Interpublic Group of Companies Inc (IPG) 2003 Q3 法說會逐字稿

Good morning, my name is Amanda and I will be your conference facilitator today. At this time, I would welcome everyone to the Interpublic Group conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw the question, press the pound key. Thank you. I would now turn the call over to Julie Tude of the Financial Relations Board.

Good morning and thank you all for participating in the Interpublic Group of Companies conference call to discuss third-quarter results. By now, you should all have received a copy this morning's press release. If anyone still needs one, you can call our office at 212-445-8473 and ask for Samantha Alfonso and we will send you one immediately following the call.

For today's call, we have David Bell, Chairman, President, and Chief Executive Officer and Chris Coughlin, Chief Operating Officer and Chief Financial Officer. This conference call will follow a standard format followed by a question-and-answer session.

Before we start, the company has asked me to remind you that forward-looking statements can obviously differ from actuality and relying on them is subject to risks. Factors that can cause forward-looking statements in this conference call and webcast to differ materially from the actual results are discussed in the company's form 10K and other periodic filings with the S.E.C.. So at this time, I'd like to turn the conference over to David Bell. Please go ahead, David.

Thank you, Julie. It's evident from our results that there's a great deal going on at Interpublic, a lot of moving parts as we move to aggressively put issues behind us, and once again, set this company on the path to sustainable growth and profitability.

However, before we dive into the details, I'll ask you to indulge me, as I remind you that on our previous calls we've been very candid concerning the obstacles this company faces in getting back to the financial performance that will give it its rightful place among the primary competitors atop this industry. Back in the spring, I clearly stated that turning this company around would not be easy. It's large, complex and requires dramatic change in corporate culture from one that focused on riding growth and buying companies to a culture focused on building companies together and creating organic growth. Beyond establishing a culture of accountability, we have talked with you about the need to improve our financial processes and to begin to change our structure. Chris Coughlin's arrival and his actions have been a major step forward in bringing focus and rigor to these important areas.

Above all, we have all acknowledged that the necessary changes would take time As I mentioned to many of you, the time required to achieve a turnaround of this magnitude is somewhere between 24 to 36 months and we continue to make progress against this time line but we're still in the early stages. Keep in mind that Interpublic's current situation is the result of actions that took place over several years. There were many acquisitions, many of which were poorly integrated into the holding company or outside our core business. Collaboration was not practiced broadly. Earn outs were often poorly managed with attendant revenue risk and loss.

The list of work to be done is long. The new management team's attention is therefore and appropriately focused on putting these issues behind us while simultaneously positioning the company and its strong agency brands for the future.

In that spirit, I'd like it move on now and begin to discuss with you some significant actions taken burg the third quarter. A number of them led to charges that you see reflected in our financial results. Chief amongst these is Octagon Worldwide where we've taken a good will impairment charge of $221 million. This pertains to the business which provides services such as sports marketing consulting, athlete representation and event marketing to our clients. The unit also develops sports programming. This is not motorsports. You will recall that motorsports is now part of Brands Hatch Motor Sports.

While Octagon was one company, it was acquired by acquiring entities in the last couple of years in the late 1990's. These acquisitions were made at the height of the market when the sports business was booming and the good will associated with them reflect the fact that Interpublic paid top dollar. What's more, the solid performance of the number of these units, up until recently, warranted a more robust valuation, which is no longer supportable.

David, maybe I can add something here. The review was part of our annual impairment test under FASB 141 and 142. Given the changing dynamics of the sports industry, we concluded that the future prospects for Octagon are still good but they could no longer support the previous carrying value of the assets.

In fact, we're talking about an estimated annual swing in profitability at Octagon, again the non motorsports business, of less than $10 million in 2003. However, the fundamental changes in this industry make the long-term outlook for this business not as robust as it was. The absolute value of this change is minor for IPG overall, but since this is a unit that reports its results separately, the change is significant enough, in relative terms, to trigger the impairment. The resulting charge is a noncash item.

Thank you, Chris. We appropriately applied the accounting impairment standard which requires writing off all of the remaining goodwill at Octagon.

As you know, we've also taken out the top management at the IPSEC group level and are actively incorporating Octagon's brands and strengths and our other entertainment assets into a powerful, new mode of disciplinary convergence offering for our clients and that can only be positive for Octagon because there is client demand for their talents and yet, Octagon remains perhaps currently perhaps the least integrated into overall Interpublic.

As to Brand Hatch Motor Sports, we're working diligently so as to be able to come to you on an upcoming call in the not-too-distant future and inform you that we have come to a determination with respect to our remaining motorsports holdings. These consist of our obligations to run the Formula One British Grand Prix and the ownership of four tracks in the United Kingdom. As we said before, we're exploring the possibility of selling the tracks and we will be hearing from interested parties later this week.

Like sports marketing, motorsports is an area Interpublic ventured into in a big way, which our competitors did not. While the impairment at Octagon Worldwide is as Chris just explained, a noncash item, the Motor Sports holdings represent a significant and ongoing cash liability for Interpublic. This is apparent from our public disclosures. We have gotten out of motorcycle racing and go-carts and we must soon come to closure and put forth a comprehensive plan regarding the remaining motor racing holdings.

A second significant charge you will notice is in the amount of $127.6 million which we anticipate to be paid principally in Interpublic's stock. Management believes the charge is appropriate at this time in connection with certain legal matters, primarily the shareholder suits related to the restatement of earnings from 1997 to 2001. In our filings, we have consistently disclosed the potential liability of these matters.

Given that we are, as David stated, trying to aggressively deal with issues and put them behind us, we feel it is correct at this time and represents a step in the right direction to quantify the potential exposure that exists as a result of these pending litigations. I would like to see us move into 2004 with as close to a blank slate as possible so that management's energy and investors visibility can best focus on the performance of our core businesses.

This brings us to the restructuring, which we announced in May and began implementing last quarter. Our progress to date has been good, and we're beginning to see cost savings take hold. While our operating margin for the quarter was obviously negative in that we posted a loss, setting aside the costs of the restructuring and the asset impairment charges we've taken, the underlying operating margin improved significantly relative to the same period last year. Chris will cover the cost savings and margins in more detail shortly.

You should know that last week we received approval from our Board of Directors to extend the restructuring program and increase the size of the program from the previously announced $200 million to a maximum of $250 million. Decisions related to the restructuring program will be made by the end of this year. The accounting effects can be expected to flow through until the middle of 2004. It also bears mention that we received amendments to our bank agreements that reflect all of the charges and expenditures detailed in our third-quarter financial results. These amendments also provide for the capacity to extend and increase the restructuring.

At this point, I'll ask Chris to fill you in on the specifics of both the restructuring and our financial results for the quarter.

Thank you, David. As many of you know, this marks my first full quarter with IPG. I would, therefore, like to preface my remarks about the quarter with some more general observations about the company and its operations. Prior to joining Interpublic, I had a great deal of experience in a number of major mulitnationals, all quite a bit larger than Interpublic, all active in as many markets around the world but none, I must admit, as complex in their organization structure. This is the most salient observation I have come to during my first three months here and that complexity is what will make this turnaround, as David indicated, a two to three-year task.

We are a company that bought literally hundreds of entities in just a few short years. Many of these were run by entrepreneurs, few with the people or systems to handle the expansion and global operations or to manage within a public company environment, particularly in this world of Sarbanes-Oxley. That is the biggest challenge we face, and that is why I have begun my tenure here by looking to get the right people, the very best people into key financial roles within the company.

We've got to upgrade the financial management across the organization. That's why I was pleased that we brought my former colleague, Bob Thompson, in as Senior Vice President of Finance. He is a first-rate financial executive. We've also changed the reporting structure of our divisional CFO's. They are aligned with IPG corporate finance, so I am in regular contact with each of them and able to evaluate and impact on their performance. We have formalized their accountability and identifying and developing talent and making replacements where necessary.

We have also formalized a role going forward in ensuring our control and reporting environment are up to the rigorous standards that every public company must live up to in today's world. Stay tuned. You can be sure that there will be more developments in the form of new faces and redeployment of talent in this critical area.

Beyond taking stock of the financial talent within the organization, I have spent the last few months immersing myself in the business and I continue to believe there are opportunities here at Interpublic to enhance shareholder value. I identified many of these at our last call. These include real estate, IT, purchasing, tax, headcount and infrastructure. And while we have made significant progress this quarter in putting a number of issues behind us, we are making progress and we are making progress on improving our infrastructure. These are still early days. Just as it is clear that our operating performance lags the industry and is clearly unacceptable given the strong brands of the company and the excellent work that they do.

Let us now turn to particulars of our performance. The third-quarter financial review has been contained in the presentation posted on the web site. Going forward, I will refer to the information contained in that presentation. Beginning on page 3 of the presentation are some highlights from the quarter. First, we closed the NFO transaction which generated $415 million of cash, securities valued at $34.5 million at the time of sale and after-tax gain of $89.1 million. We are pleased that the current value of equity has increased in July from $34.5 million to approximately $42 million. We also prepaid $142.5 million of loans to the Prudential. This resulted in a pre penalty charge of $2424.8 million. The benefit is that these were the most costly and restrictive instruments among all of our debt.

We ended the third quarter with an improved balance sheet position relative to the same period last year. Net debt decreased by over $438 million to $1.8 billion. On October 2, we filed a universal shelf registration in the amount of $1.8 billion. The company intends to be opportunistic and accessing the capital markets. Proceeds from any future transactions would be used for various corporate purposes.

David and I have already taken you through the other key developments in the quarter; The goodwill impairment charge at Octagon, the charge connected with pending legal matters, and the restructuring which I will detail in a few minutes.

Two other items bear mention. As you see from the release, we wrote down the value of certain of our investments in companies in which we own a minority interest. These charges amount to $29.7 million in the quarter and are also noncash. Further, our provision for income taxes in the quarter includes valuation allowances on certain deferred tax assets in international jurisdictions in the amount of $48.7 million.

One additional item which we do not have control over in terms of timing or process is the resolution of the pending S.E.C. investigation. The situation is status quo with no new developments to report. We continue to cooperate fully, time frame on this is clearly up to the government.

Now turning to slide five, let's review the basic numbers for the third quarter. Reported revenue increased 2.3% on a constant currency basis which removes the effects of exchange rate movement, revenue decreased by 2.4%. Adjusting out acquisitions and dispositions, we get organic revenue, which decreased by 1.7%. This continues sequential improvements from the second and first quarters of this year.

Domestically, organic revenue declined by .7%, represented a reversal in progress made in the second quarter. This decline reflects in part difficult comparables in the third quarter. For the year, domestic revenue is flat. It's worth noting that the domestic businesses, two or three of our large networks are showing signs of improvement.

Internationally, organic revenue declined by 2.9%, a significant improvement from the second quarter rate of minus 8.1%. At a regional level on a constant currency basis, we saw improvements in the third-quarter revenue performance against the first half of the year in each of the major international regions, Asia Pacific, Latin America, and Europe. Revenue performance in Asia Pacific was the strongest of the three regions, with particular strength in China and Japan.

In Europe, the UK showed improvement relative to the first half of the year. Operations on the continent, however, continue to struggle, particularly in Germany and in Italy. As I mentioned to you in our last call, we must fix our international operations. Stronger results in these markets will improve cash flow and drive down our tax rate. This again is particularly true in Europe.

Overall, while the organic revenue trend is improving, there is still a ways to go here to close the gap with our peer set. David will have more to say on that after my review of the numbers. Still looking on slide number five, you'll see that the staff costs in general expenses decreased against the same period last year by .3% and 2.4% respectively. These decreases compare favorably to a reported revenue increase of 2.3%.

On a constant currency basis, salary and related expenses were down 4.8% and office and general expenses down 7.9%, again looking against a constant currency revenue decline of 2.4%. Charges related to our restructuring program total $57.1 million, of which $9.1 million were reported in operating expenses in office and general. The impairment charges have been discussed previously.

I'll note that the difference between the $221 million in the release and the $222.7 million you see here is for capital expenditures at the Brand Hatch Motor Sports businesses that are expensed as they are incurred.

The resulting loss on a consolidated basis is 85 cents per share, of which $1.08 is from continuing operations, offset by the gain of sale of NFO by 23 cents per share. Profit and loss statements for the quarter and year are provided on slide six and seven as well as within the earnings release itself.

On slide eight and nine, we reconcile our organic growth for the quarter and the year-to-date respectively. Slide 10 provides a roll forward, documenting the change in net income from the third quarter of 2002 to the third quarter 2003. As you can see, currency continues to have a large impact. I will not spend much time on these pages as both David and I have previously covered the major causes of the change such as the asset impairment, nonoperating charges, and expenses related to the restructuring program.

Slide 11 rolls forward our results from the third quarter of 2002 to the third quarter of 2003. In the second-to live last column, you will see the organic change in revenue and operating expenses. During the third quarter, organic revenue decreased by $23.8 million or 1.7%, while organic operating expenses decreased by $71.8 million or 4.9%.

Slide 12 isolates the result of our Motor Sports holdings. While this year's third quarter improved over last year, the performance of this group continues to disproportionately hurt our results. As previously discussed, we continue to explore options relating to these obligations and operations.

Slighted 13 provides an update on the restructuring program. As previously mentioned, our total restructuring charge in the quarter was $57.1 million. That $48 million was charged to the restructuring line. As you see from the slide, combined with the second quarter, we have recorded $142.4 million in restructuring charges.

Of these, we estimate approximately $136 million will be cash, of which $56.9 million has been spent to date. Annualized savings from actions take tonight date are expected to be in the range of $140 million to $150 million. This exceeds our previous expectations that the full $200 million would be required to generate this level of savings. To date, our actions have been weighted toward severance. That will hold true for the entire program.

The quarter-end headcount in September amounted to 43,500, a decrease of almost 4,000 from September of last year. As with the second quarter, severance actions continue to be skewed toward our international operations which represent approximately 65% of the charge thus far.

Slides 14 and 15 recap or improve net debt position and our debt-to-capital ratio. The latter has been improving steadily but was negatively impacted by the large charges this quarter. However, we still show improvement relative to last year's third quarter.

Slide 16 shows our debt maturity schedule. Following the paydown of our higher cost Prudential term loans in the third quarter, our debt maturity schedule shows that we have $1.2 billion due through 2006 with the balance due in 2007 and beyond.

Slide 17 details our liquidity position. This has been an area of focus for Interpublic since David's arrival. We have made progress in strengthening the balance sheet and remain committed to continuing to strengthen our debt and liquidity positions. As you see at the end of the quarter, our available liquidity totaled $1.4 billion. Importantly, David indicated earlier that we have received amendments to our loan agreements that reflect all of the charges and developments we are outlining for you today.

Lastly, slide 18 is a schedule of future earn-out obligations. The pace of acquisitions in the late 1990's not only created organizational complexity and put a value and and put an undue weight on the people and systems at the center. It placed a very significant financial burden on Interpublic at precisely the moment this industry went into its worst recession in a half a century.

Chris, let me interject briefly here as you all know, I've been clear that our focus is on organic growth and we have abandoned the acquisition culture. By fixing operations and delivering solutions to our clients and in the bargain largely swearing off acquisitions, we have and will continue to realize the benefit of lower earn-out payment requirements.

We have provided additional detail on appendix to this presentation. You will find find tables that break down the revenue by discipline and geography for the quarter and year as well as a chart that details points of margin pressure.

As David had mentioned earlier, given the loss we have posted, we have an operating margin of a negative 12.1% for the quarter. Excluding the restructuring and long-lived assets impairment charges, we have described for you, operating margin in the quarter was 7.7%. This compares favorably with the life margin of 3.8% in the third quarter of 2002. A reconciliation of operating margin is included in the appendix to this presentation.

So, there does team to be some progress being made in the underlying operations. There's still a great deal to be done on the top and bottom lines in order to achieve our stated goal of rewarding shareholders and fighting our way back into the competitive set. Overall, our results for the quarter are clearly not acceptable. David will be speaking to some of our efforts that should have an impact on the quality of our professional product and our future revenue performance.

In terms of cost management, I will reiterate a number of points I made on last quarter's call. Our long-term real state program is taking shape. We are enhancing our IT capability while rationalizing capability are on track and will deliver savings. International operations showed some signs of picking up on the top line, we have have to plan and implement programs to eliminate and consolidate legal entities and simplify our structure internationally.

Our clients have realized that the days of scales for the sake of scale are gone forever. They have acted on that realization and now, so must we.

One last point before I turn it back over to David. On the last call we just a few weeks, just a few weeks into the job, I committed that at our year-end call in early 2004, we will come to you with a set of quantitative metrics that will provide a clearer understanding of our business and its prospects. That remains an important goal for our organization. It also accounts, in no small part, to the fact that I have focused my energies internally and haven't had the opportunity to meet with many of you. I look forward to reaching out to you in the early part of next year and providing you with an update on our turnaround.

Thank you, Chris. In closing, there are just a few more points that need to be covered. They are the two priorities in which I've taken the lead role. First organic growth, and second, the kind of acquisitions that have positive effects on the business. That is the acquisition of people in top-level organizations.

The acquisition have been aggressive and the news in both is quite good. Our organic growth initiative was launched in August, and the results are encouraging. We encourage not only collaboration across Interpublic companies but within networks and across geography.

Culture change is not easy or quick. We're trying to go from being a collection of companies to being able to connect to companies for client benefit. Clients want this. Search consultants are looking for it every day.

In the short time we've been added the response from within the organization has actually been electric. Under Kevin Allen's leadership we have over 50 collaboration initiatives and the operating growth initiative supplementary incentive system that may involve 22 companies from the largest global networks to single office specialist operations. We've got people at mid levels referring clients, finding new opportunities to provide solutions to existing clients and pitching conquest opportunities together.

All told, more than 300 individuals within these Interpublic companies have participated in projects geared at collaboration and growth and so farm the annualized revenue from these projects just since we launched in August is in the range of $25 million to $30 million.

In the past few months, we held the first Interpublic senior management conference in many years. The topic was growth. We followed with a growth summit in which over 150 business development people from across the organization got together to work on changing the way we work, improving our knowledge and growing our businesses together. Later that week, the world group will bring its top people together at a meeting they hold every five years to plot the company's future. The topic, you guessed it, growth.

A few weeks ago, I in was Chicago and Los Angeles, cities in which Interpublic growth gains, organic movements of people in our companies are being spontaneously formed, starting to meet the changing leads, putting together prospect lists and developing ideas that can be taken to each other's clients to help them. The fires of positive cultural change are started and are beginning to burn. As with all development, these things take time to become institutionized. We're working with the center to get them connected and to give them tools and data, provide support and training modules and make introductions with clients and search consultants.

But the early returns are outstanding. There is a real hunger throughout the organization to be parts of it. People realize that it's no longer enough simply to align clients within individual companies, we need to deliver solutions to their needs by aligning those needs across our companies. That's how we will evolve from being a holding company to adding real value that benefits all of our constituents.

Third quarter was solid in terms of new business primarily that we had strong performance in terms of client retention. Headline wins included KFC, Santa Fe, France Telecom, Orange, Monster, Cadbury Shweppes, Pfizer and the American Association of Retired People. In the fourth quarter, we're off to an excellent start with the Quizno's win, Separate Core and Best Western

In.the talent arena, we've also been very active. In our last call, I told you a number of key appointments in Europe and New York. Since then we worked with Rupert Howell, we just brought on in the UK and we have snagged Robert Campbell, one of Europe's top creative talents and Richard Price, a world-class financial executive to join him. Not to mention Ramesh Rajan who I think will be a huge addition to John Duner's senior worldwide team.

FCB, or Foot, Corn and Belding which had upgraded the creative leadership at a couple of its U.S. offices has done so in all of them. And Lowe has new high-profile CEO leaders in the United kingdom and France. Chris has brought Bob Thompson on board and there should be more financial firepower joining us in the coming months. And I am meeting along with Brian Brooks, the top people in our industry each and every week, virtually all of them like the idea of joining us to be change agents. They want to be part of the next couple of years here at Interpublic.

The results we're sharing with you today bears this out. They're messy, yes but we are being zealous in addressing issues and putting behind us, we're being direct in identifying them and we are committed to transparency and disclosure. We are implementing our restructuring and seeing improvement in our underlying operations. Organic growth is far from where it should be and will be but the recent trend shows improvement in our collaborative efforts are picking up steam. We've upgraded senior management at a number of our companies and will continue to do so as required.

As Chris stated, we're acting with urgency to resolve as many of our problems and one-offs as quickly as possible with an eye to moving into 2004 focused solely on providing our clients with excellent content and distribution and on delivering on improved financial performance as a result. Now, we would like to open the floor to your questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause to compile the roster. The first question from Jason Helfstein with CIBC World Markets. Jason?

Thanks. A few questions. First on the revenue side, I think particularly on the U.S. side, the organic revenue growth was maybe a little bit disappointing. I don't know if you can talk to whether it was more advertising media or marketing in communications as far as where perhaps that weakness may be, just some further color there.

Secondly, on the costs color you gave, the minus 4.8% for salary and minus 8% for office in general, is that adjusted for NFO? Could you give us those numbers? And then lastly, I think, related to the Motor Sports business, there is a $2 million impairment in the current quarter. I think that's consistent with the 11 impairment of the last quarter. With impairment charges on that side of the business on the Motor Sports business, thanks.

Thanks, Jason. Let me give you a little context on the revenue. Then I'll ask Chris to deal with the cost side, as well as the impairment issues. We believe the trend in organic revenue overall will be positive. We've seen that. We've said that quarter to quarter there may be variance this their work, clearly in the U.S. organic revenue with the third quarter versus previous. We see no reason why the overall trend of positives shouldn't continue. That was due as we indicated to some tough comparables in the prior year but it was also due primarily to the nontraditional services as opposed to the traditional .

Jason, your question on the side, numbers we gave you do exclude NFO. It's an apples-to-apples comparison. On Motor Sports, are you correct, $2 million and the $11 million a quarter ago relate to capital expenditures that we make within our Brand Hatch Motor Sports operations. We have the impairment that we previously disclosed as we make capital expenditures, we write them off immediately rather than capitalizing them.

I mean, going forward, that business would normally have a typical annual cap ex run rate so this year becomes the run rate until you sell it. Is that fair? FX?

Well, there's two pieces to the cap ex. One is the capital expenditures related to the four tracks which we are evaluating our options to sell that. The other to Silverstone where we have commitments under a master plan.

Uh-huh. And I mean, would you consider just writing those things down to essentially to zero, a net realizable value so you didn't take a charge on ongoing operations?

We can't actually take a charge until we actually expend the funds to make the improvements. So in effect, we do that on a cash basis which is the appropriate accounting.

Uh-huh. Okay. So otherwise, except for the cap ex, though, the rest of the assets have been written down, is that correct?

Yes, they are, we've written down all the assets within the Brant Hatch Motor Sports and on Octagon which is the non motorsports, that, all our goodwill is now gone.

Okay. Last question for you, Chris. You made a comment about the need to upgrade the financial systems and can you just give us some idea of how far along the way are you with that process?

Well, again, I've been here just over a quarter. So I'd say we're still at the early stages. We are making changes as quickly as we can in identifying accountability, designing responsibilities, and then putting the right people in the right positions. I think you'll be seeing a significant amount of change as we get into the fourth quarter and set ourselves for 2004.

Thank you.

Your next question comes from Joe Stauff with SoundView.

Thank you. Good morning. Two clarifications, then I have a couple of questions. One, with respect to the restructuring program, you're increasing it to 250 from previously 200. Taking about 167 to date, you have about 80 to go, I mean, where in particular, where is the incremental $50 million? Where will it apply in general, I guess is my question?

And then with respect to the Octagon unit and Branch Hatch, the Octagon unit, you look at this as more of a, you know, as part of your portfolio going forward versus Brand Hatch, correct?

We'll take that in two parts. Chris will answer the first one. Then I'll answer the portfolio question.

Yes. On the restructuring, we have moved aggressively in areas that I discussed on the last call such as our long-term real estate plan. So one of the areas that we're moving a little bit more aggressively than we probably first anticipated was the consolidation of some of our real estate.

Additionally, again, in trying to align our international businesses more in terms of in line with the revenue and looking at some of our overhead costs, we are focused more aggressively there to get our international results to a more profitable level. David will talk about Octagon and Brands Hatch.

One of the things we see in the industry is a growing convergence between what we'll call broadly entertainment and branding and entertainment with the traditional components of Hollywood and television, et cetera., as well as sports.

Octagon has many clients that it is consulting with and working with in this arena very successfully. Octagon has not been connected as well as it need to be to the rest of Interpublic and there is a need for that, there's a desire for it, and clients want it. We're working very aggressively on this convergence area. Octagon is a full participant in that and an important part of. It and we see that capability as important to our future.

Okay. Makes sense. Two follow ups actually. Can you just provide a rundown in terms of where McCann-Ericson are, where you are in the process in terms of your turnaround efforts there. Specific to McCann-Ericson and, you know, in particular, where is Duner spending the bulk of his time, I guess? Second question, can you comment on net new business? It was a huge sequential ramp this quarter. To provide commentary as to how we think about that trajectory going forward. Thank you.

Okay. We'll take the McCann-Ericson issue really in two parts. Let me first comment on John's actions. Then I'll let Chris kind of comment as we move forward on the financial side.

John has moved very aggressively in at McCann to restore it to the kind of historic profitability that it's been used to. McCann's revenue, McCann's win rate, McCann's capability has continued virtually undiminished. There were costs in the system and other issues that needed addressing, as well as some needs for incremental talent and John and his team have been the most aggressive in Interpublic in going after that working with Interpublic.

We think from our standpoint that it is progressing normally. We think there's big upside that will be achieved. I don't think it's progressing as fast as John thought it would progress, but clearly the amount of energy and time that is being put into it as well as talent is extraordinary.

Yeah, I'll also comment, again, McCann is a very large and very complex organization and I think what we're spending quite a bit of time on within McCann and John and his team again is on the international side. Where we're going aggressive in taking out costs, realigning the operations there. We're also as a part of our turnaround implementing additional financial controls and reporting controls within that unit which should help us on a going-forward basis.

One of the things John has done internationally which is important is eliminated the nonclient-basing infrastructure and helped the disciplined companies that are an important part of World Group come in closer to the mother ship of McCann-Ericson, which has both cost and delivery implications.

Want to comment on the net new business, David?

Yes, on the net new business, obviously, you know, those numbers are numbers that we draw from published sources, so as you know, they're non-GAAP kind of sources. The published sources indicate that we've been quite strong at $857 million.

Importantly on that has to do with the fact that our retention rate was dramatically up. There were clearly some significant and meaningful wins in terms of size and profile, as well as large numbers of them but as we indicated last quarter, there were three big losses that made that net new business number die. We suggested we thought that was an aberration and this quarter verifies that.

Very helpful, thanks.

Your next question comes from Michael Russell with Morgan Stanley.

Thank you. I was trying to understand the headcount and salaries relationship. It was helpful, Chris, you mentioned the headcount number and it would be good to have that as a metric you keep going back to. Seeing the headcount down 8% from a year ago but the salary line being flat or the organic operating expenses down almost 5%. How should we look at the relationships, since this is such a people-intensive business. I imagine 8% headcount reduction would show up as 8% reduction in some of the line items?

Yes. Thank you, Michael. Part of that is just the result of timing of when people exited during the year. We became much more aggressive as we got into third quarter in the number of people that left the company. I think as we get into the fourth quarter and particularly as we get into early next year, you'll be seeing a much more significant impact on the compensation line.

And is it going to be your practice to exclude severance from operating expenses because I know that they include it, and as we compare margins to them, it's important to know where there are differences?

No, on a going-forward basis, we will include severance in our normal operating expenses.

And which line would it go into, the salaries and related or would it go into office in general?

It goes into salaries and related.

Okay. And, okay, that's helpful. Then the 25% increase in restructuring charges, I want to be clear. Going from 200 to 250 because you're more aggressive on the long-term real estate and the international overhead costs are tighter. What's the difference in the cost savings? I wasn't sure if I was clear. Are you giving the same cost savings benefits as you had before, or is that conservative? Give us an idea of?

We've given a cost estimate of a savings estimate on the actions taken to date. Again, as we move up, we would expect some additional cost savings some of those will be a longer payback than the ones we've taken to date as the real estate changes take a longer period of time than do the severance.

Is there sort of return on investment that you're looking for for a restructuring charge? I mean, if for some point you were to say the restructuring charges were 225 or 275, as you kind of work through the process some more, just wondering how for modeling purposes and just for understanding purposes, how do you think the return on investment of a restructuring charge? What are you looking for?

Well, again, I think as you can see from the estimated savings that we're anticipating based on the charge and the cash that's going out, I think we're getting a very significant return on that investment. Again, within any period, it's going to change based upon the mix. Again, I think the piece that we have not yet quantified for you will not have quite the return that the piece you've seen. But it will still have a very, very high rate of return.

Okay. Then last question, haven't been able to calculate it with all of the charges this time around. Your tax rate has been higher than it has been historically. Higher than your industry peers. Clearly, that sales to be an area for, you know, the new CFO as are you to go in and make changes. Over what time frame should we see the tax rate start to come down? What's it linked to?

Yeah, the tax rate, again, is a very difficult thing to analyze here because of the number and extent of the charges that we have incurred. Our tax rate will come down dramatically as the operations improve and our profitability improves, particularly outside the United States. So as we see again as you know, we have had some significant issues and profitability outside the U.S. As those return to profitability, as we get into '04 and clearly into '05, you'll see a significant reduction in our tax rate.

We were also pleased to see outside the U.S. the improvement in the organic revenue line, which should make that margin improvement thing easier going forward.

So does it seem fair to say that maybe in the second half of next year, more normal tax rate would be achievable? Is that an appropriate time frame?

Yeah, again, we'll give some more information regarding that as we get into early '04. But suffice it to say as the international operations turn around, we will get significant benefit on the tax line going forward.

Okay. Thank you very much for your response.

Your next question comes from Lauren Fine from Merrill Lynch.

Thank you. A couple of questions for you. One, I'm curious if the shelf registration statement has actually gone effective. Secondly, I guess I'm still not sure I understand domestically why the organic growth rate took a step backwards while it was, you know, a tough comparison in that the organic decline in the year-ago third quarter was less than the second quarter a year ago organic decline. It was still from my point of view a relatively easy comparison. I guess if you could drill into maybe individual businesses like public relations or any other businesses that might have had a change sequentially that caused a step backwards? Third, I'm curious on the Coke media buying, if there's been any news there and if that is a loss you've already taken into account?

Then finally, I want to come back and understand more on your assessment of the lawsuit. We can address that after you've answered the first three.

Okay. Let's talk first about the organic revenue line and let me suggest where the revenue decline is occurring principally is in the nontraditional services and the below-the-line services more than the above-the-line services. So, that's the area where we have seen the decline. I think context for that is that we don't believe that that's a giant step backward. We think it's a corridor where it hasn't gone in the right direction. We think the firming economy as well as our collaborative growth efforts will impact that intensely in the future.

On the Coke media piece, as you know, Universal McCann has the media buying portion, which is substantially smaller than the planning portion that our competitor has and they're seeking to consolidate it. We have not had any kind of specific word, but we believe that it's imminent. The amount for us is substantially less than our competitors in a loss situation and substantially more in a win situation.

My comment, as well, Lauren, on the subject of Coca-Cola because there have been some press comments relative to a couple of losses and as we work with Coca-Cola in their moves to a new global go-to-market strategy, we may play a lesser role in some markets but overall, McCann-Ericson will significantly increase its creative and coordination responsibilities for main thrust Coke at creativity on a worldwide basis and that's something they're working with and have actually won some in a number of markets, are pitching for more business, et cetera. So. I wanted to give you that context. You can come back on the lawsuit question if you'd like.

First --

Let me --

First --

Let me first I'll comment, Lauren, on the shelf registration. We have not yet requested effectiveness. However, the S.E.C. had no comments on the shelf. We can request effectiveness at any time.

What does that mean? Why wouldn't you want it effective?

We will again, when we plan to access the markets is when we would go with effective and we haven't yet made that determination.

Okay. And I guess then the question on the lawsuit is, I'm -- if you can give us any parameters for how you determined the dollar amount and I'm not familiar with how these thing usually get resolved but I was surprised to see it, that you were doing it as a soft charge.

Let me comment, Lauren, on the accounting. We believe that during the quarter we could come to a reasonable estimate of what the liability would be against the various pending suits that we have. And we felt it then inappropriate to record a reserve against those. Other than that, we really can't comment on the suit specifically.

But again, using, as I understood it, using shares, I guess that's the piece -- if there's any comment you can -- the fact that you're paying it in stock. I just, is that something where you know that there would be an acceptance on the part of the people filing the suit to do that?

We really can't comment anymore. Again, we've said we believe that the bulk, primarily it will be settled in stock doesn't mean all of it will be settled in stock.

Okay. Great. Thanks.

Your next question comes from Alexia Quadrani with Bear Stearns.

Good morning. Following up, David on your comments about your relationship with Coca-Cola, could you comment to the extent you can on your comfort level or their stability with IPG's relationship with their maybe top five or 10 clients. Specifically there's been rumors in the press about instability with your relationship with SC Johnson?

Had to do with the intercompany discussions between FCB and Initiative Media and most of those discussions actually are in the past, as opposed to an SC Johnson issue. You know, as we've indicated before and I certainly would indicate to you now, on lots of fronts, the relationships are in very strong positions. As is the case in any kind of situations, there are ups and downs. There have been, for example, recent nice wins at Webber Shanwick from Unilever and Nestle. And I can tell you, for example on General Motors that at the "all important" new Chevrolet launch at the dealer meeting, it was wildly received, and we're very happy about that kind of activity. I think that the relationships continue strong with ups and downs, you know, on all sides but overall, we're feeling confident.

And then outside of the sports marketing business, are there other assets you're considering selling or closing that you haven't discussed?

We have not had any current plans to do any dispositions but we're constantly looking at the strength of our portfolio and ways of strengthening it. For example, we announced a merger between Suisse, Miller, and Daly last week we've looked at internal possibilities that make our go-to-market strategy stronger. We'll continue that over time. As of now, we have no plans for further disposition.

And just one last question on the professional fees. We know that it seems you've done a fair amount of, at least Chris being in for a full quarter has had time to look at a lot of the issues that have been plaguing the company. Do you expect the professional fees to maybe drop off a little bit going forward or should we expect them to be at these levels for the next few quarters?

I would expect the drop off but I would not expect a very significant drop off in the near-term quarters. So I think as we go through obviously Sarbanes-Oxley, the work that needs to be done on the 404 certifications, additional work on our pending legal matters, that that will continue for the next few quarters.

Okay. Thank you .

Your next question comes from Peter Appert with Goldman Sachs.

Hi, good morning. Two questions. One, I was hoping you might give us color in terms of any feedback you're hearing from clients in terms of budget, spending plans going into the fourth quarter in the early part of next year. Then secondly, also wondering, do you see at this point any push back from clients in tomorrows of fee structure and specifically as you compete to win new business, did the clients use your financial situation against you from a negotiating standpoint? Thanks.

Okay. In answer to the first question, I think that overall the environment seems to be firming and we feel quite positive about that. We're not declaring victory, but clearly is far better than it's been in previous quarters. We're feeling that there is the possibility for strength in '04. I think any time there is a cost-cutting focus amongst clients as the recession produces, there is always pressure on margins and this has been no exception. I think we've had no extraordinary push back from our clients relative to some of the issues that we've gone through.

I think we're focusing instead on finding ways to do business in new ways that make the value and the things that we deliver to our clients better and the costs less and that's the focus on some of the things Chris talked about in terms of infrastructure and other things that we're putting in place. So I think the issue for the industry is an issue of making certain that our clients understand the real value that our businesses bring in temperatures of driving top-line revenue and creating brand value more than simply the squeeze issue.

Uh-huh. Any thoughts in terms of client focus on marketing budgets for advertising budgets, promotion, et cetera., and how that impacts your business here on the near-term basis?

Well, as you know, the majority of our revenue tends to be fee driven, as opposed to commission driven. What normally happens in an expansion and we believe that we'll see it some going forward, is that projects get put back on the table, projects get created the need for new content is there, all of which can have a positive impact on fees. And the media side of the business, as spending loosens, that also has impact, but in our media business, although we're large relatively, it's not overall that significant.

Uh-huh. Okay. Thank you.

You're next question comes from Fred Searby from J.P. Morgan.

Good morning.

Good morning, Fred.

Thank you. Just a couple quick questions. One, can you give us some sense if you take out, if you strip out the kind of extraordinary professional fees and normalize what it should be on a run-rate basis. Are you expecting to be free cash-flow positive this year before working capital changes? And then secondly, I mean, this has sort of been touched upon but does the shelf registration mean that going forward you would prefer to tap the capital markets as opposed to divest assets?

I'm sorry, Fred, I didn't hear the second part of the question.

Well, I mean from a strategic, if you're shifting gears here from divesting assets and after we kind of get through Brant Hatch and Octagon those divesters, if you plan on you prefer to tap the capital markets over in lieu of selling more assets?

Okay. Let me talk about the first one in terms of cash flow. When we look at the cash flow, we have a number of items this year which include the restructuring. We have NFO which generated a lot of cash. So, again, I see that this business on an ongoing basis operationally should certainly be quite cash flow positive.

So in a core run rate if you strip out the divestitures, the extraordinary, what you deem as kind of normalized severance in a normal world and professional fees and sort of you think you're going to be cash-flow positive this year.

Yes, absolutely.

And then the second question --

The second question is, as David said, we don't right now as well have plans for significant divestitures in order to raise capital. We believe that again on a run-rate basis, this business is cash-flow positive. We believe that the actions that we're taking in terms of restructuring will generate additional revenues and cash flows. We will get the benefit from our reduced tax rate. So again, I don't see that our major source of getting capital will be the disposition of businesses but we will be, as we said, opportunistic in looking at capital markets as we look into '04 and '05.

Finally, just on incentive comp, I know that's been obviously lower. Can you give us where you stand in terms of 2003, in terms of bonus accruals?

We don't discuss the details of the bonus accruals. I will say obviously with the results that we have, we're not looking based on historical rates that we would be seeing very large amounts in that area.

We've previously disclosed that we are work with the the comp committee to put in a system that will help us address the specific issues of margin and organic growth and that's something that we're working on currently.

Okay, thank you .

We have now reached the allotted time for questions. Are there any further closing remarks?

No, we'd just like to thank you for listening to our work in progress. We believe we are making progress. It clearly is messy but the management team is very committed to driving through these issues and to restoring this company to the top of the class. Thank you .

This concludes today's conference call. You may now disconnect.