionality in the past six months, such as the ability to create Instagram post for any brand anywhere with just a few clicks. WPP Open's Media Studio is also being deployed into clients, integrating the best tools used by GroupM agencies into a single integrated media suite. It allows -- our plan is to design, plan, automate and optimize media campaigns through a single interface. It brings data about audiences directly into planner's dashboard. We're launching new functionality that allows us to plan media campaigns automatically based not just on live pricing, but on live audience availability. Now all of this is driving the rapid adoption of generative AI across our business. And since the beginning of the year, we've seen monthly active users of Creative Studio up 74%. LLM use is growing at 177% and image generation at 241%. And on Page 26, WPP Open is also becoming more powerful. One of the strategic advantages of the platform for WPP and for our clients is its independence from any single foundational model. While Google Gemini is core to the platform, we're constantly adding new large language and image models to give our people and our clients the ability to choose the best model for the best task and enrich it with our and our clients' proprietary data. And on the right, we've already deployed WPP Open across many of our largest clients, whereas proving particularly powerful in standardizing and integrating complex, fragmented marketing processes and supporting our clients with their own marketing transformation process. I think the area where we're seeing AI is having the most impact short term is in production. We're seeing a little, what I would call, point solutions in the market that are using off-the-shelf GenAI image platforms to create basic advertising images. But these models lack brand accuracy and product fidelity, which means they're fine for brainstorming ideation, but not for the use in finished work. So we needed to find a different solution. Our multiyear partnership with NVIDIA is really bringing our strength to do this in two areas. On the left, it's allowing us to build production pipelines into our Open Production Studio that will enable us to practically create advertising and other materials incorporating both product accurate visualizations and GenAI backgrounds. And on the right, most recently working with NVIDIA and Shutterstock, we developed an LLM-based 3D design solution, giving new levels of control and flexibility for clients, such as The Coca-Cola Company and Ford, who require high volumes of content permutations. This innovation work was recently showcased by Jensen Huang during his keynote interview at the prestigious SIGGRAPH visual effects conference. We continue to invest in the next generation of creative technology talent to bring this technology to our clients and have put our creative technology apprenticeship program at the heart of our innovation work with NVIDIA and Shutterstock. So let's hear from them now how AI is impacting their creative work. So can we please play the video, the first video? [Presentation]

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 way 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? [Presentation]

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. And study after study is showing between creative success and the effectiveness of work and the ROI for clients. So we're very pleased that Ogilvy were Network of the Year, and also that WPP was ranked at 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. And 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. So 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 and 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 clearly 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. And you can see some of the prestigious clients that they're winning and the way this new offer is resonating in the market. And lastly, turning to GroupM on Page 34. The 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 way. Its scale and capabilities are unrivaled, but our breadth and structure has 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 builds on that foundation. And integrated within the platform is WPP and third-party data, in particular, 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. And 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. Now 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, for us to start winning again in this critical market. So 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. And all of that on Page 35 gives us the confidence to deliver our medium-term financial framework, which I'll remind you is 3%-plus organic growth in a 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. [Operator Instructions] Our first question comes from Laura Metayer of Morgan Stanley. Laura, your line is now open.

Hi, Mike. Hi, Jon. 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. And 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 done 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 is 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, we're moving -- we've opened a facility in Wuxi, which is a city of about two hours from Shanghai, enable us to produce work in lower-cost locations. So we're moving to sort of 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. And I would say that they're compounded by the Western multi-natural 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 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?

So in terms of the reviews, we are very focused on all three of those. You're correct that the Amazon review was Colgate appointing us to help manage their Amazon spend, but it's an important win nonetheless. I don't really, at this point, have anything to add, Adam. Unfortunately, we're -- part of those reviews and the client decisions will come when the client's decisions will come. I think we've done an excellent job in all three, but they're very competitive situations. Joanne, do you want to talk to H2 and the cash flow?

Yes, let me talk to the moving parts. So the minus 1% to flat implies in H2 will be at minus 1% at the bottom end and plus 1% at the top end. The bottom end is really in line with our H1 like-for-like, but of course, we have the softer comps. So it seems a more challenging performance if you look at it on a two year basis. And really, the drivers of that would be macro and China. So a continued challenging macro environment, which is weighing particularly on our -- some of our smaller agencies and that project-related work. And then, of course, on China, we've seen a significant deterioration in Q2 and really that continuing through the second half. The other variable within that is the tech recovery. So we are assuming that we continue to see a sequential improvement in tech through Q3 and Q4. But at the bottom end, that recovery would remain and would be quite slow. And then at the top end, Adam, we really assumes a step-up. And again, that reflects the comps. It would assume that we see some of those macro pressures starting to lift a little bit at the back end of the year. And then on China, as I said, we are expecting a challenging year in both scenarios, so double-digit decline, but perhaps a lower extend, and that tech recovery contributes to growth in a more meaningful way. And then on the -- sorry. Can you just repeat your question on cash? So it was around 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. And 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. And 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. And 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.

Yes. Good morning. First one on China, I'm trying to gauge much of your full year organic downgrade is linked to China. So by how much -- can you give us an indication of how much you downgrade your organic expectation for China in the second half? Second question, two-part on Kantar. You sold FGS for a very good price. So what about Kantar and also progress on the disposal of Kantar Media? And lastly, any other assets that might not be core? So you still have a stake in Imagina, I believe. What else in the associate line or in the fully consolidated entities you could crystallize value from? 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 site 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 sort of 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 120 basis point drag on GroupM's like-for-like. And 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 double-digit decline. And 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 noncore apart from Imagina?

I would -- I don't want to go through the list. I just think that they've been there, and we've continued to hold them under review. We've done a few over the years. We've sold our investment in Two Circles early this year. So I just think it's that sort of continuous process of review. And at the right time, we would look to continue 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?

Yes, yes. So let me talk to 2025. And of course, I'm going to say it's far too early to give guidance on 2025. But as we think about the 2024, we've had a number of headwinds. So we've talked about the 2023 client losses, which really only impact us this year. We've talked about China, and that has been a significant headwind in 2024. Tech, we think will be broadly neutral after being a big drag in 2023. And then we've talked as well about we're seeing a big impact on our smaller agencies and the macro. So some of those have dropped out, some will stabilize and even some may turn into a tailwind. I would expect some of them to turn into a tailwind in 2025. We've talked today about the strategic initiatives that we're undertaking, strengthening our offer of VML, Burson and GroupM, and those are all built around contributing to accelerated growth. And we're seeing very encouraging growth from our largest clients. So really, those are some of the moving parts, and we'll have to see where we exit 2024 before we can really give a better guidance on 2025. And then your second question was on margin in 2025 and how we're delivering this year. So what I'd say on margin this year is we are incredibly pleased with how the three teams are delivering those against their strategic initiatives. We are on target to deliver the annualized cost savings of GBP125 million. We'll actually see an accelerated saving in 2024. So previously, we talked about 40% to 50% in 2024. I think that will be closer to 60% this year, and that's really supporting -- getting structural cost saves and helping us progress the margin in a year where the top line is flat to slightly down. We've also -- as you will have seen in the first half, we've been very disciplined around cost actions on those agencies where we have seen a softer top line and more significant impacts. We have been quick to take headcount actions and really address the discretionary cost, which is some of the benefit of our high level of variable costs across the business. So really, those are the drivers of 2024, and it's definitely too early to talk about margin in 2025.

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

Good morning. Thanks for taking the question. A couple, one of which follows on from the last question, actually, which is, how you're thinking about operational gearing in the business at the moment? Obviously, you brought forward the cost savings, but the -- for this year, but the margin guidance is unchanged. I'm just wondering what the interplay is. And also you talked about reduced -- I think you were talking about reducing bonuses or the bonus pool. And I wondered how persistent that could continue for or how persistent that could be. And then just turning to GroupM. I was interested in what you're saying, Mark, about the various measures that you have taken there. It would just be useful if you could just kind of go through them and identify what the issue was that you feel was there in GroupM and how these measures rectify what the problem was and hopefully drive growth in the future. Thank you.

Yes. Look, why don't I start with GroupM? I think we've had a -- we have not been as successful in winning new business in North America as we would like, and I think that's down to a number of factors. Some around leadership, probably more around the complexity of the old population, and there's a few -- there's quite a lot of noise in the background. Do you want to go on mute? I think other people will hear it. Quite a lot around -- some around leadership, quite a lot around the complexity of the structure that's not enabled us to get our best people in front of our biggest opportunities, and then some around our base and technology platform, which, because it was fragmented, was not always resonating with clients. I think over the last year, we've made a lot of progress. We have a new CEO, GroupM in North America. We've restructured, and we brought our new business team. We've integrated our technology and launched WPP Open Media Studio that's resonating. I think this made us much more competitive. So I think all of that brings us, let's say, to parity. I think we need to now demonstrate that success in the market and win new business. So I think there's a discussion to be had around the use of proprietary media. And I think there's a number of, I would describe them as, black box media models in the market that perhaps WPP has not offered. And I think some of those black boxes are not that transparent. I'm not sure in the long run that they're going to work in a market that's transparent like America. But we are looking at our proprietary media products and trying to -- and looking at how we can innovate to be more competitive. We do offer some proprietary media in the market in the U.S., but much less than a number of our peers. Joanne, do you want to get the other questions?

Yes. So just on -- well, let me talk with -- start with the bonus pool and the incentives. So what we've seen in the first half is incentives dropping year-on-year. That's both our annual incentives on our long-term incentive plan, and that's really mechanical, reflecting the performance in the first half. As I said today, I do expect us to rebuild the annual incentives in the full year. And so I think that's really phasing of delivery of the target for this year. To your question on the past few years of incentives, we have some very strong years on incentives and they came off a little bit last year, reflecting performance. And then in those agencies where we're seeing a more challenged performance, obviously, that means that those incentives are coming down again. So -- but as I said, I would expect it to be flat to slightly up for the full year. In terms of the operational gearing, look, we have a very high level of variable cost in our business, which means that we have quite a level of flexibility when we see the soft line deteriorating and to offset that in some markets that's easier to do than in others. In the first half of this year, how to think about it is in China and the smaller agencies, we've probably seen more of that impact from the soft top line and flow through to the bottom line, which has been a strain on the margin. But we're offsetting that, as you said, with the structural cost savings that we are seeing coming through -- start to come through in the first half, and we'll see more of those come through in H2. So good gearing, more challenging in smaller agencies and in China this year, but hopefully offset that by structural cost initiatives.

Thanks very much.

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

Yes. Thank you. Steve Liechti from Deutsche Numis. Thanks for that. Three for me, please. First of all, just on FGS sale, can you just talk us through why you're not giving any money back to shareholders, no cash returns rather than paying down debt? I hear about your debt corridor, but just your thoughts there on even a partial return. Secondly, on the media business. Brian -- the Brian Lesser appointment, you kind of touched on it. But I wonder if you could flesh out that a bit more in terms of what he brings to the party and whether you think that perhaps you haven't done enough previously and he's a new catalyst there. And then lastly, on the tech side, just anything on green shoots visibility there? Obviously, there's been a lot of noise about the big tech companies spending a lot of money on AI but not getting that much on it. And does that mean that the products are not really coming through that you see? Just anything on the pipeline that you can see going forward there.

Yes. So on the proceeds of FGS, we're going to use them to reduce -- to pay down debt, and it will take our leverage for this year buying it in the middle of our range. And I think given that, it's right to sort of stay at that point. And we'll keep that under advisement as we go through this year and into next year. On Brian, he worked for WPP for 10 years. He came in through 24/7. He and I worked very closely on the creation of what was then the media innovation group and then Xaxis, and Xaxis was really the first proprietary media business run by agencies in our sector. He's -- he understands technology. He understands product. His last role at GroupM was running GroupM in North America. So he's very familiar with the organization. And the people in GroupM, though some people have changed, many people are still with us from when Brian run a business in North America. He went from there to run Xandr, which is the AT&T ad sales business, as he again brought together advertising, technology, media; and then most recently, InfoSum, which is really a data-driven technology business. So I think you can see in his background, he combines what GroupM needs. And that's certainly not to say that Christian didn't, but Brian brings expertise in product, expertise in technology, good relationships with clients, and he's a leader of a business. So I'm positive about the impact he'd had on the business. This is not about a single person, but I think he brings a lot of skills that we need. In terms of AI, I think we said in the statement, I think AI is still, I'd say -- I'd describe it as we can see the impact that it's having, but it's a little bit too early for a lot of the products to be used in finished work. And I'd say that's true across industry more broadly is through WPP. Now at a recent event with a number of CEOs, they are talking about -- many of them have individual ways of using AI in their business. I don't think it's fully scaled to its full potential, nor do we see a lot of consumer models that are driving widespread sort of revenue lines for technology companies. I think technology companies are being a little bit more cautious on investing, though we did win two or three weeks ago an assignment with one technology company to promote their AI services to consumers. So I think we are starting to see the market there. So 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 here from Citi. Just a couple of questions, if that's okay. One is, Joanne, I think you mentioned the structural cost savings in the context of China. I just want to double and triple check that, that means that from here on in, you're going to be a bit tougher on the margin in China. Because I know that's been an area where you've tolerated a bit of drag sort of pending an upturn in the past. So a clarification on that would be great. And then the second question, on the sale of FGS, if we look back when FGS was created, I think you indicated that the margins for that asset were a lot higher than the peer group sort of -- or the segmental average, at least. Does the sale necessitate any change in the sort of medium-term margin guidance?

So just on the China question, Tom, and the structural cost savings, yes, absolutely, we look across all of our businesses in the markets to make sure that we are optimizing the P&L. And for China, what we have done this year is we have appointed a President of China, and he is working with all of the CEOs of the agencies to really optimize our talent and our proposition in that market. And as part of that, we are looking at our cost base. So we have taken headcount actions in China this year. And as I said, we have -- we are opening a hub in Wuxi, which will -- which is just outside of Shanghai, and that is intended to have a lower cost hub than what we have. And we'll continue to do that through the second half. China remains a strategically important market for us, and we are taking all of the actions that we need to. I think, as I said, it will continue to be tough this year. But I would hope that we would see some stabilization in 2025. And then in terms of FGS, the question was does it change our medium-term guidance, no, it doesn't. FGS was a great business. It was a fast-growing business, a good margin business. But overall, it's not a material impact for us, and very much still confident in delivering those medium-term targets that we set out 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 to the year. And 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. 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.