WPP plc (NASDAQ:WPPGY)
Q2 2009 Earnings Call
August 26, 2009 9:00 am ET
Paul W.G. Richardson - Group Finance Director, Executive Director
Martin Sorrell - Group Chief Executive, Executive Director
Unidentified Company Representative
Good morning everybody. Thank you all for coming, first half 2009. Paul is going to take us through the results and then I'll come in, I think at about slide 34, when we start to talk about TNS, all right?
Ok, good morning. I hope you got the hard copy, it will help as we go through this. So, the interim results for 2009, billings were up 11% to 18.72 billion and reported revenues were up 28%, really as results of both currency and acquisitions or revenues were strong. So on a constant currency basis excluding the impact of foreign currency, which is approximately 20%, revenues were up 8.6% and on like-for-like basis revenues fell 8.3% in the half year and gross margins fell by less were down 7.8%.
Headline profits before interest and tax were down 24.5% to £342 million from £453 million the year before and headline operating margins were down 4.5 margin points to 8% on a like-for-like basis, and down 3.1 margin points pre-severance and one-off costs. In the text, the press release, we take you through the difference between both reported like-for-like and like-for-like pre-severance and one-off costs, and I'll take you through it again verbally, to see if I can help.
So, on a reported basis, our margins were 13.6% last half year. As a result of the acquisition of TNS, which was margin dilutive, some currency impacts of about 0.2 and other minor adjustments, the like-for-like margin equivalent to 13.6 or operating full margin for first half of 2008 was 12.5%, compared to what we achieved at 8% that was a margin decline of 4.5 margin points.
The severance in the first half of 2009 was considerably greater. It's actually 1.6 margin points, this half year, so on a perseverance basis our margins on a like-for-like basis were 9.6 which compared to last years perseverance margins of 13.1, so 3.5 margin point decline.
Then adjusting for the one-off costs of property move, were we had double rent to the Ogilvy worldwide headquarters, where they move buildings in New York and some restructuring cost in relation to TNF, which was approximately 0.4 of a margin point on a perseverance like-for-like and one-off cost basis our margin was 10% compared to 13.1% a year before.
It was down 3.1% was disappointing compared to some of our competition, which held margins declines in the order of 1% or 2% to revenue decline of the same order of magnitude organically in the first half. So, in terms of the headline PBT, which was down 35% to 252, obviously that was impacted by the extra debt that we had on board as a result of the acquisition of TNF, which was two-third funded by debt.
An extra interest cost which rose from £64 million last year to £90 million this year. The tax rate on headline profits improved by 2.1 margin points to 24.8% similar to that achieved at the end of last year with some modest benefits coming through from the (inaudible) of our tax status.
Diluted headlines earnings per shares were down 40.8% to 12.9p from 21.8p a year ago, and as a result the dividend base was maintained at 5.19p flat compared to last half year was covered by 2.5 times by after-tax profits or after tax headline profit.
Estimated net new business billings of £1.2 billion pounds or 1.87 was achieved in the first half of this year. So building up organically on the revenues, the like-for-like revenue decline was minus 8.3. The acquisitions, principally TNS added 17% to revenues in the half year to show constant currency revenue growth of 8.6%, foreign exchange impacted the revenue line by plus 20% and impacted both EPS and profits line by approximately 10%.
On a full year basis, I'll expect foreign exchange to positively impact the revenue line by closer to the 10%. If we were a US dollar reported currency and US dollars was our base currency, our reported revenues would have been down 3%.
Turning now to some of the headlines P&L statements. The revenues of 4,289 million were down 8.3% on the like-for-like basis, to up 8.6% on the constant currency basis or 28% on a reported basis. The PBIT at £342 million was 24% or £111 million better than last year.
Profits before tax of £252 million, was 35% down compared to last year and headline diluted EPS at 12.9 was 40% below that we achieved last year at 21.8. As I mentioned forward, the headline operating margin on a reported basis was down 5.6% and on a like-for-like basis was down 4.5% after severance and one-off charges. Headline EBITDA at £455 million was down 76 million or 14% compared to the year before.
Turning now to [statutory] profit and loss account. Pulling out the items I think that are different to those in headlines; in terms of the goodwill amortization and impairment, that is significantly higher this year because of the amortization of intangibles and brand names in TNS acquisitions. So, of the £124 million, £88 million relates to amortization which compares to approximately £25 million in the first half of last year, pre-TNS. In terms of goodwill impairment, we took a charge of £40 million the first half this year compared to £20 million last year.
So, those two factors are the key elements of the £124 million charge for goodwill amortization and impairment. The other point I wanted to bring out in terms of the net finance cost. The headline finance costs are £ 90 million, what I call 'true interest cost'.
We had two benefits, reducing this cost to £39 million. One was a £25 million gain on financial instruments. The second was more real and long-term, with a £26 million gain on termination of swaps taken out on TNS debt that's subsequently been repaid. £14 million of that cash was generated or received in 2009. The balance will be generated as a license swap, but those were the hedges against the debt that was also redeemed by us and ended up with ultimate cash and an accounting gain.
Those are the items I think I wanted to talk about in the statutory P&L, and ultimately, profit after tax on a reported basis were £138 million, down 41% compared to year-ago.
In terms of providing some color about how the first half progressed and how our performance compared on the various expense line; if you recall, the first half organic decline this year was minus 5.8%. It followed a flat quarter for 2008, but I think a surprise to us and most in our industry was the speed of decline in quarter two. In our case, we were down 10.5%, and very similar to our competition whereas Omnicom were down 10.8%, Publicis, 8.6%, Interpublic, 14.5%.
So, the speed of the decline in the second half we found difficult to cope with, so our revenues, seen at the left hand column are the reported revenues and expense items for 2009. The right hand column is the reported numbers then adjusted on a pro forma basis to include the impact of TNS, which obviously wasn't in our numbers last June '08, and adjusting for currency basis, like-for-like pro forma sterling comparison to June '08. As you can see there on the revenue side, we were down 8.3%.
On the staff cost, we were only down 3.2% as a result of the maintenance in taking out some of the staff in the first half of this year and the headwinds we had coming into the year from the staff cost growth both in headcount and cost in the backend of 2008.
Establishment costs are up principally because of the increase in rents in the economies in the Far East and Asia Pacific and Latin America in the last two years feeding through into rent increases now, in addition to that one-off property move, and we are similar to our competitors in moving our establishment ratio from about 7% to 8% at the half year point.
Obviously, we've been very proficient at utilizing less space in our property portfolio, we could mitigate the rent increases that arisen in the last 24 months on the global macro-economy.
On other G&A expenses, we did okay. We achieved an 8% reduction in G&A expenses, in line with what we had hoped for with an 8% decline in revenues, but net-net, with revenues down 8.3%, our total operating expenses were only down 2.9%.
I think one indication of how we are performing at the end of half, compared to beginning of the half is looking at both the June and the January revenues salary cost. Suffice to take the January run rate of salaries, ex-severance, and compared that to the June salaries ex-severance and use an index of a 100. If January was 100, June was 93% on the salary basis, and this is despite revenues in June being traditionally higher, so if revenues were 100 in January, revenues in June would be 120.
So, if I did the same for May, the revenues on index are about 113 in the month, compared to January and salaries ex-severance in May were about 95%. We are achieving a core reduction in the staff cost, ex-severance in both May and June compared to January.
You can see the corrections that we are beginning to put in place more clearly I think as a result of the terminations that has happened in the first half and will continue throughout the rest of the year. So, the severance charge specifically, the $100 million or about 1.5/ 1.6% of revenue in the first half, 1% more than the prior first half.
If you look at the organic revenue declines, the average headcount reduction and the point-to-point headcount reduction, so in March, the end of first quarter, our organic revenues was down 5.8%. , but because of the tailwind at the backhand of last year, and the speed of action in the first half of this year, our average headcount was only down 0.6% for the three months ending March were point-to-point from the end of last year to March 31st, we were down 3.1% in headcount. By June, revenues have fallen further on average 8.3%, average staff declined on average by 2.8 and point-to-point headcount was down 5.2.
At July, the average headcount was down further still at 3.5 and the point-to-point headcount was down 6.3. So, we are catching up in terms of the speed of correction of our cost base versus our revenue lines. On average, in the first half, our estimated cost of severance is five months of salary, so when you exclude the company costs the pay back is around four months. There will be continuation of severance in the second half of not this similar amount that we have accrued for and spent in the first half this year.
In total, on this [plenty of] similar around 1.25% to 1.5% of severance's, on a full year basis 30 percentage of revenue compared to 0.8% last year. I think, we are one of the few that are recognizing that severance will be continuing item of the second half, which will have almost all of its benefit in 2010.
Moving now just through the traditional revenue splits by geography and by discipline. As, we mention for the first quarter, the revenue decline was minus 5.8. In the second quarter the revenue decline was 10.5 and if I look at it by discipline, advertising which represents 39% of our business. The like-for-like decline in the first half was 7.8, by quarter it was minus 3.9 and in second quarter minus 11.2.
On the Consumer Insight business, the renamed Information, Insight and Consultancy division, which includes both traditional account, our businesses in TNF, which now represents 26% of our business. Organic revenue decline for the half year was 10.3%, on a GM basis was minus 7.8%, and in terms of quarterly split, quarter one was minus 6.4% and quarter two is minus 13.6%.
On the public relations and public affair, discipline which represents 9% of our business, organic decline for the first half was 8.2%. The quarter one decline was minus 6.1%, the quarter two decline was minus 10.1%.
On the Branding and Identity, Healthcare and Specialist Communication businesses, representing 26% of our revenues. The half year decline was minus 6.9%. The first quarter split was minus 7.9%, down organically. The second quarter split slightly better at minus 5.9%.
So, overall, organic revenues declined 8.3%. Quarter one, minus 5.8%, quarter two minus 10.5%. A similar pattern by geography, there was no region that has exempt. The decline in revenues in the second quarter with North America representing 36% of our revenues was down consistently in the first half of 10.1%, but on a quarterly basis was minus 9.2% in quarter one, and minus 10.9% in quarter two.
United Kingdom faired slightly better in the first quarter was down 2.2% organically, but down 8.2% in the second quarter making 5.3% decline for the first half. Western Continental Europe, which represented 26% of our business, was impacted overall by 10.5% in the half year, minus 7.2% in the first quarter and minus 13.4% in quarter two.
Asia Pacific, Latin America, Africa, Middle East, Central and Eastern Europe are combined region totaling 26% of our business, overall the first half organically was down 4.7%, was down 9% in the first quarter and minus 7.8% in quarter two. Of this region, Latin America is the only market to be just about flat in the first half. Asia-Pacific overall is down about 8%.
So turning now to margins; on reported basis, all our disciplines and geographies across the board, that margin declines have been quite severe across the board. So in Advertising and Media Investment Management, the margin decline was 5.7% to 10.2% on a reported basis; this is using a 5.6% decline as a benchmark for the whole group, the Consumer Insight business was down four margin points from 10.1% to 6% -- 6.1% in the first half.
The Public Relations business margin declined from 16.1% by 4.5 percentage points to 11.6%, and the Branding & Identity, Healthcare, and Specialist Communication businesses margin declined from 10.7% by 5.3% margin points to 5.4%. Overall, the group decline on a reported basis 5.6% margin points.
In North America the margin decline was 6.2% margin points from 15.8% to 9.8%. In the U.K., faired slightly better, margins only down 3.1%, 12.9 to margin of 9.8% in the half year; in Western Continent, the Europe, a margin decline of 7.8% taking the margins down from 12.8% to 5.4%, and East of Latin America, Africa and Middle East, Central and Eastern Europe, margin decline was 3.5% margin points, down to 7.5%.
Looking at the relative strengths of certain markets, it’s been again highlighted in the press release, but those markets that are still exhibiting growth in the first half include Argentina, Brazil, Poland, Russia, South Africa in zero to minus 5% revenue decline organically regions included Mainland China, France, India and Mexico.
Then revenue declines of 5% or greater, but probably the most impacted were countries like Japan and Australia for us in particular, but a number of European markets were pretty severe in their declines as I think we mentioned, Netherlands, Portugal, the Scandinavia market and Spain in our press release that’s having probably the most severe declines organically in the first half.
By client, on a like-for-like basis, we've had some business wins, and so the growth in computers, electronics are very specific to new business put on in those various sectors. The vast majority of businesses obviously have organic declines of 5% or more, automotive and financial services, retail, telecommunications, travel and airline. In the mid-band, drinks, food, government, oil and personal care and drugs.
In terms of currency, very significant in terms of reported numbers; up 19.8% in revenues, reflecting the weakness of the pound against the dollar, and the euro and the yen in the first half. As I mentioned, on a full year basis, I think currency would impact revenues by about 10% positive.
If I take the headline PBT of £252 million, based it at 2008 levels, we would reported a profit before tax of £210 million in the first half. In terms of new business, the underlined or red on the slides are those business won or lost in the second quarter, a number of followed wins coming through, Wunderman, agency of for Microsoft, a high profile win for Grey, the NFL account in the USA, and JWT launching the new search bar for Microsoft Bing, again, on a the worldwide basis of note in the first half of the second quarter.
Likewise, a number of other wins on the next slide. I won't go through them all. Then a number of losses, both in the first half and the second quarter, principally media, a number of losses or reallocations and consolidation of duties on the media side which stayed, say, prevalent right now. A limited number of creative wins and losses taking place in the first half.
So, in terms of billings, overall, a fairly weak second quarter compared to a fairly strong quarter one this year, over £1.8 billion of billings won. It was down compared to last year's billings first half of £2.5 billion.
It was identical in media and in other creative businesses that it was lower, because I think there was less business churn in the creative advertising category, so billing this year won about £540, which was considerably lower than last half year of about £980 million.
In terms of wins and losses since the half year, we've had a couple of quite significant wins both in JWT on a worldwide basis for Microsoft and MEC in Germany for Mercedes Benz.
Turning now to cash flow, so in terms of operating profit on a reported basis, £199 million, compared to £378 the year ago. The items in the P&L of a non-cash nature that would affect the cash generation are the non-cash compensation, i.e. share based compensation charges, depreciation, amortization impairments, which is significantly higher this year compared to year before, interest paid, obviously increased over the year ago.
The tax paid is actually higher than the year before, principally because of the cash taxes paid on prior years profits are flowing through this half P&L due to the '08 strong profitability versus '09.
In terms of how do we use the £272 million cash that we generated? £129 million was on capital expenditure. Unfortunately decisions taken two years ago, some major relocation moves in New York for both Grey and Ogilvy this year have resulted in about a run rate of £55 million of CapEx higher this year, it probably run through to the end of the year, expecting CapEx in the order of £275 million, £280 million this year compared to £212 million last year, solely as a result of those property moves. All other CapEx has significantly reduced.
Where we have been much disciplined is in terms of new acquisition payments in total, both investments in wholly owned businesses, totaling £55 million in the first half, burnout payments that was scheduled of £38 million, making total acquisition payments to £93 million, share buybacks of a minimal amounts of 0.2% of share capital, generating £30 million in the first half this year compared to £31 million last half year, and that was the before net working changes.
If you look at the balance sheet, we've seen about £100 million improvement in net working capital from June '08 to June '09; would actually hide the fact that we've had a even greater impact because TNS brought with it something like $300 million of working capital that we've had to deal with, and we still have a £100 million improvement.
When you look at the cash outflow in the first half compared to December to June, it's running at an outflow of £481 in our traditionally weak cash first half and a very strong second half, compared to £572 the year before, again, so a £100 million improvement. So, on both counts, we have done well in working capital management in the first half of this year.
In terms of interest costs, again just breaking out the detail to point you to the direction of the £90 million from the headline finance costs, which was up 41% compared to a year ago, when overall debt levels are up 55%.
Again, just to go through that. So, net debt at the end of June, 3.5 billion compared to point-to-point a year ago up 86% or 1.8, on an average basis were up 55% on a constant currency basis. Headline finance cost of 90, covered 3.8 times by EBIT at the half year point, but that's not a covenant measures. Again, I will come on to the covenant measures straight away.
In terms of debt this is just to give you some pictorial view of how we are doing on the balance sheet, net debt to taking the June '08 position of 1.8 billion, adjusting for currency will be 2.2. Writing that across, you'd see we have actually done slightly better in that on the core business when you allow for the yellow which is the TNS effective cash cost and extra debt that we took were actually below the 2.2 line. So the core business is doing well, but on an absolute basis it includes the debt we took on for TNS.
The total is 3.4 down from the June point, and for the March point of 3.7 billion. In service maturity profile, as you know we had to refinance the £650 million term facility from the banks. We successfully completed that since the end of the results last year and the first quarter issuing both the convertible bond, the [tri packs of] £6 and trading at about 120 or 1.20 currently, so doing well.
The US dollar bond more recently both at 2014. So we have satisfied our re-financing requirements. On our next call, on any facilities is the banks facilities 2012 and the bond markets 2013, and just to remind you, we are generating sufficient cash to repay the TNS acquisitions revolver, which was 600 million, which is currently 400 million because the first 200 is being repaid and remaining out there 236 was drawn at the end of June, so those elements will be repaid from surplus cash generation.
So, in terms of the banking side, we've gone through this before, but just to remind people there are no covenant or ratings through for the public bond, other than the most recently issued US dollar bond that has a sub-investment grade trigger of 50 basis points, should we go to not just down on the rating, that would have an absolute cost of $3 million.
The bank and the TNS facility has a following on identical covenant. Net debt to the last 12 months EBITDA, less than or equal 3.5 times measured at June and December, and EBITDA again for the last 12 months net interest to not be greater than five times again measured at half yearly intervals
In the covenant definition of EBITDA and its interest, we are allowed to exclude non-cash and non-operating items such as bank fees or bond fees in the calculations. So the net debt-to-EBITDA calculation, which must be less than 3.5 times, as of June measuring, we were 2.7 times slightly higher and we are traditionally higher June versus December, where we were 2.3 times.
Again, well within the covenant headroom of 3.5 and the EBITDA for net interest cover, which on a reported basis on the face of the P&L for last 12 months, you'd calculate 6.9 times cover. On the banking covenant basis, we have adjustments the ratio is as is consistently shown, and every time we're showing these covenants that we come out 8.2 versus the covenant of five times, again so sufficient headroom on the banking side.
Dealing with the ratings, I think it's important to try and keep you up-to-date on where we are and the ratings calculations are complicated and I think we will happily hand out the two separately in appendix that details both the Moody's and S&P calculations for both EBITDA as adjusted, and debt as adjusted to rent and leases to those that are interested, to actually follow through on the ratios in some detail.
Again on a 12 month training basis, as of December on S&P, we had a ratio of adjusted debt to EBITDA of 3.2 times. As at June, rolling for the last 12 months it's reached 3.7 times. It is just on the cusp of the ratings boundary of 3.5 times, just over that.
Likewise Moody's, on a different calculation, but a similar trend; as of December, the adjusted average debt to EBITDA ratio is 3.2 times, it's now 3.8, again, right on the cusp of the ratings boundary, from BBB down to Baa2 to go down a notch.
I now wanted to point out what Moody's said in the last release. The ratings maintenance requires amongst other things, one, leverage not to exceed the ratio 3.75 times on a sustained basis; two, the focus on cost control and operating margin protection; three, the use of discretionary cash flows towards debt reduction; four, successful and timely integration of TNS, the realization of synergies in line with the company expectations. Again, Martin will comment on that shortly, and five, the company to manage liquidity proactively and discretionary outflows tightly.
To that aim, we just listed out the three levers that we are actively committed to maintaining tight control over both new acquisitions. We are restricting up to £100 million a year for both '09 and '10. Currently in the first half we spent £55 million in share buybacks.
We have reduced the scale of the share buybacks quite considerably over the last few years. It will now be restricted to up to 1% of share capital, currently running at 0.2% or £10 million. In dividends, we brought the rate of growth which historically has been at 20% per annum growth to no greater than 15%.
We have in fact decided, in light of the results, to have us maintain a flat dividend in the first half. So despite the downturns we still generated £272 million of cash and had a net cash generation for the first half.
Finally, just two slides on ordinary shares again. This is purely mechanical. One factor is obviously the share price and the option calculations, but on basic basis, the full year impact, the shares we issued for TNS is flowing through, which was about 7% of share capital, is flowing through into basic share count.
When working through into the full year diluted basis, there is no difference. A couple of things the Grey convertible has been redeemed, and the sterling convertible, actually I apologize, it seems to be a sterling 450 million, it was anti-diluted, so it wasn't included in the calculation in first half year.
Our estimation for the full year headline weighted average share count diluted is in the order 1,240 million shares. Again, it's an estimation because the shares and dilution figures don't change as a result of the share price as of the other potential issue of shares. With that I'll hand over to Martin.
Paul gets the easy part of the presentation. Let me just move on to TNS integration which is an important part. Yes, it's true that revenues are down in the consumer insight business, and consumer insight being hit by the recession pretty much as other parts of the business.
Revenue performance does tend to look as though it's in line with fears. I think Ipsos is reporting this morning. I haven’t seen the second quarter number, but you can see in the first quarter and the second quarter the revenue level is pretty similar, and path one is, we'll see how that all pans out.
However, if you look at the gross margin level, the position is somewhat different and that’s partly due to the impact of moving the business increasingly online, as we discussed before, but the revenue decline at the gross margin levels is about 7.8%, which compares much more favorably with what's being going on inside WPP itself.
In July, like as we've indicated for other parts of the business showed an improvement in the revenue performance and indeed the pipeline. Just on the integration process itself, it's been reorganized; a number of things have been reorganized.
First is that the TNS's custom business has been brought together with the RI, Research International throughout the world. Kantar Health, Kantar Media, Kantar Retail and Kantar Worldpanel have been formed out of the TNS businesses in those four areas, and the Kantar businesses have been brought together under the Kantar brand.
There has truly been some delay on the severance actions tuning to European regulations, that negotiation with Works Councils and implementation of the regulations themselves, but the synergy program is very much on track.
In fact, probably is in advance of where we thought it would be and the synergy benefits have been raised from £52 million to in excess of £60 million, so we feel confident about the achieving of the synergies that we set out of the time of the acquisition, in fact, if anything, more so.
The combined product and client offering is proving to be more competitive than we thought. There are more consolidation opportunities with common clients of TNS and Kantar and even beyond than we thought.
Just one other observation that the strength of technology and automotive, both in TNS and indeed in Kantar has affected our performance. In other words, those are two sectors that have been negatively affected by what’s been going on. I’ll just flip through quickly the strategic side, just because there have been one or two changes.
In terms of the objectives, they remain the same; the faster growing markets to be one-third, we are up at 26%, marketing services to be two-thirds of the total group. We are almost there in terms of marketing services as you’re seeing quantitative disciplines, including consumer insight to be one half of the group. Again, we are almost there, about 46%.
If you look at it, in the faster growth markets, as you can see that today, including associates almost gets us to where we need to be in terms of the position, but clearly we have a significant BRICS and Next 11 presence with the objective to be a third, a third, a third.
Performance in China, Brazil, India, and Russia is still very strong. Brazil and Russia interestingly were only two of the four markets, the others being Argentina and Poland where we saw positive revenue growth in the first half of this year, but we have strong businesses in all those markets and market leadership positions.
The same applies to Middle East, Central Eastern Europe, and on a much smaller scale, Indonesia and Vietnam. We just reworked or updated the numbers in terms of our position in these faster growth markets in Asia, Latin America and elsewhere.
Competitively, you can see that from a geographic point of view, we still have an extremely strong position in terms of Asia Pacific, Latin America and Middle East. I think recent acquisition activity doesn't make much of a difference in relations to the size of the businesses in the faster growing markets.
We have just updated here, these are the GroupM estimates of what is going to happen by region and for the world as a whole in terms of advertising spent in 2010. You can see the GroupM is still forecasting 2010 spending to be down slightly, but not less so than in 2009. You can see that the growth market Latin America and Asia Pacific.
I just reinforce what Paul mentioned that the pressure in Asia Pacific is really coming in Japan and Australia, and New Zealand. Those are the two markets that have the most significant impact, particularly in Japan in terms of the pressure in Asia Pacific.
It's not so much the growth. The other growth markets like China and India have suffered particularly in Q2, but I don’t know we are near as affected as we have seen in the two markets Japan and Australia. So that's the pattern spending for next year.
In terms of media billings, we still have worldwide leadership according to the latest recommend figures, slightly number two in the Americas, in Europe clearly number one position in Asia and worldwide.
Including associates does not make too much of a difference to marketing, services being two-thirds, but you see we're at 61% or 60%, if you include associates again with the objective of being two-thirds.
Our Marketing Services businesses are extremely strong. This includes our digital business and recent acquisition activity doesn't make much difference that we calculate that our digital business is now about 25% of our business or about $3.5 billion of our $13 billion running rate business, so still very significant business in terms of growth and development.
Quantitative disciplines now are up to about 47% of our business. By quantitative, we really mean digital plus consumer insight, and we think these are two of the growth engines, particularly as we come out of the recession. Here is the digital for the first half, I said about 3.5 billion for the full year, so you can see about 1.7 billion in the first half at around 25% of our business.
It was just pleasing to note that our leading independent research firm, which is Forrester in their interactive agency report highlighted three leaders OgilvyInteractive, VML and Wunderman out of the top seven leader agencies or the leader agencies as they define them.
Objectives remain the same. Operating margins, flexibility in the cost base, free cash flow, which Paul has already touched on, not only to enhance share and value and return on covenant employed, but in regard to ratings, developing the role of the parent company, emphasizing revenue growth as margin improves and improving creative capabilities.
Here is the pattern of profitability with what has happened in the first half. Our targets remain the same in the long-term. We have indicated in the press release that the second half, we are forecasting to be stronger, and we are looking to maintain our margins in the second half in line with what they were last year in the second half, and we'll see how that progresses. Certainly, the indication in July is, only one month out of the six was more positive both top and bottom line.
In terms of flexibility, we have given you the numbers in the press release in relation to incentives, we have actually given you in relation to severance costs, total severance costs and relative severance costs and extra property costs.
The flexibility has been reduced by the reduction in the absolute amount of incentives that are in the P&L in the first half of this year versus last year, but there is still flexibility in the cost structure; its running at about 8% variable staff costs as a percentage of the staff cost, and 5% as a percentage of revenue as opposed to the 6% or 7% that it has been historically.
In terms of the uses of pre-cash flow, we bought a little bit of stock back this year, only about [0.2%] of the share base, but you can see the totals and pattern for the last year. This is the graph that we have used every half year to demonstrate returns to shareholders. You can see the first half return in 2008 was a total of 3.2% taken into chart to account dividends plus share buybacks, and it was 2.7% in the first half of 2009.
On acquisitions, we have limited ourselves to up to £100 million a year, part of the discretionary control that we have. We've spent a fair bit of that, not right up to the limit; we focused on a number of smaller acquisitions in geographical areas, in marketing services areas that we think are important, particularly direct internet and interactive and consumer insight.
We did 10 small and mid-sized acquisitions in accordance with that strategy and we have made one or two in advertising to bolster or reinforce local agency or client needs and again, we particularly find interesting opportunities outside the US where multiples are more attractive. This is the pattern of them. The Venn diagram intersects between faster growing markets and quantitative and digital, but you can see a number of smaller acquisition that have been focused on that.
In terms of creative capabilities, again, we carry on in terms of recruitment, creative success, acquiring highly creative businesses like Jupiter Drawing Room in South Africa, placing greater emphasis on awards. We were second for the second time in two years in succession at Cannes and narrowing the gap to the first place.
So, in conclusion, the financial crisis and the credit tightening certainly has triggered a recession across the globe and has had a severe impact on our first half results as you can see.
We had a significant deceleration in Q1, which I think understandably, we couldn't managed the headcount too in Q1, and an even greater decline in Q2 revenues and the consequent severance that’s had to be taken as a result of that, particularly that second quarter decline spread into Western Continental Europe has depressed our margin.
You saw the pre-severance costs and pre-exceptional property costs, the margin was around 10%, 9.5% to 10% depending on what definitions of severance, whether you include incremental or the absolute amount.
Number of people in the business as Paul has indicated is much better aligned at the end of the first half and increasingly at the end of July, where there has been a further percentage point increase from about 5.3% to 6.3%.
The balance is far better now than it was at the end of the first quarter or going into the year. We didn't take a massive general provision at the back end of 2008 to protect the margins in the first half of 2009 or indeed the full year.
For 2010 the action taken should allow us to improve the year-on-year margin between 2010 and 2009 given a stable revenue environment, and although I guess we don't like to be pushed at this time of the year to talk about what might happen in 2010 from a revenue point-of-view, it does seem as there is more stability in the marketplace.
As we were discussing before and we discussed this morning with the media, those are maybe a definition of a semantic issue here. People talk about things getting less worse; and all these things are relative statements.
I think CEOs and CMOs do feel better about life, but I think for sort of strange reasons, the basic reason is they did look into the abyss after the Lehman catastrophe and a number of companies were faced with the prospect of bankruptcy. They have survived that. Armageddon didn't happen, and they feel a bit better about life.
There is a relief rally. I think we've had two relief rallies in the stock markets. I don't think we've had a fundamental change in the pattern of investment in branding amongst our clients yet.
I think what’s happened is, people feel better about life and so their heads and hearts are stronger, but that hasn’t extended, as we said at the end of the first quarter, to the checkbook or investment in branding.
Most clients give you a number of advertising and promotion, and I think the breakdown between advertising and promotion is an interesting one. My instinct is or from the data we see, is that promotion is up, and price based promotion is up, and market share is being bought by sacrificing pricing to some extent in many sectors.
However, what we have not seen yet is that greater confidence, greater confidence because you saw all the de-stocking that took place in Q1 and Q2 in the backend of 2008. That was the sort of panic reaction to the lack of credit and the supply chains being squeezed, but we've not seen the next step. It may well be that we lag the upturn.
I think we lead the downturn, if people get worried they cut, and we’ve said this before many times. I think we lag the upturn. In other words, people don’t start to invest in branding aggressively until they are sure of a return. Again, the reason why I think it's semantic, and this I think is important is, it's rather like looking at the national GDP statistics.
I'm somewhat amazed that people think that things are improving when they look at sequential quarters and they don’t look at the year-to-year comparisons, and that’s the thing that we look at. We don’t look at sequential quarters; we tend to look at year-to-year comparisons.
So, to some extent, there is some stabilization because the comparatives are getting easier and as we go into 2010 we are going to be lapping a very tough first half 2009, and things should get better just naturally because of the sequencing of the numbers.
Again, what we are really looking for which I think would make us more optimistic was if we saw a change in the pattern of behavior of clients, and I don't think that has happened as yet. I think just things look better I mean, because we're cycling tough numbers. So I think that's the outlook. The outlook for 2010, we have said even Steven, we've said we think that it will be next year roughly where it is this year.
Having said that, there are five things happening next year, which give you a little bit a cause for optimism, probably in order of the importance, I guess it's the FIFA World Cup in South Africa, not as big as Beijing in China but important for Africa. Africa is a region where we continue to see some growth interestingly on a smooth scale.
Second, probably is the Vancouver Winter Olympics, again, not massive but helpful particularly in the North American context. The third and probably be the mid-term elections that President Obama faces in November of 2010. The Asian games, probably Expo in Shanghai and the Asian Games in Guangzhou. So there are some events that are happening in, what we would call I guess a mini quarter annual year 2010 that give you a little bit more in the media markets as a whole.
New markets, new media and consumer insights are the three things that we are focused on strategically. We think those three areas are going to become more important. BRICs and Next 11, I think it's obvious. The China surpassing will be at minimally. Germany is the world's largest exporter, in the last few days is just another iconic movement or statistic.
New markets already 25% or 26% of our business, new media, 25% of our business, we effectively have a $3.5 billion new media business. Then consumer insights, some commentary that research is not performed as well in the recession, I think this recession is not discriminated against any segment or sector or geographic sector.
I think, the consumer insights will continue to be very important, data will continue to be very important. You saw the latest moves by a consortium rumored, I guess it's not official yet. Rumored consortium in the US in relation to media measurement of group of media owners and indeed agencies that are rumored to be putting together a new approach or new tenders for media measurement to go beyond the traditional, go to the new in particular.
These source of insights that new media give you are becoming increasingly important and clients are going to be very focused on what changes to consumer and in the corporate spending will take place or have taken place or might take place as a result of the recession.
We think, we are very well placed to benefit from those trends, we think that the TNS acquisition gives us a major competitive advantage and we are seeing that, as I have indicated in our approach to clients on a combined offer, as well as the source of future margin improvement.
We'll continue to position our business and the top line in the highest growth function in geographic sectors and improve the effectiveness of our cost structure, and we'll manage our cash flow to return average net debt to EBITDA or as Paul has indicated, that ratio to below two times in the medium term, which is what we said at the time of the TNS acquisition. We said it will take us two to three years, and with the goal of maintaining our investment grade rating.
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