Interpublic Group of Companies Inc (IPG) 2003 Q1 法說會逐字稿

Thank you all for holding and come to your conference call today with Susan Watson. As a reminder to all participant, today's call is being recorded for transcription, so when you do speak, if you would, state your name first, and Ms. Watson, we'll turn the call over to you and thank you for using Sprint.

Thank you operator and good afternoon, everyone. Welcome to Interpublic's first quarter conference call.

With me today are David Bell our Chairman and CEO. Sean Orr is our Chief Financial Officer and Steven Berns, Interpublic Treasurer.

We had released our earnings after the market closed today and we posted on our web site, www.interpublic.com a slide deck illustrates many of the numbers we will discuss this afternoon. A replay of today's call will be available at the website for 45 days. As the alternative you may access the telephone replay for 24 hours only by dialing 800-252-6030 the reference number for this call is 1616826187.

Please be advised that this call contains time sensitive information that is accurate as of today, May 8, 2003. It may contain certain forward-looking statements which are subject to the risks and uncertainties described in our press release and in our 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. Nine weeks ago today, I introduced myself to the financial community, although perhaps reintroduced would be a better term for many among you, given our previous experience together at True North. That was my first week on the job as CEO of the Interpublic Group.

At that time, I told you that I held no illusions about the nature of the tasks facing this company. I clearly acknowledged that we have a hard road ahead. I went so far as to use the term turn around in describing what would have to take place here at Interpublic. And I alerted you that such a turn around, could not possibly be immediate.

The financial results we're sharing with you today bear out those initial assessment, as was the case for fourth quarter results, these numbers both top line and bottom line are disappointing and unacceptable. There are also largely the result of continuing operational and legacy issues.

Principal among them is a breakdown in cost disciplines that took place at McCann in the later part of 2002, particularly within the advertising agency in Europe, as well as significant revenue short falls in the WorldGroup's project related corridor businesses. The bloated costs that slash profits at that largest unit by approximately 40% last year were still in the system in the first quarter of this year.

Now that John Dooner is back at McCann, he and new CFO, Art D'Angelo have started to aggressively address this situation which I will speak to in greater detail later on this call. Higher severance and professional services costs also negatively impacted our results.

As is the case with our key competitors, we also experienced softness in our project-related businesses, especially public relations, during the first quarter, due in part to the uncertainty created by the war in Iraq and the period immediately preceding that conflict.

To address this issue, we're taking three of our most underperforming units, FutureBrand, previously a part of the WorldGroup, Golin/Harris and its design consultants, Springpoint, and putting them all under the management of one of our most capable executives, Harris Diamond.

As I mentioned in our last call, Harris has led a very successful integration of Weber Shandwick and BSMG into the world's largest public relations company. He will now be responsible for all of our constituent management activities and oversee them, and be responsible for getting these units to strong financial performance.

Unlike our competitors, we're also finally reaching the bitter dregs of Interpublic's foray into motor racing in the late 1990s. These operations, revenue and cost problems remain a disproportionate drain on overall holding company result, after Sean has reviewed the numbers I will post you on the headway we've made in putting Brands Hatch and superbikes ventures behind us.

I will also provide detail and status on other acquisition overhang issues that have contributed to our disappointing results. These are fundamental problems reflective of past business actions that in the midst of an economic boom emphasized expansion growth and under valued organic growth which is currently negatively impacting sustainability of earnings.

Of course, that was a defensible choice given that ours was a rapidly consolidating industry operating through a period of rapid economic expansion. However, that has changed and we at Interpublic must now systematically work through and resolve these problems, guided by the strategy priorities that I have set for our company.

As you will remember from our last call, these are what I call the mantra of our new administration, strengthening the balance sheet, financial reliability and accountability, organic growth, and margin improvement, and since that time, we have added a fifth priority relating to talent and that is to ensure that we have world class talent leading all of our major business units and at the corporate center.

On that front, we've already taken a major step toward meeting our commitment by hiring Christopher [Coglin] as Interpublic's new Chief Operating Officer.

Chris is an exceptional executive who has enjoyed successful tenures as the CFO of three major multi national public companies, Pharmacia Corporation, RJR Nabisco Holdings and Sterling Winthrop. At each of those leading firms, he demonstrated the ability to make significant impact on strategic and operational business issues, well beyond his areas of responsibility.

Chris also has direct operational international, marketing experience, notably in his role as CEO of Nabisco International. Chris possesses a highly effective operating style, significant experience in successfully managing large organizations going through transition, and he enjoys a strong reputation and rapport with the financial community.

Sean Orr continues as our CFO reporting to Chris and will continue to work with us on balance sheet matters. We saw some great candidates, but the Board and I are satisfied we now have a Chief Operating Officer with the best combination of operational strength and financial skills. And I believe we've selected a partner with a background that is uniquely suited to helping me and our team turn around the Interpublic group.

There have been other significant developments on the talent front. First and foremost new leadership at McCann and the persons as many of you know John Dooner and Art D'Angelo and in the next day or three, you will see an important announcement of a major addition to the senior management team at World Plus Draft, that new structure recently put in place to drive growth, and that new structure is starting to drive growth as evident in last week's wins of Macy's and the A6 athletic shoe account for Pan-Europe.

Plans are in motion to reduce back office costs at these units and that will be the number one priority of the new addition to their team. We've also appointed Kevin Allen, the first Chief Growth Officer for Interpublic. And more on that in a few minutes.

Another significant development that continues to progress and is now reaching its final stages is an anticipated NFO transaction. When completed this deal would be the capstone to our recent efforts to strengthen the balance sheet. And that is what I see as our most significant accomplishment since we all last spoke together on March 6.

In that short time frame, Interpublic has made very significant strides in strengthening our balance sheet and putting to rest concerns about the company's liquidity. As you know, our convertible bond offering in early March was extremely successful. It allowed us to retire the zero coupons in a subsequent tender offer as well as to refinance an additional 200 million to provide greater balance sheet flexibility. As a result, our debt maturity schedule has been significantly improved.

We also closed 2002 with a debt to cap ratio of 55.7%, down from a high of 64.3% in September of 2001. By using the proceeds from an anticipated NFO deal and continued working capital management discipline to further reduce debt, to approximately 2.3 billion, we plan to end this year with total debt to EBITDA ratio, that dips below three to one for the first time in quite some time.

The company's liquidity position is also strong. As of March 31, 2003, we had total credit facilities of 1.75 billion, against which we had drawn barely more than 100 million. Leaving us with available credit to close to 1.65 billion.

As you will have read in today's press release, we have also received commitments to renew the full 500 million, 364 day revolving credit facility. A facility that I would have you note Interpublic never had to draw on at any point last year. So as you can see, we're well under way to achieving the first strategic priority we set for Interpublic.

The balance sheet is strong and getting stronger still. As I mentioned to you earlier, I'll be providing you with an update on progress against all of our key strategic priorities. However, it will be useful to have reviewed the company's performance before I move on to those items, and I would therefore like to at this point turn things over to our Chief Financial Officer, Sean Orr who will take us through the first quarter numbers.

Thank you, David. And good afternoon, everybody. I will be referring to the conference call notes that Susan mentioned at the outside throughout my remarks. As you can see from the agenda on page two, I will first go over some highlights. Then I will analyze Q1 operating performance and balance sheet management, before very briefly addressing our future outlook.

On a positive note that continues to be significant accomplishment in the area of balance sheet management. First, we successfully refinanced our zero coupon debentures in the first quarter, removing a significant potential maturity at year end. This transaction closed on April 4.

Secondly, we continue to track -- continue on track to effect the sale of NFO WorldGroup. We also have received $500 million in commitments to fully renew our 364 day bank facility.

Our working capital management and quarter end debt position were again strong. Payments to honor prior acquisition capital commitments continued to decline. And all Cap X acquisition and other investment activity remained tightly controlled.

Unfortunately, while our new business competitiveness remains positive, our operating performance is otherwise disappointing, as our organic revenue performance remains weak, especially outside the United States, and our cost reduction efforts are not keeping pace, necessitating higher levels of catch-up, severance charges.

Moving to page five, I will review briefly some key statistic for the quarter, reported revenue was up almost a percentage point, however constant currency revenue was down 3.6%, organic revenue was down 5.4%.

Operating expenses on a reported basis were up and we're also up in constant currency but I'll provide you some better analysis of that comparison in a moment. Net loss per share was two cents a share. However, we have a 5 cent impact from higher fees and other charges which I'll highlight. And at 4 cents loss from Brand Hatch Motor Sports as well.

Turning to the P&L, on page six, you see the quarter's income statement. As foreign exchange is inflating our '03 numbers, the analysis I present on the following pages will be a more useful way to review the results. On page seven, you see the components of revenue change, and again, see that organic revenue declined 5.4%, versus the prior year.

The next page shows that domestic revenue declined 3%, and international revenues declined by about 8 1/2% in the quarter. And you can see the degree to which Latin America and Europe are big issues for us.

On page nine, the chart reveals that after four consecutive quarters of progressive improvements, in revenue comparisons, versus the prior year, we have slid backwards slightly in the quarter. As David has already suggested, we think that persistent geopolitical uncertainties were an important contributing factor here.

The next chart shows the components of our year to year net income change. But the next page, page 11, again presents a more useful analysis. And let me go through it slowly.

As you can see, currency inflates both revenues and costs about equally. And acquisition and disposition activity, likewise, affects gross revenues and expenses, with little effect on profitability.

Now, as we had suggested on a year end call, we had some write-downs in our Octagon Motor Sports unit that we were not permitted to take at year-end that hit the first quarter as we continue to clean up that portion of our portfolio of businesses. But ultimately, the real story is our organic revenue decline with corresponding expense reductions leading to a $94 million decline in what we call organic performance.

On the next page you see that the $79 million revenue decline was only offset by $18 million in expense reduction at the operating level. Obviously, revenue performance needs to improve. In the meantime, more costs need to be taken out and faster.

Consequently, you see, we incurred an additional 13.6 million in incremental severance costs in the quarter. And like we saw in the fourth quarter, professional fees, bad debts and other transaction costs, including the costs of the refinancing that I mentioned earlier, accounted for an incremental $19.5 million of expense in the quarter. These two items add to $33 million, a pretax costs, that while not a permanent part of our cost structure, represents about a 5 cent drag on earnings in the quarter.

Turning to page 13, and to Octagon Motor Sports, please note that the numbers presented include the $11 million in portfolio write-downs that I've just mentioned. Now, David has already talked a little bit and will talk some more about this area and our plans involve the sale of our fully-owned track operations and a stabilization of operating performance, once current contractual commitments are met in 2004.

That said, these numbers are consistent with our projection of OMS for the full year, which will nonetheless represent a substantial improvement over last year's disaster.

Turning to new business, on page 14, let's first remember that this data is an indicator of competitive vitality and not in and of itself a revenue predictor. With that said, we continue to demonstrate our competitiveness in the first quarter, by winning new accounts and projects from big name clients like the ones presented on this chart.

Turning to balance sheet management and page 15, I am first of all pleased to report that debt levels remained about flat versus year end in Q1. Which is often times a time of year in which we are cash flow negative. And this occurred despite our disappointing operating performance.

I would also just like to point out for a minute the difference between the numbers presented in the column labeled reported March 31, 2003, and the adjusted March 31, 2003 column which actually represents our balances on April 5, which is the day after our closing of the refinancing of the zero coupon debentures that I mentioned at the outset of my presentation.

Turning to page 16, you see that we continue to move solidly in the right direction towards our goal of a 50% debt to capital ratio. And more important impressibly, I think than the flat performance in our debt levels between March 31 and year-end, is the fact that on a proforma basis, in other words on April 5, our debt levels were about $200 million below our debt levels for the comparable date in the prior year, which I think is a noteworthy accomplishment.

Turning to page 18, I would just like to comment that with the $800 million convertible offering in March, we have now improved our capital structure and as David mentioned, also our schedule of maturities. And we expect that with the NFO transaction, to be able to reduce at debt levels even further.

Thus, we continue to have a very strong liquidity position with a new $500 million, 364 day revolving credit facility, to begin next week, which I again repeat was a full renewal of the expiring facility.

Lastly, on balance sheet management, this picture on page 20 tells an interesting story. One that David has talked about before.

Point one, that post-2000, our acquisition activity has been dramatically curtailed from levels that were clearly not sustainable. Point two, that we are now seeing the benefit from such curtailment and that deferred acquisition payments from the '90s are finally beginning to decline.

Regarding our outlook, as David has already said, we are accelerating cost savings actions during this second quarter. And believe that our company's operating results in the second half of 2003 and first half of '04 will finally provide us with a firm baseline for the future performance of the real IPG.

And as David will elaborate on, we are evaluating all of our operating units as well as the corporate center and will detail an accelerated cost savings plan when we release second quarter 2003 results in early August. Despite continuing macro economic uncertainty, at this juncture, our projected revenue performance is consistent with our previous estimate of a one to four percent decline in 2003, exclusive of future divestitures and foreign currency effects.

However, cost overhang issues persist at some units and incorporating savings generated by the cost reduction program and excluding charges and gains, that is balancing the NFO and other gains, with the incremental severance and other program charges, we believe our previous 2003 earnings guidance of 68 to 72 cents per share is achievable.

Finally, to recap, we know our operating challenges. That is, to improve our revenue performance, accelerate cost reductions, and most importantly, deliver on our commitments and I welcome the addition of Chris [Coglin] to bring much-needed focus to these areas. In the meantime, our balance sheet and liquidity picture continue to improve and will continue to be a major focus. David?

Thank you, Sean. As you have now heard, much of our recent poor performance can be traced to an inability on a part of a number of our operating units to deliver against their commitments. That is in large part why I have identified financial reliability and accountability Interpublic's second key strategic priority and that will be job one for Chris [Coglin] working with operating unit heads and their CFOs.

As you know, our convertible offering in March was extremely successful. It allowed us to retire zeros as well as refinance an additional $200 million and Sean has covered that clearly.

The cost structure, nowhere is it more needed to work on than McCann WorldGroup. The first quarter cost and operating issues at McCann make it clear that the former leadership of that unit came up dramatically short in their financial management but it is equally important to point out that the McCann problems have not extended to client relationships, professional capabilities or the quality of the offering.

The reason why the McCann is the perennial legitimate choice for best global agency is still there. Witness this past quarter in which McCann once again contributed disproportionately to the strong 888 million of net new business won by Interpublic.

With big new assignments from current client L'Oreal, wins like Budget Rent-a-Car, Nikon had a terrific start to the second quarter with CapitalOne.

You should know that in the past week, John and Art D'Angelo have articulated a program that takes out significant costs and streamlines worldwide management. It also addresses the regional structure in two parts of the world in which McCann has recently experienced disappointments in revenue and profitability, in Europe and Japan.

We are taking out unproductive administrative layers, ensuring that senior executives are client facing and adding senior new financial and managerial talent on the ground in Europe. These moves will not only significantly reduce cost, obviously it must, they will also increase transparency and improve oversight in the regional and local operations at McCann-Erickson in Europe.

A second key contributor to our weak performance in motor sports, in our last call, I mentioned we engaged independent advisors to help us explore exit strategy, I also informed you that the motor sports investment had been substantially written off for accounting purposes, but there would have to be additional write-downs taken to these assets as we exit the business. Our progress to date has been good.

Interpublic's Sports and Entertainment management developed a strategy and independent advisors validated it. We have shut down or sold our go-kart racing ventures. And divested ourselves from superbike holdings. We have also renamed the remaining auto racing tracks, Brand Hatch Circuits. This is important because it separates motor racing venues from the rest of the Octagon portfolio which is performing well.

We have engaged a leading British concern, Jones Lang Lasalle, to sell the four tracks either as a package or separately. That will leave only our responsibilities to run the British Grand Prix and to do so at Silverstone. As previously disclosed, the contracts that bind us to these commitments make a quick resolution difficult.

Having rid ourselves of other holdings and distractions for the moment, we are concentrating our marketing efforts and professional skills which we're good at on doing a world class job marketing this July's Grand Prix. There by maximizing our financial return. And the team that will do that just came from successfully marketing an event that Brands Hatch itself which budgeted 20,000 visitors and had 35,000.

And that, after the sale of the other four Brands Hatch Circuits later this year, we will be in a much better position from which to re-evaluate options for the last piece, which is formula one.

Finally in the area of financial reliability and accountability, there is another overhang issue that must be acknowledged. In 1998, Interpublic made 80 acquisitions, followed by 60 in '99, and 96 and 2000. Many of these acquisitions could have been better integrated into the holding company. And some were outside our core business. Which means that potential opportunities were not fully exploited.

Or revenue risks materialized as earn-out periods lapsed and this has adversely affected revenue in a large number of acquired companies. What's more, as Sean pointed out, in 2001, 2002, and this year, Interpublic will pay out between $220 and $320 million per year of deferred acquisition related payments in cash and stock. The effects of this legacy on our results can't be ignored and as I said earlier they're a reflection of a '90s mind set that is no longer appropriate today.

Thankfully, this pressure on our performance will soon lessen considerably. Given the fact that in '01, '02, and '03, combined, Interpublic has seen us make only 31 acquisitions. By '05, the number of payout will be approximately 100 million, declining steadily, in the years preceding that.

And that will help considerably as will the fact that our forward plan is focused single mindedly on organic growth and quality of earnings which brings me to the other key strategic priorities and an important one, organic growth and margin improvement.

Here again, the company's recent performance won't work. And again, the changes that will be required to alter our course will take a little time because they are both cultural and systemic. In the area of organic growth, there is a need for a concerted initiative to better leverage the size and power of Interpublic.

We have over 4100 clients around the world. Yet only a small percentage use more than their primary source of IPG's service. Of course we want and need more growth success stories, such as the Banc of America and integrated wins that have been the the hallmark of the Deutsche, Campbell, Lewald, and McCann. But there is a low hanging fruit if we can find the ways to serve the 3500 companies we already do business with. That work with only one of our companies.

We have an incredible range of brands and quality offerings. This collaboration area is an area in which a number of our competitors have excelled. And it's an area we espoused with strong success at True North. It is also one we will now be pursuing doggedly at Interpublic.

To that end, as mentioned earlier, we're naming Kevin Allen as our first Chief Growth Officer. Kevin Allen is a long-time industry McCann veteran who is one of the best business builders around.

He was one of the key players behind McCann's advertising teriffic new business record both in the U.S. and in Europe and was particularly effective in increasing client expansion through the corridor companies. As a dedicated Interpublic executive who owns collaboration and growth, I believe he will generate the same outstanding level of results.

With Kevin in place, by June, we will have launched an organic growth business center with tools such as a contact locator, relationship finder, resource enabler, that will empower our companies to better work together and build business. We will subsequently roll out best practices, noncompetitive case study, and refine client database, to further facilitate and encourage collaborative behavior.

As important in the coming weeks, we will institute an overlay incentive system to reward practitioners whose activities improve collaboration and result in organic growth. The system will be seeded with $1 million, and a million options. A number of these options will be earmarked for the middle managers and relationship managers, who use the tools to build the organic growth. And we will be reporting back to you at every earnings call on the specific progress of this collaboration initiative.

Last in the area of margin improvement it is clear that a promise I made to you in February will have to be kept. I pledged then that we would take a long look at our infrastructure.

I told you we would be prepared to aggressively take costs out of the organization in the face of a challenging revenue environment. Today, I will go further and tell that you we're evaluating a number of plans that will see us make significant cuts, and our bank covenants permit restructuring costs of up to 200 million directed specifically at accelerating cost savings with aggressive flow-through in the latter two quarters of this year.

Since all such programs can only work if there is participation from across the company, we at corporate have gotten the ball rolling by eliminating the infrastructure associated with the advanced marketing services unit and the companies in that group now report directly in, and we pledge and have already taken steps that will deliver 25 million in annualized savings to the cost cutting effort from the center.

I want to see our margins back in competitive range for the last six months of 2003 that we can move into next year at a run rate that will allow us to leverage even a modest economic recovery into meaningful profit performance. The exact specifics and amounts that will comprise our restructuring program have yet to be determined.

And this is an area in which Chris[Coglin] can play an important role and we want to involve him in the process, but the two key criteria will be clear, invest in cuts that yield quick and certain savings such as head count reduction, real estate and second, to design a program that is substantially balanced out by the gain we expect to realize on the sale of NFO. This program will be finalized and implemented prior to the end of the second quarter. And detailed with you on the next earnings call.

I've covered a long list today. We are digging out from a deep pit. In short order, we've made progress against the commitments we set out in March.

We certainly made progress on the balance sheet issue. And the NFO deal would be clearly a capstone to these efforts.

The financial results today are unacceptable. And clearly indicate financial reliability and accountability are job one. A new engaged and effective chief operating officer will help here. Increased cost disciplines at McCann are required and in progress.

Additional progress and winding down all our motor sports business except the Grand Prix will further improve our ability to deliver. Though our new business numbers are extremely competitive and one analyst reported us as leading the field again in April, until we see a closer correlation between head-to-head wins, and revenue performance, we will not be satisfied.

Organic growth from existing clients clearly will receive greater management focus and collaboration needs to be aggressively pursued. Me must better leverage our relationships and find ways to help those clients with their revenue line.

Margin improvement will be delivered in three ways. First, a new management team will hold operating unit management to a higher standard than ever before and be willing to make personnel changes should that prove necessary.

Second, we're putting programs in place that better leverage the size of the holding company. Procurement can be improved. Our successful shared services program can be extended and rolled out internationally.

Third, as I indicated earlier, a major company wide program of cuts with accelerated savings in the back half of this year will also be ready for implementation in the second quarter. We'll report back in detail on that in the end of the second quarter.

While the numbers we're reporting disappoint, they are also not yet reflective of where we're going or the actions we've taken in the first two months. We will continue to be aggressive in working the plan we believe will restore the IPG holdings to the fine performance of many of our business units.

We will begin to see the impact of these actions in the second half of this year. And I'm looking to those two quarters along with the first two quarters of '04 as the point at which we will finally get a solid look at the baseline performance for this company. The basic building block, or what I'd like to call the real Interpublic. And that turn-around year will serve as the foundation for restoring IPG to its rightful place among the leaders in advertising and marketing services. Thank you and we're happy to take questions.

If you have a question at this point, if you would press star one on your touch-tone phone. The first question is from Michael Russell, go ahead please.

Just wondering, David, you talked about the $200 million in restructuring costs is. That something that you expect to use fully, is that part of the guidance of the 68 to 72 cents? How should we think about that restructuring cost as part of your guidance?

On the first part of the question, we have not specified 200 million except to say that our bank cover permit up to 200 million. We will be very specific about that in the second quarter conference call. Both in terms of the number of amount and the specific actions taken.

As to the outlook, I will ask Sean to address that.

Mike, I did mention in my remarks that we are expecting the balance any of the gains that come from NFO and other asset sales with the spending against this program in achieving the guidance of the 68 to 72 cents.

Can you remind us what the basis is on NFO?

The guidance that we've given, Mike is that last year's revenue were 466 million.

We have not previously disclosed any specific balance sheet information on NFO, Mike.

Okay. And then Sean, on slide 12 of your presentation, just was a little confused. The fees transaction costs and bad debt that are 19.5 million, some of that is professional fees and some of it is refinancing, could you split that out? Could you explain the other operating expenses of 18 million?

I think it is in the back.

Mike, I think we -- I refer you to the appendix on the back on page 26. I think that shows the detail you're asking for.

Great. And what is the other, that's a positive, that's --

What that is, is when you strip out -- when you strip out the severance and the bank fees, and these other costs, that on an organic basis, salaries and other run rate operating costs actually declined in the period versus the prior year. That's the good news.

The bad news is they only declined by 18 million dollars against a revenue loss of 79 million dollars. And when you have a revenue loss of $79 million, that large, you need more aggressive cost cutting than that.

Okay. I see. And then the planned -- you keep saying the NFO deal is on track. Just looking at page 25, the discipline, it shows marketing intelligence, which is -- I imagine predominantly NFO, is your fastest growing group.

And if were you to back that out, is it true -- I mean have you thought about what the organic growth would have been excluding NFO? Which seems to be contributing on the organic growth side.

The numbers that we talked about in terms of revenue guidance for the full year, Mike, takes into account an approximately mid year disposition of NFO.

And looks like NFO may be drops the organic growth by about 100 basis points is. That the correct way to look at it?

That's not a normalized kind of growth rate, Mike and what we have said, as you know, in our revenue guidance for the year, we've taken into account that kind of growth.

Okay. Great, well it seems like there is an awful lot going on, David. It is great to see all the activity. Thank you.

Thank you, Michael.

Kevin Sullivan hat the next question. Go ahead, please. Kevin, your line is open.

I apologize. Just touching on the guidance again, you can just let us know what sort of operating losses from motor sports or Brands Hatch have you built into the 68 to 72 cents for the year? And secondly, Sean, if you could just clarify what you meant by excluding charges and gains again, I apologize, I missed that.

I'm sorry, Kevin could you repeat the second question before I answer the first?

I missed the part where you walked through excluding charges and gain, was, was that just a restructuring program or --

What we're contemplating is that the gains from NFO and other asset sales and, and the incremental charges, and again, David, to repeat David's point, the $200 million number that he mentioned is the maximum allowable amount per the bank agreement, not a forecast at this point. But we are expecting those activities to substantially offset one another.

Now, we have not given specific disclosure on a full year operating forecast for Brands Hatch, but we have taken the guidance that we have given, takes the losses for the year for Brands Hatch, including the expensing of all its capital expenditures relating to the Silverstone operation, and the disposition of NFO at mid year into account, in determining that guidance. And that's all we've said, Kevin. So I think I'm limited to that at this point.

Just to be clear, I assume that Brands Hatch is -- there's no operating loss?

I will say that the operating losses, as I said earlier, are substantially less than the disaster we had last year. Both because there is going to be much fewer write-offs as we disclosed at year end, that were very substantial one time write-offs in Brands Hatch last year, and also because you're going to have very significant run rate operating performance improve at Brands Hatch in the year as well.

Okay. That's helpful. And one last thing. In terms of the level of professional fees, I think you had said in the last conference call that you expect them to be somewhere in the neighborhood of last year's amount.

I didn't take a position. I think I said that we expect that over time we'll be able to manage them down below last year but we were not prepared then nor now to commit to a number.

I think also, Kevin we said they would be front end loaded in '03 compared to back end loaded in '02.

Great, thank you very much.

The next question is from Lauren Fein, go ahead, please.

Thank you. I'm sorry this is somewhat confusing and sort of your earnings guidance but I guess maybe it would help, under your definition, what did you actually earn in the first quarter. Based on getting to the 68 to 72 cents? Are you using the two cent loss? Are you using any of add-backs.

We lost two cents in the first quarter, Lauren.

Based on your calculation, all right. And I'm wondering if you could share with us in terms of the COO hire, what types of specific goals does he have that will be bench marked against in term was his compensation and could you share any of the incentives he will be given?

Yes, first of all, you know, in terms of the five pillars that we've outlined, His primary responsibility will be in the following areas. Obviously improving the balance sheet which is largely behind us.

Clearly, financial accountability and reliability in working with the business unit heads and their CFO and margin improvement. He will be incentivized and the senior Interpublic officer that he is and his incentive will be based on Interpublic performance both shares and any kind of cash compensation based on delivery.

Okay. And then two other quick ones, could you define, you said that you would hope that your margins in the second half would be competitive. Could you give us a sense of, sort of what kind of margins you're aiming for in the second half? And then secondly, is there an expectation that you might start paying a dividend?

On the first question, we're not going to give guidance on that. I think competitive is as far as we want to go, Lauren. I think in terms of dividend, you know, clearly we understand the external dividend environment. Not only as shareholders but with our institutional shareholders. Right now, we are not paying a dividend.

We are looking at that issue on a regular basis, and when it's prudent both in terms of our earnings and other issues, our intention will be to review it toward restoring it. But for now, we're not paying.

Okay. And I guess I will sneak in one last one. Are you surprised that given the strength that you've seen in new business, you know, both last year as a whole and in the first quarter, that you aren't getting a benefit on revenues?

In the strength that we've had, we're clearly not satisfied that we're not getting that on revenue. There are, as we indicated in some of the areas like constituent management business, there have been revenue declines, caused by, you know, some of the anxieties leading up to the war, et cetera, et cetera, but that's a real area of focus for us, and I think one of the things that the organic growth initiatives will begin to do will begin to close that gap and make it far more transparent in terms of what we're doing because there will be a lot more activity done under the radar screen and out of the headlines in terms of major wins which is the primary source for the net new business data.

Great. Thank you.

The next question is from Joseph Stauf, go ahead, please.

Thanks. In terms of I guess you cut about 1400 reduction in terms of head count in the first quarter. Can you give us a breakdown in terms of where at least, you know, the lion share of that came from? And by division. I've got two follow-ups.

No, we really don't provide guidance on the specificity of head count reduction but we're happy to take your follow-up.

The only thing I would say, Joe, it was pretty broad-based. It was distributed fairly balanced across the portfolio.

Okay. Let me take a couple more cracks. In terms of the first quarter, did you lose any business in terms of your top 20 clients other than clearly what was announced from Coke?

We didn't lose any of our top 20 clients. There was a U.S. assignment from Coca-Cola that we lost and that's included in these numbers.

But my question is, was there anything incremental other than coke?

If the real question are we losing business from our top clients, the answer is no.

Okay.

As to the specificity of could there be a brand in one country, another country, et cetera, et cetera, yes, of course that could happen and it happens, but we also as we've indicated in McCann's net new business wins as well as overall Interpublic on that list a number of additional new assignments from current clients and some of them are clearly in the top 10.

And also, Joe, the fact that we did not lose any clients does not mean that many of those clients did not spend less.

Okay. And then one follow-up. Brands Hatch Circuits, how many years does Brands Hatch Circuits own the Grand Prix rights, and what's the value of that --

Thank you for using the name Brands Hatch Circuits, you picked up on the new name. We love you.

All right. Appreciate it.

Sean will --

We have never and we're not permitted to disclose contract details, Joseph. So unfortunately, we'll have to take a pass on that question.

Okay. And then I guess one more. The 220 million of contingent liabilities at least that you alluded to for '03, I mean is the expectation that you will have to pay that amount? Regardless of performance.

Those are earn-out payments you're referring to and that is what we are expecting to pay out for the year, so that is our operating assumption at this point, yeah.

Okay. Thank you.

The next question is from Blaine [inaudible], go ahead, please.

Yes, first question, is for David Bell. You alluded to this at the end of your commentary and that you're unsatisfied with the organic revenue growth. I mean you can be more granular in terms of parsing it out? You know, is it business lines? Geography? Where the low hanging fruit is? Because certainly at least your competitors and the other major to are reporting significantly higher organic revenue growth.

We don't get specific granularity by brand, but we can tell you that clearly there have been not enough growth in Latin America and Europe and this particular area, we can also tell you that a number of the project-related business with the spotlight on some of the public relations businesses have had dips. We can also tell you that in the brand identity field, which has been largely driven in the past during an expansion by transaction kind of business, certainly for corporate I.D. has slowed dramatically.

Do you have a time frame in mind with which you would like to kind of close the gap between the rest of the industry and with your organic revenue growth?

We're not providing that kind of guidance. What we have said is that on our collaboration and growth initiative, which we're launching in June, that we will be providing updates at each quarter conference call.

Okay. And finally, for Sean, excluding the cash you get from NFO, would you expect to pay down debt on top of that? I guess what I'm asking, is considering Cap X earn-outs and restructuring.

Yeah, excluding NFO, we were expecting to be cash flow positive for the year in use -- that cash flow further debt reduction.

And that would include any restructuring you take in addition after this quarter.

Correct.

Okay. Thank you.

Operator, are there any more questions? Hello?

Okay. The next question is from Alexia Quadrani.

Good afternoon. David you did a great job describing the different components of the Octagon and the motor sports division and I am just wondering if there is a way you can sort of quantify, now that you -- how much of the 4 cent loss in the quarter was attributable to the go-karts and the superbike holdings which are now gone.

I'm going ask Sean if perhaps he can give some color. They haven't really articulated that but perhaps --

Included -- those two items are included in the 11 million dollar number that I alluded to earlier, Alexia.

They are?

All are.

Okay.

And they were both loss operations which as you know, we've exited now.

Okay. And then with regard to the second quarter should we assume the same level of professional season in the second quarter?

Very difficult to tell, as you know, there are a number of initiatives coming off Sarbanes-Oxley, you know, all the 404 kinds of things and everything are going to be there, which can increase fees but it is very hard for us to assume whether they will remain constant, decline or increase. We're doing the things that are important to do, and you know, the fees will be what they are.

Just to go on back to what Susan said earlier, as we have acknowledged, that there are going to be more balanced or front loaded this year versus last year, and I think that's as far as we can take it at this point, Alexia, if that helps.

So the same also for the 13 and a half million in severance, you know, assuming --

Severance is going to be affected by where we come out with the program to accelerate our margin improvement. And so you're going to see substantial severance in the second quarter.

Okay. And -- thank you very much.

Bill [inaudible] you you now have the floor.

Sorry about the technical problem earlier. Given that this is an intellectual capital intensive business I just wanted to ask about what steps are you taking to retain your talent.

Well, what we're -- the steps that we're taking to retain our talent, let me just start by taking -- saying to you that we are being very aggressive in recruiting top professionals in addition to simply focusing on retaining.

In fact, Brian Brooks who we believe is the strongest in the industry has been very aggressive in going in this market to find key players for many of our units that have needs. But in terms of retaining them, clearly we have what we believe is a strong incentive program in terms of cash and long-term incentives as well as other pieces.

We're being very aggressive about articulating them. And articulating them clearly so that the realization level can be high given performance, and the performance and realization pieces come together and the more clearly we link those, the more productive that we will be. One of the other things that we have clearly for a number of our people is many of our people believe that Interpublic can be and deserves to be a strong operating company and that our stock being under-valued is of interest to them.

It's also interestingly of interest to people on the outside, who believe the same thing. So we have a strong program of incentives. And we are working very strongly as well on cultural issues, against which we're making progress, and interestingly, the collaboration initiative will add value to that cultural piece in terms of our retention of people.

All right. Thank you very much.

The next question is from Frederick Searby, go ahead please.

Frederick Searby from JP Morgan. A couple questions for you. There is obviously a substantial snap back you're expecting in the second half and we're sitting here in May. Can you -- the organic growth was particularly disappointing in the international markets.

And I'm curious as to whether you're seeing some of that project related work that you alluded to falling off, during the geopolitical conflict we had in the Middle East.

Is that coming back in April, May and is that in part buttressing your sense that you can maintain guidance here, and if you can give us some update on how continental Europe is doing sequentially in April and if you -- if there is any sense that there is an improvement in Germany and some of the other markets that have been notably weak, and Japan as well for you. And I have one or two other questions.

You know, clearly, one of the things that is involved in looking at project-related revenue and other revenue in Asia will be the SARS issue which will have its impact on those areas. The one thing that we are seeing that we feel comfortable about is that the net new business thing continues to improve, particularly at some of our business units that have not necessarily been that strong. And we are -- we don't think that there is reason to change it based on the April results which is why we're keeping it.

So you're saying you're seeing some improvement as the conflict is -- has ended, have you seen some pick-up?

We have not seen the continued decline which is what gives us the confidence to continue.

Yeah, two things I would say, add to that, Fred, number one, we just completed doing our first series of business updates with each of our business units, which is a fair and very comprehensive top to bottom review of the businesses, and unlike what we've been hearing over the last couple of years, the general tone of these conversations was one of revenue in the stabilizing or being -- revenue either having stabilized or stabilizing.

And the other thing I would point to is the fact that you need to take into account the seasonality of our business, where the -- the revenues in the second half of the year are substantially stronger, just by the historical seasonality than the revenues in the first half of the year. So against like or better run rates, and cost, your second half profitability is going to be substantially higher than the first half of the year.

Sure.

Okay, so you know, those are a couple of key factors as to why we feel good about the position that we articulated.

Finally, just to drill down on McCanns since that's been the juggernaut of this business, I'm curious, can you give us some sense of where operating margins below, did they fall not single digits? You talked about a 40% decline.

I mean it's still been quite strong on a net new business front, what kind of -- is it cycling better than the business on organic revenue generation, still, or -- you've pinpointed the cost side, I mean is organic growth still substantially higher than the rest of the business?

Well, we're not providing guidance on that, except in my remarks, I indicated that that these lack of cost disciplines which have been momentary, which are now aggressively being moved against by both John Dooner and Shawn are done from a position of strength. But has the top line maintained its robustness or is that -- We don't detail that by individual brands. But we will go so far as to say that we are addressing the cost issues from a position of strength.

Okay. All right. Thank you.

The next question is from Michael [inaudible], go ahead please.

Just for clarification, based on your 68 to 72 cents restructuring, after Cap X, after any puts, you will be free cash flow positive even before the sale of NFO? Is that what you said before?

Not before the sale of NFO. I think -- we're dealing with so many moving parts here, if you want to take into account the costs of the -- whatever we do in the second quarter, which has not been firmly established at this point, you're getting into an area that we can't -- we can't fairly answer right now.

Well, before, when you answered the question that you will be free cash flow positive and being -- paying down debt before NFO, that's before NFO, but after what?

We're going to refer this question to Sean --

Let me just make sure I'm answering, though, the question, because perhaps I didn't understand what you originally asked. You're asking whether we will be free cash flow positive before the NFO transaction?

Yes, but after -- yes, before the proceeds from NFO come in, but after your Cap X, any earn-outs you have to pay, any restructuring charges.

We still be cash flow positive.

Okay. Come in, but after your Cap X, any earn-outs you have to pay, any restructuring charges.

We still be cash flow good.

And can could you just provide an update on what is going on with the SEC?

We continue to cooperate with them, but as --

There is --

It is going slow. There is no new news and we continue to cooperate and that's all we have to say.

Is it fair to say that their inquiry has not spread beyond McCann-Erickson?

We don't comment on where the inquiry is. I think that what's fair to say, that it is proceeding normally, and that we're cooperating fully, period.

Thank you.

Operator, we've run over. We will take one more question.

Okay. The last question is from David Doft, go ahead please.

Thank you. Just a couple of quick ones. Just to clarify on the remaining pieces of Brands Hatch circuits you will have after the recent sales of and the sale of four racetrack, there will be the running of the British Grand Prix and the Formula One business. Do you still plan on selling those businesses.

Actually what it is, it is the running of the British Grand Prix and Formula One race at Silverstone.

So just one thing?

Yes. Right now, we are focused on making certain that the marketing of that activity uses all of our considerable skills and is a financial success to the degree that it can be, which puts us in a strong position to again evaluate that last piece of the puzzle.

Fair enough. Fair enough. And then on a different note, the new business win number in the quarter, what were a couple of the key losses outside of the Coke one? There has been about three or four I guess over the -- since the beginning of the year of somewhat substantial losses that offset some of your wins and I just wanted to know what fell in the first quarter and what is going to fall in the second quarter.

There were a couple -- there was the Burger King loss of some of our business units.

That was second quarter.

That was second quarter. I'm sorry. The other one is in the first?

I think Nextel was the second quarter. I think most of the headline losses you're referring to, were in the second quarter. Although, we're going to pull out a piece of paper here and find something.

AOL, Altel are the ones that come to mind as well. Those are correct. That's right and...

They're all in the second quarter?

Those are in the first quarter.

They're in the first?

Right.

Okay. Great. Everything else has been answered. Thank you very much.

Thank you. Okay, we want to thank you all for being on the call. We are clearly a work in progress. Understand that fully. But are on the points that we believe will restore the company to strength and we look forward to giving you further progress in the second quarter.

I'll be available for follow-up for about an hour. My number is 212-399-8208.