Interpublic Group of Companies Inc (IPG) 2002 Q1 法說會逐字稿

Hello, and welcome to your conference today with Ms. Susan Watson. At this time, this conference is going to be recorded for transcription purposes. During the conference, please state your name prior to speaking and try to avoid speaking at the same time as someone else. Thank you for using Sprint Conferencing Services. I turn it over to you, Ms. Watson.

Thank you, Operator. Good afternoon, everyone, and welcome to Interpublic's First Quarter Earnings Release Conference Call. With me today are John Dooner, our Chairman and CEO, and Sean Orr, Chief Financial Officer. Our earnings release is posted at 4P.M. today, and is available on FirstCall, Business Wire, Bloomberg, and in the financial section of our website, www.interpublic.com. For purposes of today's discussion, we will assume you have read the release. The outline for today's discussion, which illustrates many of the points made in our press release, will also be found at our website. A replay of this call will be available by telephone for 24 hours only by dialing 800-252-6030. International callers should dial 402-220-2091. The confirmation number for the call is 12042178. You can also access a replay of the call at our website for 30 days. Finally, I will incorporate by reference safe harbor language at the end of our press release, and in the discussion outline. Now it's my pleasure to introduce John Dooner.

Thank you, Susan. My comments are going to probably be briefer than Susan's, but as it has been our practice Sean will review the details of the financial performance of the quarter. But before he does, I'd like to make a few brief remarks to kind of set the content to Sean's presentation. First I want to mention that our first quarter results are consistent with our plans. Basically they held no surprises. Secondly, that while we're not satisfied, and certainly we're not complacent with our organic growth performance, the numbers are largely as we expected. For the second quarter, we expect to see improvements in the organic revenue. They remain challenged. Finally as noted in the release, we remain on track to deliver double-digit EPS growth in 2002. So I'll pass it on to Sean, and he'll take us through the numbers, and then we'll open up the floor for questions. Sean?

Thank you, John, and good afternoon everyone and thank you all for joining our conference call. I will begin my remarks by referring to Page 2 of the conference call notes, which represents a year-to-year comparison of operating performance. As with the fourth quarter of 2001, the first quarter of 2002 gives a very clear picture of the operating performance of the company without any unusual items. However, as noted in our press release, there is a required change in our accounting for goodwill amortization, as you are seeing across all industries, and will note in the comparison of the line labeled "Amortization of Intangibles." Picking up on John's comment on revenue, we do indeed consider a 15% revenue decline disappointing, but it was within the range of our internal estimation, and therefore, not unexpected, and we've been managing our costs accordingly. If you look at the operating costs on the chart and the depreciation costs on the chart, in total, operating costs for the quarter were reduced by more than $200 million, which is an acceleration in the improvement in our cost run rate, versus our fourth quarter of 2001, in which the year-to-year comparisons benefited from reductions and incentives as well as reductions in ongoing operating costs. Our first quarter comparisons do not enjoy the benefit of reduced incentive costs. These reductions in operating costs are ahead of our plans, both in terms of the size of the savings flowing through our P&L, and the timing of the realization of those savings. Which is not surprising, or should not be surprising, because as we've been saying, our business model for 2002 is one where we are looking to manage our margins very very aggressively, and return our margin performance to our margins levels of at least 2001, if not exceeding that margin performance. I will talk more about margins some, in a minute. But just to repeat what John said in his opening remarks, and as I will expand on later, the performance you see in the first quarter does keep us on track to deliver against our margin and profit objectives for the year. Turning to Page 3 of the conference call notes, I would just like to analyzing our revenue change for the quarter versus 2000. Looking at our organic revenue performance down 12.8% in the quarter, as was the case in the fourth quarter of last year, this trend is a composite result of lower spending levels by our current client mix, carryover effects of our merger-related losses and is impacted by our disproportionate exposure to the US market in general, and the advertising sector in particular. The performance you see in the first quarter, closely mirrors the performance that we had in the fourth quarter as I will show when we get into some analysis by geography and discipline, with the notable exception that there was decline in revenue trend on an organic bases in certain markets in Europe. Going down the remainder of this analysis, we do point out and isolate the impact of two major account losses that were directly associated with the True North combination, the case of Chrysler, it was an account loss experienced by True North prior to our agreement to merge with True North and in fact without such change of event, we could not have contemplated a merger with True North. The Pepsi account defection was something that was well expected and anticipated and valued in evaluating the economics of the True North transactions. Do want to also point out that net dispositions impacted our revenue trends by about .5%. This number principally represents office closures and the like that were a consequence of the business combinations and restructuring activities that took place in the middle of last year. But what this number also indicates is that our analysis that we'll be talking about throughout the rest of this conference call is not heavily influenced or distorted by the impacts of acquisitions. So the numbers you're seeing give you a very clean read of what's really happening to the operations of Interpublic Group. Turning to Page 4, we will look at a similar comparison of the cause of change in net income from quarter to quarter. And as you can see from the analysis the important story really is what's happening to revenues and what's happening in our operating expenses in response to our revenue trends. Here again, you see the combined effect of the operating expenses and depreciation representing more than a $200 million reduction on a year-to-year basis on a repeat. That is an improvement or an acceleration in run-rate performance relative to the fourth quarter when you take into account that the fourth quarter had reduced incentive costs. A couple of other points to make about changes in net income from year to year, you see the 40.4 represents the effect of the accounting change that I mentioned earlier, and you see in the case of the increase in non-operating items and the increase in equity earnings in minority interests that the elements of our P&L below the operating line are now adding P&L leverage versus taking P&L leverage away from us, as they did in all of 2001. Turning to Page 5, I do want to spend a minute just going through EBITDA margin trend. As I've mentioned, this year, from an Interpublic standpoint, the business plan represents a margin management and margin improvement plan. But that's based upon hitting certain full-year margin and operating cost targets. The way that plan was built and is expected to work and will work is that you will see sequential improvement in larger performance by quarter throughout the year. Now, as I've already mentioned, our first quarter cost run-rates are ahead of plan both in terms of timing and size of benefit. Our margins for the quarter were ahead of our internal plans. When you look at the margin delta for the first quarter of 14.8 in 2001, 13.4 in 2002, where a delta 1.4, and compare it to the delta in the fourth quarter of 1.1%, that gap in improvement is more than accounted for by the incentive benefits that I've already alluded to. Turning to Page 6, I'd like to spend a minute on certain cash flow and balance sheet items. For your convenience, we have spelled out the effects of depreciation and amortization to better enable you to analyze our cash flows. You see again the impact of amortization of intangibles and the accounting change. You also see cash used for acquisitions in the first quarter of this year versus last year. I want to spend a moment on that point, that about half of the acquisitions spent in the first quarter related to earn-outs on acquisitions made in prior year, and about half of the monies spent related to acquisitions we closed in the first quarter. Now, the acquisition activity that we see happening right now roughly mirrors what you saw in 2001, where we did complete 21 transactions in addition to True North at an approximate up-front cost of about $100 million. So we continued to make strategic investments to build out our four major strategic operating groups, but we have not been aggressively buying growth, but is what some people occasionally the industry people occasionally the industry of doing. We will continue to make the kind of acquisitions you're seeing us make these days as we continue to see the need to strategically build out both geographic coverage and capability coverage among our four major strategic operating groups. And we will continue to do so as our balance sheet and our share price continue to gain strength. The last point in terms of data presented on this page is to point out our capital spending numbers for the first quarter compared to the prior year. I think these numbers truly indicate how serious yus we are about managing the levels of capital expenditures and managing cash flow for the company. Having said that, I'd like to comment on cash and debt and cash flow for the quarter. I can honestly say I'm very pleased with our first quarter cash and balance sheet performance. The the end of our first quarter, our debt levels are just slightly above $3 billion. At the end of the year, that debt was just slightly above $2.9 billion. The net cash we have used to run the business in the first quarter of 2002 is $500 million less than the cash we used to run our business in the first quarter of 2001. We are very pleased with that number, given the seasonality of our business and our cash flows, and given the first quarter dividend and tax payment requirements that we have every year. Our debt-to-equity ratios approximate 60% at the end of the first quarter, compared the to our high-water mark at the end of the third quarter of last year, which was 63%. And we feel very very good that with this cash flow performance, we are on track to deliver against our cash management goals for the year and continue to work towards building balance sheet relationships between debt and equity back to our historic 50% target and levels. Turning to Page 7, there is a schedule on revenue by discipline. I will refer everybody to our press release, where we do provide definitions for the categories that you see presented here. For the convenience of those who have not been able to study the press release, I'll quickly recite the new definitions. Marketing Communications, represents a category that includes direct marketing, sales promotion, event marketing, health care, public relations branding and interactive marketing. Marketing Intelligence includes marketing research and consulting. And Marketing Services include sports and entertainment marketing as well as our corporate meetings and event management businesses. There is a schedule provided in the appendix to these conference notes to provide you with some historical restatements of 2001 to enable you to recast your databases and models to give effect to these new definitions. I would say the single punchline relative to information on this chart relative to the first quarter is that the behavior you see across marketing and communications services vis-a-vis advertising and media buying in the first quarter very closely mirrors the experience we saw in the fourth quarter of last year. Turning to Page 8, which is revenue by region, this chart presents information by important regions outside the United States, and we provide totals for international and U.S. business, showing revenue trends on a reported constant dollar, an organic basis. And as I alluded to earlier, I think the most important swing we see relative to our run rates in the first quarter is a decline this organic revenue performance in Europe, which was at a negative 7% and the fourth quarter and has had a negative 11% in the first quarter of this year, which we do not think is strange as we do, and we believe the industry and many of our competitors have seen a deterioration in trend in Europe in the first quarter. And our instance, it was largely attributable to the UK and Germany. But we feel that with the trends we see in the first quarter, that we're starting to see much anecdotal evidence that the European situation is flattening out, much like the United States. Turning to Page 9, I'd like to spend a moment on net new business in the quarter. We believe that this chart speaks very encouragingly about our competitive performance in the first quarter. We're very proud of the list of wins and the names that are represented by the wins, very, very well-known household names. We feel that this suggests a very strong momentum moving into the second quarter, relative to new performance. We're happy to see in the instance of American Airlines, our McCann business overseas piggybacking onto a new relationship established with [Pemmert-Wynn-McClane] in Dallas as a result of the True North merger, and picking up all of the American Airlines work outside the United States. We feel very good about what we see in the month of April, where we have seen wins of such well-known clients and corporate names as Price Waterhouse Coopers and Sarah Lee, as well as the DeVris Institute. And some of you may have seen in the paper this morning, that we continue to be involved in big-name pictures including long John Silver and Staples at the moment. And we're also encouraged by the fact that it appears that all of our major businesses are very much in this game of pitching for new business at the moment. Turning to Page 10, we'd like to speak a little bit about the balance of the year. And as we've said, since the end of the fourth quarter of last year, the first quarter was going to be a most difficult quarter of comparison in 2002 from a revenue perspective and from a net earnings perspective. A year-to-year cost comparison were going to be most favorable in the first quarter in terms of absolute decrease in cost from one year to the next. However, you will continue to see run-rate improvement in our operating costs for a period of time into the remainder of 2002. In the second quarter, the revenue comparisons will become easier, and year-to-year revenue comparisons will improve, although they will still be negative, as John alluded to earlier. Cost run rates will continue to improve. However, we're overlapping periods in the prior year, where cost improvements were being realized, so you may not see the same absolute dollar reduction this operating costs on a year-to-year basis. Margin comparisons will continue to improve in the second quarter. Looking at the second half of the year, revenue comparisons continue to get easier. Our cost run rates in the absolute will begin to stabilize, as will the year-to-year comparisons and absolute costs dollars. However, our margins will continue to improve in the second half of the year, relative to the first half and relative to the second quarter. Two key questions on the upside relative to our performance balance of the year is number one, when and by how much will current client spending rebound in the second half of the year; and secondly, what will the impact of this new business momentum be? And I'd like to just again refer back to the previous page and the momentum we seem to be enjoying at the moment on the new business side, and how quickly and to what degree that impacts our second half numbers remains a question on the upside. Now, referring back to the guidance that we've been giving about the year 2002 for quite some time, the algorhythms still are such that a flat full year revenue scenario would lead to EPS growth of 15%. But I believe everybody in the audience can do the math just as easily as we can. But a flat full-year revenue scenario will require very strong revenue performance in the second half of the year. In planning and managing our business and managing our cost structure, we are not counting on that. We are planning against a more conservative scenario. Given that, the remainder of this guidance algorhythm does continue to hold true. I think it's more relevant to talk about possible revenue declines versus further annual revenue increases. But if revenue does decline for the year, our goals are to at least deliver margins equal to 2001, and in all likelihood, margins considerably better than 2000. And we believe that unless there is a further deterioration or in fact disruption in the economy, that a double-digit profit growth remains the appropriate target for the company. So in summary, to recapture the key messages of this discussion, we are in fact riding out a very tough revenue scenario. However, given that, you should see sequential improvement in revenue performance each quarter this year. Meanwhile, we are managing our costs, our cash, and our balance sheet accordingly, and we feel we are on track to deliver against our margin expectations for the year and our profit expectations for the year. Any upside to the scenario that I'm painting here would be a nice problem for us all to have in the second half of the year. So with that as a brief explanation of our first quarter results, I will open it up for questions.

Yeah. Nothing really to add to that. Why don't we go to questions?

Operator, we're ready for the first question.

All right. Hold on, please. If you have any questions, please press star 1 on your touch tone phone, and we'll come on the line to put you in line. Our first question is from Michael Russel. Mr. Russel?

Yes, thank you. I have two questions. Number one, could you just tell us, maybe with the 2000 margin goal that you have, is that going to be with or without amortization, and could you tell us what the percentage of margin is that you're focusing on for 2000 as the goal or the worst case scenario?

It would be without amortization, Michael.

Am I correct -- because of difference on -- different proformas, and what have you. Is that a number --

Michael, the 2000 number, after amortization was 14.1, but if you add back the amortization, it's about 16.5.

Okay. So that's the goal.

Yep.

Okay, great. And then, second --

Michael, somebody pointed out to me I may have mis-spoken and said 2001, when I meant 2000. So if anybody is confused by that, I apologize.

We're just reading along, so.

That's fine.

Second question is, John, just wondering when you see new business wins reported, you know, the 745 is a solid number, the historical numbers we've kind of counted on them and we don't know what haircut to take to them, because obviously, the people said they were going to spend, they didn't spend, but it seems like new business wins would have given you some lift. So with a down 12.8% organic revenue growth it means that your clients that were with you before really cut back quite a bit, and quite significantly, more than even the media spending cuts that we were seeing.

A couple things Michael, one is the new business growth in the first quarter was almost three times the size it was in the fourth quarter. As you know, new business coming online takes few months, if you will, normally, to start to see the revenue effect. I will tell you though, to that end, you're seeing a disproportion in the manner of local new business win, which come on line faster than the multi-nationals, so that should be to our advantage, going forward.

Okay. But even so, you had one business a couple of quarters ago that would have helped you in this first quarter. And I would imagine some of that is not -- they're not delivering the same magnitude that you though, but it seems that clients have reduced, your client group has maybe cut spending more than maybe other holding companies.

Well, if you step back from it, I think Sean was talking about it, I think there is, if you will, cutbacks. But I've got to tell you, the other flip side of that, Michael, that's stabilized. We're not seeing the cuts that we had seen if you will third to fourth and post 9-11 going forward. That is true. But I think you have to have also in looking at your organic, a look at the, you know, the U.S., if you will, density in and the advertising density, which was disproportionally hurt in terms of spending levels. So it's not simply that our clients had any kind of uniqueness, in my judgement, in their spending levels. But rather the confluence of a couple of those things creating the organic number that you have. But that said, I have to tell you that, watching fourth quarter and first quarter, that spending has stabilized. I do not see a continued trend that really started, if you will, second quarter of last year, later part of second quarter last year.

Michael, the other thing I'd say, and you know, at the end of the day, we've got to manage the hand that we have, you know, that we're holding. But if you looked at our performance versus, say a WPP, which is the more relevant comparison in the short term, if you look at the performance of respective U.S. businesses versus their businesses outside the United States and take into account the relative rating of U.S. business in our instance versus theirs, if we had their geographic mix, our revenue performance would be 3 points better. If they had our geographic mix, theirs would be about 3 points worse. So it's just a factor to consider. It doesn't change anything, other than in terms of bench marking performance against others, you need to at least take into account differences in the composition of the portfolio.

Just to clarify your point, Sean, so if WPP had your geographic mix, you said at a 9.3 negative, they'd be --

Yeah, they would be about three or four points more negative, because the U.S. business is performing less well than the rest of the world. And the same thing is true for us, so you know, you could do the math either way, and it gets you roughly the same answer.

Okay, great. Thank you very much.

Our next question is from William Berne. Mr. Berne?

Yeah, hi. Just two questions. One, I just wonder in you'd expect to see much of a shrinkage in the rate of decline in organic growth in the Q2. And secondly, I was wondering if you could you talk a little bit on costs, maybe [drill] down and describe some of the adjustments you've made from q4 to q1. I'm trying to understand the $204 million sequential decline in costs and whether they're sustainable.

I think we mentioned -- I let Sean talk about more the cost, but I think we mentioned that we're anticipating the organic revenue will improve. And you know, if asking that question in a different way about looking in the environment, I think we are seeing and have seen a stabilization of the existing business. We are seeing attitudes that, both from consumers and CEOs that are turning more positive. We talked about the new business and the pipeline. I must say that I think our new business model is very robust. It's probably about 80% of what it was before a year ago at the same time, when it was, if you will, a much more stimulated marketplace, but still very reasonable. And also we're seeing that the upfront, and I think it was mentioned also by [INAUDIBLE]-- the upfront pre-negotiations are much more vibrant, which may be some indications that may have some effect on [if you were to spend]. We're not suggesting that all of a sudden the pocket books are out, and that the money is coming in. But I would suggest to you that it seems that a lot of things are coming together, and I think a lot of people are waiting for the gun to go off to see an increase.

Bill, to your [INAUDIBLE] question on costs, one point you'll see when you see our Q was that our headcount is down another 1,000 people from the end of last year. And the single most important element of cost that is accountable for the acceleration in cost improvement is salary and related salaries. But some of the other things you see flowing through your P&L in terms of cost savings are direct consequences of major initiatives to take costs permanently out of our business. So you're seeing efficiencies in real estate, you're seeing efficiencies in a number of other operating cost line, where we're consolidating purchasing and lowering the costs of a lot of general office costs as well. So what you see in terms of cost improvement and the numbers are real hard numbers there -- there's nothing in there that's non-cash accounting like in nature. It's the consequence of reductions in workforce as a follow-up to our restructuring programs that we communicated in the middle of last year, a disciplined maintenance of the proper relationship between our cost and revenues throughout our business, and a more aggressive approach towards managing the other discretionary costs in that business.

Sean, I think on your last call you had indicated that you were trending towards I think 300 million in annualized cost savings based on actions already taken. Just wondering how are you measuring up now, versus that goal, if you can quantify the annualized cost savings?

Well, I can, but I'm not going to other than to say we're well exceeding that $300 million, Bill. I think a more important thing -- and just leave it at that; we are significantly beating that target. But I think what's more relevant that whether the savings came from the restructuring or just through ongoing management is what we're saying about our cost structure going forward. I think you can take the cost run rates that you see in our operations for the first quarter as an indication of what costs are likely to be for the balance of the year. I think you'll see them come down more before you see them leveling out. Okay, but the degree of decline is going to slow. You won't see the same kind of -- you won't see a $200 million delta that the second quarter, because we're overlapping some cost reductions in the prior year. But you will see margin improvement throughout the remainder of the year.

Thank you.

Our next question is from Blaine Marter. Mr. Marter, you have the floor.

Hi. Sean, can you give us the cash balance at the end of the quarter?

I've got some nitpicky reclasses that I may be doing. So I'll give you a preliminary number, but if it's tweaked a little bit, don't shoot me. It's just a little north of 750.

Okay. But you say you burned 500 million less than you did last year. I'm showing last year you burned like mid-$500 million. So that's saying you burned just a little bit of cash, maybe $100 million or something?

The number's north of 700 last year, Blaine.

Blaine, you might not have a balance sheet that includes True North from a year ago.

Oh, okay. That's possible.

We can help -- I'm happy to help you with Susan reconcile this offline, but the number is considerably higher than that.

Okay, and did you pay out any of the restructuring costs? I think at the end of the year, in your K you had $311 million or something. Did you burn through any of that in the quarter.

There was $81 million of payments made out against the restructuring of the quarter.

Okay. And finally, after you pay out all the restructuring payments this year do you expect to be free cash flow positive before acquisitions, even if you pay out all those restructuring costs?

Yes.

Okay. Can you be more specific?

I think the ultimate cash flow number for the year will depend upon acquisition activity, But we have felt very comfortable talking to a number north of $300 million.

Fantastic. Thank you.

Our next question is from Alexia Quadroni. Ms. Quadroni, you have the floor.

Alexia Quadroni from Bear Stearns. John, could you talk a bit what you're seeing at [FDB], do you believe the business there has stabilized from a client and staffing perspective, is it where you want it to be in terms of a competitive agency?

They have a fantastic go-to-market offering, and I think they have been saddled with things that were not of their fault, if you will, in terms of performance or their capability in the past. Unfortunately, a negative momentum, if you will, has its own movement. What Brennan is doing now is forging a very powerful management team, bringing in Charlie Channie and Jean Barkley, and I've already seen some of the positive results of that. And I think he will continue to strengthen that management team. And I believe there could be issues with Compaq because of Hewlett Packard really being the acquirer there, but I believe that by and large that they are stabilized, they have to cycle through some of the issues that came up and was rough on the merger. But I think you will be very proud of some of their achievements in the coming months.

Okay. And Sean, just a follow up on your comments earlier about organic growth. I guess I'm curious why you choose to pull out Pepsi from the line? I understand what you said, but why wouldn't you pull out also AT&T then, following that logic? I think --

The only thing we didn't do with AT&T was we didn't think it was related to the merger, that that was just an account loss. That was really driven by other reasons, so that's why we didn't do that. We could have.

It was anticipated though?

Correct, correct.

Okay. And lastly, Sean, do you have the breakup of operating expense yes, in terms of salaries versus office and general?

I do.

There are about 20 items on the list though.

Yeah, so what's the question? [OVERLAPPING SPEAKERS, LAUGHTER] I don't think you'll be satisfied with my answer.

Could you share it with me?

I don't know what you're looking for in terms of salaries and related salaries in the quarter. But the number was a little over $860 million.

Okay, thank you.

Our next question is from Lauren Fine. Ms. Fine, you have the floor.

Thank you, a couple of questions. One, I just want to ask, on new business, it looks like you might be accounting for it differently in terms of the media buying only. It looks like you're not including the overall billing number. Are you taking some portion of that?

We've never counted -- Oh, sorry, John -- we've never counted all of the media billings in total. They have always been discounted by 75%, Lauren.

Okay, good to know. And then, on the guidance, when you're - I'm just curious what you're using as the the comparison of 2001 EPS when you're referring to the 15% EPS gain with flat revenues?

Well, when we began talking about this, Lauren, we were talking against old accounting basis numbers. We appreciate that that would create, in order to deliver double-digit, there's about a 3 cent to 4 cent difference between the 10% growth on old basis and new basis. We'd like to do it on both bases, if we can.

Maybe you can tell us what those figures were, given all the different charges and everything that were taken last year? I just don't know which number are you using, either the old or --

Oh, I see --

You were [INAUDIBLE] 97 cents for the full year --

Right.

We adjusted it to $1.34. So are we use the $1.34 now as the base? That's what I'm asking.

Well, as I said, when we began talking this, we were using 97 as a base, and our goal would be to make it on both basis. So in other words, if you did it - whether you -- the short answer, use the $1.34.

Okay. And then I'm wondering, I think Compaq is one of your biggest clients. What percentage of revenue is it, roughly?

Well, by far, it's not one of our biggest clients, Lauren.

I meant of the agency, I'm sorry, not of the company, but of the agency.

Yeah. In the case of SUB, because of the their relationship with Compaq and the recognition that it was being acquired by HP, they have had they numbers adjusted, they adjusted their planning numbers, going into the year, realizing that there's a chance that they will not be going with them, forward. [INAUDIBLE] So what we've done is we've, at least in the case of FCB, they have made some altercations to their planning, going forward. I don't know that again, Compaq business at Interpublic is in a wide range of companies. And some of those, I think, may, you know, remain as primary relationships as it goes to HP.

Okay. And then just one last question. Similar to what Alexia was asking about [Focone], I'm wondering if you're pleased with the progress of Lowe's, since you changed the management last summer. And if they've started to get invited to new business pitches yet?

The answer to the latter part is they are starting to get invited, and obviously their win rates, you know, you want to see their win rate, you know, increase. They just had HSBC consolidate order of business in the United States. That's a really big get feather in their cap. I think that -- to answer your question that the change to Jerry Judge, he's forming a management team, not unlike what you're seeing Brendan do to give added strength. He's also -- FCB has really got a very powerful go-to-market strategy. And I think that with the new low, if you will, they are working to further strengthen the go-to-market strategy. So it's in progress. I'm very comfortable with the progress. I'm never happy with the amount of time that anything take, but I'm very encouraged that they'll be good and strong force going forward. And it's stabilized, too, Lauren, I think it's important to say, which I don't think would be easy to say in the past.

Our next question is from Fred Searby. Mr. Searby, you have the floor.

Good afternoon, Fred Searby from J.P. Morgan. Couple questions for you. First, Sean, you talked about free cash flow being strong if we adjust for seasonal changes and working capital and the tax payments. Can you give us a sense of what core free cash flow, is it running, you said about 300 million for the year, is it running somewhere, I mean, south of $100 million on a core basis?

Well, actually, one of the things I think, given how well our first quarter went is we're going to be revisiting [INAUDIBLE] objectives for the balance of the year. Because our capital expenditure numbers are running much better than we had originally anticipated, as is the contribution from working capital in the first quarter. So let me just stop there. I think we will be revisiting whether we need to get more aggressive with our targets.

Talking about something else, revisiting, it sounds like -- I know you didn't give us explicit guidance, and there was some confusion about that, but that you gave us the algorhythm that if revenues were flat, which seems unlikely, but still you said costs would benefit you to the point you could still grow earnings per share of 15%. I mean, costs are tracking now better than expected and had a plan. So do you think we would see a better -- is that algorhythm now if costs are flat earnings per share again more than 15%?

You know, Fred, I'd rather not get into that discussion, because it invites the expectation that we think a flat revenue scenario is likely. It's possible, but I don't think it's likely at this point, because you still would require a very, very strong revenue performance in the second half of the year. So I don't see the point of getting into something that academic.

Okay. In just jumping, you know, it sounds also you guided for some kind of improvement sequentially in the second quarter in organic revenues. Is that simply a function of the easier comps, the fact that business kind of came off in May of last year, or are there some categories in April you saw actually pick-up spend?

It's a combination, Fred, but the big driver is that the comps in May and June are a lot easier than the first four months of the year.

And finally and quickly, on the net new business win number, which looks good and I'm sure you're pleased with, I mean, is that still disproportionally McCann and Draft? And will [Linthus] and [INAUDIBLE] anything or not?

We said, Fred, it was pretty well spread. And if you go into April, and I think Sean was mentioning it, with Toshiba and Mitsubishi in Canada, HSBC and DeVris, and as a matter of fact, Price Waterhouse was asking McCann, Hill Holiday, and Initiative. And then some of the media wins that are in Europe and around the world, no, it's pretty widespread, and that's a good sign relative to some of the earlier questions on that. And - you know - period.

Okay, thank you.

Our next question is from Bill Warmington. Mr. Warmington, you have the floor.

Good evening, and I just want to say congratulations on the new business wins and also the tight cost controls. A question for you on whether you're seeing some signs or pockets of improvement in specific areas, specifically, something in the promotions or the fulfillment area, or something in the credit card marketing area? Any signs of hope there?

It's interesting. What you have is, some people would say yes, and they would say PR's are going to read it, there's indications or promotions or meetings and some would say, no, it's probably the ad sector or what have you. And I don't know that you can make a blanket statement to that. I think you're almost seeing concurrent stabilization and growth. Certainly some areas that stayed a little more stable and did not suffer from some of the issues, like the CRM area and intelligence and consultancy. But no, I don't really -- I can't really say to you from our subdivision. If you're asking on the outside, meaning what client segments seem to be leading, I'd have to say to you that consumer products are probably the lead you will, costs coming out of some of this difficult spending. Obviously if we see new technology, you'd see them jumping in that game as well. But right now, I say, if pressed with a question, that consumer products would probably be the ones you're going to see most -- most advantageous in terms of organic growth.

And a question on the revenue and EPS guidance, just to make sure I'm interpreting it correctly, but it sounds like, what you're saying is for a flat revenue scenario of 15%, that's very clear, the question I have is whether, in the less-than-flat scenario, you actually have negative revenue growth: At what point of negative growth do you start to go below that 15% level? And then I guess the question would be at what point --

On that Bill, we did -- what we've said is that when you have a revenue decline, we feel that we can deliver you the same margins or better than 2000 margins. And that we will deliver, unless something falls to the floor, a double-digit profit growth.

Okay.

But we're, I think, in between there. I think how much above double-digit will be a function of what revenue turns out to be balance of the year, and there's still a lot of uncertainty about just at what level the balance of the year revenue number will come in. And I don't think we're prepared to take a position on that.

Okay. I wanted to see if it would be possible to get some high level revenue guidance, given the new revenue disciplines that you're laying out. Just, if that would be possible?

I'm not sure, I'm not really sure how to answer that, to tell you the truth. I think that what we're not doing is giving guidance in the revenue area for all the reasons that Sean articulated, but rather to reiterate our commitment and our belief that we will be able to deliver based on all that we see, and what with that which is in our plan, double-digit profit return in this year, and we're not giving out guidance as it relates to revenue. The only guidance I think that is appropriate and must be there is that we've talked about seeing improvements in the organic revenue going forward that we believe both through what we're seeing from base plans and new business, that that will be evident in the second quarter.

All right, well, thank you very much.

Our next question is from Catherine Kim. Miss Kim, you have the floor.

Hi. I have a quick question on the marketing services lines. I'm just trying to back into, well, one, whether or not they face easier comparisons in the second half of the year as does probably the advertising market services and two, where you were seeing the weakness. Was it primarily public relations? Was it mostly in the U.S., and was it technology spending?

Well, for sure, I think we have PR on a marketing communication. I suspect that that's what you're asking.

Right.

But you're absolutely right to think and suggest that the PR was in the market and communications sector, the one that was the most difficult to challenge. And they were. And number two, it was exactly what you mentioned. They had a huge knock in the technology area. Obviously public relations had a huge upswing over the last couple of years and technology and financial areas. And the technology really went south on them. As a result of that, I think you're seeing not only ourself, but our peerS, big knocks in that area.

So basically those comps should get easier as well in the second half?

Catherine, marketing services held up about one quarter longer, maybe a quarter half in advertising.

Okay, thank you very much.

Our next question is from Tom Thompson. Mr. Thompson?

My question has been answered, thank you.

Our next question is from Brian Shipman. Mr. Shipman?

Thank you, Brian Shipman, Robertson Stevens. What kind of new account opportunities do you see stemming from the [INAUDIBLE] [B-Com-3] client conflicts? And can you at least steer us towards what areas those might come from? Thanks.

Well, having just gone through a major acquisition, there will be some fallout, likely. There are some sensitive areas of conflict and relationships that they have to work through. And I don't think it would be appropriate for us to really articulate or identify them, directly. The other thing is the impact to the industry that that would have is obviously creating an environment with a stronger share and hopefully, maybe even a loosening of the conflict restrictions going forward. But I don't think it's appropriate for me to mention specific targets, but it is reasonable to expect that some fallout with probably happen. There are sensitive areas that they have.

Okay, thanks.

At this time, there are no more questions.

Thank you, everyone, for calling in. We'll look forward to talking with you after the fact and next quarter.