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The first seven months of 2010 certainly saw a significant recovery in revenue growth and profitability, with sequential monthly improvement in like–for–like revenue growth, with a minor rate fall in June and with July showing the strongest growth of all, up almost 7%. By the end of July, year to date like–for–like revenue growth was up 3.1%. Mild expansion has replaced fear and stabilisation. The expected LUV recovery, L–shaped in Western Europe, U–shaped in the United States and V–shaped in the BRICs and Next 11, is now more LVV–shaped (LuVVy–shaped?), with the United States, in particular recovering much more strongly than anticipated. In our 25 years of existence, we cannot remember a more speedy recovery or turnaround of a region – from almost –6% in like–for–like revenue growth in the fourth quarter of 2009, to almost +4% in the first quarter of 2010 and +8% in the second quarter and at a similar level in July. Traditional advertising has also recovered sharply, advertising and media investment management moving from almost –10%, to almost –1% and to almost +6% in the same quarters and up even further to over 9% in July. This certainly reflects America and traditional media biting back. In the first half of 2010 headline operating profit increased by a third to £455 million and operating margins, pre–incentives, improved by 3.7 margin points, reflecting the significant benefit of both the improving revenue trend and cost actions, particularly those taken in the second half of 2009. Bonus pools have largely been refilled, with the increase in incentives accounting for 1.4 margin points, with reported margins, after incentives, up 2.3 margin points.

The return to top–line growth came earlier than others expected in 2010. As we originally thought as far back as this time last year, growth did come in the second quarter. During the first six months of this year revenues have been running consistently above budget, by about 3%. Our first quarter revised annual forecasts indicated full year like–for–like growth of around 2%. In the second quarter, revenues came in around 1.5% ahead of even those forecasts and our second quarter revised annual forecasts indicate full year like–for–like revenues even ahead of seven months year to date growth of 3.1% and ahead of current market consensus forecasts of around 2.5%. However, we are also seeing further projected increases in headcount and associated staff and discretionary costs and we need to remain focused on ensuring these are controlled as we approach 2011 and three year plans and budgets. Our full year margins should improve in line with, if not better than, the Group’s margin target of 1.0 margin point improvement. As expected, the first half of 2010 was much better than the first half of 2009, both in terms of profitability and margins (so they should have been given the weak comparatives). The second half should also improve, but will be more difficult because of tougher comparatives in the second half of last year, when post–Lehman cost reductions ensured that our proforma operating margins were the same as in the second half of 2008. We are targeting a level of diluted headline earnings per share in 2010 similar to that achieved in 2008, the previous all time high, and, if achieved, will result in operating margins ahead of the proforma operating margin achieved in the second half of 2008, before the recession.

Whilst the underlying current environment is better than anticipated, clients are pretty unanimously uncertain about future prospects. As indicated by us at the Allen & Company Sun Valley Media Conference some months ago, “the poison in the system is the uncertainty”.

As also mentioned in the AGM statement a couple of months ago, we have to continue to be cautious for two principal reasons – there are still volatile fears of Eurozone fiscal contagion from Greece, Portugal, Spain and Ireland to other parts of Europe; fears of the impact of the UK Government’s new austerity programmes; fears of the effects of similar austerity programmes in France and Italy; and fears of the withdrawal of fiscal stimulus in Germany, reinforced by that country’s strong recent GNP quarterly performance and exports. Perhaps, most important of all, fears for US growth later this year, as comparatives get more difficult and next year as the Bush tax cuts end, together with fears of any withdrawal of the US fiscal stimulus to reduce the deficit as taxes rise on corporate profits. There is also concern about the Obama administration’s attitude to business, particularly as profits, as a proportion of GNP, are virtually at an all time high and the United States corporation tax yield is low, particularly at a time when all sectors of society are being asked to make a sacrifice.

Whilst politicians, journalists, economists, analysts and investors argue about double–dips, inflation or deflation, the most likely scenario is a slow growth “slog”, particularly in the mature geographical markets and traditional media markets, perhaps with inflation and higher interest rates in the long–term. In some senses, the recovery will not be over for a long time. The world, as Jeffrey Immelt, Chairman and CEO of General Electric pretty much first said, has reset or reached a new normal, although worldwide GDP growth is forecast at 4.5% this year, with communications services expenditure growth at a similar level, stimulated by the Vancouver Winter Olympics, the FIFA World Cup in South Africa, the Commonwealth Games in India, the Asian Games in Guangzhou, The World Expo in Shanghai and the United States mid–term Congressional elections. To use a UK football analogy – there is the Premier League consisting of the BRICs and Next 11, digital media and consumer insight; the Championship consisting of the United States and television, both big and resourceful, never to be under–estimated; and, finally, Division I – Western Europe and traditional print media with legacy methods of production, social mobility costs and healthcare and pension liabilities. The world is growing at at least three different speeds. Even Europe, it can be said, is growing at different speeds – Germany and Eastern Europe growing faster than Western Europe.

Plans, budgets and forecasts will, therefore, be made on a conservative basis and considerable attention is still being focused on achieving margin and staff cost to revenue or gross margin targets. Margins have recovered in important parts of the business. In addition to influencing absolute levels of cost, the initiatives taken by the parent company in the areas of human resources, property, procurement, information technology and practice development continue to improve the flexibility of the Group’s cost base. Flexible staff costs (incentives, freelancers and consultants) have returned to the historic high of around 7% of revenues and continue to position the Group well, if concerns for 2011 materialise.

The Group continues to improve co–operation and co–ordination between companies in order to add value to our clients’ businesses and our people’s careers, an objective which has been specifically built into short–term incentive plans. Particular emphasis and success has been achieved in the areas of media investment management, healthcare, corporate social responsibility, government, new technologies, new markets, retailing, internal communications, financial services and media and entertainment. The Group continues to lead the industry, in co–ordinating investment geographically and functionally through parent company initiatives and winning Group pitches. Increasing co–operation, although more difficult to achieve in a multi–branded company, which has grown by acquisition, than in an organically grown uni–branded one, remains a priority.

As the world stabilises and probably avoids a “double–dip” at least, the Group continues to concentrate on its long–term targets and strategic objectives of improving operating profits by 10–15%; improving operating margins by half to one margin point per annum or more depending on revenue growth; improving staff cost to revenue or gross margin ratios by 0.6 margin points per annum or more depending on revenue growth; converting 25–33% of incremental revenue to profit; growing revenue faster than industry averages and encouraging co–operation among Group companies.

As clients face an increasingly undifferentiated market place, particularly in mature markets, the Group is competitively well positioned to offer them the creativity they desire, along with the ability to deliver the most effective co–ordinated communications in the most efficient manner. The Group’s performance this year at the Cannes Advertising Festival was particularly pleasing – second as a Group, as the previous year, but with the gap to first place narrowing to a very small margin.

As the impact of the sub–prime, insurance monoline, Bear Stearns and Lehman crises abate and relative performance becomes easier, the Group’s strategic focus on new markets, new media and consumer insight will become even more important. Clients will be increasingly looking for growth, advice and resources in the BRICS and Next 11, in digital communications and in understanding consumer motivations.

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