Interpublic Group of Companies Inc (IPG) 2002 Q2 法說會逐字稿

Welcome, everyone, today to your conference call with Ms. Susan Watson. Just a brief reminder, today the call is being record ready for transcription as well as playback purposes. I turn the call over now to Ms. Susan Watson, director of investor services.

Thank you, operator. Good afternoon, everyone. Welcome to Interpublic Group's second quarter earnings conference call. With me today are John Dooner, chairman and CEO, and Sean Orr, CFO. Our earnings release was posted today at 4 p.m. I understand that the website has had some trouble getting our press release up on the wire. It should be there now. Be patient if you haven't already received it by e-mail. You can go to www.interpublic.com and get that release, and also an outline for today's discussion.

We will assume you read the release, however.

A replay of this call will be available by telephone for 24 hours only by dialing (800)252-6030. International callers should dial 402-220-2491. Confirmation for the call is 13028827.

You can access a replay of this call at our website for 30 days. And finally, I will incorporate by reference the safe harbor language at the ends of our press release and discussion outline

Now it is my pleasure to introduce John Dooner.

Thank you, Susan. As noted in our press release, it was unfortunate but absolutely right for us to have postponed our second quarter earnings announcement. The issue that merited more review was the intercompany activity, particularly at McCann Europe. We have addressed the issue directly and taken action from preventing it from recurring in the future.

I would like to have Sean take us through the chronology of the events and the actions we have taken. Sean?

Well, first, John, I would like to address what are the items that are giving rise to this restatement? And simply put, they represent a balance in intercompany activity that arise when one office does business on behalf of another. In our business in providing service to multinational clients, numerous coordination centers generate thousands of small dollar transactions within the company in promptly accounting for activity with shared clients.

And this activity requires ongoing diligence to keep our books and records in balance. Now, intercompany has taken over the past 18 months or more a company wide project to improve our control over this type of intercompany activity across all of our agencies and to catch up on the needed reconciliation process to make sure these accounts stay in balance.

I will comment on the status of this exercise as it relates to the rest of the company later. But as part of this process, in the first quarter of this year new procedures were put in place in the McCann agency around the world. And it required a new formal reporting relative to these items for the end of the second quarter.

The findings arising from this reporting are what gave rise to this current exercise and were the reason why we delayed the release, to provide ourselves with the additional time it was required to evaluate the extent of the problem, the size of the problem, the proper remedies, and to determine whether anything more needs to be done to prevent the reoccurrence.

Simply put, what we are dealing with here is the effect of not reconciling intercompany accounts on a timely basis, leading to an accumulation of imbalances that although immaterial to any prior year require a material adjustment to get our accounts caught up.

Although it was believed that some catch up was going to be required as we began this exercise with McCann this year, the size of the balance sheet effect once the exercise was undertaken proved to be much higher, much higher than any internal estimates.

So the accounting conclusions upon finalizing the numbers were that although the effects on prior years, on any prior year, whether it be quarter or full year, were clearly immaterial.

The one-time accounting adjustment required in the current quarter to bring our accounts up to speed would be material to this present quarter. As a result, our best judgment affirmed by our audit firm, Price Waterhouse Coopers, was that the appropriate way to handle this correction was to go back in time and restate our prior year financial statements.

So while the $68.5 million - and that's a pre-tax number restatement - is the amount of the total charge and I will describe the effects by year in a moment, the review of the procedures and the personnel and accountabilities relating to this action will continue until we have a full understanding of how this happened.

Having said that, the accounting effects that I am articulating now are final. These accounting effects have no impact on cash flow in the present or for that matter in the past, and do not have any implications on future performance. Nor do they have any impact on any individual client accounting.

In terms of remedies, new management is in place in McCann Europe. A new CEO from the beginning of this year, a new CEO from May of this year, and other changes are being contemplated in the McCann financial organization in response to this.

As I said, the review to get a complete understanding of how this issue arose and on whose watch will continue. And if necessary, if any further personnel or procedural changes are required, we will be prepared to make them and will make them.

Relative to the rest of the company, with all this said and done, we are caught up with new procedures in place at all our major agencies. And our consolidated financial statements are caught up in terms of bringing our consolidated intercompany picture in balance. However, I will say that learning from this exercise to the extent it suggests that the new procedures put in place are not adequate will be exported to our other agencies and put into place in other agencies to make sure that a repeat of this episode will never happen again.

Let me reiterate, one of the things Sean pointed out importantly, as we further review the matter, recognizing there is no additional charges that would be identified, as we review the matter, if additional changes are appropriate in personnel or procedures, we will take that action immediately.

If it's okay, what I would like to do now is turn our attention to the second quarter.

One thing I will do first, John, I will on page five of the materials, we do have a schedule that lays out the net income effect by year of this restatement. Those who had it in front of you will see the net income effect in any one year of the five years we are going back to restate is no more than $6.8 million.

So the impact on that net earnings, impact on operating profit, the impact on earnings and operating profit in any given year in the absolute or on the trend of earnings during this five-year period in all respects we believe is immaterial.

However, as I have said for reasons previously described, we believe this is the appropriate way to remedy this out of balance situation and correct our past reporting.

Thank you, Sean. What I would like to do now is turn our attention to the second quarter earnings. Let me state as an overview or, if you will, an overall statement, with the exception of performance issues that we have in a couple of Octagon's sports properties, our core businesses are making very good progress in delivering quality profit to earnings and exceptionally, especially of late, are doing well in new business.

Frankly, among all our businesses there is a little bit of a buzz, a positive buzz among our people, among all the brands that we don't want to get lost. If you will, in a dialogue this evening.

To that end let me have Sean take us through the details of the quarter. After that, I'll open it up for questions.

To the quarter, I would like to refer to page six which lays out certain hemlines, if you will, relative to the second quarter. I am going to cherry pick certain items to highlight and speak to more specifically.

Number one, as John alluded to, we have a business performance issue of some magnitude at our Octagon motor sports business. The I am packet of this group in the second quarter was to reduce our earnings per share by 5 cents a share. This was late breaking news as it is a business that is very seasonal, with the June through September time period being very, very important to it. And I will comment more about that in a minute. But I just want to highlight the significant EPS impact that affected our reported performance.

But at the same time I would like to echo what John said about the core business Octagon excluded in that we continue to see good progress in our plan to turn around and improve the performance of our collective core business portfolio.

What you see in evidence in our second quarter numbers is an improvement in year-to-year revenue trend relative to the first quarter of this year and fourth quarter of last year. You see that our cost reduction program continues to be on track as is evidenced by an absolute decline in costs on a year-to-year basis of $135 million in the quarter.

And as is evidenced by our head count, continuing to decline to about 52,300 personnel in the, by the end of the second quarter.

You see evidence of being on track relative to cash flow performance with again positive contribution from working capital to our cash flow picture in the second quarter. And a continued improvement and debt to total capital ratio as we continue to target moving net ratio toward the desired fifty-fifty relationship.

And we will also see later on in the presentation that we continue to perform well in the arena of new business. We were pleased with the numbers we had to report for the second quarter in new business and we are also pleased with some notable momentum that we have starting off the third quarter as well.

We will touch on many of these points in detail as I go through the rest of the presentations.

Turning to page seven, we have a schedule that compares a reported results of second quarter 2002 to 2001. We also for your convenience show what the numbers are after adjusting for the change required by FAS 142. I will remind everybody that the change there is simply taking out the amortization of good will from the P and L. So the numbers on the far right-hand side of the page are the numbers that are like for like comparable to our 2002 reported results. I would just point everybody to the line amortization of intangibles to help you understand the difference between the pro forma numbers for '01 and the actual reported numbers for '01.

I will discuss the actual business trends reflected by these numbers on a later schedule. I will turn to page eight, where we provide you with the same information for the first half and again the only point of comparison that is different between the pro forma numbers and the reported numbers is the treatment of good will amortization.

Moving to page nine, we provide you with certain analytical detail that helps you understand our build up or calculation of organic revenue growth. The two qualitative points I would make, highlight on this page is number one, the organic revenue performance of minus nine and a half percent is an improvement from the first quarter as I've already said when we were down by about 14 percent.

The other point I would just highlight for your analytical purposes is that the positive impact of currency on our revenue numbers accelerated a little bit in the second quarter relative to the first quarter, as you will see when you compare the effect of currency in the first half on the next page.

As I've already said, on the next page where we have the same analytical detail for the first half, the organic revenue number reflects greater weakness in the first quarter relative to the second quarter, and a lightly more modest impact on currency on the first quarter numbers.

But I would like to turn to page eleven to use as the primary basis for analyzing in as transparent a way as we could figure out what is happening to our business in the second quarter. And so I'll spend a minute explaining the schedule. What we have here is our second quarter by key line item. So we have revenue operating expense, operating income, margin and change in margin. Analyzed on, looking at the 2001 report of results on a FAS 142 basis. That is without the good will amortization. We have a like for like comparison.

In this schedule we are showing you what effects currency had on revenue, operating expense and income and margin, the effect of acquisitions and dispositions on a net basis on all of those elements of our operating performance. And for your analytical convenience, to highlight the effect on revenue operating expense profit and margins of the loss of Chrysler and Pepsi business on the second quarter, to get to a number which we are labeling organic for lack of a better term. But you understand what is in and is not in those numbers.

What this does is shows what the performance of the business would be without those effects.

One of the points I would like to point out or highlight in this analysis is as we have been saying, our operating target going into the second quarter was for our core businesses to achieve margin performance parity to the prior year in the second quarter. And on this analytical basis you see that the column we label organic does reflect a margin performance equal to the prior year.

Again, for your analytical information and just so you will understand what is happening to our cost basis, on a like for like basis, as part of the exercise of closing the second quarter and as part of identifying certain balance sheet issues relative to McCann Europe as previously described, there were some other balance sheet items that were, we did conclude that we should take into account in the second quarter and we did through operations and a charge to the P and L, those amounts were about $12 million.

Those represent paper charges or one-time - I should say non-cash charges included in our cost structure in the second half. If you are looking for run rates, I point that out to you in case you are trying to project what the hard core run rate cash improvement was in the second quarter.

I also have on the schedule is the effects of Octagon and some other non-operating items on our various elements of revenue expense, profit and EPS for the quarter and give you more detailed color as to how Octagon affected us by 5 cents in the quarter, to get you to our 31-cent reported results.

On the next page, I won't walk through this in any kind of detail, but we will be happy to invite questions. We have similar analysis relative to the first half. And two things I would just point out is that the impact of the Chrysler, Pepsi account activity was slightly larger in the first quarter than it was in the second and that on the organic basis the margin decline reflects the fact that in the first quarter, although we made incremental improvement against margin performance relative to the prior year, we were not back to margin parity with the year 2001 as we are in - in Q2.

I would like to turn to the next page where we are doing something unprecedented for Interpublic. That is showing specific detail on an individual operating unit for the second quarter. But we feel the Octagon business and the reversal of trends in the Octagon business is so material in the quarter that it is important to give a lot more detail to our shareholders.

Octagon is the brand name for our sports marketing business. It represents an array of offerings broadly defined as sports marketing. You have representation, you have event management, you have the sale and marketing of television rights and you have also some sports properties as part of the portfolio businesses within Octagon.

We did see some slowing in performance in Octagon in the first quarter, but we have seen a significant deterioration in operating performance in the second quarter and particularly in June of this current quarter.

As many of the businesses and in particular the motor sports business is a highly seasonal business with the summer season from June to September being a very important period for the business.

Recognizing this deterioration of trend, we did have some internal audit work begun in June. When we recognized that we were going to delay our reporting for the McCann issue, we tried to accelerate some of that audit process so that to the extent there was a need to, we could incorporate any findings into the second quarter relative to Octagon as well, which we have done.

You will see on this page that there are $16 million worth of charges in other expense relating to unique write offs relative to Octagon. But just as importantly, you see a $9.4 million operating loss in the period, which represents a swing from year-to-year of almost $23 million. You see that the Octagon business and in particular the Octagon motor sports business and this investment write off activity represents 7 cents of the EPS swing that you see in our reported results from quarter to quarter this year to last.

We have a new management team in place in Octagon and they recognize that the whole business but in particular the motor sports business and our portfolio of sports properties as opposed to sports marketing businesses need a fresh new look and a strategic reevaluation. That is taking place as we speak.

John, I don't know whether you want to -

I think it's important that we communicate that we remain committed to the total sector as it has importance to our clients in terms of advertising communication. In particular, we remain committed to sports marketing and we are relying on Mark [Dowling] and his new team to make sure that the strategy we are pursuing is one that will also render some shareholder value as well as some strong client value.

I have great confidence that will be the case.

I would like to move on in the presentation quickly so we can move to questions and answers. On page 14, we have a detailed analysis of our EPS calculation. So everybody understands the effect of all that convertible securities and stock options upon our EPS calculations.

On page 15, we have a trend analysis relative to the progress we are making against improving EBITDA margin relative to 2000 and 2001. And you can see from a low water mark of having a decline of 3.3 percent in the third quarter of last year that you see that with that full effect of Octagon we were 18 versus 19 percent in the second quarter. And without Octagon, we would be at 19 percent.

As you saw from a prior chart, Octagon on a normal, in a normal performance year would have been if anything a positive effect on our overall margin performance, and the margin performance of our portfolio.

On the next page we have selected cash items. What we are reporting in the quarter. Two items to highlight, one is the continued decline in capital expenditures, which is consistent with what we saw in the first quarter.

Secondly, I would like to highlight the fact that we had $249 million of total acquisition spending for the first six months of this year. In that number you see about $160 million of earn out payments being paid on a year-to-date basis.

I would comment that one of the things, one of the phenomena you have in place relative to earn outs is that as we continue to consolidate business as a follow through of the restructuring that we did last year and the rationalization of the portfolio last year, to give us greater freedom of flexibility to do so now and in the future, we are accelerating certain earn out payment and step up rights. So you will be seeing some higher number relative to earn outs and step ups for the full year. That number is trending north of $200 million.

The total commitment remains the same. We are just really talking about timing of payments between 2002 and later years. And you will see that the disclosures relative to earn outs that will be reported in our 10-Q tomorrow will bear that out.

On the next couple of pages we have information relative to our revenue performance for the quarter and half, relative to marketing discipline. And I will just highlight here that the trends for marketing services reflect the aforementioned performance issue at Octagon and in particular Octagon motor sports. The trends you see in our marketing communications sector reflect the challenge in the public relations sector that we and the entire industry are experiencing right now.

On page 19 and 20, you have information for the second quarter and on a year to date basis by region. On page 21, you see a chart indicating key wins relative to new business for the quarter. And the net amount of $874 million which is a number and level of performance that we are very pleased with. I also commented in general about the very strong start that we had to our third quarter performance.

John, I don't know whether you want to add more to that.

There's definitely a nice momentum going. That goes with the earlier comment I made about buzz and it is very broad reaching among all of our operating companies. It's a very positive sign.

On the next page we have other balance sheet information that we have been following the practice of providing, showing among other things our total debt and cash and cash equivalent story.

The good news here is that you see from the high water mark of September 30 of last year when our debt as a total percentage of capital was at 63 percent, we continue to make progress with 56.6 percent ratio at the end of the second quarter. And we continue, we feel, to make progress against achieving our targeted debt level of about $2.8 billion by the end of the year.

Talking about outlook for the balance of the year, I think two important points to raise which I think perhaps are new news in the quarter is that as we sit here at the mid point of the year, the revenue outlook for the balance of the year remains very volatile and unpredictable. Whereas at the beginning of the year we thought the scenario that could envision flat revenue performance on a year-to-year basis, we now do not believe that a scenario of that nature is at all feasible.

We are now talking to an EPS range for the year that is within the dollar 25 to $1.35 bracket. This gives recognition to the cloudy revenue environment we have for the balance of the year. Our best guesstimate is assumed in this EPS estimate is a full year revenue decline in the six to 7 percent range that contemplates a third quarter revenue decline in the five to 7 percent range.

Having said that, I would also have to add that the Octagon business will be a major swing item in our performance in the back half of the year.

As we move forward, we recognize the need to give, continue to give you full transparency on Octagon as we know more about the business and as we can more crisply define how it will impact our full year results.

We are evaluating balance of the year strategies for the Octagon motor sports business as we speak. The best I can tell you as we speak is that you saw a 7 cents year on year EPS effect in the second quarter for the full year the Octagon impact on our year on year revenue or EPS comparison is likely to be more than a dime.

Having said that, I would like to echo what John said before about the core business and the promising results we continue to expect for the balance of the year with the core business. We continue to expect to see incremental improvement in revenue performance on a year-by-year basis. We continue to expect to see both margin improvement on a year on year basis for the balance of the year and earnings growth in operating profit and EPS for the balance of the year as well.

One other point I would just like to add as a form of heads up relative to the fourth quarter, I want to echo what I said before relative to Octagon and how strong or how seasonal a business it is and how important the June to September time period will be. Relative to Octagon and relative to its impact on our company's performance as a whole, to the extent it continues to have a drag on our performance, that dragging effect will be skewed to the third quarter. I would also like to just highlight or mention, really, that the third quarter will represent the anniversary of our taking the restructuring charges that were reported last year and have given rise to well over $300 million of cost savings in the current year P and L.

We have a duty to true up the effects of and the accounting for that restructuring in the third quarter and I just want to let people know that we are in the process of doing that shoring up exercise so we can close out that activity one way or the other in the third quarter.

With that, I think I'll turn it back to John.

Yes, I think it would be appropriate now to open up to questions. 14:37:03

Thank you. At this time if anyone on the phone lines does have a question, you can do so by pressing star one. That will take you into the queue. If someone has answered your question you can remove yourself by pressing the pound sign. Once again, press a star followed by the one if you have a question.

First question is from Michael Russel. You have the floor, sir.

John, could you give us an idea, the new business wins, they keep looking strong yet they don't show up in organic revenue growth. There seems to be significant decline amongst your clients whom you currently have.

Just help us get comfortable, what is the foreseeable time where we could see the revenue growth return? Is it something with the easy comparisons we see in the fourth quarter? One would have thought the third quarter -

Good point, Michael. As the comparisons become a little less formidable, you should be able to see some of that. I think what you are also seeing is us being a little conservative for all the reasonable reasons as to the estimates of revenue because of the volatility and lack of visibility in the marketplace.

But for sure, this pace of new business has to have some impact going forward.

It hasn't even shown up in the reported numbers from what you had previously. Seems like there's some disconnect between the new business wins that you are reporting and the organic growth.

There's two things. The relative impact of new business, you understand, is I guess in about the 4 percent range. Its ability to dramatically impact is obviously captured within that number.

You take that and the marketplace that still has erosion to it or some issue, I think the combination of those are not demonstrating any kind of organic growth we like to see.

You're right, as the costs become more palatable and the marketplace further stabilizes and maybe even starts to grow, you will start to see the impact of that new business.

Michael, what you will see for the balance of the year is a continued improvement quarter by quarter, year-to-year revenue trends. The third quarter will be an improvement on the second quarter. The fourth quarter will be an improvement on the third.

I would not rule out the possibility of a positive comparison in the fourth quarter, but I don't want to predict it at this point either because predicting revenue that far out, even just that far out at this point is just a dangerous game to be playing at this point.

But it is clearly feasible that you would see that positive comparison in the fourth quarter.

Also remember in the back half of last year, especially the fourth quarter, the new business wins were pretty light. That would be reflected in revenues late in the first quarter and in the second quarter. So there is a ramping up effect involved, too.

Last question. One thing you probably have more information on is the cost side. There seems to be some confusion on when you mention things like organic operating expenses and the reductions. Could you possibly just give us an idea what your assumptions are for the total expenses for the third quarter? Or how the total numbers might look rather than talking about what is organic and the confusion?

Maybe just tell us what you intend to spend.

Well, that's not - that answer is a difficult issue, Michael. We can tell you what we intend to spend in terms of people and people related costs.

But there is an element of operating cost that does flex with the revenues. You can not look at the total operating cost picture as an independent variable from revenue.

Could you give us an idea of what the salaries you expect to pay for the rest of the year, how that -

I prefer, and I don't think we did this or took enough time doing it in the, after the second quarter. I would be happy to take that conversation off line and work with you and make sure that you understand what you need to to make your estimates on costs.

But I don't have my budget in that level of detail in front of me right now.

Could you tell us what the salaries were for the second quarter?

Again, I have information - well, go ahead.

Just a second. We have the Q right here.

Salaries and related expenses for the second quarter were $883 million, Michael, versus 972 in the prior year.

So the 883 is above the 862, the second quarter. But your head count went down. I forget what percentage the head count went down. The 52,300? Head count that you mentioned at the end of the second quarter? Do you recall what it was at the end of the first quarter?

It's down a couple of thousand, Michael. Hang on. I might have that.

I have to all you back, I'm sorry. I think it's down a couple of thousand.

Theoretically, why would the salaries and costs be up in the second quarter if it's down a thousand or so people?

The salary number and all the cost numbers are affected by currency. They are affected by acquisitions and they are affected by severance. And we did take over the first two quarters, we are taking our severance charges through the P and L. There's about a $10 million severance charge in the second quarter as well, Michael.

So the number has elements in it that aren't strictly, that aren't strictly head count driven.

Then can you give us, is it 10 million severance in the first quarter as well?

No, it was less than that. I think it was closer to six.

Do you have a schedule what it is going to be for 3Q and 4Q?

Like I said, Michael, this is information I'm willing to sit down and go over with you off line. Most of the information I have in front of me deals with total operating expenses at this point.

Okay. Thanks very much.

Thank you. The next question is from Blaine Marter. You have the floor.

Hi. I was hoping you could clarify a couple of things. Your guidance surrounding Octagon is that your earnings estimates for the year are kind of a dollar 30 mid point, assuming Octagon doesn't worsen further or doesn't worsen kind of worse than the 10 cents swing factor for the year?

It takes into account a very weak performance during the remainder of the summer season, which is why I'm saying what I'm saying about the third quarter.

Now, Blue Management is in place - hello?

Actually, sir, I dropped him out of the cue. It was coming from his line.

But I'll finish the answer. That is, the reason I'm not giving any more guidance than I am today on Octagon is that the second quarter performance is, and the June performance was marked decline in trend, new management is taking action. We are not happy with the numbers and we are looking to intervene and correct the performance trend as quickly as we can.

And we need to spend a little bit more time determining what those actions are and how quickly they can take effect in the business before it would be appropriate to go public with further guidance on Octagon at this point.

Thank you. The next question is from Fred Searby. You have the floor.

Good afternoon. Fred Searby from J.P? Morgan. How are you all doing? A couple of questions for you. First, you said that debt reduction the target was 218.

You had talked in the past that costs and cash flow were turning somewhat better and maybe you could see, foresee paying off two to 300 million in debt. Could you touch upon cash flow since you have the Q in front of you? Is there any comment about working capital trends and if there's any up side here, if that is trending somewhat below expectations from last quarter?

And then just, you may have talked upon this point, I think you did, but could you give us some assurance, when I review the procedures of personnel is a continuing ongoing process, what assurance do we have that we are not going to uncover something at one of the other overseas subsidiaries. And where are we in the process, how final are you, or is this an isolated incident?

Fred, with the first one, if we hit a 2.8, it would be close to a $150 million reduction in debt from the prior year. You should understand that, number one, the sing he will most important variable in how much cash flow we generated. Our revenue expectations are quite different now than they were when we started the year.

The other variable at play in how we use cash flow is investment activity. I did comment on the fact that we are moving forward the payments of certain earn outs to give us operating flexibility.

Again I repeat, it doesn't affect our overall earn out commitment in total of the next several years.

550 in your K, is that still the number?

That's still the number. But given that, that is a trade off decision being made relative to paying down more debt quicker.

Now, even with that, as you can see from the chart I alluded to earlier, we are making good progress in moving our relationships in debt to equity from 63 percent to about 56 and a half at the end of the quarter.

Relative to your question on intercompanies, again a good and fair one. I will repeat what I said perhaps not clearly in the presentation. That is, the exercise at McCann this year was the tail end of a better than 18-month company exercise to improve the process of managing intercompanies across all their agency systems and get our accounts and reconciliations caught up to speed.

With the completion of this work at McCann, and I will acknowledge that again we did not expect to find such a big balance sheet issue there, the new procedures were put in place and they now cover the company. But if we find as we finish our review at McCann that there's more steps that need to be added to our process to make sure that we are bullet proof everywhere, we will do so.

But an important point that is implicit in all I'm saying is that the reason this was uncovered or discovered is because of an initiative that we had undertaken quite sometime ago as a company, okay. And it's important to note, we found this ourselves as a result of putting new process in place. This is, wasn't found because the auditors had to come and tell us something because of the absence of process in place.

In terms of answering your question, why am I comfortable that we got it all? Hopefully this helps.

Why, Sean, why was it that if this was an 18-month process this was kind of the last minute? This came out at the last minute with -

The reason it came out at the last minute, we put new procedures in place in McCann in the first half of the year which involved, among other things, new reporting. That new reporting was taking effect for the first time with the balance sheet closed at McCann for the second quarter.

Which happens for the whole industry. And for many industries at the very, very tail end of the consolidation process. So the size of the imbalance issue that we were facing, okay, was much larger than anybody in their wildest dreams anticipated, which is why we needed to take more time to analyze it before we reported in earnest the second quarter today.

Thank you very much.

Thank you. The next question is from Alexia Quadroni. You have the floor.

Good afternoon. Sean, following up on the comments you're making on free cash flow given the lower revenue guidance for the year, what is your outlook now for the free cash flow for the year?

So far I am happy to say we have been working capital positive so far this year. Free cash flow before, or before discretionary spending, I mean repayment of debtor acquisitions, we are still shooting for a number in the 330 to 350 range. That's million.

Okay.

Just to be perfectly clear.

A second question. Given that the revenues are a little bit below what your original expectations were for the year, are your costs more in line? Are you looking at that?

We continue to look at that, which is why our head count numbers continue to go down and we are continuing to monitor that to make sure as we look going forward on a run rate basis that costs stay in line with their expectations of revenue.

We continue to hit not just EPS targets, but the margin targets, because an important metric in terms of not only delivering on our earnings expectations for this year, but to, delivering on our earnings expectations as we go into next year.

Do you think there's a possibility for another one-time charge later in the year for -

For something like severance? No. What we have been doing since the, we are accounting for costs as we said we would. I would just remind people that we are required to true up our restructuring at the end of the third quarter. And we are currently looking at all the real estate accruals we took at the end of last year and making sure that they remain relevant and current given the state of the real estate market since that time last year.

If an adjustment plus or minus is required to those accruals in the third quarter, we will make it as required.

One last question. On your organic growth number for the quarter, does that exclude the problems at Octagon or does it include it?

That includes Octagon. You have the numbers to compute the effect, but Octagon, I think, had a six to seven tenths of 1 percent revenue trend in the quarter.

Thank you very much.

Thank you. The next question is from Peter Thompson. You have the floor.

All mine have been answered, thanks.

Next question is from Kevin Sullivan. You have the floor, sir.

Thanks. My questions were actually on cash flow and have been asked a couple of times. Could you give us some sort of estimate of where you think CAPEX will be on the year?

The original target for the year was about 225 million. We are trending below that so far. So I would like to think we can beat that. And we are undertaking to beat that.

Okay, on the restructuring -

We have to spends like crazy in the back half of the year to hit that number.

On the restructuring charge, what is your estimate on the cash outlay in the back half of the year of what is remaining?

If you hold on a second, I think I have that.

It is roughly $100 million.

Of cash?

Yes.

Great. Thank you.

That was contemplated in the 330 to $350 million in the number I just gave Alexia.

Great.

The next question comes from Bill Warmington. You have the floor, sir.

I have a follow-up question on Octagon. I just wanted to, in an effort to understand the business a little better, ask a little bit about how the cost [inaudible] works in that business.

The business that we are dealing with here is one which we own a lot of hard assets. We actually manage and run a facility, including several racetracks. So the fixed cost structure here is much, the relationship of fixed cost to revenue is much higher than any of our other businesses, which is one of the problems we have here because we are seeing significant revenue shortfalls this summer against a largely fixed and inflexible cost structure.

So that is one of the short-term problems we have in mitigating the effects of Octagon on our operating performance in the short run.

It should be reiterated, too, that what we are doing, as Sean mentioned earlier, we have a very successful year in prior years with some of these operations. And our hope is that the new management team will evaluate this not only to have a better appreciation for those areas we should be in, but to have those areas that we are in run to the peak and to the level which are managed to our expectations.

One question on the operating expense line. I found the revenue going down on a year-to-year basis, but the operating expenses also showed a significant increase. That was a surprise.

When you look at the operating expense number on a total consolidated basis, like I said before, you have currency, you have ago situation and disposition and other factors affecting the lower reported number. You appear to have the same interests as Michael and we will be happy to help you understand the movement in our cost numbers year-to-year and from first quarter to second quarter off line.

No problem. What does that business typically do on an annual basis? You mentioned it was seasonal.

Talking about Octagon?

Sorry, repeat the question again?

The question is, on an annual basis, what does Octagon typically do for revenue, given its seasonality?

The total business is roughly 200 million. The motor sports business is roughly half of that.

All of these businesses collectively are higher margin than our portfolio average.

Thank you very much.

Thank you. The next question is from Troy [Mattson]. You have the floor.

Thank you. Good afternoon. Could you give me some detail by business line, whether business line or advertising and marketing services where you see the most and the least pricing pressure currently?

The overall pricing pressure, talking about clients and negotiating rates, that's a question often asked and one that has been around for almost as long as we all have been in the service business.

I think that there is no individual sector that is getting a disproportion at amount of effort against pricing. There is no question that all clients want greater productivity in the work that we do for them and we have to work towards that.

But that is not new and that, by the way, I suspect that will always be.

Have you seen any acceleration in that focus, perhaps, in this current environment?

No, no. I can only tell you it is continual. You know, keeping in mind that the growth in our broader world is, you know, coming from and measuring productivity. I think we have to demonstrate an ability to provide that productivity or efficiency going forward. So no, it's not new. I don't think it's particularly increasing. It is continuing.

Okay. I wanted to go back to Octagon. Maybe, if you had a chance yet, I know you have new management in place there, but has your perspective on ownership of properties such as motor sports changed, given what has happened this summer? Is this something you might not be pursuing in the future, taking on assets like this with the highest costs?

I think it's important - one, a couple of things. We are committed to the sector overall. It is a valuable marketing tool for our clients.

That's the sports marketing sector John is alluding to.

Within the context of that, as we examine that, in terms of all the different properties, whether from football to motor sports to go cart racing and so forth, that the new management is charged to evaluate different properties as well as the different general areas they are in to come up with a strategy that overall puts us back in a winning way.

I don't think we are exclusively looking to motor sports to do, to make a significant change, but rather we are looking for Mr. [Dowling] and his group to come to us with a much more proactive growth strategy than we have had in this recent past.

Maybe just one final question. Your acquisitions have been almost non-existent for the last couple of quarters. What are your thoughts there going forward? Do you expect to accelerate the acquisition activity in the near future? Do you have any plans there?

The strategy we have, as I think Sean alluded to before, we have increased our acquisitions year on year. But they still remain relatively modest. The overall strategy for acquisitions has not changed. That is, we look for properties that add to the geographic or competence of our existing businesses and/or give us a tighter, deeper relationship with our important clients.

Today I think it is prudent for all people to examine the level at which they would go into the acquisition world, given the economy.

So there's no question there is going to be less than there has been in the past. I think it's particularly prudent for Interpublic right now and for the recent past as well for us to focus on the core business to build organic, focus on building business not avoiding acquisitions but focusing on some of the other elements of growth.

Thank you.

Thank you. The next question is from Tobias [Willow]. You have the floor.

Hello. Could you tell me, what is the projection that you are using for the Q4 organic revenue?

Like I said before, to bias, the game of predicting quarterly revenue is a dangerous one right now. Just to help your math, I prefer to our range of minus six to minus 7 percent for full year. That's revenue, and you can do the math. That would suggest something roughly flattish if we are in the 6 percent range. And a minus 2.2 percent if we are in the 7 percent range for the full second half.

Okay. Most of that -

And we talk about a five to seven. Now, this is, this is, I'm talking to the template we are managing the business to. But you know, revenue commitments at this point are a dangerous game. I'm just saying that the working assumption we are managing to at the moment is best guess six to 7 percent minus range for the full year.

It's important to understand that it's appropriate to manage, I believe, given the environment at that level. Obviously if things improve, then those benefits of that to the bottom line should also disproportionately improve.

How much of the quarter to quarter improvement is based on the September 11 comp?

We said last year, going from memory, I think we said the number was about $35 million. And we think that was one time. We did, if you go back over our disclosures, you'll see that.

Two other things to keep in mind. As you know, the organic is getting very close to the reported growth because of the acquisition activity being low. Currency is going in our favor, so you might see those spread apart.

Okay. Could you tell me - I'm sorry, I feel like this is a piece I haven't gotten yet. What the cash flow from operations was in the quarter?

Right up.

On an internal basis it was a slight positive. And the working capital contribution was about a $66 million positive.

What you'll see in the 10-Q on the external reporting basis, it's a minus 24. On an internal basis it's about plus 50.

I'm sorry, what is the difference between the external and the internal?

It is the treatment of certain balance sheet items. What I think, to bias, just to highlight, let's work off the external reporting numbers. That's the matter of public record.

I want to call your attention to the fact that minus 24 million. I'm talking relatively small differences here, which compares to a minus 320 in the second quarter of last year.

Right, okay. But the working capital number that we will see will be a plus 66 in the Q?

Hang on.

Hang on. Why don't we do this? I'm happy to give you a reconciliation off line about how we do things internally to externally.

I'm trying to figure out the external numbers. I understand the free cash flow numbers for the year. It appears that sequentially debt is up. I'm trying to figure out how much of that is accelerating the earn outs and the acquisitions -

Well, in the second quarter in the earn outs, they were $119 million versus $43 million in the first quarter. So in terms of measuring what impact that had on second quarter working capital, you are getting your answer more directly. That's it.

All right. Accelerating the earn-outs and the payouts, are you essentially accelerating '03? I mean, by definition how do you accelerate an earn-out if you don't know they hit the targets? What are the assumptions that are made?

We would never do that unless either, unless there was virtual - I can't say absolute, but virtual assurity of hitting numbers. You don't do that when performance is a question because you are paying results on performance.

Okay? That's really not an issue.

Right.

One of the things it does from an operating perspective, it gives us the freedom to combine businesses. You don't have the need to maintain so many separate profit pools. That's why from an operational perspective and a go to market perspective, there are advantages to do so, even though from perhaps your perspective it may appear to be cash flow inefficient in the short-term.

Right. I'm wondering if that outweighs what would be, you know, the lower interest costs on paying down debt.

We obviously look at that trade off, to bias when we make these positions.

So you don't think [inaudible]

No, as I said before, these judgments are in our assumptions and going to the $2.8 billion debt number targeting at the end of the year.

Right. You pay more in earn outs this year than you pay down debt, if I understand you correctly.

That remains to be seen, but there may be a slight increase, yes.

Thank you very much.

Operator, how many more questions are in the queue, please?

Right now, ma'am, we still have about six or seven other parties that are in the queue right now.

Take a few more and see how the timing goes.

Next question is from Ron [Rimkus]. You have the floor.

Good afternoon. I want to ask you a follow-up question regarding the $68 million charge and the time period under which that hits. The adjustments that are listed for 2001 add up to 27.1. And I'm just curious on the remaining 41 million, do you have a sense for the time period?

The numbers you are looking at are net income numbers. So you would be talking about, that equivalent to, say, a $40 million number versus a $68 million number.

68 is a pre-tax number.

All right. The remaining piece, though?

And prior.

Great, thank you.

Ancient history.

Excellent.

Operator, is there another question?

Yes, ma'am. Next question is from Steve [Pukawitz]. You have the floor.

Bear with me. I got on a little late here. I wanted to recap a couple of things here. I have EBITDA numbers for the quarter. I wondered, your free cash flow on number four and your bank availability.

Bank availability is basically unchanged. We have liquidity of about $900 million.

Okay.

We just went through free cash flow for the quarter. You'll see the Q tomorrow. It may be more productive to give you a chance to look at that and come back to us with specific questions.

But on the external reporting basis, the net cash used in operating activities is a minus $24 million.

Okay. I'm not familiar with here your treatment when you define free cash flow. Talking about cash flow from operations? On the front seven?

It's a GAAP definition. So it's the GAAP definition of cash generated in operations. So it's all cash activity other than investing activity which would include acquisitions, capital expenditures and the proceeds of sales of assets or investments.

And it would be excluding cash flow from financing activities, which principally is cash in and out relative to borrowing activity or from stock issuances with dividends.

Understood. Okay. What was your maintenance CAPEX this quarter? And what did you extend -

Well, I prefer you to the presentation in the interest of time. The presentation includes our six-month CAPEX numbers and

That's fine. But what was it for the quarter?

It's like - in the $40 million, - I would have to do some math. It's 81 minus 35, but I'm going from memory.

If I can have that number, that's fine.

See the numbers tomorrow in our Q.

Terrific. Thanks again.

Operator, one more question.

Our last question is from Stephen [Loge]. Sir, you have the floor.

Okay. We don't want to beat this to death. The free cash flow, that's after earn outs?

Yes.

Okay. And I suppose we could wait for the Q, but looking at the quarterly, cash is down and the total debt is up to the tune of around 80 million bucks.

Again, the big swing item there was the increase in earn out payments in the second quarter.

Okay. That's great. Thank you. Do you want to add?

OmniComm came out with one and a half percent organic revenue growth. You guys are down nine and a half percent. How do you account for that difference?

I think a couple of things that are playing to that. One, the relative density they have relative to OmniComm versus the marketing communication sector which advantages OmniComm. If you look at those numbers tightly, what you will see is that the international organic growth is the same between both companies, which shows that the GAAP between companies seems to be opening. Albeit the gap still is on the positive side for OmniComm.

I think I said this before. OmniComm has been running on all cylinders. That aided their performance. It's only a period of time and certainly is our goal to eclipse that performance.

Great, thank you.

Thank you, everyone, for joining us this afternoon. I will be available for awhile this evening. I'm at (212) 399-8208, and all day tomorrow. Thanks again.