Interpublic Group of Companies Inc (IPG) 2003 Q4 法說會逐字稿

I would like to thank you all for holding and welcome to your conference call today with your Chairperson, Julie Tu. I would just like to remind everyone that your conference call is being recorded, today and also you will be in a listen-only mode throughout most of the conference until we open the lines for questions. At that time I will let you know what to do to ask a question. Ms. Tu, I will go ahead and turn the call over to you at this time. And thank you for using Sprint Conferencing Service.

Good morning and thank you all for participating in Interpublic Group of Companies conference call to discuss fourth quarter results. By now you should all have received a copy of 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 and Chief Executive Officer, and Chris Coughlin, Chief Operating Officer and Chief Financial Officer. This conference call will begin with comments by management to be followed by a question and answer session. We plan to complete the call by market open at 9:30 eastern time.

Before we start the company has asked me to refer you to the Safe Harbor language in the press release and to remind you that this call may contain forward-looking statements. Actual results can obviously differ and relying on these forward-looking statements is subject to risk. Factors that can cause forward-looking statements in this conference call and webcast to differ materially from the actual results are discussed on the company's Form 10(K) and other periodic filings of the SEC. The company would also like me to point out that the discussion of earnings per share excluding the impact of restructuring and integration expenses is a non GAAP financial measure.

In managing its business the company evaluates the results of operations from core operations excluding costs associated with business acquisitions, facility consolidations and other non-recurring events. In the company's written press release which is accessible on its Internet sight at www.interpublic.com the company has provided a detailed reconciliation of GAAP net income with net income excluding the impact of restructuring and integration expenses, as well as additional details about the restructuring and integration expenses and a statement explaining why management believes this non GAAP financial measure is useful to investors. So at this time I would like to turn the conference over to David Bell. Please go ahead, David.

Thank you, Julie. Good morning and thank you all for joining us as we review Interpublic's fourth quarter and the full year 2003 results. And importantly as we describe for you the status of our turnaround progress. The outline of this call is familiar to those of you who have been following this company. Interpublic's fundamental problems, clearly evident when I took the helm here almost a year ago, were reflective the past business actions. The acquisition culture of the late 90s left behind a complex, over leveraged, poorly integrated company with the need for a new mission and greater accountability.

We consistently pledged to you that we would move with speed to systematically work through and resolve Interpublic's outstanding issues and we have done so. But we've also been clear about the time frame. We are now six months into a 24 to 36 month turnaround plan. We said that you would see quarterly progress in putting issues behind us while simultaneously positioning the company for the future. I believe that we also noted that the process would not be a linear one.

As we move forward rapidly there will no doubt be stutter steps as there are in any evolutionary process but progress overall will be visible. As we look at our results for the fourth quarter the validity of these assessments can be seen. We see considerable evidence of continued progress in our turnaround. There are, as well, signs of the vague recent fluctuations one would expect as this new management team works to change and in some cases reinvent an organization as large and complex as Interpublic.

Once again the quarter saw us retire a number of overhang issues such as the resolution of the shareholder suits and the sale of the Brands Hatch Tracks. We also disposed of certain nonstrategic equity holdings. The equity offerings we completed at year end were extremely successful. As you will see from Chris' presentation the financial condition of Interpublic is today stronger than at any time in many years. Concerns about liquidity and debt that swirled around us as recently as six months ago have largely been put to rest. Today Interpublic has one of the healthiest balance sheets in the sector. Another highlight from the quarter is the significant improvement in our margins.

When we first announced our restructuring program a few quarters back I said that I wanted to see run rate margins making major improvements by the end of 2003. That process is clearly underway. Chris will take us through the specifics shortly but I'd caution that we cannot be sure that we'll see such dramatic improvements every quarter. This is in part due to the cyclical nature of the business and to the strength Interpublic traditionally experiences in the fourth quarter. However, it is clear that Chris, Bob Thompson and the team from the business units have been doing yeomen's work and that their efforts have resulted in notable early success in the implementation of our restructuring program.

There is still much to be done in terms of improving our margins and greater discipline is required within a number of our operating units but I'm encouraged by our progress in this area. A third headline that bears mention is organic growth. For the third consecutive quarter we posted a sequential improvement in this key indicator. I am very pleased with our collaboration initiative which I've described for you in detail on past calls. This collaboration in organic growth initiative continues to pick up steam. More on that in a few minutes.

I'm also generally pleased with the competitive vitality of our brands. It's a credit to their reputations, their go-to-market propositions that we won considerable new business in the quarter. We also held our own in head to head pitches against our major competitors. Regrettably a number of our company's didn't perform as well on the client retention front and this dragged down our overall organic revenue performance this quarter. With so many legacy issues behind us now I am making it an IPG priority for us to work more actively with operating unit management focusing on client retention.

I also believe we continue to be penalized by the disproportionate number of acquisitions Interpublic made in the late '90s. So many of these were just not integrated into the fabric of the larger group. So many deals had either poorly designed or poorly managed earn-outs and there has been considerable revenue loss as these earn-outs lapsed and these companies languished. And we've shuttered many failing operations particularly project based marketing services businesses. While this will and has helped our margins it has adversely affected our revenue picture. The charges you see in the quarter all relate to important turnaround actions. Some stem from the restructuring.

Others have to do with the Brands Hatch racetrack sale. As you heard on last quarter's call we recently aligned our operating CFOs with corporate finance, a first for Interpublic. Chris and his now extended team have been focusing significant resources on improving the company's control environment. That essentially means we are shining a set of halogen lights into every corner of this huge organization. Chris will take us through the impairment charges in the quarter. We are zealous in this area which is our obligation.

Before turning it over to Chris I'd like to briefly review for you the state of our various companies, some key developments that will impact on our future and to give you a sense of the status of the cultural changes we are working to drive throughout the organization. The single most important development within our operating units is that the changes we've been making within the McCann World Group are beginning to bear fruit. John Dooner has actively changed out the leadership in a number of key regions and recruited additional top talent into his organization. He brought Joe McGee into MRM. And Joe played a key role in the huge MRM win at Microsoft.

Remesh Rajan(ph) and Dick Sneeder are helping get the financial organization at McCann in shape and working with Chris to upgrade financial management across the World Group. This past quarter we saw revenue recovery at McCann which is very encouraging and should lead to continuing growth and profitability. As you know Lowe is going through a difficult patch. But I am pleased with the progress the new team made in improving their margins in 2003 and in organizing themselves for change. Of particular note is Lowe London's Vauxhall Tea Grow win under the new leadership of Matthew Ball.

Lowe today are focused on growth and are partnering with Interpublic and IPG companies more than at any time in their history. However, reversing the revenue decline at Lowe, which has had no real new business program, will take sometime. SCBS struggled to maintain its margins in the face of difficult conditions internationally. Draft has been quite successful in the U.S. this year but its international operations acquired in the late 90s are struggling. Initiative Media has generally been the opposite with strong international operations and a weaker United States. I think the recent successful defense of the huge AOL media account may prove an important watershed and a proof point for the actions they are taking domestically.

They are also in the finals of the American Express media competition and I was very impressed with the insights they've developed on the future of media for that prospective client. The major independent, Campbell Ewald, Hill Holiday, Deutsche, Carmichael Lynch, the Martin Agency, Gotham continue to fire on all cylinders. Terrific leadership, differentiated product offerings and very disciplined business practices characterize them. Within CMG, the marketing services agencies continue to fight declining revenue. As I mentioned earlier some of this is planned as we close money losing operations but we do still lag our peers growth in identity and public relations. We are doing a good job on the cost side and on integration at CMG and I am seeing excellent collaboration among those companies.

Being part of a disciplined village has without a doubt helped both our major PR brands. Recent wins, such as the Viagra at Weber Shandwick, show that they are picking up momentum and their peer awards show the strength of their offering. To my mind there are a number of areas that should drive significant growth in our business in the years to come and Interpublic is well-positioned in these areas. First clients will increasingly reward accountability. Determining the return on investment on the marketing programs we create will be vital for future success. McCann Erickson's demand change management and fusion 5.0 processes are among the best in the business.

Draft is also a leader in the signs of quantifying results generated by communications. With FCBs database models and initiatives consulting arm both making significant strides. Another key area for the future is the Internet which has once again begun to show signs of robust growth. I think the Web will continue to increase in importance to our clients. We are fortunate to have R/GA, which was recently named interactive agency of the year for the second year in the past three. They are doing terrific work for clients such as Banc of America and Nike. Take a look at R/GA's Nike work.

You will see how the Web is evolving from a transactional medium to one that creates real brand experiences. Another terrific example is the brand power of [inaudible] agency recently did with General Motors which won J.D. Powers recognition as best automotive site. Of course we've been hearing for years that the era of thirty-second supremacy was coming to an end and that prediction is finally coming true. Clients want in on proprietary properties such as the opening, closing ceremonies of the Olympic games which Jack Morton is producing, or the recent major concerts produced by Momenta, one featuring Dave Matthews for AOL and the other with Sting for AMEX.

Clients understand there is great potential in harnessing the power of sports and entertainment on behalf of their brands. The programming successes of our MAGNA entertainment units are hard to match. You've all heard of the restaurant and the Emmy award-winning show The Doors developer Johnson and Johnson. Just last week Bill Sell and his group added two talented new veterans of the entertainment industry to the successful programming team at MAGNA and they recently signed several new projects.

None of our competitors have as strong an array of sports and entertainment marketing resources as Interpublic. As we continue to extricate ourselves from venue ownership and other nonstrategic sports properties, our sports and entertainment assets can be aligned for maximal impact and our companies are working that plan as we speak. One last key trend that bears noting. As holding companies increasingly become brand and as I have the chance to participate in consolidation opportunities such as Banc of America or the current HSBC competition, I become more convinced that the changing culture here at Interpublic coupled with the breadth of our resources bode well for our growth and our future in holding company consolidations.

The turn around here at Interpublic is a journey. We've accomplished a great deal in a limited time. The cultural changes we must achieve are underway. In finance where Chris is more connected now to the operating units CFOs and CEOs than any of his predecessors, they've made great progress in areas such as restructuring and real estate with other opportunities such as shared services, IT and procurement still largely ahead of us. Collaboration is most evident in the organic growth initiative which was launched in August. It generated approximately 50 projects in the third quarter and another 50 in the fourth.

The aggregate organic revenue connected to these projects is already in the 50 million range but more important than the revenue is the fact that behavior is changing. Last week I heard tell that one of our major competitors has begun to recruit for a collaboration and growth officer who's charge will be to work with companies to encourage sharing of knowledge, best practices and working together. As they say, imitation is the most sincere form of flattery. I've also seen collaboration as the heads of our major companies seek to co-locate in many developing markets where making money can be quite difficult. Others are referring or sharing clients.

Our event marketing companies came together a few weeks back to compare notes and best practices and they will now jointly develop a resource database so as to be able to share information and jointly book the top local subcontractors and creative talent in their sector. This should have cost benefits as well as to insure that everyone of our event company's product moves toward best in class. There are many such examples I could point to just as there are still many top people who see opportunity in joining Interpublic. Last week we added a great talent in the branding field. John Louis Demu(ph), who leaves his post as head of Europe for WPP's Landor to become worldwide CEO of Future Brand.

FCB pulled Lynn Side out of OmniComp's BBDO to head their New York office, put a new top team in place in their Southern California office and elevated Scott Hollingsworth to head Europe in place of the retiring Harry Reed. CMG hired back Tim Sutton to head Europe which we believe promises growth. And here at Interpublic we announced the arrival of Stephen Gatfield as Executive Vice President Global Operations and Innovation. Steve is a remarkable talent who has run great creative agencies, at Publicis's agency Leo Burnett, was an immensely successful region head and has experience in Asia, Europe and the United States.

He's a rare asset and will work with both me and Chris to accelerate the pace of many key turnaround activities, particularly international. As you may have noticed I've not made specific mention of the five strategic priorities that we consistently communicated to you during the first year of my tenure and that's because we've effectively achieved our balance sheet objectives, made strong starts against the mandates for improved financial reliability and margin improvement and, of course, will always be accountable for our clients for getting the best talent to work on their business and to know our shareholders for organic growth. As I see it the first phase of the turnaround is drawing to a close. We've come through a rocky period, achieved a stabilization of the company.

We must now work to differentiate ourselves and move into a period of growth. We will continue to refine and add to our list of priorities which we look forward to communicating to you as well as to all of our employees and other constituencies. With that I turn things over to my partner and Interpublic's Chief Operating and Chief Financial Officer, Chris Coughlin. Thank you, David.

As you have all heard and seen from our results the fourth quarter continued to reflect the impact of our turn around efforts. As David indicated we have just about completed the first phase of the turnaround and are now moving into a period during which we must focus our offering and begin to build toward a successful future. You will see that we have posted a presentation deck on our website in conjunction with the earnings release.

During my comments today I will refer to certain information contained in that presentation. So let me start with slide number 4 which contains highlights from the quarter. Organic revenue, while declining 1.1%, showed sequential improvement as it has in the last three quarters of 2003. This is good news but we must stay focused on closing the growth gap with our key competitors. The biggest highlight of the quarter, however, was our margin performance.

Aided by the restructuring program and other cost containment actions, operating margin grew by 250 basis points to 9.2% on a reported basis over the same quarter of last year. This margin includes the impact of the restructuring and impairment charges. When we exclude those charges in both periods, charges that vary significantly from year to year, our fourth quarter operating margin was 14.3%, almost double the level of 2002's fourth quarter of 7.2%. Clearly our cost initiatives are taking hold. This improvement reflects the improved coordination and cooperation among the operating unit heads, their financial teams and the corporate finance team.

We previously announced our restructuring program would approximate $250 million with accounting effects running through our P&L through mid 2004. For the year 2003 we recorded $176.5 million of charges and we expect approximately 170 to $180 million in gross annualized savings from actions taken to date, a portion of those savings were realized in 2003. We have also made significant strides in the fourth quarter in shoring up our balance sheet. We raised $693 million in net proceeds through our common stock and mandatory convertible preferred offering. The offering was a huge success and in January of this year we redeemed our convertible debt that was due to mature in September of 2004. Further we disposed of nonstrategic equity positions in Motor Media and Taylor Nelson Sofres raising net proceeds of $99 million.

The clearest evidence of our improved financial condition is our net debt position. As was December 31, 2003, our net debt stood at $469 million, down over $1.2 billion from the same date in 2002. Cash and equivalents at the end of the year were $2 billion, more than twice the amount at the end of 2002. We are extremely pleased with the progress we've made on the balance sheet. We believe these actions coupled with improved future operating performance are important steps in strengthening our credit ratings. Slide 5 provides information on the resolution of two important overhang issues that David mentioned in his remarks.

The first is a proposed settlement of the shareholder class action lawsuits. We have reached a tentative settlement with the plaintiff's attorney to issue 6.6 million shares plus pay $20 million in cash. This was provided for in our third quarter results. Procedurally we are waiting for the class to be notified and then final approval by the court. If the settlement is consummated as expected all pending shareholder suits will be resolved. In January we announced the sale of our four Brands Hatch racetracks in the U.K.

The sale generated approximately $26 million for an asset that had been posting operating and cash flow losses. In connection with this disposal we recorded a non-cash write down of $38 million in the fourth quarter. We have therefore succeeded in selling go carting, motorcycle racing and now four auto racing tracks. This leaves only the Silverstone lease contracts and our commitments connected to the British Grand Prix which run through 2015. As we have stated previously it is our intention to exit motorsports entirely and significant progress was made in this regard in 2003.

With respect to the SEC investigation that began in January of 2003 we continue to cooperate fully with the authorities but have no new news or developments to report to you at this time. Moving to slide 7, on a reported basis salary and related expenses were up 3.6% while revenue increased 5.7%. On a constant currency basis salary and related expenses were down 1.5% on a revenue decrease of 1.1%. Office and general expenses were down 10.6%, again, on a reported basis, and down 15.6 in constant currency, further evidence that our cost containment and restructuring actions are taking hold.

This improvement in office in general was driven by a reduction in our bad debt provision and savings we realized from our real estate actions and in cost containment activities in areas such as travel, supplies and telecommunications. Our restructuring activities in the quarter amounted to $40.6 million, of which 7.4 is included in operating results in the office and general category. We also wrote down the value of certain of our investments in companies in which we owned a minority interest. These charges totaled some $42.7 million in the quarter and are non-cash in nature. Provision for income taxes was 217.7 million. The tax rate was negatively impacted by the restructuring charges, nondeductible impairment charges and continued poor international performance which receive little or no tax benefits.

As a result we have the unusual situation of having income before taxes of $124 million and a net loss after tax of $103 million, or 26 cents per share. Profit and loss statements for the fourth quarter and the full year are provided on slides 8 and 9 as well as with the earnings release itself. Slide 10 provides a margin reconciliation which highlights the impact of excluding the restructuring and impairment charges from operating income both for the fourth quarter and the full year. The next slide, slide 11, contains a comparison of 2003 to 2002 by quarter of our margin performance. Each line item shown is a percentage of revenue.

As you can see our operating margin before restructuring and impairments has improved significantly during the third and fourth quarters of 2003 as a turnaround actions have begun to take hold. Slide 12 contains the same analysis but excludes our motorsports operation which, though small, has had a disproportionate affect on our results for quite some time now. Slides 13 and 14 provide detail on organic revenue growth for the fourth quarter and the full year respectively. To arrive at organic growth we adjust out the impact of foreign exchange and acquisitions and divestitures. Acquisitions are excluded in both periods until we have a full calendar year of results in both periods while divestitures are excluded from both periods as well.

Beginning this quarter we made another adjustment to the reported revenue resulting in what we believe is the truest reflection of the underlying organic revenue performance of the company. This adjustment consists of a reclassification of out-of-pocket costs as well as to some international operations that we deconsolidated in 2002. The reclassification has no impact on operating income or net income. For comparability we have gone back and recalculated the organic revenue growth for each quarter of this past year. Those figures are presented in the press release.

It is important to note here that we believe that it is appropriate that the out-of-pocket cost be excluded from organic revenue growth because the company earns no income on this revenue. Slide 15 shows the geographic mix of our business and the reported and operating revenue for each region. As you can see, while the absolute organic revenue figure is below where we'd like it to be, we have seen improved revenue performance in the fourth quarter than the earlier part of the year for every region except Canada which represents just a small part of our business. While the United States was stronger in the fourth quarter than earlier in the year we were disappointed in the absolute revenue figure.

We saw pockets of strength and positive trends in advertising and media in the States but some of our project businesses continue to struggle. Europe continued to show improvement with positive constant dollar growth in Germany and Italy. The U.K. also continued to show progress just as it had during the third quarter. France was weak in the quarter following a relatively strong performance in the third quarter. Asia Pacific was strong led by China, where growth has been exceptionally strong, and Japan, where the fourth quarter marked a large revenue pick up.

This should bode well given the fact that McCann has one of the largest foreign agencies in that market. Latin America accelerated growth led by strong top line performance in both Brazil and Mexico and these are two key large markets for us. On a constant dollar basis in the fourth quarter we saw gains in healthcare, event marketing, sports marketing, corporate meetings and the entertainment business. Advertising and media were down less than 1% on a constant basis while our public relations continued to struggle as David mentioned earlier. Slide 16 covers the specifics of our restructuring. Slide 17 depicts our motor-sports business. These results include tracks that were recently sold as well as Silverstone.

On slide 19 we move to the balance sheet. Following our concurrent common stock and mandatory convertible offering at December 31 we had a debt to capital ratio of 48.7%. Subsequent to the quarter we paid down our 1.8% subordinated convertible notes due in 2004. The middle column shows the adjusted debt to capital of 46.1%, a drop from over 64% at the end of the third quarter of 2001. Slide 21 shows our debt maturity schedule following a paydown of those 1.8% converts and, as you can see, we have minimum maturities in 2004.

Slide 22 details our liquidity position and clearly the balance sheet focus we have had has resulted in a very strong liquidity position as we now have nearly $2.5 billion of available liquidity. On the next slide, which is 23, we show the declining cash requirement resulting from having curtailed our acquisition activity. Our obligations related to earn-outs are expected to decrease by over $100 million from 2003 to 2004 with an additional significant decrease forecasted for 2005. Now I will come to the section in which I will introduce some of the metrics we've previously commit to providing for you. As I mentioned to you on the last call Interpublic has not integrated its financial reporting systems in a comprehensive manner.

It is, therefore, difficult to get information in a consistent, relevant manner here at the center. We have by necessity focused much of our attention during the last six months on addressing the financial control issues mentioned earlier, the restructuring program and improving the capital structure of the company. We are therefore still working to get the appropriate global systems aligned to provide us official information which will enable us to discuss certain metrics, particularly those in breaking down our revenue in a manner we would like. What we are trying to accomplish here at Interpublic in our interactions with all of you is to be open and share information with you that is meaningful and consistent with how we manage our business.

We have done quite a bit of internal analysis looking both at ourselves and our competitors. On slide 25 we begin to discuss the metrics. We remain committed to our goal of achieving competitive performance within our two to three year turn-around time frame. As mentioned earlier we are six months into that turnaround by the end of 2003. By the time the turnaround is affected we expect to achieve competitive levels of performance on a run rate basis. We have provided certain specific targeted levels of performance. The underlying assumption in these targets is that industry prospects are consistent with current industry forecast. Additionally we have targeted competitive set performance which means performance in line with peers based on comparably defined and calculated metrics.

The metrics are relatively straightforward. During 2003 we resolved a number of issues, many that resulted in charges, investment impairment, resolution of lawsuits, sale of the racetracks just to name a few. We continue to explore alternatives with our Silverstone formula one racing commitment. Therefore for purposes of establishing a base line of targeted performance we have excluded motor-sports from our results in our metrics. In the future we will continue to provide you the information necessary to measure our performance against these targets. On slide 26 the first metric is organic revenue growth.

On past earnings conference calls we have discussed supplemental incentive plan we introduced back in August that rewards organic revenue. We have highlighted its impact to date in generating new business for the company. Our fourth quarter organic revenue continued to show sequential improvement. While more improvement is still required we are targeting peer level organic revenue growth by the end of the turnaround. The average organic growth rate in 2003 for our competitive set which includes OmniComp, WPP, Publicis, Havas and Gray, was between 0.5% and 1%, while we were negative at 3.6%. So we are looking at about a 4% gap and we intend to make up half of that gap in the next 15 months.

Slide 27 shows a second metric which is operating margin. Excluding restructuring impairment charges in motor-sports our 2003 operating margin was 9.9% and we are targeting an operating margin of between 12 and 15%. We expect operating leverage from revenue growth and expect continued progress from our restructuring program as well as our cost and productivity initiatives. Our targets in this area are to boost margins by 125 to 150 basis points, both in 2004 and in 2005. We have talked in the past about IPG's initiatives in real estate and procurement and slide 28 contains an overview of the status of our real estate. We have gone market by market and drawn up master plans based on our presence in those markets, prospects for growth and our lease terms.

We have put in place tighter controls to insure that all real estate decisions of consequence are approved here at IPG, within our real estate organization. Based on the 12.9 million usable square feet of space we average 326 square feet per person. We are targeting to reduce that to 225 to 250 square feet within the next five years. Now I would like to talk about our tax rate.

Due to all the charges running through our results the past couple of years and the future impact of significant tax timing differences, it is not meaningful to provide a forecasted tax rate for the next few years. Our high tax rate stems principally from the mix of profitability coupled with the significant write downs and restructuring charges. It is important to note that we make money domestically yet on a consolidated basis we have lost money in Europe. Many of our cost initiatives will therefore be targeted at Europe. As these actions take hold and profitability improves internationally, our tax rate will benefit. It is therefore possible that our effective tax rate will be artificially low at a time after these international operations return to profitability.

It is probably most important to focus on our cash taxes over the next few years as we expect favorable cash flow impact from the utilization of tax loss carryforwards. With now turn our metrics to the balance sheet which are shown on slide 30. We have targeted an overall debt to capital ratio of below 50% which, as you can see, we have achieved through our actions to date. The goal of improving our capital structure is to strengthen our credit ratings. With our balance sheet efforts to date we are comfortable with the company's liquidity and balance sheet position. We believe our credit rating improvements will now be principally a function of our operational performance.

Return on equity is shown on slide 31. The net results of our action improved performance going forward will be the return on equity should approach peer levels. On slide 32 we have provided further balance sheet metrics to monitor our success and continuing to improve the overall financial condition of the company. We have highlighted our objectives in debt to EBITDA and our interest coverage. By the time of the end of our turnaround we expect substantial improvement in each. Over the past year we have managed our capital much more effectively. We expect our capital expenditures to be equal to or less than our depreciation as we move forward. In 2003 depreciation amounted to $192.8 million, while capital expenditures totaled $152 million.

We do not see any spike in technology cost that we cannot fund from within the capital expenditure figure when coupled with savings from the elimination of redundancies in technology. We are in the midst of a cultural change that David talked about earlier and that is required to carry out a successful turnaround. That change continues day in and day out. We have met with our key people. We made it clear to them what happened here at Interpublic and help them dimensionalize the issues and the upside we believe that exists within the company. While these meetings continue we are starting to see a culture develop and a process of self selection take place, though it's committed to and able to drive the change are taking the reins. As we conclude 2003 it was a year of significant transition and repair for Interpublic.

Our results are complicated due to the write downs, impairments, restructuring and divestitures and the like. One very important metric I would like to finish with before we turn it over to questions is that even in the face of all these charges, write downs and our large loss from continuing operations, much of it was non-cash. And, in fact, in the face of all this, the company generated positive free cash flow in 2003. Therefore we think we are positioned to make even further improvements in 2004 and we look forward to providing you with updates on our progress on future calls and now I would like to open it up to questions.

Instructions Our first question is from Mike Russel. Go ahead, sir, you have the floor.

Thank you. I was wondering, first question, Chris, on the reclassifications. Is that going to be something, since this is the first time we've seen that term, that we are going to see for the next three quarters as we kind of work through that? Does that mean that revenues are probably overstated in the previous quarters?

We have adjusted all the quarters that you see here to reflect what the out-of-pocket expenses and, again, we believe that since these are really costs that flow through directly to our clients that we don't record income that it's most appropriate to exclude these and we will continue to show that in organic revenue. It's more conservative probably than what many of our competitors do so as we see the out-of-pockets which we anticipate increasing, I think it's most relevant that we exclude those so you see the increase in revenues where we can actually earn our income.

As we kind of look forward over the next three quarters roughly the same amount should be excluded?

It's tough to say what's going forward. Again, I think as our business continues to strengthen we would think that out-of-pocket expenses would continuing to go up. But again that's why we think that that would be artificially inflating our organic revenue so we want to take, it's more meaningful to look at it without those out-of-pocket expenses.

Also for you, Chris, could you just walk us through on the income taxes of 217 million. How much of that was for, I think it was in one of your slides about how much was for impairments and other things, but I still don't think I have a clear idea of it. Could you just point us to a slide and tell us maybe a little bit better idea about, is this a sign of you writing down further, other assets besides the assets that you sold?

Yes. What it really reflects, if you think about the unusual circumstances that we had during 2003, there are timing differences from a tax point of view of when you can d3educt things like restructuring charges and a very large amount of impairment charges that we took are not deductible for tax purposes. And additionally we, again, internationally where we didn't make money we don't record a benefit of those losses. So if you think about for the year, we have about $400 million worth of losses that are reflected by, and much of it not non-cash losses in terms of impairment, some of it being the restructuring charges and that's what generates this very significant income tax difference because in fact we made money in the U.S., we reduced our reported earnings by all these impairments and therefore you end up with a tax liability while you've lost money. It's a bit complicated. But, again, as we go forward some of that will be turning around, as I mentioned, and we'll be receiving benefit both on the effective tax rate line and, very importantly, on our cash taxes that we actually pay out.

Is there a goal that you have for cash taxes or book taxes, at what point, is this also going to be kind of normalized over the 15 to thirty months of the turnaround or is that something that's going to lag?

Well, I think it's likely to move in unusual directions based upon these charges. So what can happen is if we are successful in turning around, say, our international operations and become more profitable in '04 we could end up with a very low effective tax rate and, in fact, a low amount of cash taxes being paid. So it's going to take us a number of years as we have had so much of these charges over the last couple, to get to a more normalized rate. And as we go forward we will try to give you better visibility into that.

Okay, I'll let other people focus on operational things, but the taxes do kind of confuse me.

It's very confusing.

Could you give me an idea of what the evaluation allowance was, then?

It was $85 million of additional evaluation allowances reported in the full year. The quarter was about 30.

30. Okay, great. Then just for my last question, one of the things that you are focused on are peer targets and I think that's helpful. It sounds like you are just taking the weighted-average of the industry based on revenues of what the others have reported in organic revenue growth. Could you give us an idea on how you get to the target or peer group margins? Are you able to feel confident that, is there a peer group margin that you are focused on? I didn't see that in the slides and just to make thing apples to apples?

Yeah, what we have said, Mike, is that we anticipate our margins at a run rate basis to get in the 12 to 15% range and we've provided guidance as to how we see improvements both in '04 and '05. And we think that those are and will be well in the competitive set.

I was just wondering what your view is of the competitive sets current margins after you make the adjustments for apples to apples because it does get confusing when you go across company like that?

Well, I think there are a number of our competitors that are within that range and there are some that are below it. We are going to have to move on, Mike, because we are pressed on time.

Thank you.

Next question is from Jason Helfstein. Go ahead, please. You have the floor.

Hi, thanks. A few questions. First, just to focus on the margin a little more. It looks like kind of for '04 you are talking about 11 to kind of 11.5% operating margin before racing charges and restructuring. Can you just review, you had said this year the margin was 9.9 excluding those items. Can you just review kind of what those dollar amounts were and then I don't know if you are in a position where you want to detail perhaps what professional fees or kind of what some of the one times will be in '04. So I think we are all looking for 50 million of restructuring severance in '04. I just want to get an idea of what the margin will be after the items as well. That's my first question.

Again, our belief is that the margins as you outline we expect about 100 to 125 basis point improvement in our margin in '04. We will, again, our cost containment activities, the impact of our restructuring, will help us to get there. Again, we've indicated that our restructuring program will total about $250 million when completed. That is not included in that margin forecast nor any other sort of one time kind of charges.

Just to be clear, so things like professional fees, bank fees, you are considering those in operations.

Those are normal operating expenses that are included in there, that's absolutely correct.

Just two other questions. What's your NOL position right now and do you have an idea of what your cash taxes are for '03?

I don't have the NOL number with me right now. But we can follow up on that. And we have not disclosed yet our cash taxes.

Okay. Then just a follow up for David. David, as far as the organic revenue growth in the U.S. this quarter was minus 1.2%, kind of slightly worse than the minus 0.7% in the third quarter, should we think of that as kind of flattish and more of rounding or did the business feel like it did slow down in the U.S. in the fourth quarter? Should we make something of that or does it feel like performance in the fourth quarter was in line with the third quarter and perhaps if you can give us some color on how business is feeling in a little more detail going into the first quarter? Thank you.

As you look at the reclass on organic growth, the third quarter was actually not quite that good. I think, importantly, we see it as a stutter step. The issue that impacted organic growth was really some client losses, one of which was not actually a loss, which was the RJR stoppage of one of their programs that they had through Draft. I think you should think of it as a stutter step and we should be able to see continued sequential improvement in that organic growth.

And I'll also mention, as David mentioned earlier in his comments, that we have seen some of our units such as McCann pick up significantly in their growth.

Thank you.

Next question, please.

The next question is from William Burke. Go ahead, sir, you have the floor.

Chris, I was wondering if you could talk a little bit about timing on implementation of global systems. Also, I might have missed it, but I was wondering if you have a net new business number. And finally I don't know if you have a figure on this yet, but if you had elected to expense options do you know what the per share impact would be? Thanks.

On the net new business, I will take that first. We have decided not to provide you a lot of detail on that. I have not been comfortable that that's an accurate kind of number. It's always been put together through external data in a very sort of unscientific way. I think what we are going to be trying to do is give you an idea of major wins, major losses, but, again, having been comfortable with the, there's no accurate external data to be able to get that. In terms of our global systems, we are working on that, that's going to take sometime to implement as, you can well imagine, with so many different operating units with different systems but we are putting in some over arching systems that we can put over our existing financial systems that will provide us better data going forward.

Bill,on the net new business wins we did say that we were quite pleased with the top line but that we were disappointed in some of the losses that impacted it without being specific about amounts.

Next question, please.

Next question is from Joe Stauff. Go ahead, stir.

Hi, good morning. A couple questions. A couple clarifications. Just to be clear, what else needs to be done to really complete what you describe as sort of the first phase of the turnaround? Second question is, excluding clearly the highly publicized losses at Lowe, what was your organic revenue growth in the fourth quarter? And then I have two followups.

Again, what else needs to be done, it's much the same. It's a relentless look at our overhead structure and how we are organized. It's looking at our procurement activities in terms of things like telecommunications or IT costs, changes in our real estate. It's all sort of basic blocking and tackling in pulling together a very, very complex organization, and we think that there is much continued opportunity there as we go through. In so many markets around the world this takes time. We also need the systems and the processes in which to do that. So we believe we are making progress but have quite a ways to go.

I think, Joe, the other thing that's part of phase I of the turnaround is continued acceleration of the culture change that will fuel both the organic growth part of the mix as well as the cost containment part.

Then in slide 10 or 11, whichever one you want to look at, office and general expenses, I mean the year-over-year improvement really is driven from that line item. Can you just provide some commentary in terms of the improvements that you were able to realize in that line item, particularly in the fourth quarter versus year-over-year?

Yes. As I mentioned in my comments, Joe, there were quite a number of items that are included in that category which drove our performance. One was we had significantly less in terms of our bad debt provisions than we had in the past. We focused a great deal on our collection efforts around the world and in looking at that. Additionally we had the impact of our real estate actions. We've reduced our travel expenses, supplies, procurement, et cetera. So that really is what's been driving that line down. So, again, it was all the cost containment activities, some of which was driven by the restructuring actions. As you remember we really started in earnest with that in the July time frame and we indicated while there was some benefit in Q3 we would really start to see the benefits in Q4. And I think you are seeing that in the office and general line.

Great. Last question. Of the 33 million in restructuring charges in the fourth quarter, what percentage of that do you think is a permanent savings going forward to your cost structure? And then of the $250 million program which as [inaudible] will continue in the first half of this year, what drives your decision making process wether to increase or decrease that amount in theory?

Okay. I think, Joe, what we would say is that by their nature the restructuring charges we have changed the way we do business, changed the structure of the organization and, therefore, we would see that those are permanent in nature. There are other cost items within running an organization this size and complexity that will also tend to increase. So, again, you are going to have to look at the cost increases in terms of compensation for individuals, et cetera, and other operating costs like rent and want not that will go up. But those specific restructuring actions that are taken would be permanent in nature. As we look at what we do in the level of restructuring charges that we take, again, I think what the main item is is making significant changes to the organization that will increase productivity and have a very quick pay back to our shareholders. As we see those opportunities we will continue to take them and, again, as we focus more and more on managing this organization toward a positive cash flow organization, those items that provide a very quick cash return we will continue to take and we believe right now the estimate that we have provided is reasonable. We will take one lasts question. We are getting close to the market opening.

Okay. The last question is from Lauren Fine. Go ahead, you have the floor.

Thank you. A couple things. One, you didn't answer Bill Burke's question on if you expense stock options what impact that might have had. You mentioned that you already were generating a portion of the savings in 2003. I'm wondering in the fourth quarter what the run rate of savings really was. And then I wanted to clarify on the restructuring that it's another 18 to 30 months that you're looking at. And then I guess one last question, could you tell us what the organic growth rate would have been in the fourth quarter and the year without the reclassification of revenues?

Yeah. Let me take those. First on the last one, obviously, the organic revenue growth would have been higher. There's a reconciliation in the deck that you'll see what that impact is. I don't have the deck right in front of me right now. Stock options, again, as you'll see, that will be disclosed in our 10(K) but I think the number is about $35 million. And I think your other question was on the savings run rate in the quarter. I'm not sure that I have that rate right here in front of me.

Can you estimate?

But I think it was about $75 million for the year, most of that falling into the second half where the disproportionate piece in the fourth quarter.

Just on organic revenue, when would you expect to show positive organic growth especially in the face of some of the big losses you've already incurred and potential losses you might incur on business in the first quarter?

Again, Lauren, I think that's going to be a difficult thing obviously to always project. I think that in some of our businesses that are going strong they are reporting organic growth currently and we expect that to continue and in some of our other units where we have experienced some losses in '03 we will continue to have the year-to-year decline unless we get some large wins in those units. So it's difficult to exactly say when but, again, we believe that as we exit '04 and our organic revenue initiatives have really started to take hold we will close that gap with our competitors.

Then just lastly, are you contemplating any divestitures outside of Silverstone?

We haven't announced any divestiture program other than trying to extricate ourselves from our motorsports activities.

Okay, great. Thank you.

Thank you. Thank you, everybody.