WPP, the world's biggest advertising agency, is on its way back,

having recovered to making worthwhile profits and paying a promised

dividend, but there is no call to get carried away with enthusiasm for

the group's recovery situation as it has a very long way to go to return

to full financial health.

It still has negative shareholders' funds of #160m (albeit down from

#253m a year ago) and its main markets remain weak, making disposals

difficult. Somehow it has to trade its way out of the trough and only

through painstakingly raising margins will it do this.

But the first-half figures certainly make encouraging reading, with

pre-tax profits for the first half of the year up from just #1.82m to

#24.1m and the interim dividend -- the first since 1990 -- of 0.35p, is

as forecast with the #88m rights issue in March. Excluding exceptionals,

trading profits were 21% ahead at #42.6m.

Turnover showed strong growth, up 16% at #700m, but much of this

reflected currency movements, with underlying growth put at 5%. The

pattern of trading varied considerably from region to region with

revenues rising by 9% in the US, helped by the recovery in the economy

there. But in the UK revenues were down 3%. The rest of the world was

10% ahead, led by emerging markets in advertising terms, Latin America

and Asia-Pacific.

At least with its global range WPP does have exposure to whatever

expanding economies there are. The group grew from humble beginnings

during the great 1980s' takeover spree with the rationale being that in

a shrinking world multinationals would want an agency able to operate in

all principal markets and able to offer various services. This seems to

have happened as WPP worked with 868 companies in two or more functions

in the first half.

But the recession put paid to the hopes for growth while the group was

loaded down with debt. Past acquisitions continue to haunt it because

the consideration included deferred payments which left the group

running to try to keep still. Payouts in the first half of #23.4m

outpaced operating cash flow of #19.8m. Commitments for #61m remain.

WPP has made a number of disposals to reduce debt and would like to

make more. But with markets poor it is just impossible to get worthwhile

prices for businesses. Negotiations have been going on for several

months to sell the New York subsidiary Scali McCabe Sloves, which

operates independently and therefore should be straightforward to sell,

particularly as its revenue grew by a quarter in the first half.

Other proposals such as the flotation of the successful

market-research activities and the operations in South-east Asia, which

are trading well, plus the sale of one or two smaller companies, are

under investigation but in most cases the net proceeds would not even

match the cash flow they generate.

Debt is coming down slowly. It averaged #372m in the first half,

against #476m, though much of this reduction stemmed from the #88m

rights issue.

Market research maintained a strong showing, increasing revenues by

12%, while audio-visual services, healthcare marketing, direct

marketing, and certain specialist communications performed ''reasonably

well''. Corporate design and identity did well in difficult conditions

while sales promotion performed reasonably in the UK and US but less

well in Europe.

However, these are peripheral activities. The most important operation

after advertising is public relations, led by Hill & Knowlton, and this

still suffers from dull economic conditions, particularly in the US.

Revenues fell by 12% overall.

Advertising revenue was up 7% but there are doubts over whether this

growth can be sustained. The debate is centred on the value of brands

following the well-publicised price cuts in famous brand consumer goods

such as Philip Morris's Marlboro cigarettes and Procter & Gamble

nappies. The success in value-for-money generic brands in creaming off

sales means that less money will be spent on advertising as

branded-goods manufacturers are forced to curtail spending to save

margins.

The recession has clearly made people acutely aware of value for money

and the question is really whether this is a permanent shift. Own-label

products have improved in quality and quickly respond to product

innovation as the supermarkets are keen to see this proportion of their

sales rise. The jury is still out on the question.

However, WPP's recovery does not depend on the volume of business.

Getting margins up is the important thing and here progress is being

made. Excluding severance costs, operating margins improved from 5.8% to

6.6%.

Chief executive Martin Sorrell says that even given a stable climate

they should be able to make considerable progress as margins remain well

below the best-performing competitors and their own historical

performance. The problem is that the climate from WPP's viewpoint is

barely even stable. Mr Sorrell says on the basis of client experience so

far it is possible the economic recovery will be delayed for some time.

This brings us back to where we began -- namely, WPP is clearly on the

mend but recovery is going to be a protracted affair. The shares gained

3p to 93p yesterday.