Interpublic Group of Companies Inc (IPG) 2002 Q3 法說會逐字稿

If I could have your attention please, I would like to thank you for holding today and welcome you to your conference call with Susan Watson. I'd like to remind everyone at this time that your lines are in a listen-only mode. You will be given an opportunity later in the conference to ask any questions. The conference call is also being recorded today for playback purposes and transcribed.

Ms. Watson, I'll turn the conference over to you. And thank you for using Sprint.

Thank you, Operator.

Welcome everybody to Interpublic's third quarter conference call. At 4:00 P.M. today we posted a comprehensive earnings release on First Call, Blomberg, Business Wire and at our website at www.interpublic.com. In addition, you will find a Powerpoint presentation in the financial section of our website, which will be used as a discussion outline this afternoon.

A replay of this call will be available for 24 hours only by dialing 800-252-6030. International callers should dial 402-220-2491. The access number to retrieve the call is 14480984. In addition, a replay will be archived as our website for 30 days.

With me today in New York is Sean Orr, Interpublic's Chief Financial Officer, John Dooner, our Chairman and CEO has joined us by telephone from Europe, where he is attending a number of previously scheduled meetings with a number of our European clients. John?

Thank you, Susan.

As you can see from our release, the restatement that we have been moving through is finally final. Last week, I shared with you the disappointment and frustration we at Interpublic felt about this episode. Let me also reiterate our regret to our shareholders over the turmoil caused by this restatement.

Now, as you could expect and would expect, we will fully focus all of our energy where it belongs, with our clients and our people, and against achieving our financial imperative. Sean will be taking you through all the numbers in a moment, let me just point out something of a highlight that we're encouraged by, and that is the improvement in organic growth relative to the full year. And our continued strong new business performance.

Finally, I want to thank our clients for their strong support over the last few months and express appreciation to our people across all our companies. Who have maintained their high standard of work and a dedication to getting the job done.

Now, I'd like to pass it over to Sean to go through all the details. After which he and I will return to open up for questions.

Sean?

Thank you, John.

We've obviously been tackling some significant issues here at Interpublic, which makes for a very complicated start. Now, I will attempt to make this complicated story a simple and clear as I can, and throughout I'll be referring to the conference notes that Susan alluded to.

The agenda on Page 2, I'll just briefly review that at first, I will speak to the restatement issue and explain it as best I can. Then we'll turn to our third quarter financials and third quarter performance and provide much analysis, and then we'll discuss outlook very briefly at the end of the discussion.

Turning to Page 3, I just want to recap something that we are covered briefly last week when we spoke, and that is to review the process that was undertaken to finalize the restatement. As I said last week, it was an expansive, exhaustive three-month process, an interim process which involved going out and looking for the issue, and when you find items continuing to expand, you work until you're satisfied that there's no longer any more matters to discover. We have involved two premiere law firms and they've involved in the internal review of this matter, also two big four accounting firms who have each been involved in a number of capacities. We've used extensive internal resources involving tens of thousands of man hours, spanning the world and covering over 50 countries, and although our focus has been on McCann-Erickson, to be safe, it has also covered other parts of Interpublic, and as John alluded to, we are confident now that the process is complete.

Turning to Page 4, I point you to the disclosure of the numbers and the effects of the adjustments by year. Now, I won't go through all of this now. I'll allow you all to read it for yourselves. I would just like to point out in the section B on quarters in the lower right-hand corner of Page 4 that certain of the adjustments made did affect the previously reported first and second quarters of 2002.

Turning to Page 5, we have a summary analysis of the contents of the overall restatement. More detail is in the 10Q, providing further description of these items. I do call your attention to the $101 million item, the totality of the intercompany imbalance situation at McCann, which was the genesis of the review and restatement exercise to begin with.

I do call your attention to two other items. One, the accounts payable item of 30.3 million, which is also referred to in the 10Q. I would simply describe this item as a Legacy Accounting issue that dates back prior to 1996.

The other two items, one for $36.3 million, miscellaneous items within the McCann World and another $13.7 million dealing with entities outside of McCann, I would best describe these items as a collection of items that are not individually material, but because the balance sheet was open to restatement, management at Interpublic, with the concurrence of our auditors, PWC, believed the appropriate treatment was to incorporate these items into the restatement.

Turning to Page 6, I do want to just reiterate an analysis that we articulated last week on our conference call, and that is number one, the final adjustment is $181.3 million. That, as you saw from the two pages ago, no full year's EPS was impacted by more than 7 cents. The impact of the restatement related to periods 2001 and prior. There was no impact of any of these adjustments on our current cash position, nor did it have any impact on client funds, nor has it had any impact on client service or our new business activity, as I will highlight later when we talk about new business and how well McCann-Erickson is doing in that regard. I would also point out that you cannot extrapolate the effects of this control issue at McCann-Erickson to the rest of the Interpublic Company.

As I have already pointed out, many of these other items relate to either Legacy Accounting issues or were small in their own right, but were incorporated into restatement because we were in a restatement situation. But I would also point out, as we have previously stated, that we have already invested significant effort across the rest of Interpublic to establish the requisite controls over into company activity, and feel very comfortable that as of September 30, we are substantially in balance on our intercompany activity across the rest of Interpublic.

Moving to Page 7, and addressing some of the actions that have come out of the review of this situation, as you've already seen, and as we have stated, a search is under way for a new Chief Financial Officer at the McCann-Erickson WorldGroup, and we're very, very hopeful to be in a position to announce very shortly some exciting news about a new CFO at McCann, who we are very, very high on. As you've also seen, we have appointed a Senior Interpublic Executive to serve as active Controller at McCann-Erickson for a short term. This whose name is Joe Studly, has in his career previously served as the Controller for all Interpublic in a previous position.

Meanwhile, we -- as we have indicated, we are going to pursue the search for a permanent replacement for the Controllership at McCann-Erickson WorldGroup, and likewise have initiated a search for a new Controller within the McCann organization in Europe as well.

In addition to these actions, other appropriate personnel actions have taken place within the McCann arena, including several other terminations.

And while we are in a transition mode here, we at Interpublic are lending some senior financial resources, both to the WorldGroup accounting staff and to its European accounting staff, to provide the necessary, both leadership and support, to its financial reporting capabilities while we replace the key positions I referred to earlier. In addition, we have made the requisite policy or at least during the process of making the requisite policy and procedure changes secured the situation in the long run. New policies have been established and procedures are being implemented, and I am -- I am leaving tomorrow night to join Tom Dowling, our new Senior Vice President in Charge of Risk Management at Interpublic, to review the status of the implementation of these items as it relates to McCann Europe with the new CFO of McCann Europe.

In the meantime, as I indicated earlier, new policies and procedures are already in place elsewhere throughout our Interpublic, but as part of this process, we will be revalidating both of these controls will be -- will be adequate in the future based upon the learnings that we've gained from the McCann situation, and that, if necessary, any further enhancements will be made. In addition, we are adding new monitoring procedures and reporting mechanisms to provide additional visibility to intercompany activity and the balancing of intercompany activity at the Interpublic level, including a controllership level individual responsible for oversight of intercompany activity that will report directly to Tom Dowling as Senior Vice President of Risk Management.

So with those steps, we feel we are well under way to having this situation bedded down permanently at McCann, so that we will not be discussing this issue at year end.

May I now turn and start my discussion of the third quarter, and so, I will be turning to Page 8 of the document. Some headlines about the third quarter. On a reported basis, our EPS comparisons are two cent EPS figure for the third quarter of 2002 versus a loss of $1.30 all in for 2001. However, as we did last year, when we reported the restructuring program that was announced in that time, to offer fair and life-to-light comparisons, we are providing analysis that backs out nonrecurring charges that relates to the restructuring program from both this year's numbers and last year's numbers and also normalizing the comparison fort change in accounting for goodwill amortization in which case the fair comparison is a four-cent number for this year, versus 23 cents for last year.

As you will go through the materials, you will see that the issues we previously identified at both Octagon Motor Sports and McCann-Erickson are the principle factors leading to the change in performance versus last year. We will also show you that even though -- first of all, that revenue has sequentially improved, but the environment remains volatile, and you will have some discussion about that in my remarks. We will also show you that we are pleased that new business performance remains good and appears to be impacting our revenue comparisons. We're also talk to continuing points and margin pressure. The revenue scenario that I alluded to and the challenges it presents relative to cost management. We'll be talking to the need to reduce further costs, and, therefore, severance becomes a factor that play in the margin analysis, and I will also talk to other matters impacting comparisons.

Finally, I will talk some about our balance sheet picture, and you'll be pleased to see that our debt declined again in the third quarter, and that we have positive operating cash flow, and, also, a positive contribution from working capital.

Turning now to the next page, Page 9, I will just offer this page to you for you to review at your Leisure. It represents our reported numbers, the 2001 numbers all have been restated,and these numbers are before the nonrecurring items that I alluded to earlier, which means that in the 2002 period, the $12 million update of our restructuring program, a $12 million charge has been included from the 2002 results.

On Page 10, we offer you the same comparison for the nine-month reporting period.

Moving to Page 11, I would like to show you the separate year-to-year comparisons for both the third quarter and the year-to-date period for the Brands Hatch business that we discussed at length for the first time in the second quarter report. At that time, we did alert you all to a growing and developing problem relative to this business, and here you see the comparisons of performance for the third quarter.

I do need to point out that in the operating expenses for the -- for the third quarter period of '02, there roughly $20 million in write-offs that were taken in the quarter, but I also need to point out that the performance that you see here is the result of a host of reasons, but the most important of which is the less successful Grand Prix racing event that was held by this business in July of this year, where attendance declined from approximately 146,000 in 2002 -- I'm -- 2001, to about 93,000 in 2002. This was the single biggest contributing factor to the revenue decline that you see in these reported results. Since that event, we have announced that there's been a major management change at the Octagon Motor Sports, or Brands Hatch level where a new CEO has put in place and several other management team, changes have taken place. And as we've previously disclosed, this business is now under the oversight of the newly formed Interpublic Sports and Entertainment Group Management, headed up by Mark Dowling. As we also previously indicated, that we recognize that these businesses, virtually all of which were acquired in the late '90s, are certainly not an Interpublic sweet spot, and, therefore, we are currently examining our strategic alternatives relative to this set of business, and as things develop, we will continue to keep our shareholders and other investors informed and updated on our thinking relative to these holdings.

Moving on to Page 12, what I'd like to do now is take a brief snapshot of what the Interpublic portfolio would look like without the inclusion of the Brands Hatch results. So on Page 12, I offer you a like-for-like comparison for 2002 year-to-date and 2001 without Brands Hatch in the numbers, and on Page 13, I offer you a similar comparison for the third quarter period.

What I would then like to do is move to Page 14, which provides a very detailed cost of change of the components of earnings that account for the swing in Interpublic's other core business earnings for the third quarter period.

Now, I will not go through each of the individual components, because we have shown this analysis to you all before. What I would like to do is focus on one particular data point on this chart, and that is under op organic operating income, you see that with the exclusion of currency acquisitions and one major account defection triggered by the True North merger, our earnings are down -- operating earnings are down by $48 million in the quarter.

Now, in explaining that number, I will first reference back to that -- what was discussed last week on our conference call when I discussed why our reported results were at the two-cent level versus the previous range of 8 to 10 cents. At the time I indicated that there were unexpected charges that were a consequence of the comprehensive review that was performed on the McCann financials in the third quarter, that led to that six-plus cent shortfall. So consistent with that, I want to point out to the audience that almost all of this $48 million shortfall can be explained by what is currently happening at McCann-Erickson.

Now, I will remind you all of what we have said about the McCann situation since the last quarter. We have publicly acknowledged that there are issues in terms of performance in a number of McCann's marketing services businesses, most notably FutureBrands and Momentum, and in particular, the Transworld business within the Momentum group. We have also indicated that we have had revenue softness and consequent margin pressure, and certain other parts of our business around the world, especially certain soft spots in Latin America and Japan, and certain marks in Europe. So in addition to the unexpected charges we talked about last week, we are experiencing margin and operating profit pressure in certain pockets of McCann, some of which is necessitating additional severance costs that have been incurred in the quarter, and, also, the exercise of doing the comprehensive review surrounding the restatement has come with some additionals outside service fees that are incorporated into our earnings for the quarter. All of which means that we have a very atypical quarter for the McCann business that has led to the significant decline that you see here.

Other factors that are affecting our business, and these factors also are factors that we have discussed before, largely lie in our marketing services business where revenue pressure persists in public relations, and in other specific marketing services businesses, and in the appendix to where materials here, we do preside some more color on what our revenue trends are for the quarter and nine months by discipline, and I just invite you all to look at those analyses at your leisure.

Turning to Page 15, I offer you a similar analysis for the nine-month period of time, and will again point to the organic change in operating income for the quarter. I would indicate that roughly two-thirds of the swing that you see in that number is accounted for by the previous issues I've described, and within the McCann arena, and the other third is the result-of the other factors that I mentioned a moment ago.

Turning, then, to Page 16, I would just like to recap for you in more simplistic terms what we believe is going on in the business right now. If you go back to the beginning of the year, I will repeat what our -- what our planning algorithms was going into the year. It was such that if we were able to achieve a flat revenue environment with the prior year, we could achieve 15%-plus EPS growth. That clearly has not happened.

When we built this plan at the beginning of the year, we had tolerance for as much as a 5% loss of revenue relative to 2001, and we could still deliver 10% EPS growth for the full year. That, also, has not happened.

As we have previously indicated, we are now trending towards a full year annual revenue comparison of down roughly 9%. Relative to that 5% scenario, that represents an incremental $250 million decline in revenue, largely skewed towards the second half of the year, and as those of you who have been following us and understand services businesses, revenue declines of that nature, in the back half of the year, are very, very difficult, in fact impossible, to cover in the very short term through incremental cost reductions in the current period, which is creating margin pressure throughout the business and throughout the industry, as we have seen with all of our major competitors, including WPP and Omnicom. Now, this issue, obviously, is compounded by the issues I've already discussed relative to Brands Hatch, and relative to the McCann situation.

So what I'd like to do is talk a little bit about what we are doing about this now, and as we move into 2003, obviously cost cutting and cast management are two of the very key priorities of the company at this point, and so, as we build our plans for next year, looking to make the necessary adjustments, the head count levels to achieve our margin goals going forward is key. Many of our businesses are therefore, are affecting salary freezes, and in some cases, including McCann, salary reductions. And because travel and entertainment is such a big cost area in our business, we are also making cutbacks and putting restriction on our internal rules around those spending activities as well.

Meanwhile, McCann has disclosed certain management changes that they have made in the past quarter relative to the businesses that I've already referred to of FutureBrands and Transworld and Momentum, involving changes both at the CEO level, and in each instance, the CFO level as well.

Meanwhile, our businesses are addressing the challenge of building plans for 2003 that can get us back to our historical margin levels, and we will be looking to validate how achievable and how quickly that can be achieved as we review these plans over the coming weeks with each of our businesses. However, going into that planning process, I think we believe at this point getting back to our historical margin levels will involve not only additional waves of cost reductions that we are currently affecting through our P&L, and as a regular matter of managing the business, but will also need to entail some revenue growth in addition.

Turning to more positive subjects, let's turn now to net new business on Page 18, where you see some important client names listed among our key wins for the quarter. We're very, very pleased and upbeat about this performance and upbeat about McCann's performance in this regard, in particular given the accounting problems that we've alluded to earlier in this discussion. McCann was recently cited by "Air Week Global" being number one among its peers in terms of global new business. Also not mentioned on this list is our most recent win, of Banc of America, which we are very, very high about, because it's a big, big win for our new partnership group, and we're very, very pleased about that.

Moving to Page 19, I'd like to just point out our organic revenue progression, and we are encouraged by the fact that we are seeing sequential improvement from the first quarter to the second quarter to the third quarter of '02. These trends, of course, are affected by easier comparisons as the year goes along, but we also believe, as aided by the new business performance that I have just spoken about.

Moving on to Page 20, it just points to a set of disclosures that we make each quarter, as is our normal practice, but will like instead to move on to Page 21, where we show much more detail on our current credit picture that will allow you all to read for yourselves, but do want to point out that when we compare our debt levels at September 30th of last year, compared to where we are now, you see that our debt levels are more than $220 million lower than they were at the comparable period last year.

On Page 22, we provide more detail about the details and pieces, or component parts of our total liquidity picture, and I do want to point out, as we have disclosed in our 10Q, that we-have agreed to amend our principle credit agreements with our lending institutions by January 15th of 2003, to include mutually acceptable limitations upon the company's ability to, among other things, pay dividends, make acquisitions, and make capital expenditures.

Moving to Page 23, I show a condensed consolidated cash flow for the third quarter, and I'm pleased to highlight positive cash flow from operations for the first nine months of this year. We'll point out that the cash flow from investing activities of $360 million is mainly due to earn-out payments that are obligations from acquisitions made largely back in the late 1990s. There is more detail on this in the 10Q, and, as you look at the 10Q, you will see that in its component parts, they're significantly lower capital expenditures, and significantly lower new money being put against acquisitions where we have only closed 11 relatively small transactions so far this year. Slicing and dicing this for the third quarter, in the last three months, I would -- I'm pleased to say that you again will see positive cash flow from operations, positive cash flow from working capital, and over $300 million improvement in cash flow from operations for the three months ended September 30th, 2002, relative to that same three-month period in 2001, and you will see -- or you would see the same story around tighter spending in the capital expenditure and acquisition areas.

Moving to outlook. As we've said in the release, because of the uncertainty of the current revenue climate, and because of some of the unanticipated charges that I've discussed earlier relative to McCann, and because our focus now is getting our cost structures right to put ourselves in a position to deliver appropriate levels of profitability in 2003, we no longer expect to meet the earlier guidance of 85 to 90 cents for the full year. We have also indicated that in building our plans for 2003, debt reduction and return to our historical for-profit margins as quickly as possible will be our primary goals, and, as I said earlier, we'll have a much better sense of timing and achievability as we go through our detailed planning processes with each of our businesses over the next few weeks.

So in summary, in trying to summarize, as I said earlier, what was inevitably going to be a very, very complicated story, we believe our accounting restatement is complete and behind us. We have -- we continue to have -- suffer from the deflating effects that are noncore Motor Sports business is having on our operating results, and we know we need to address that issue, and as I've said, we are evaluating our alternatives there. The core business results have been diluted by the unanticipated costs principally at McCann, but that otherwise core margins have stabilized on a run rate basis, even though we do feel our need to take further costs out of the business in order to achieve our margin expectations for the future.

Meanwhile, net new business has been strong, especially at McCann, despite our accounting woes. Our revenue comparisons continue to improve. Our cash flow performance was positive. Our balance sheet and debt position has improved and balance sheet health remain as very, very high priority. You've seen the company announce any number of major organizational initiatives over the prior quarter, but I hope you all understand under the circumstances, we need to be very cautious about our short-term outlook and can't say any more than we've already said about the fourth quarter or '03 at this time.

Now, with this, unfortunately long and complicated summary of where we are at the end of the restatement, and at the end of our third quarter, I would just turn it over to John for a moment to see whether he has anything else to add before we turn it over to questions.

No, Sean, I think between the summary you stated and my up-front remarks, I think people have a -- should be able to have an oversight as to where we are. I would say in a broader sense of the word that I believe that we're going to come through these experiences, these recent experiences more competitive and more powerful and more successful going forward. If it makes sense, if I can, let me open it up to questions from the phone.

Operator, we'll be happy to take questions now.

All right. At this time, we'll ask anyone who has a question online to press star 1 on your touch-tone phone. Your line will be placed in the queue. After you hear your name announced, you may ask your if someone has already asked your question and you would like to remove yourself from the queue, you may do so by pressing the pound key. Again, if you have a question at this time, please press star 1.

Our first question is from Michael [INAUDIBLE] go ahead, sir.

Thank you. I was just wondering, three or four questions, number one, can you give us an idea, the expenses at Octagon gone, even excluding the write-down, were up 34%, which is a rather dramatic increase. Are there other things in marketing services after your review that you look at that really aren't services companies that are more principle companies, like a large chunk that Brands Hatch turned out to be?

Within the Octagon are portfolio, Michael, the business model of Brands Hatch is clearly an asperation relative to the rest of our businesses. The rest of our businesses in that portfolio are service businesses, they do not involve the kind of heavy asset investment that Brands Hatch involves, has a different profile and the cost structures are very similar to our other businesses, and that is basically people and rent.

So in terms of that portfolio sports marketing business, the portfolio sports marketing businesses, we believe the motorsports business has very specific, unique characterist be that are not at play elsewhere.

And then, it seems a good time for you to have Brian Brooks back on your team, because you're doing a lot of hiring and moving people around. I'm just wondering, really the press is focused on Mr. Heekin at McCann, and, John, I know McCann was part of your -- obviously, your tenure overlapped with some of the issues here.

What should we think about some of the suppositions about Mr. Heekin?

What can you say publicly about that?

And how much of the situation at McCann-Erickson actually were, you know, the timing coincide with your tenure as well?

Well, I was at McCann during some of these events, and, you know, I have to tell you that that keeps me or makes me more embarrassed and more humbled, and I think, also, therefore more resolved that this would never happen again. As it relates to Jim Heekin, what you read in the press is extremely exaggerated. Our relationship is fine. Obviously, when you have tender situations, you know, things are going to be as they would, but our relationship is fine.

Okay. And then, as people worry about that, you acknowledge having a strong relationship with Coca-Cola. What relationships does Jim have that people might be worried about if they're worried about Jim?

I mean, what are his strongest --

I don't think there should be anybody worried about Jim. Period. So I don't think the other part of the question is really needed to be addressed.

Okay, that's fair. And then lastly, on the expenses, the 10,000-plus man hours and the severance costs, can you quantify some of those things, Sean, to give us an idea of what is one-timish, and the 10,000-plus man hours, were they all, you know, the outside law firms and accounting firms, or does that involve an awful lot of people at Interpublic, just distracted from doing other things?

It's a combination, Michael. In the quarter, severance is up $17 million, and let me just double check it, but I believe the professional services in total is up $24 million, and a big driving factor, not all of it, but an important driving factor in that is the involvement of professionals around the world on both the -- the auditing and review of the accounting situation at McCann and some assistance in the implementation of the solutions.

Just tell us the law firms and accounting firms that you used.

I don't feel like advertising for our -- for our law firms and accounting firms on this call, Michael. I think you probably have other ways to figure that out, but I'll take a pass on that question.

Okay, great. Thanks very much.

Frederick Deer with J.P. Morgan, your line is open. Please go ahead.

Good evening. A couple of questions.

First, can you talk to us just on your cash position, how much is actually accessible to you in terms of how much is at the holding company versus how much is actually tied up in media billings?

And then, if you could -- you've said you're going to be cash flow positive this year. I mean, can you talk about -- give us -- I guess you can't really talk about fourth quarter cycling, but in terms of some sense of what would be, you know, a baseline case for debt reduction, and then what your target would be next year, in an ideal world, how much of that would be through divestiture and through free cash flow?

On the second point, Fred, I think you're getting ahead of us in terms of looking for answer for those questions. I don't think -- I don't think that now is the time for us to be making public declarations on that. I think it's still a work in progress. But Steven Berns, Interpublic's Treasurer, is here along by my side, and I'll just invite Steven to answer your question about cash availability.

The company's cash management situation is that we have the ability to consolidate our global cash through the usage, you'll see in the 10Q, of international cash pools and global cash pools, so at any point in time, that number can be volatile because of the large amount of pass-through we have from our clients to the media, so at any -- like I said, at any one point in time, that's fairly volatile. It's not necessarily measurable, but on an average basis, it's a fairly sizable sum of available cash.

And, Fred, you --

What does that mean -- does that mean 50% to 300 million or what -- when we're evaluating liquidity, you list that cash position, and I just don't know how to evaluate it when it appears that so much of it could be actually inaccessible to you.

Right. And I think as we've talked about in the past, a better way of analyzing the company's immediate position in terms of liquidity is to look at with regard to the balance sheet, to look at the overall networking capital. Which is much more indicative of the company's short-term -- very short-term, as in one day, so if you're looking at a balance sheet as of the 30th of September, you should look at the networking capital position to assess that, because it's highly volatile with the cash movements, receipts and disbursements.

And, Fred, as we appropriately give the moving parts we're dealing with here, I'm not taking a forward-looking position on the fourth quarter, and next year we do -- we are comfortable that we will be cash flow positive in the fourth quarter, and reducing debt without committing to a number at this point.

Do you think -- I mean, is the expectation that there's a good chance that you'll be able to, through your cash position, and free cash flow generation, actually assuming your stock does not get back up into the high-20s, able to pay off the 575 million or the substantive --

-- next year?

Yeah, is that the assumption --

Again, you're -- you're thinking ahead, but we're not -- well, there is some discussion on it in the queue, but we have that in front of us in terms of looking at the various options we have in front of us on how we address that issue between now and December of next year, and we certainly don't want to wait until the end to get that issue addressed and behind us.

All right. Thank you. I'll let other people ask questions now. Thank you.

Igor Crutas with Vanderbelt Asset Management.

Yes, good afternoon. Can I ask you, you said that the focus of this accounting investigation was on McCann, but it covered whole parts of the company. Can you tell us if -- when you looked at these other parts if any inappropriate accounting was found there?

Or was it --

I will refer you back to Page 5 of the materials that we presented in the deck. And you see of the 181 million, $137 million of it related to McCann-Erickson. And, as I said earlier, there was a $30 million accounts payable reconciling difference between a subsidiary ledger and a general ledger that dates back to prior -- to 1996 that we took the opportunity of correcting as a result of the restatement.

Was it specific to McCann as well or --

No, that -- that item wasn't relating to McCann, and then there were a small number of other items that added up to $14 million in other parts of Interpublic that did not relate to McCann.

Okay.

And those were the only items that have been incorporated into the restatement from other parts of Interpublic.

Okay. I think last quarter you said that you were accelerating the earn-out payments. Do you have an estimate right now --

Well, that was either a combination of poorly communicated, shame on me and misinterpreted, which is nobody's fault, but I think what I was trying to do is explain some quarter-to-quarter and year-to-year changes in trend, but it's a relatively minor part of the totality. We're not in this -- at this point in time looking to accelerate payments of that nature. As I said earlier, debt reduction is our highest priority from the balance sheet management standpoint at this point.

Do you have an estimate for the sort of the expected earn-out amount?

There is some information in the 10Q on Page 30 that could give you that detail, so I just invite you to look at it, and if you have any questions, you could call us.

Okay, great. Just one more question. With respect to those unanticipated charges at McCann related to these issues, was a significant amount of that, you were mentioning the man hours and so forth, was there a significant amount that spilled into the fourth quarter, or was it largely the third quarter?

Largely the third quarter.

The expenses.

But remember, our CFO at McCann left the company prior to the third quarter close, announced his retirement prior to the third quarter close, and Interpublic has -- has asked Joe Studley, our former Controller, to go in and provide support leading the financial reporting process, and so one of the things you do have going on is you have new people involved who are revisiting judgments that were made, and without questioning the appropriateness of those judgments in the past, and that also has been one of the things contributing to the unanticipated charges we took in the third quarter.

Mm-hmm. I'm sorry, one last thing. The arrangement that you are about to make with the creditors, it does not contemplate eliminating the dividend?

What I said earlier was that we will be discussing it. The outcome of that discussion, we will determine by no later than January 15th, but I can't give you a conclusive answer at all, one way or the other, at this point.

Okay, thank you very much.

I'd like to request that people limit their questions to one so we can get through a very long queue.

Bill Moore with Hamilton Investments. Go ahead, please.

I think you just addressed it, but as I understand it, the amendments on the bank lines, you haven't agreed on an amendment yet, you've just agreed to agree by January 15th. Is that the understanding?

That is correct.

Okay. I'll jump back in. Thanks.

Okay.

Lauren Sign of Merrill Lynch. Go ahead, please.

I guess if I can only ask one question, I'm actually going to ask two, organic revenue growth down 5.2 in the quarter, I guess I'm trying to understand based on my own assessment of currency, with the dollar having weakened in many different areas in the quarter, how you're showing foreign exchange as a detractor versus a contributor in the quarter, and so, I guess I'd like to understand that, both having watched other companies and looking at exchange rates myself. And then secondly, I'd like to understand future commitments at Octagon in terms of multiple year commitments that you would have made on certain venus.

The principal Octagon commitments are lease commitments that are embodied in our disclosures, Lauren, but I'm not -- I'm not in a position to -- we typically don't disclose those kinds of commitments for individual units, okay?

As we move forward and that becomes more relevant, we will. But I think that -- with regard to the currency, I think the pound is the single biggest factor given the size of the operations across all of our businesses in the U.K.

Lauren, I may have been misleading in some prior conversation, because it may be an extrapolating the-experience in the second quarter, I led people to believe it would be the same in the third, and I'm not in control of currency, obviously.

No, it's just really looking at currency independent of the company and looking at other companies' field results, I just haven't seen this elsewhere. Anyway, thank you.

Okay.

Sure.

Sherwood Small of Boston Private, go ahead, please.

Good afternoon, thank you very much. I'm just curious if you're willing to comment on [INAUDIBLE] as your primary auditor.

They're not our primary auditor, price Waterhouse Coopers -- here you are making me advertising for the two of them.

I'm sorry, I didn't mean to do that. Well, let me -- [ overlapping speakers ]

-- looking for me to make?

Just your thoughts about the retention going forward.

I think -- you know, I'm not on the audit committee, and I don't think I have a right to speak for the audit committee, but our audit committee every evaluates the performance of our outside accountants, and other accounting advisors, and our process that takes place annually as part of an audit committee meeting, and I have full confidence they will do the same this year and make appropriate judgments about the performance of all our accounting advisors.

Would you -- how do you -- are you willing to clarify how you feel about their performance over the last couple of year .

I think that's an inappropriate thing to ask me, and I'm not going to answer.

Okay, thank you.

Ann Tramle of DSL Capital, go ahead, please.

Yes, I don't know what to degree you can address this in more detail, if I look at your slide that has debt maturities on an annualize basis, can you give any comfort as to how you plan to deal with those, particularly the zero convert next year, and also the $500 million bank revolving maturity?

I touched on the convert before, but I'll let Steven Berns add to what I said earlier.

As you can see, on Page 37 of the DEC that was provided to the audience on the website, the $500 million, 364-day facility has no borrowing outstanding at 930, and as Sean indicated earlier in his remarks, the company is very focused on its debt maturities in 2003 and it's taking appropriate action in consideration of its alternatives with regard to the refinancing or repayment of that maturity.

I think I said as you would expect, given where the stock price is now, that's not an issue we want to wait until the back half of next year to address. Thank you.

Sebastian Long, you now have the floor.

This is a follow-up to the last question. I guess implicitly you're saying that you're going to probably reach some kind of solution regarding the $500 million bank revolver, because you've agreed to agree by January 15th. I guess is the balance of which for the maturity schedule of 2003 going to be met by, what?

I'll Steven -- I'm not sure I -- you're giving us a deadline for addressing the put, which is -- are your words, not ours. But relative to the other maturities, let me give that to Steven.

I think that -- I'm not sure I understand the question with regard to the maturity of the 2021 convertible in December of '03, the company is not looking -- is looking at its alternatives with regard to both rolling of its bank facility which matures in May of '03 as well as the refinancing of the put in the potential put in December of '03 and considering its alternatives, including refinancing of the bank facility as well as our potential capital markets transaction or other transactions that would be appropriate for such a refinancing.

Follow-up question on the S.E.C. investigation. I guess, what is new or what is going to be probed that's new, and I guess, is there any color as to what the worst case could be?

I don't know what you mean by the question, what is new?

We've been keeping the S.E.C. informed as they make requests of us, as -- as you would expect. You know, they're current on the situation, but I don't know how to answer the question.

Well, I guess, is there any new -- is there any new extension to what they're looking for?

Is it just the same issue --

Well -- in the disclosures, they're making an informal inquiry, and that's all it is, and they ask questions and we answer them, and that's where it stands.

Okay, thank you.

Shane Natasan of Wachovia, go ahead, please.

Thank you. One bookkeeping question. The operating cost number that you had in the slides and the operating cost number that you have in the press release seem to be a little bit different. This is -- the year-to-date number, could you clarify the differences of 150 million difference, what the nature of that is, and my real question is --

I'm sorry, could you just repeat that for a minute?

I didn't --

Right, okay. If you look at the year-to-date operating costs number you have in the press release.

Mm-hmm.

You say that's $4,095 million, okay?

And in the slides, it says $3,945 million.

There are several versions of costs on the slides because we tried to exclude certain nonrecurring or usual items, so tell us which slide you're talking about.

Slide 10, year-to-day summary results.

I think it's probably depreciation and amortization.

The other thing it does not include in either year is the restructuring costs, which were very substantial set of charges in 2001 -- [ overlapping speakers ] and $12.1 million in 2002.

My question relates to 2002.

Typically, when we do the operating costs for this chart, we get you down to EBITDA, that does not include the depreciation and amortization, which is included in the charts.

Okay.

If you see down in the middle of the chart, depreciation and amortization, separated out as separate operating costs.

Okay, got it. I think that's the difference.

Okay.

My question is this. You alluded to the fact that you might be making additional cost-cutting actions across the company, including head-count reductions and so on. Could you give us a sense for what your goal might be --

First of all, I don't want anybody to misunderstand that this is not -- suggesting in any way, shape, or form that we're about to embark on the same kind of restructuring activity that you saw in the third quarter of last year. What we're talking about here is that all of our businesses are expected to maintain a certain relationship of staff cost to revenue, and as revenues move up and down, they have to adjust staff costs accordingly. We continue to be in a down cycle, and so, therefore, our businesses as an ongoing matter, need to continue improve head count in reaction to the current revenue environment, and that is what is happening right now. In many instances and many markets, that does involve severance, and in the fourth quarter as it did in the third when we had an increase of severance verse the prior year of about $17 million. But as we've been doing all year, to the extent we incur those costs, they will be charged to the P&L.

Okay, thank you.

Alexia Calbarney with Bear Stearns, your line is open.

Sean, I just have a question on the financial reporting, you know, could you give us a sense of the improvements you've made in financial reportings throughout the year with regards to your budgets and your financial capabilities, meaning -- I understand you don't want to share with us the fourth quarter guidance, but when will you have a sense of when the fourth quarter will look like for your own internal purposes and give us an idea of the timing involved and when you'll see, for example, October's numbers.

That's a lot of questions there, Alexia. Let me take just a couple of them. Number one, reporting financial controls has any number of dimensions to it, and I just want to echo or reiterate something I've said earlier, that you can't extrapolate the issue that we had in terms of controlling intercompany activity at McCann to any other part of Interpublic, because we're not --

I'm talking more like forecasting the business, not really intercompany issues.

Forecasting, in terms of visibility, what I have and what we're prepared to go public with are two different matters. We obviously have a point of view on the fourth quarter, but as we've discussed here today, there are a lot of moving parts in the business right now, which makes it inappropriate for us to put a stake in the ground on a number, because a lot of judgments need to be made in the aftermath of this third quarter in order to determine how the best position ourselves to go forward into 2003.

No, and I totally understand that, and I actually appreciate that rather you not coming out with a number and miss it, so I understand. I'm not complaining about that at all. I want to get an understanding of, sort of your financial reporting capabilities, when will you see October's numbers, and when will you have sort of the high level --

I already have October numbers, to be perfectly honest, given what been going through relative to the 10Q and the 10K-A, I must confess I haven't paid much attention to them yet.

So is it six-week lag --

Some early summer visibility into October already.

Okay, so a six-week lag, you probably see the month's numbers, the previous month's numbers --

A lot less than that, Alexia.

Okay, and you have a fair amount --

It's well within the month that I get P&L visibility.

So the financial reporting and your forecasting capabilities have greatly improved throughout the --

Well, I'd say they've been continuously improving, the McCann hiccup aside, and I don't mean to belittle it by calling it a hiccup, but it will be a continuum, and you never are where you'd like to be, and we'll continue investing in that. You'll see investment people, and we did -- we did for the first time this year consolidate all IT spending worldwide through one single leadership, and we're going to be -- we're going to be consolidating our efforts and our investment in IT going forward to speed up the development of our IT systems going forward.

Okay, thank you very much.

Okay.

[INAUDIBLE] Daubing with Commerce Bank, your line is open. Please go ahead.

Hi, good evening. Just a few quick questions.

One question, please.

Okay. On obligations, continued obligations on your 10Q, you have about 244.8 million listed. Can you give us some color on what those are, and the time line those obligations are due in?

I'll let Steven Berns answer since he has the 10Q in front of him to answer that question.

Okay.

Those are primarily letters of credit which are required in certain jurisdictions as a function of placing media within that jurisdiction, and they typically roll annually.

So those will be due sometime next year?

Well, when you say due, as I say, they typically roll. It's more of an evergreen where they just roll each year and there no actual draw.

Okay. And then, just lastly, on the earn-outs, any cash earn-outs for the quarter?

Yes, but I think you get -- you get visibility into that in the queue, so I just invite you to look at our cash flows and disclosures there.

Okay, thank you.

Samial Shaunbalm with Highland Capital Management, your line is open.

Yeah, well, it seems since you just agreed to them in the bank covenants, you perhaps can't give us the detail we'd like, but as those are amended, I'd say we'd like to know what the covenants are when you talk about maximum debt to EBITDA, and EBITDA to interest, those type of factors, because as we're looking at those, we are trying to figure out under what circumstances you could lose your bank lines, what effect would a junk rating have on your bank line. Does it come through that you guys understand how aggressive the rating agencies are at cutting companies to junk and the effect it has on your debt in the market?

And we just really need some guidance on how are you going to fund net-put next December.

I think that the -- just to correct, I think maybe your initial reading of the 10Q, and that is the company did not -- is not in violation of the covenants contained in the syndicated credit facility. We are in compliance with those covenants at 930.02 and so there is not a current discussion, do we expect to have a discussion with the bank about the financial covenant levels, since we are in compliance and expect to be in compliance.

But as we don't know what those covenants are, you know, all we have is your word that we're not even close to broaching that, and what effect it might be if you do broach them.

Well, the credit agreement is on file as an exhibit to the second quarter's 10Q, had as an exhibit the 364-day credit agreement and the five-year facility was filed as an exhibit to the second quarter of 2000 as an exhibit, and so, the covenant definition with all of the defined terms and all the levels and any subsequent amendments to the facility are included for your review.

Okay.

Jim McCluski with Bear Stearns, your line is open go ahead.

My question's been answered, thanks.

R.J. Bukavak with Putnam Investments, go ahead, please.

Yes, hi, should we expect a goodwill write-off in the early of the year 2003?

What's the time for reviewing the $3.4 billion on the books?

We do it every quarter, R.J.

Okay.

And so, there's no timetable for a write-off. We review our goodwill every quarter.

Thanks.

Okay.

Douglas Ormond of J.P. Morgan. Go ahead, please.

Thank you. What events or circumstances would cause the amounts under uncommitted bank lines to become due upon demand?

An uncommitted bank line by its nature is not necessarily a change in any one circumstance, and so, it doesn't have to be a company-specific circumstance, and so, that's really not a question in which the company by itself could provide an answer. I think, you know, it's the nature of the line.

Thank you.

Lauren Sign of Merrill Lynch. Go ahead, please.

Your original 85 to 90 cent guidance for the year, you presumably had some anticipated severance at that time in the fourth quarter, recognizing that might have changed, could you share what assumption you had been making for the fourth quarter?

I'd have to go back and look, Lauren. I don't have my 85 cent forecast in front of me anymore. I haven't been looking at this in a while. So off the top of my head, I can't answer that question.

Okay, and then in the number that you gave for the quarter in terms of sort of a recurring figure, were you including, and I know it's a small numb be but a small gain on sale in the quarter. Was that included?

They were 4.7 million pretax.

Which was less than a penny, Lauren, it would have almost no impact on earnings reported.

I know. Was it included, I guess is the question?

The way I've looked at it, Lauren, the puts and takes and these nonoperating lines of the P&L put out next to nothing for the quarter. There's a net gain of 4 million, but there's a write-off somewhere else of three, and then there was other charges of about 1.1, and when I look at all that activity together, it's less than a million dollars.

Okay. Shane Natasan of Wachovia, go ahead, please.

Thank you. On your uncommitted lines, my understanding is those are available at foreign occasions. Could you confirm that?

The question is, are you comfortable that you will have continued access to those lines over the next 15 months?

The answer to the first part of the question is, they are primarily international. There are -- there's a small amount of domestic uncommitted lines. And, yes, we are comfortable that they will remain available for the next 12 to 15 months.

Thank you.

Operator, we seem to be well into the second round of questions from people, so we will take one more, and then we'll call it a night.

All right. Daniel Adler with Bear Stearns, go ahead, please.

Yes, I'd just like to bring your attention to towards the end of the press release where the outlook and guidance, you hope to achieve additional debt reduction and return to historical profit margins in future, just that perhaps help us out in understanding what those profit margins are, there's been a lot of moving and shaking in terms --

We continue to use as an internal benchmark where we were corporately in 2001.

And so, after all these restructurings, where was that exactly?

In 2001, we didn't have any -- I'm sorry, 2000, we did not have any restructuring activity, and the margin that you'd be talking about is about 16.5%.

That's operating?

Operating. So that is -- that is the number we have out there as the goal.

Now, under the circumstances, we are coming out of the second year in a row where the industry has experienced, and we, like most of our competitors, have experienced revenue decline, whether that's achievable in one year and whether that's achievable without revenue growth is something we'll be evaluating as we look at each of our businesses in the planning process.

Do you think, though, even at the current revenue levels, is it possible to cut costs to the extent that you could actually achieve those margins at the current revenue run rate?

You're asking me what I think, looking at it, but it would be a mighty tall order, without some revenue gain.

Gotcha. Fair enough. Thank you.

I think that'll be the last of the questions, John. Do you have a benediction for us, or should I say goodnight?

I think in listening to all the questions, better that we say goodnight.

Thank you all for joining us.

Thank you, all.