Interpublic Group of Companies Inc (IPG) 2002 Q4 法說會逐字稿

May I have your attention. I would like to thank you all for holding, and welcome you to your conference call today with Ms. Watson.

Just to remind all the listeners, your lines are in a listen-only mode until the question and answer session, and today's call is being recorded.

And at this time I will turn the call over to Ms. Watson. Thanks for choosing Sprint Conferencing.

Thank you, operator. Good afternoon, everyone, and welcome to Interpublic Group's fourth quarter earnings conference call. With me today are David Bell, our new Chairman and CEO; Sean Orr, Chief Financial Officer; and Steven Berns, Interpublic's Treasurer.

We released our earnings after the market closed today. At the same time, we posted on our Web site, www.interpublic.com, a slide deck illustrating many of the numbers we'll discuss this afternoon.

A replay of today's call will be available at the Web site for 30 days. In the alternative, you can access the telephone replay for 24 hours only by dialing 800-252-6030. The confirmation number for this call is 15800376.

Please be advised this call contains time-sensitive information that is accurate as of today, March 6, 2003. It may contain forward-looking statements which are subject to the risks and uncertainties described in our press release and SEC filings. Interpublic undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

David and Sean each have prepared comments this afternoon, after which we will entertain your questions. We expect the call to last about one hour.

Now it's my privilege to introduce David Bell.

Thank you, Susan. I would like to begin by saying hello to many old friends in the financial community. We have not spoken for some time, certainly not in this kind of forum, but the expression of support and good wishes from many of you in the past few days have been much appreciated, and I accept the trust and the responsibility that goes with those sentiments.

Also, I want to introduce myself to the numerous other financial professionals on the call today whom I have not yet had the opportunity to meet or work with. The first thing I would want you to know about me is that I understand the task at hand, and I feel a deep sense of responsibility to all of our shareholders, including those that came over with True North in 2001. Of course, this is not to say that I'm under any false illusions about the nature of the task that confronts Interpublic. It will be a hard road. And reaching out to you, lending a ready ear, keeping you informed of key developments within our company, all of these will doubtlessly help the cause.

But in the end, communications and optics are not the root of our issues; performance is. Consistent, reliable, accountable financial performance. Having said that, I can still tell you that I am confident of our ability to approach this daunting task, and this assurance is built on personal experience.

At True North I managed a complex worldwide marketing services company whose results rewarded shareholders, clients, and employees. These past two years at Interpublic, my experience has taken me to many other corners of this company, whether overseeing the partnership or managing the varied agencies within the advanced marketing services group. As a result, I have up close knowledge of nearly every one of our companies outside McCann-Erickson, and thankfully McCann-Erickson is now in the hands of the person we believe most capable of returning it to its rightful place at the head of the global advertising and marketing class, and that person is John Dooner.

As you will hear from Sean in his review of the numbers, a significant part of our disappointing fourth quarter performance can be attributed to McCann's having temporarily lost its way financially, in spite of its great product and its great ability to deliver integrated services to major clients.

After years of robust growth, McCann's project-based marketing services or corridor companies had a disastrous year. Separately, the company was hurt by economic down turns in Latin America and in Japan, where it's the only Western agency with a top 10 ranking. Above all, the severe drop in profitability at McCann reflects a loss of the cost disciplines instituted and so successfully run by John Dooner and the dynamic culture that he instilled in that company.

Those are the keys that drove such brilliant performance at McCann in the past, and it is to John's great credit and a testimony to his character that he stepped forward and decided to return to lead McCann for the benefit of Interpublic and its shareholders, just as it is a credit to our board of directors that they understood the value that he can bring in this role. He is, in our opinion, the best person in our business to run that company, with its complexity and its history, and we believe strongly that he can nurture and build on key client relationships and restore the luster to McCann, once again making it the leading growth engine for all of Interpublic.

Another area that has had a disproportionate negative impact on our results is the motor sports division of Octagon. You have heard more than you want to of these operations. My review regarding motor sports is we have neither the need nor the desire to be involved in venue-based ownership. So the properties do have some intrinsic value. The contracts and liabilities that were entered into as a part of our involvement with these holdings severely limit our options going forward. The board of directors and I have retained outside independent advisers to add to the internal review that has been performed on an exit strategy, and together that will help us determine quickly our potential exit strategies regarding Octagon Motor Sports.

However, I fear this will not be the last time we speak of these operations on an earnings call. I would, therefore, be remiss if I did not alert you to the possibility that there will have to be additional write-downs taken related to these assets as we exit the motor racing business. And the amount of those write-downs will depend on the exit strategy that we determine.

The news at Interpublic, however, is not all bad. As you will see from our release, Interpublic has made great strides in getting its financial house in order. Improvements in our working capital disciplines have allowed us to take debt down significantly, from 2.9 billion to 2.6 billion in the past year and down from the high watermark of 3.1 billion back in September of last year. We've gone from, at that point, 64 percent debt to equity to now 55 percent debt to equity.

An NFO transaction, which we stated is a priority, will further help us to address the balance sheet, and as we have signaled in today's release, we also intend to go to the capital markets in the near term. The challenges posed by these past two years of severe weakness in our industry have been considerable, but they're exacerbated by the fact that the harsh conditions were immediately preceded by a period of such exuberant acquisition-driven growth. Deleveraging in the face of plunging revenue has been a task, yet we are in sight of achieving an appropriate debt low . And I'm pleased to report that, in the past few days, Sean, our great treasurer, Steven Berns, and I have had important sessions with each of the rating agencies.

Another bright spot for Interpublic is what I call the brand vitality index on our new business performance. Again, I see progress here with a strong fourth quarter and equally successful full year 2002. Importantly, we track internally but will be sharing numbers that tell me that we are regularly winning with our brands in head to head pitches against the other major holding companies, and we track that from reported sources all the way through. That vital -- that is vital in the share battle we currently see ourselves. We have what it takes to win in the marketplace, and that is great agency brands in virtually every communication discipline.

Many of those brands are also performing very well financially. Our domestic, fully integrated, independent advertising agencies are the envy of the industry. They win business, they win awards, they're client-centric, and important for this audience, they deliver for clients and deliver terrific top and bottom line results for Interpublic.

Public relations, though, hard hit by the difficulties that have befallen technology and financial services, has also consistently improved its performance. The nearly flawless integration of Weber Shandwick and BSMG into the world's largest and most powerful public relations agency under the leadership of Harris Diamond is one of the least heralded accomplishments in our entire industry.

Other businesses are also coming out of difficult cycles. Both Foote, Cone & Belding and Initiative Media have done an excellent job of halting and reversing negative momentum and perception, and the trick now will be for those units to move to the next logical stage in that development to become again consistent generators of good news and good growth in addition to strong earnings.

In the coming months, we will also have an announcement concerning a new collaborative working relationship that more closely aligns two of our brands, Lowe and Draft. Those are companies with highly complementary capabilities and expertise. Lowe works with five of the top 10 global advertisers, while Draft is the world's largest marketing services agency. Lowe is the leader in global creativity, while Draft's Science Behind the Methodology makes it a leader in achieving marketing effectiveness.

There is a lot that can be done by harnessing this horsepower in innovative new ways. They have decided to do that, and stay tuned for development from those companies in the coming weeks.

I could, of course, go on, but I'm sure you get the picture. We're very much a work in progress at Interpublic, to say the least. But John's return to McCann is a big step in the right direction, and in my new position, I believe I can play an important role in addressing many of the other issues. There is clearly much to be done, and I intend to bring a real sense of urgency in our getting on with it.

Now I would like to turn it over to our Chief Financial Officer, Sean Orr, who will take us through the fourth quarter and full-year performance. I'm reminded that, when asked about the pressing issues of his day, the great journalist Edward R. Murrow often said, "Anyone who isn't confused doesn't really understand the situation." And Sean will make sure that you fully understand what is an admittedly complex situation -- Sean.

Well, thank you, David, and I'll do my best, but first of all, I'm very delighted to have the opportunity, for the first time in public, to welcome you to your new role here at Interpublic. And on behalf of our finance organization, we all, and I, am, looking forward to working very closely with you and supporting you every step of the way.

As Susan mentioned at the outset, we have posted a slide deck on our Web site which contains all of the usual disclosure, as well as some new items. In the interest of time I'm not going to go over and review each of the slides concerning revenue sources or causes of change, because we think they speak for themselves.

Instead, I'll review 17 slides covering our revenue and cost performance, new business, items affecting comparability, our liquidity picture, and some overall guidance. To start with, an overview of these items appears on slide three. As you can see, revenue declined 3.8 percent in the quarter, earnings per share were five cents, which included two cents of non-cash asset impairment charges. More importantly, however, we incurred higher operating costs in the quarter that included steeper severance, bad debt expense, and professional fees relating in large part to the well-chronicled problems at McCann-Erickson and Octagon Motor Sports.

Organic revenue improved sequentially to minus 4.9 percent in the quarter and minus 7.7 percent for the year, but as David has already said, this was below our plan for the quarter and certainly not satisfactory by any measure.

Net new business was strong again in the fourth quarter, with about $850 million of net new wins and total wins for 2002 of approximately $3.2 billion. And again, as David said, we're proud of our balance sheet performance in this difficult operating environment. Debt declined, again, $300 million year-over-year, despite our unsatisfactory earnings performance and this year's required earn-out payments. Our cash position and available liquidity are strong, as you'll see later on when I provide some details.

Now I want to stop for a minute because, for very technical reasons, we do have two restatements to report. First, in the fourth quarter, the company identified approximately $136 million of pretax charges, primarily non-cash, relating to asset impairments and other operating expenses relating to the Octagon Motor Sports business. Because the events that triggered the impairment occurred in the third quarter, charges of 132.1 million of the 136 million have been appropriately recorded by restating the third quarter of 2002. The remaining $3.7 million of charges relate to prior periods from 2001 and earlier quarters in 2002.

Secondly, as part of a broadbased review of the company's balance sheet in the fourth quarter, approximately $30 million of pretax charges not related to Octagon Motor Sports were also identified and recorded to prior periods in the years 1997 through 2002, principally reflecting adjustments to intangible asset amortization, purchase accounting, and other miscellaneous items.

While not material to any prior period, these charges would have been material if they had been recorded in the fourth quarter of 2002 due to our abnormally low earnings in the quarter. So (inaudible) explain that very simply. It's not the size of the adjustments that is causing us to go back to prior years, but the size of the earnings against which those adjustments are measured that is causing us to go back to prior periods.

Now, as we indicated in the release, the third quarter recognition of the Octagon impairment charge required waivers from our lenders. Let me explain that. Because we recorded the charge, not the fact that the charge existed, and not the size of the charge, which was less than our lenders were expecting, but because we reported it in the third quarter instead of the fourth quarter, we did require waivers from our lenders, which we received very easily.

Continuing to go through this overview, the sale of NFO WorldGroup continues to progress satisfactorily, and the final headliners that the company does expect to access the capital markets in the near future.

Let me now turn to page four. This page is required by new SEC regulations, Regulation G, to provide a detailed reconciliation between our net income and the net income, excluding specified items, that we will be using as we report our fourth quarter and full year and provide analysis of operations. So it does provide a comparison between 2002 and 2001 and how it's affected by substantial changes in both periods for previously reported restructuring and other merger-related costs, long-lived asset impairment and other charges and bus impairment, and miscellaneous write-offs of operating assets and, of course, the related tax effects of these items.

I will now move to page five. For the quarter again, EPS was five cents compared to 26 cents in the prior year. If you'll exclude nonrecurring items and goodwill amortization in 2001, EPS was seven cents in the 2002 quarter compared to 36 cents a year ago. As already noted, the recent difficulties at McCann-Erickson and the problems at Octagon were the principal factors in the decline.

Revenue improved sequentially, but not as much as we had hoped. We did get some help from currency in the quarter. Also, acquisition activity has been extremely limited, so going forward, our revenue comparisons will be increasingly, if not exclusively driven, by organic growth and currency. Continued revenue declines put pressure on margins, as did the severance costs we incurred in response to reduce head count accordingly.

I'll also talk about higher bad debt provisions and professional fees and their impact on margins as I move on later into the presentation.

Moving to page six. The key issue here is the 4.5 percent increase in costs against a 3.8 percent decline in revenues in the quarter. First, our people costs remain too high, given current revenue levels, and we continue to manage down head count. As you saw from the release, we did reduce head count from 54,100 at the beginning of 2002 to 50,800 at the end of the year, but we need to continue to manage head count tightly and bricks it down until revenues stabilize.

Secondly, as I've already mentioned and we'll detail a moment, severance, bad debts, and professional fees were major cost factors in the quarter.

Moving to page seven, you will see a better relationship between costs and revenues but the same factors exist, just to a lesser degree over the span of a full year as more of our revenue and operating shortfalls were skewed to the second half of the year.

Moving to page eight, here is the detail I was alluding to on the non-people-related costs that increased significantly in 2002. Regarding bad debts, this is -- this increase is another result of our broadbased balance sheet review. Tighter setting of bad debt provisions we think is appropriate given the current economic climate and business performance, and that's what you see here. And professional fees are up dramatically as a result of the accounting restatements and the resulting activity that took place throughout the remainder of the year - again, activity that was largely concentrated at McCann-Erickson and the Octagon Motor Sports business.

I will now turn to page nine, where I provide some detail on the Octagon Motor Sports business, both for the fourth quarter and the full year. I caution you that operating costs in these analyses are inflated versus our going-forward expectations because the numbers include adjustments that were the result of increased management scrutiny by our new management team in the back half of the year, as well as because of expanded auditing at Octagon Motor Sports at the back half of the year. When we talk later about guidance, please note that the ongoing operating losses and funding requirements for this business will have been taken into account.

And to repeat what David said earlier in his remarks, we have engaged an independent consultant to help us reevaluate and look at various alternative exit strategies. We do have remaining asset exposure of about $70 million, and we could have further write-offs in this business as we exit the business, depending upon the exit strategy we choose to employ.

Let me now move to page 10, and I won't steal David's thunder because I know he has already mentioned it, but we're particularly pleased that we continued to show strong new business momentum in the fourth quarter, most notably the Bank of America account win, which was an important head-to-head win against a major holding company competitor, and the size of the lien has expanded significantly since we were named the agency of record, and we now have 16 different agency properties that Interpublic engaged in the account and generating revenue in a collaborative manner, and I'm sure David will want to say more about that later.

Moving to page 11 and 12, I just want to point out that these tables show how currency is beginning to help in the fourth quarter, and again, as I alluded to earlier, how acquisition and disposition activity is disappearing as a factor in our trends, as you would expect it would.

Moving to page 13, you see the modest improvement from the third to fourth quarter in organic revenue that we've mentioned earlier.

Let me pause for a moment. I will not be referring to a slide here, just a comment very briefly on tax rate. You will note a significant increase in the full-year tax rate reflected in our full-year numbers as a result of the Octagon impairment, Octagon operating losses, and a decline in profitability across our international businesses in the back half of the year. To properly reflect that higher full-year rate, we have -- we have increased our estimate for taxes for the full year in our fourth quarter, thus creating an artificially high tax rate in our fourth quarter.

Let me move now to page 14, and here I'm showing numbers that just provide the proof of a comment David made earlier about the progress we have made in managing our -- down our debt on an organic basis, again, during a difficult operating period for the company, and again, while continuing to pay out and honor the required earn-out obligations from past acquisitions. We're pleased with the progress in moving our relationship of debt to capital from above 64 percent in September of '01 to 55.7 percent in December of '02, and obviously we're not done. We're looking to make meaningful progress throughout the remainder of '03 as well.

When we report our full cash flow for the year, you will continue to see, as you did in the third quarter of this year, the impact of the cash management disciplines we have in place around working capital, and you'll see a significant contribution to cash flow from working capital, and you will continue to see meaningful declines in investment activity, such as capital expenditures and acquisitions.

Moving to page 15, I will just tell you that we provided details of our current, strong liquidity picture that David alluded to and I alluded to earlier in our remarks.

Moving to page 16, I also show a picture of our current credit picture, and you see that, at the end of the year, our relationship of debt to EBITDA is at a 3.1 percent -- or 3.1 ratio. But we feel very comfortable that in carrying out balance sheet management priorities that David alluded to earlier will lead to us a much improved relationship in this important metric to us by the end of the year, and we feel that it will be safely below and well below the three to one ratio by year's end.

Finally, let me turn to page 17 and talk about the future for a moment. While we're not inclined to give quarterly guidance at this time, we do want to set some parameters for the year 2003. When we met with many of you at the December media conference, we indicated that our budgets being built at the time were assuming a flat revenue scenario. However, given our fourth quarter results, the current economic climate and geopolitical uncertainties, and the caution we have been hearing from our clients, we think a more conservative position is appropriate at this time.

Thus, we have modified our revenue outlook down to a minus one to minus four range for the full year 2003, adjusted to reflect any potential asset sales. And we believe that, at this revenue level, we can produce earnings per share in the 68-cent to 72-cent range for 2003.

Now before, I turn it back over to David, I do want to make one other comment on behalf of Interpublic and its finance organization. We do understand that straightforward, transparent financial statements are critical to rebuilding investor confidence, and this is one of our highest priority, along with balance sheet management for the finance organization of Interpublic in 2003. And again, I would like to repeat what I said at the beginning on behalf of the finance organization of Interpublic, I'm again delighted to welcome David Bell, an executive of outstanding caliber, and we look forward to working closely together with him in the future - David.

Thank you, Sean. You have heard about our performance in some detail now, and I know I speak not only for myself, the finance team, Frank Borelli, our presiding director, and in fact, our entire board of directors, when I tell you that these results are unacceptable. A turnaround cannot and will not be immediate, but a turnaround is precisely what is required.

As I mentioned to you before, we have strong brands, and these will be among our most important levers going forward, and so will a relentless focus on discipline. It's too soon for me to come to you with my turnaround plan and that is something our team will be developing and which I look forward to sharing with all of you. For now I would like to leave you with a sense of my immediate priorities for our company. These are the very same priorities I am speaking about in talks with our agency managers and employees, which I have already done a number of in the past few days, and this is vital because, for us to succeed, the goals and agendas we set and articulate with all of our constituencies have to be perfectly aligned.

First, as I mentioned to you earlier, we will be relentless in our efforts to strengthen the balance sheet. I'm pleased to be taking on my new responsibilities at a time when Interpublic's balance sheet is in better shape than it was even one month ago, certainly a year or 18 months ago, and I pledge to you a month from now this will again be the case. Getting this right will be a huge breath of fresh air for shareholders, for you in the financial community, and also for our own people, and as a result, for our clients.

Taking credit and liquidity concerns off the table and out of the headlines will do our employees' peace of mind a world of good, and this in turn will energize to us better assist our clients in achieving their business objectives, our number one reason for being.

The importance of this cannot be overstated. At the end of the day, Interpublic is a client-centric organization, and here again, our alignment of interests is a win-win situation for all of our stakeholders.

Our second key priority will be financial reliability, accountability, and transparency. While perhaps we should apologize for the complexity, even the seeming untidiness of the financials today, we do not apologize for the transparency or the zeal with which we've attacked the accounting issues and scrubbed the balance sheet.

Of course, financial reliability requires systems to better monitor and assess our company's performance, just as it requires systems at the holding company that provide insight into our business, as well as into the broader trends and opportunities at work in every sector where we're active.

Financial accountability is also about leadership and communications, about making it clear that the operating management must own the financial results and their ultimate consequences. Yes, it's about getting the best possible financial executives, but it's also about educating all of our non-financial managers in the importance of financial disciplines.

Finally, it's about communicating effectively with all 50,000 of our employees. In the past week, they have already received two communications from me on this very topic. I firmly believe that every IPG staffer must understand the relationship between their individual performance and our groupwide financial results, the cause and effect that links their contributions to our future success. All of these elements will be necessary to assure stability and sustainability in the numbers that we report to you going forward.

The third priority is margin improvement. I repeatedly alluded to cost disciplines that have been lost at some of our companies. Just as I have told you that we will devote considerable time and single-minded focus to getting this right. The quality that professional service being provided by so many of our companies simply demands that we get the margins back to where they belong. Our people deserve that. Our shareholders deserve that. You deserve that.

But given that our guidance to you includes a full-year 2003 revenue expectation of a 1 percent to 4 percent decline, it is clear that we will have to look long and hard at the infrastructure of this company. It is a simple fact squaring us straight in the face. If necessary, or perhaps I should say as necessary, we are prepared to be aggressive in taking costs out of our organization in light of a challenging business environment.

But obviously, cutting costs to growth is not a viable long-term answer, which brings me to my fourth and final priority, organic growth. In a share battle, most every dollar won is also a dollar lost by one of our principle competitors. Every incremental dollar earned from an existing client is revenue that can boost margins, and here change will happen. While I'm not timid about taking costs out, as the CEO, I'm certainly aggressive about creating a growth environment. Organic growth flows from a focus at the top, and from a genuine company-wide growth culture. In our business, that means being equal part warrior and equal part collaborator.

For us, the most recent example, and since I played a role in that, is the Bank of America business. Won in heated head to head battle against Omnicom. The account is now served, as Sean indicated, by 16 Interpublic companies. It has been nurtured and more than tripled in size in less than six months, and we must simply do more of this in our companies and in Interpublic.

And this is another area in which alignment of interest can do wonders for us. We must grow. To do so we'll have to motivate and recognize the key individuals who fuel both organic growth and margin growth. So I've asked that our incentive plans be looked at immediately by our head of human resources, Bryan Brooks, to reward that kind of collaborative top line business building behavior that we need to have more of.

There in a nutshell are the priorities for the first 100 days and beyond. Above all, we will stay focused on our clients. I have already reached out to senior management at the majority of our global clients. And then a mantra that you will all grow familiar with, the four priorities --, balance sheet strengthening, financial reliability and accountability, margin improvement, and organic growth. There are other qualities that I will seek to promote within our companies -- greater clarity and decisiveness, an incredible sense of urgency, inclusivity and greater commitment to communications, both internal and with the financial community, and in the spirit of that greater commitment to communications, I would like now to open up the floor for your questions.

Operator, we would like to start the question and answer period now.

At this time we'll begin the question and answer session by asking those who wish to ask a question to press star, followed by one on your touch-tone phone. Your lines will then be placed into queue. Your name will be announced in the order it is received.

There will be a brief moment before we have our first question.

First question or comment is from Joseph Stauff from Credit Suisse First Boston. Go ahead, please.

Hi, good afternoon. Could you touch on management for -- at least the hold code as well as the four operating groups? Where are the voids currently, and what needs to be done in terms of filling them out?

The second question is, the expectations for your cost structure, at least in the first half of '03, certainly given a level of severance in the fourth quarter. Should we expect severance to continue, at least in the first half? And then finally, just the expectations for professional fees in 2003, will they continue, and what -- how do we think about sort of further amounts of sort of write-offs or charges? Thanks.

Those are three different questions. Let me take the first two and I'll ask Sean to chime in on the third question.

We don't have any current voids at any of those business units at all. As we have indicated previously, we are in the market looking for a chief operating officer and are well underway, working with the board, to fill that particular position. As we look at our infrastructure, it is clear that the costs are too high, and we will be aggressively working on that project through the first and second quarters.

Joe, as far as the professional fees are concerned, we have -- we have two different factors moving in different directions for us on that line item. One is that a lot of the special auditing work and investigatory work that was done in the middle of the year around the restatement activity clearly goes away. However, we are supporting the SEC inquiry, and that is consuming some resources.

But more importantly, as we move forward with addressing our Sarbanes-Oxley obligations, there is a significant amount of external audit work and legal support that we will obviously require to support that activity. And as you know, there are some class-action lawsuits the company is dealing with, so litigation support will consume incremental professional resources. We're hopeful that the net of this year's activity versus last year will result in lower costs but be very difficult to give you a good number at this point, and you probably shouldn't be making any aggressive assumptions about reductions of professional fees at this point.

Okay, great. Just one clarification. On the guidance for the year, which excludes potential divestitures, is there anything above and beyond what we expect, I guess in general, that being NFO and possibly Octagon and are they excluded for the full year?

We have no specific plans to divest of any assets other than the ones that we have signaled.

Thank you.

Our next question is from Bob Dunham (inaudible). You have the floor.

Yes. With regard to your capital market activity, have you come up with a strategy whether it will be debt or equity or some hybrid thereof?

I think we have commented on our plans as specifically as we care to at this point. We obviously are evaluating all of our options and appropriate timing and we'll be more specific when the appropriate time comes.

Thank you.

The next question is David Doft of CIBC World Markets. You have the floor.

Thank you. to follow up on the guidance question to be totally clear, so the guidance excludes NFO at this point or includes it for part of the year? Can you clarify that?

It -- it takes into account NFO divestiture from current targeted closing date, which would be in the latter part of the second quarter.

Okay.

David, we're trying to give you an apples to apples comparison on the revenue.

Got it.

Okay, thank you.

So would it also exclude NFO on 2002?

Well in talking about revenue comparisons, we were backing out the numbers for the two years.

You were, okay, great.

But in talking to EPS, we really need to take it into account from the expected closing date.

Sure. That makes sense.

Okay.

Yeah, that is very, very helpful, great. Then in terms of the incremental financings, I mean, looking at your debt obligations and it looks like you might need above and beyond NFO another 400 odd million or so. Is that something around in line with what you're thinking?

I don't think ...

Outside of the plans that we have detailed today, one of which is the NFO sale, the other which is our intention to access the capital markets, I don't think we have any other issues with the balance sheet at the moment.

David, as we tried to already point out that we feel that our liquidity is very, very sound so I'm not sure I understand the premise of your question.

Above and beyond what you raise from NFO, you're talking about capping -- tapping the capital markets. I'm trying to clarify how much more above and beyond NFO you would need?

David, I think we have said all we're prepared to say about our other capital markets or financing plans at this point.

Fair enough, fair enough. I'll let the next person go. Thank you.

The next question or comment is from Ann Trumlefine of Deerfield Capital.

Hi, thanks. I think the number of my questions have been answered. Maybe you can give some clarification as to the revolver that comes due in May. I'm assuming that that has not yet been rolled and then you said that you have sufficient liquidity and you said that a few times and includes capital market raising activities and refinancing and if we go to war and capital markets are not there, what alternatives are available? Thanks.

Let me turn that question, thank you, this is David Bell, let me turn it over to our Treasurer.

With regards to revolver, the company has $500 million 364 day facility maturing in May, the company has not utilized that since the inception of the facility in May of 2002 and so in addition as it was at the December 31 2002, there is a diminimus amount outstanding under the $375 million facility and so in terms of the bank's willingness to recommit and we don't see any problem and have frequent conversations with the banks regarding that.

So you expect to renew the 364 day facility even though there has been no usage and don't expect there to be a problem even though on the UBS standby there was some changes I think to the wording?

That is correct. And the answer to the question is, yes, I expect to have no issues in renewing the facility at an appropriate size.

Can we have the next question, please?

The next question or comment is from William Bird from Smith Barney, go ahead please.

David, I was wondering if you could elaborate on the problems at McCann and have any new problems been uncovered since the last call? Also, does your earnings guidance include a potential capital market transaction and does the one to 4 percent expected revenue decline include any list from currency?

Let me first answer the McCann-Erickson question and then I need to start by talking about the professional level of services provided by McCann. That is not an issue. As we indicated before what has slipped temporarily are the cost disciplines that were a major part of McCann-Erickson historically. In terms of the other issues that had surfaced earlier, we have had 91 other of those issues since that then period. But I'll ask Sean to answer the last question.

David, just so I -- I'm sorry, Bill, just so -- you saw that 1 percent impact of currency on the fourth quarter just to give you a bench mark, but in modeling out our numbers for next year, we're not counting on currency lift to get to those numbers at this point.

You also asked about a capital market assumption. We have not made any capital market assumptions in any of the guidance that we have given.

Thank you.

The next question or comment is from Fred Searby of J.P. Morgan. Go ahead, please.

Good afternoon. A couple of questions for you. First, could you just elaborate on, it looked like marketing services had a very difficult number and is that draft or what is happening specifically? Do you think that is partially reflects marketers or something intrinsic that happened there, it was fairly steep? And then I just - I know this subject has been beaten to death. When you look at the components down one to five percent beyond the FX which is a tail wind right now, with the net new business you're reporting it looks like existing client spin has to come off fairly substantially -- I mean, can you give us some sense what capitalization rate and how we should think of net new business winds flowing through?

Let me answer the marketing services question and touch on the other one and ask Sean to weigh in on the capitalization or to address that issue. As we signaled earlier, the marketing services declined did occur in the quarter, companies of McCann-Erickson that had previously been strong, but it was more broad-based than that. We think it can be attributed to two things: One, there had been in the sector a belief that marketing services would carry in a recession the fact is in a malaise it is quite easy to delay project related businesses.

Beyond that, there is an opportunity even for people in the traditional advertising sector to delay refreshing of commercials on the production side, et cetera, et cetera. And we have seen that around. Our belief is that those project related businesses will come back as soon as the malaise is over. We are seeing strength frankly in the media sector which we think is very encouraging as CEO's move to address the revenue issues in their company. But that accounts for most of the marketing services decline. Sean, if you want to talk about the new business flow-through issue that would be good.

Well, Fred, as we have tried to consistently say about new business, it's a very chancy exercise to use business as a financial metric. I think as David alluded to earlier, it's more of a measure of the vitality of your brands and of your product offering.

Sure.

And how well your agencies fair in competitive activity in the marketplace. The billings numbers that are reported relative to new business don't always translate immediately in -- into revenue even though if I had to give you a metric, the average yield on billings is probably about 12 percent. But client spending plans change all the time. New clients spending plans and existing clients spending plans, so trying to extrapolate or dimensionalize or gag net revenue or using new business is a predictor of that is very, very chancy. One last point. The reason for that is existing clients spending behavior's are much more important driver of our year to year revenue comparisons than the contribution from net new business.

Put it in order of magnitude, if you assume that 90 plus percent of that year to year revenue number is driven by current client behavior, net new business wins are at a very small percentage of it, which would say that many clients have delayed spending or in fact have cut spending in a difficult environment.

Sure. I agree with that and I understand that. Just very quickly, what is the cash burn on Octagon today, and at what point did you just close this thing down? There is anything preventing you? If there isn't a bid, you know, given the cash burn and what it is worth just closing it down.

There will be obviously one of the alternatives being looked at, but I think we have said all that we're prepared to say about Octagon at this point.

Other than the fact that we have exit plans that have been developed after much study internally by our new management team and the board and I have recently hired advisers to give us independent as we move forward through it.

I appreciate your candor and best of luck to you.

The next question or comment is from Igor Crutus at Bonzibell . Go ahead please.

I have a question that I would like to put to David Bell. Can you give us a rough sense because the previous CEO was suggesting that the operating margins can be close to 20 percent for this business which a lot of people thought was a little on the high side. Can you give us a sense as to what is a normalized level of earnings given the current client spending because there are just so many charges that at this point it is very difficult to see through the numbers. I don't know if you have a sense approximately on the annual EPS basis given the current level of clients pending, how much of the -- basically, how much would you add to the 68 to 72 cents?

I think the -- I think the way to respond to that question is that it is clear that in different sectors there are different normalized marginal kind of performance levels. I believe that our issue is to take the unacceptable performance levels that we have and to move them forward sequentially, aggressively using all of our components to get to a level that all of us can be proud of.

Is there anything sort of more specific do you feel that there are certain easy things that can be taken out or something that you could see that the annual level of earnings given the current client spending should be at least 90 cents? I mean, is it something that you could clearly see or not necessarily?

I think we have signaled those areas where our major focus is on having said that, it is our plan, intention and implementation to move forward on the margin line in each of our businesses so that the ago get can -- so that the aggregate can move toward the market that we need.

All right, thank you.

The next question or comment is from Alexia Quadrani of Bear Stearns - go ahead, please.

Good afternoon and welcome, David. I wanted to follow up on your comments. I think you said the weakness at McCann was cost related and due to some pull back in marketing services or project revenue. Is it fair to say then from those comments that you saw no further deterioration in the advertising business at McCann in the quarter?

I think it's fair to say that, Alexia, although all of the global agencies have had client cutbacks in this difficult environment. I think we indicated earlier that some of the U.S. stand-alone ones had some very strong performance. We also signaled issues in Latin America and Japan where clearly McCann-Erickson is the number one player in those deteriorating economies which has had a major impact on them. But it's primarily the project related businesses and those two geographies.

And could you talk a bit about if you're seeing any pricing pressure both from existing clients and on the new business win front?

I think we have seen pricing pressure over a long time. Having said that, you know, our business is and will always be about a value equation and where we are providing meaningful value, most clients continue to be more than willing to pay us a fair wage for that value. And that is really our focus. We have not seen any extraordinary pressures from clients even though they're in their cost cutting modes and have been for sometime.

And lastly, given that we're very close to the end of the first quarter, is there any way you can maybe quantify the anticipated losses from Octagon in Q1?

I think we will not be providing guidance on anything for Q1 other than to indicate that the malaise overhang that we have seen and the factors that we have weighed into our guidance for the full year.

Okay, thank you.

Thank you, Alexia.

The next question of comment is from Dave Ross from Commerce Bank.

If you could give us a working capital swing, that you had cash increase roughly of 300 million at the end of third to the fourth quarter, end of fourth. Is that differential coming from positive working capital changes and then secondly, your debt that you paid down, what exactly was -- did you pay down? And then lastly this might have been answered, but I wanted to get a sense of how much of your revenues, you know, did have a favorable impact from the euro dollar exchange rate?

I'm going to ask Sean to weigh in on that question and then perhaps Steven Berns as well.

I'll take the working capital question and turn the debt one over to Steven. But we have not published cash flow statement for the year yet, but I think you will see when we report it that the contribution to cash from working capital in the fourth quarter is substantially better than last year.

In terms of the debt pay down, as you see in one of the slides presented, the current credit picture, we repaid debt under bank loans as well as other debt that was outstanding which was made up of uncommitted lines overseas as well as some outstanding indebetedness on term loans.

Okay. Then maybe on the euro-dollar exchange rate, what the favorable impact might have been on revenues?

Well, total currency was 1 percent positive in the quarter and most of that uplift was coming from Europe.

Great, thanks very much.

The next question or comment is from Peter Stephanus of (inaudible). Please go ahead, please.

Thank you very much. My questions have been answered.

Next question is from Sebastian Hobb of Canyon Capital. Please go ahead.

I wanted to regarding about coming in December and the capital market situation you're considering, it looks like you have adequately liquidity right now through your bank lines to meet that. Is it available to use for the put A and B, if not, is that the purpose of the capital markets transaction?

We'll ask Steven Berns to answer that question.

Well, the answer is that the company doesn't look at any one piece of debt to refinance any other single piece of debt and so under our existing bank lines, we -- they were not put in place contemplating that they would be used to take out term debt instruments. Under our current bank agreements, that debt cannot be used to repay the put.

However, has David indicated in his opening remarks and repeated again, both of the strategies that we're pursuing with regard to capital market's transaction as well as with regard to the sell of NFO to provide the company substantial alternatives in addition to the fact that we have other sources of liquidity in which we could tap and the company has and has always and continues to have excess capacity in its lines of credit due to the large amounts of monies that pass through Interpublic, we see that as something that is important both to our clients as well as to our shareholders and in order to maintain that liquidity which has obviously in the past been difficult times.

Thank you.

Our next question comes from David Doft of CIBC. You have the floor.

Just a quick follow up. Can you comment on new business activity from year-to-date?

Yes, I can. We are not going to provide any specific guidance regarding amount but as you have probably picked up from the trade press, we have had a number of headline wins, most notably the Electrolux win which is a global win for Lowe , the Gotham one, a very nice piece of AT&T fixed wireless, McCann-Erickson won at Nikon, wins at well Cone & Belding, a number of them the (inaudible) win for Lowe and there are a number of lists of them but we're not providing specific guidance beyond that.

Okay. And on a net basis though is it positive negative at this point?

We believe that it is positive at this point, but we won't be providing specificity.

Okay, thank you.

Operator, I think we would like to end the call now. If you have further questions, we can take them off-line. My phone number is (212)399-8208. Thank you, David, thank you, Sean, good night everybody.