Interpublic Group of Companies Inc (IPG) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Interpublic second quarter earnings conference call. My name is Carlo. I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this presentation. If at any time during the call you require assistance, feel free to press star followed by zero and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's call, Mr. Philippe Krakowsky. Please proceed, sir.

Thank you for joining us this morning. We have posted our earnings release and accompanying slide presentation, both of which will be referenced on this call, on our website at www.Interpublic.com. This morning we're joined by David Bell, Michael Roth, Bob Thompson and Chris Coughlin. We'll begin with prepared remarks by management to be followed by a question and answer session. We plan to complete the call by market open at 9:30 a.m. eastern time.

During the call we'll refer to forward-looking statements and non-GAAP financial data. Forward-looking statements about the company are subject to uncertainties, referenced in the cautionary statement including in our earnings release and slide presentation and further detailed in our annual report on form 10-K and other filings of the SEC. We also refer you to the press release and slide presentation for definitions, explanations and reconciliations of non-GAAP financial data. At this point, I'd like to turn the conference over to David Bell.

Thank you, Philippe, and thank you all for joining us. The results we're sharing with you this morning bear out much of what you have been hearing and seeing from Interpublic during the first year of our turnaround process. There is progress in a number of important areas, particularly organic revenue growth. On other metrics, our results are not as we would have liked them, but again, I would remind you we have consistently communicated that there would not be linear improvement every quarter on every one of the key measures we identified in the fourth quarter call earlier this year.

It bears noting that during the second quarter we made head way in putting to rest legacy issues reflective of past business actions. It's also worth pointing out that our performance was effected by the added costs of moving an extremely complex, poorly integrated organization into the new age of transparency and accountability in which all public companies must operate today. For me, the most promising news this quarter was on the top line. We posted our fifth consecutive sequential improvement in organic revenue.

Once more, we saw a return to organic revenue growth for the first time since early 2001. On these calls we've been talking regularly about the importance of culture change at Interpublic. The need to create a new kind of culture that values organic, not acquired growth, to nurture people and organizations that know how to go out and win business separately and together, and to incent individuals and teams that collaborate together on those kind of activities and we're clearly making head way in this area.

Look at the organic growth initiative, which in one year has involved nearly 650 of our employee population, many of whom work in our non-traditional marketing services companies and at our independent advertising agencies. Or consider the new willingness that exists on the part of our companies to partner together to drive our client's businesses and own revenue prospects and I'm pleased that we seem to be making great strides in that area of growth.

Revenue growth was particularly strong in our domestic operations across the marketing disciplines. McCann world group, once again, posted organic revenue growth growth both in the U.S. and internationally and you will recall restoring McCann-Erickson to its luster was one of our principle priorities. The new business performance there continues to be outstanding. Leadership on the McCann advertising and the MRM side should be credited with these advances.

The professional offering at Draft Worldwide is among the best in its discipline areas. The company continues to perform extremely well in the United States, yet be penalized by its small international offices acquired in the late '90s and we're aggressively addressing the situation by linking those agencies with other larger Interpublic companies in many markets.

The public relations group built on its operating performance in the first quarter, which was at its best in two years. And once again, our strength was at Weber Shandwick in the United States. Again, internationally where our PR companies did many acquisitions to build out their global footprint, operations remain challenged. This was particularly true in Europe, but conversely, initiative media wrote strong international performance to overall organic revenue growth.

FCB experienced good domestic organic revenue growth and the agency continues to work hard and well to pursue new business as well as to defend its Samsung business.

For a number of quarters we talked to you about the difficulties at Lowe, along with the agency's management we remain focused on doing what is necessary to get Lowe back to its rightful position of creative preeminence in those world markets that are vital to the long-term success of its major clients. We're proud that Lowe won 10 lions at the recent Cannes Advertising Competition, but we're not satisfied. And we're also not satisfied with their operating performance and are taking the necessary actions to improve on those results.

And our United States independents led by Deutsche and Campbell-Ewald also performed well in the quarter. One last note on the performance of our operating units. Freed of its motor racing operations, Octagon Sports marketing had strong performance in the quarter. That is but one small benefit of our determined efforts to extricate ourselves from motor sports venue ownership. It's been a tough haul to work through and resolve these immensely complicated and honorous deals, which bound us to a business we never should have been in.

During the second quarter we announced an agreement that terminated our contract and related guarantees with Formula One related to the British Grand Prix. To put that in context, we eliminated obligations that generated approximately 125 million in operating losses in 2002 and 2003 and had potential liabilities of more than $400 million, well in excess of the amount we paid.

Subsequent to the quarter, we negotiated the right to terminate our Silverstone contracts before the end of 2004. We are now positioned to complete our exit from motor sports by year end and move into 2005 without this considerable drag on our operating results.

We're also making progress on our shareholder suits and have reason to believe that, like motor sports, this is an issue that we will leave behind by the end of this calendar year. And that leaves only the SEC investigation as a legacy item remaining to be addressed. And once again, we have no new news to report. We continue to cooperate fully but the resolution and timing of this matter lie in the hands of the commission itself.

With Chris Coughlin stepping down at the end of the second quarter, we were pleased to see Bob Thompson assume the CFO title. This is a logical progression for us since we brought Bob on board with the understanding that he would eventually step into that role.

We're also very fortunate that one of our board members chose this time to step forward and enter the fray and to enter our team. In an exceptionally bright, tough-minded and intuitive individual, a terrific operating and financial executive, our new Chairman of the Board who joins us this morning on his first earnings call, Michael Roth.

Thank you, David, and good morning. It is indeed a pleasure to be here with all of you. At this point, I'm finishing my third week at Interpublic. I've been spending these early days meeting with as many people as possible. Our operating unit heads, as well as other key executives across Interpublic and outside our company. In these meetings, I've tried to listen, ask a lot of questions and learn as much as possible as fast as possible.

With that as background, I would like to make the following observations. One thing is obvious, we have many talented individuals applying themselves to figuring out how to position and change this business during these challenging and exciting times. My enthusiasm for Interpublic and its potential continues to grow. There are some terrific assets and franchises to work with. We have put in place a number of initiatives that will advance our turnaround and enhance shareholder value.

Going forward, we have to stay open to new ideas and new ways of doing things. We must keep changing the culture and driving toward a greater sense of accountability to one another, to our investors and obviously to our clients. I'm excited to be here and I am looking forward to meeting with many of you to discuss the issues and prospects for our company. David?

Thank you, Michael. We are all very excited to have you on our team. Your unique skills and drive will partner with us as we continue to lead the turnaround here at Interpublic.

Another new member of our team who joined us recently is Executive Vice President and Chief Human Resources Officer, Tim Sompolsky who comes to us from Altria where he had a long and very distinguished career and he has already begun to make his mark. During the past year we've done an excellent job of recruiting top talent into our organization at both the operating unit and corporate levels. Tim will help us take our game to another level and make good on our promise to be the most talent friendly company in our industry.

Yet another talented executive in a you new role, of course, is Bob Thompson, VVP and chief financial officer. Those of you who have had the pleasure of meeting Bob know he's got a great command of the workings of the business. He's been a senior financial executive at major multinationals and worked around the world. More importantly he leads a very strong team that includes Treasurer, Steven Berns, new Controller, Nick Cyprus and Joe (ph) Zacola, our Head of Shared Services.

At this point, I'd like to turn it over to Bob who will take us through the numbers, address the key drivers of second quarter performance and update us on progress against our turnaround metrics.

Thank you, David. Good morning, everyone. We posted a presentation deck on our website in conjunction with this earnings release. Going forward, I will refer to the information contained in that presentation. I'd like to begin by addressing at a high level the key performance components in the second quarter, which are called out on page 2 of our presentation deck.

They are our sustained improvement in organic revenue, the rise in office and general expenses compared to last year, and charges taken in the quarter related to our restructuring program and motor sports.

As David mentioned, we drove progress on both the top line and in our efforts to exit motor sports, but operating results in the quarter were adversely effected by increased expenses due to higher professional fees. As you can see on slide 3 of the presentation, organic revenue was up 30 basis points. Our growth was led by business in the United States, which was up 2.3% organically, but slowed by our performance outside the U.S., which was down 2.1%.

Most of you will recall that our measure of organic revenue adjusts out currency effects in the effects of acquisitions and divestitures, as well as revenues that are passed through to clients and are also included in our office and general expense line. As David mentioned, second quarter performance not only returned our company to positive organic growth for the first time since 2001, but marks the fifth consecutive quarter of improved sequential performance in this key measure.

The second item I would like to underscore is that operating margin results in the quarter do not fully reflect our revenue successes and cost takeouts. This is due largely to charges in the quarter, but also due to an increase in some categories not related to restructuring. On slide 4 in our deck, we will walk you through the distinction.

The restructuring charge of $2 million in the quarter represents the tapering off of our 2003 restructuring program, as it nears its conclusion. We continue to believe that our total investment and restructuring will not exceed 300 million, of which 260 million will be in cash. The program began in last year's third quarter and we have recorded about 270 million of the total through the end of this quarter. A relatively small amount of restructuring expense related to acceleration of lease hold improvements is embedded in the office and general expense line as has occurred in the past. As you can see on slide four, we also illustrate this expense component which costs us 20 basis points of margin, as did impairment charges.

The largest charge in the quarter was the $80 million item related to exit of motor sports as disclosed previously. This is-- this has been a major priority for us and we are pleased that we continue to make progress in closing that chapter in our company's history. The resulting margin comparison before charges in this year's second quarter and operating margin before charges in the same period last year is 9.5% versus 10.5%.

Moving now to slide 5, we track the expense variances that account for the difference in adjusted margin relative to the second quarter of 2003. The largest variance is in professional fees. These are currently necessary expenses for financial and management control initiatives under way in our company around the world, especially our company's efforts to implement and comply with Sarbanes-Oxley requirements. These efforts are in full stride alongside our work to cure our previously disclosed material control weakness, which we foresee continuing for sometime. These expenses are investments in Interpublic, creating a contemporary foundation for global management information and financial reporting and control systems, no less vital to the future of our company and its turnaround than the other initiatives we have shared with you.

The increase in professional fees from last year was approximately 150 basis points of operating margin, primarily driven by significantly higher than anticipated fees related to Sarbanes-Oxley. The secondary driver of these fees was the implementation of our shared service initiatives. Other expense variances that were adverse in the adjusted margin comparison are as follows: expenses related to prior acquisitions that are accounted for as compensation costs, costs us approximately 70 basis points of margin. The combined effect of higher out of pocket for reclassifications in the quarter and foreign currency exchange costs, another 10 basis points.

On a year-to-date basis as seen on slide 6, first half operating margin adjusted for charges is up from 6.7% to 7.2%. While the 50 basis points improvement is not at the rate of annual improvement we have targeted it, does reflect the benefits of our restructuring actioned and our improved revenue trend offset by the second quarter factors that I've mentioned previously.

David has already shared his thoughts on the importance of bringing our restructuring program to completion and the significance of extricating our company from motor sports, these are referenced on slide 7. In that context of major initiatives I would like to add that our financial condition remains strong. Our net debt reduction is in excess of $1 billion compared to a year ago, I'll come back to that again in a few moments.

On slide 8, we turn to the full income statement for the second quarter. As you can see, our reported revenue was up 3%. In addition to organic performance, foreign exchange effects were positive compared to last year, while we met $21 million of revenue compared to a year ago. At 56% of total revenue domestic performance is always a key for us and organic revenue was up 2.3% in the United States.

Salaries and related expenses were up 1.8% as reported. Foreign exchange comprised the largest swing factor, adding 13.8 million, or 1.6% year-over-year. We disposed of businesses that made up 9.8 million, or 1.1% of compensation last year. The reported total also reflects $11 million in expenses related to prior acquisitions that are accounted for as compensation, which we called out for you in our discussions in the Q2 expense variance. That added approximately 1% to the increase from last year's second quarter.

Head count was 43 ,900 at quarter end, down from 44 ,500 from a year ago. Our head count reduction restructuring target has been achieved. We have, however, recently begun to invest in those businesses that are growing, that is the U.S. advertising marketing services businesses, as well as key growing markets such as China. I've already spoken to office and general expense and the operating margin reconciliation in some detail.

Slide 9 simply recaps my remarks on revenue in the quarter by showing the increase of its components. Foreign exchange had a positive impact, adding 1.7%, but, of course, also impacted expenses adversely. Reclassifications of out of pocket expense were up 2.4%.

Geographically, in slide 10, you can see the strong performance of U.S. revenue and certainly its position is the driver of our favorable revenue outcome in the quarter. Asia was also a very strong market for us and was up 12.6% organically. Our businesses in Europe continue to be challenged organic revenue was down 6% there. These regional results are approximately in line with our first quarter experience with two exceptions. Asia has accelerated. Latin America has slowed due to a falloff in Brazil and Venezuela.

Slide 11 provides a different view of the operating margin reconciliation, which breaks down the percent to revenue for each line item. The next slide quantifies the impact of our motor sports business on our results in both the quarter and year-to-date, revenues were down for the year ago. Operating loss narrowed from a year ago with improvements of approximately 6 million in the quarter and 8 million year-to-date.

On slide 13 of the deck, we report the quarter and year-to-date period excluding motor sports. Here again, we have stripped out the restructuring expense that was reported in O&G as well as the separate restructuring and impairment charges to arrive at comparable margins.

The lull of the operating profit line, there were two swing factors in the quarter which we highlight on slide 14. Interest expense decreased by $7.7 million from a year ago, a total debt declined almost 500 million from last year and we were able to pay down the high cost Prudential notes we've been carrying in last year's third quarter.

Our tax provision was 33.4 million, 11 million higher than the second quarter of 2003. Measured against pretax results, the provision reflects the high effective tax rate in the quarter due to losses in certain international markets that receive little or no tax benefit.

The next slide reflects key balance sheet items. We are quite pleased with the reduction in our debt, our debt to capital ratio has fallen from 55% a year ago to 46 1/2% currently, largely as a result of the equity financing we accomplished at the end of last year.

Slides 16-20 are an update on our performance metrics that we started reviewing with you six months ago. We feel that our organic revenue performance represents solid progress. We know we made considerable strides in the first quarter and our performance improved sequentially once again in the most recent period.

On slide 18, it's clear that we did not sufficiently progress on operating margin versus a year ago. I've explained why that was the case, particularly as relates to higher than anticipated professional fees. The bulk of these have to do with Sarbanes-Oxley, which is an area many companies are finding to be increasingly costly.

Looking forward, we remain confident that our efforts and shared services, IT, procurement, and real estate will enable us to exit from the turnaround with operating margins at our targeted range. Given the pressure of increased professional fees however, our ability to achieve our margin target in 2004 has clearly become more of a challenge. We are focus order taking actions to meet this challenge.

As I mentioned, we are progressing on debt to capital. We are also making solid progress on debt to EBITDA and to interest coverage. That concludes the financial part of the review. I'll turn it over to David for his remarks.

Let me just close by saying that management remains focused and committed to delivering on our turnaround commitments and that concludes our final - our formal presentation and now all of us are happy to take your questions.

Thank you, sir. Ladies and gentlemen, at this time, if you wish to ask a question, please press star followed by one on your touch-tone telephone. If your question has been answered or you wish to withdraw your registration, press star-two. We will take questions in the order they are received. Once again, star-one for any questions at this time. One moment, please. Sir, our first question is from Brian Shipman with UBS Securities.

Thanks, good morning. If it's possible, could you give us the D&A number? And then also, wondering if you could give us an update on current account reviews of the Samsung account still under review, if there is any update there. That would be helpful. Thank you.

Let me first take the Samsung question and then I'll ask Bob to take the next one. The Samsung review continues. We make no predictions as to where it will end. Obviously, it has been a very long review. As participating in that review, I can tell you that the delivery against the RFP that was done by Foote Cone & Belding and the balance of Interpublic was very strong. As you may expect, the recent work that we've done for them, including the Olympic work, has been very well received and we are confidently hopeful that it will be a positive result.

As you know, those reviews are always difficult. The ability to win in those kinds of reviews is the very low percentage, but we're pleased in recent months to have won both the AOL media review, the Verizon review, as well as the SC Johnson review, beating the odds on those kinds of things.

The other reviews that you, that we asked about as you know, there is a Subaru review in which we have two contestants. There is also a Nestle Global Media review, which we're very aggressively participating in, and Unilever who regularly reviews their individual markets in which we've had strong gains, as well as some losses in the past, is reviewing their European media thing as part of an ongoing program.

Depreciation and amortization in the quarter was approximately $40 million. The year-to-date number is about $79 million.

Thank you.

Sir, your next question is from Joe Stauff with Schwab Soundview.

Good morning, thank you. Couple questions here. Can I start on slide 5, please? With respect to your, you know, some of these variances, I just want to go down the list if I might. You know, for instance, Sarbanes-Oxley, you know, 80 basis points, is that an expense in - you know, I'm trying to clarify whether or not each expense that you have listed on this page will be permanent going forward or will roll off at some point obviously determining-- to be determined with respect to where you are in the turnaround? Then I have two follow-ups. If you can kind of go through the Sarbanes-Oxley and shared services and so forth.

Yeah, as you know, we have a material control weakness and-- that we're in the process of remediating.

Mm-hmm.

We don't yet know the extent of all the controls that need to be remediated attended to Sarbanes, we're in the process of doing that. So the Sarbanes-Oxley professional fees will stay with us for sometime through the turnaround period. Shared services on the other hand, should have a shorter shelf life and should taper off within the turnaround period. Other services is more kind of due to timing than anything else. So that shouldn't be structural.

And I think as it relates to the Sarbanes-Oxley added fees that, we are quite similar, not only to our competitors, but to many others in American industry who have been surprised by the extent to which those fees have risen as companies work towards the 4-'04 compliance.

Yeah, this is Mike Roth, and it's obvious that although they are incremental and they are extensive, at some point in time, these fees will, in fact, go away as we solve the internal control weaknesses and it's certainly our plan to do that as quickly as possible.

And that's, that's basically the trade-off between your expenses incurred in terms of shared services now and the future benefits that provide, and obviously Sarbanes-Oxley, correct?

Exactly.

Can you help me out on the remaining two, expenses related to prior acquisitions, will that continued work taper off, et cetera?

Yeah, we recorded about $11 million in earnout payments in the second quarter as compensation. Earnout payments must be included in compensation if the employee has to stay with the company to receive the payment, and as it turns out in the second quarter, we had $11 million of that such payments. We have reviewed our remaining contracts and while there is a little bit of this yet to go, it is not significant by any measure, so that will taper off.

And some of it is a timing issue. The other part of it is as we move to tighten our controls and do those reviews that are required, these are the kinds of things that we find, but as Bob indicated in the future, we don't anticipate--

So, again, just to try to put-- I know things are influx here, but to try to put some timing with respect to, you know, again, sort of incurring these costs going forward, maybe your latter two will somewhat roll off, would it be fair so say by the end of the year, or within a year and obviously your Sarbanes and shared service obviously will continue over the next 18 months or so?

That's a reasonable expectation.

Okay, and then clarification on slide 12.

Okay.

Your motor sports operating loss, I guess in the quarter, 3.9, you know, was-- that was included in your operating results, correct, separately?

Yes, it is included in our operating results.

In terms of, you know, either the salaries or the office and general expenses lean?

That's correct, yes.

Okay, and lastly, you had mentioned Bob, sort of towards the end of your comments, actions that you could take to meet sort of this challenge with respect to, you know, again, further margin, you know, efforts. I mean can you sort of outline, you know, other tools that you think you have at your disposal right now?

Well, we certainly can look at markets that aren't growing and be more aggressive in terms of head count reduction. We also have, as you know, a number of initiatives under way with respect to procurement, IT, shared services and the like, and those continue to yield increasing benefits for us. So those are principally the areas that I would focus on.

Okay. Thanks very much.

You're welcome.

Sir, your next question is from Alexia Quadrani with Bear Stearns.

Good morning. On your impressive improvement in organic revenue growth on the quarter, could you drill down, I guess into more detail, I know you talked about the cultural change driving it and our organic growth initiative driving it, but I think if you look at it more specifically, is it really the turnaround of McCann, is it improvements in Europe, is it the overall environment, is it the business plan? I guess on that sort of same vein, what are your-- which of those are your opportunities going forward in terms of seeing further improvement?

I think as we have always talked about, the principal driver of organic revenue growth in Interpublic has to be and needs to be major culture change and moving from an acquisition environment to an organic growth environment, and to move from a totally independent operating environment to a powerful brand connected environment. So what I believe the underlying change is, is a powerful culture change. Clearly there are business units that have worked very, very hard to become extraordinarily aggressive in the new business arena. The organic growth initiative is a part of it, but there are also underpinnings of a number of joint collaborations that don't even hit the organic growth initiative kind of line that we're seeing more and more of. I think that that will continue as we go forward. Obviously we're hopeful that it will be sequential, but we know that during the course of the turnaround, our commitments to restoring that organic growth to a very positive kind of trend will get there.

And on the, I think in your press release you say restructuring is essentially complete. I guess how much margin improvement, or where are we in sort of the time line for the margin improvement in Europe in I assume most of the restructuring was in Europe. That seemed to be where you had the weakest profitability.

European margins and profitability continue to improve in, you know, all up. We still have some operation markets that lose money. That's what's effecting our tax rate, but overall, the restructuring savings that were anticipated for Europe are yielding what we had intended them to yield.

And as I think I indicated in my remarks, Alexia, the struggling issues have been those companies that were acquired and created as opposed to the more established companies, particularly in Europe. And we indicated that in the case of draft as well as Weber Shandwick, but it's not limited to those. As you know, we have some very strong disciplined companies within the world group that also share similar characteristics. I think the good news is there that in the last year there has been some very, very strong efforts to create cultures within those companies that we believe will have benefits in the future.

And just lastly, following occupy your comments about Sarbanes-Oxley, it seems like, correct me if I'm wrong, but the bulk of the expense is the first really heavy quarter you've had in terms of seeing a big pickup in the expense. Is there any way you can quantify how long it will stay at the level? I think you said in your comments you should expect it to last about 18 months, but should we see the bulk of it in the next maybe two quarters and then drop off or--.

Alexia, you should anticipate the same rate of spending over the 18-month period. It's not going to drop off before that.

Okay, and then you-- one of your competitors talked about how you will always see some Sarbanes-Oxley expense now going forward. Are you suggesting that after that 18 months will just drop off a little bit and you'll still see some or will it drop off completely?

It won't drop off completely and the reason for that is that the external auditors have to perform certain procedures to certify compliance under Sarbanes-Oxley. Those costs will obviously not fall off. They will be a recurring costs every year.

And I think there are two things, Alexia, that are driving ours high. One is our commitment to establish a proper world class control environment from the very decentralized organization as an impact, but Sarbanes-Oxley on top of that really drives it as well.

Okay. Thank you very much.

Sir, your next question is from Fred Searby with J.P. Morgan.

Thank you, and good morning. Just a couple quick points. One, can you give us the level of earnouts that you have the still the commitments outstanding? I know you have been literally chipping away at that, and then secondly, obviously in Europe you're showing nice growth in the U.S. and still declining in Europe and what are your clients saying about the second half and your thoughts on purse strings from your clients and did - I inferred from your comments that there may be more personnel reductions. So do you see severance picking up there? And then finally, I don't-- on Page 9, the slide with your organic revenue growth, you break it down, the reclassifications out of pocket; is that a pass-through of those expenses that you cited?

Let me take that one first. As you know, we elected to use the most conservative organic growth compilation and, yes, that is that element that comes into that organic growth piece. On the European, we have seen some gathering of steam at McCann Erickson Advertising. Others of our business units have been struggling on the organic growth line, and we see that continuing for a period of time as some of the changes that we've made there, the business units take hold and move forward.

With respect to earnouts, we anticipate somewhere between $175-200 million earnouts paid out in 2004. We expect that number to drop by about half in 2005.

And then that's essentially it? I mean is that-- then it tapers off substantially?

Then it tapers off substantially, that's correct.

Okay. So when do you think you can get-- I know this is-- start generating money in Europe, I mean what's the-- if you put on your prognosticator's cap here, do you think in 2005 you'll show a positive operating margin in Europe?

We haven't disclosed that, but what we are doing is really driving with our business units with that kind of focus and that kind of target.

Okay. All right. Thank you very much and good luck.

Thank you.

Sir, your next question is from Michael Russell with Morgan Stanley.

Thank you. Good morning, gentlemen. Just wondering, could you take a look at, back at third quarter and give us the employee count and just as you do that, just trying to understand the employee count that you note in the press release, 43,900, it looks like you're adding about 200 or 300 people per quarter now in the past two quarters. Is it fair to say that in the third quarter you'll actually have year-over-year for the first time in a while employee growth and should we expect that growth to continue at kind of around that level, given where you are coming out on organic revenue growth? If that were to slip, would we see a reduction in the head count?

Yeah, I think the simple answer is that we will invest in head count increases where businesses is growing. If the business stops growing, then that investment will stop and head count will remain under control.

I think the kind of areas that we're talking about where we have strategically been adding, you may recall that we were the recipient of a major Microsoft win, particularly in below the line at MRM and as they moved staff up for that rather large account, that has head count increases. Also in key markets in Asia that are showing very positive organic growth, we are adding to staff in those places, as well as the United States advertising sector, which has shown strong organic growth.

Okay. If I extrapolate-- I have 2 Q numbers and 4Q numbers. I just don't have 3 Q numbers from last year. It would seem that then, based on this case, you would be showing some slight year-over-year growth in the third quarter, so we're not going to get margin improvement really from the salary line, as you give people kind of a 1 1/2% increase. So any margin improvement that we see for you to play catch-up on your plan is all going to come on the office and general side; is that fair?

Well, we will-- where we have lost key accounts and where there are markets declining, we will take action on head count and so I think to say that you won't see any improvement from salaries and related is not necessarily correct.

But, Michael, as you also know, where there are revenue reductions, normally there is a lag factor in the head count reduction, so part of our focus is on moving expeditiously against those things.

Okay, and then the Sarbanes question obviously is a topic of great importance and the fact that it's going to be for the next 18 months, I mean just to confirm that, the level that we're looking at for the next four quarters is kind of a new level and then after that, we would expect the same level. So it wouldn't, wouldn't impact your second half comparisons for next year; is that a fair way to look at it?

No, I think you should anticipate the level of spending that you're seeing in the second quarter will continue over the 18 months unabated.

Right, so it will be difficult comparisons for the next couple of quarters and then in the back half of next year, it would be pretty similar to the back half of this year?

That's fair, absolutely.

And I know we can do the calculation, but can you just give us the number, what's it cost you in audit fees and what's it costing you in the people internally focus on that? How does that split on the 80 basis points?

The 80 basis points represents external professional fees, it does not represent anything that we're doing internally cost wise.

Okay, and then those are incremental professional fee, you already had high professional fees before this for the other remediations so these are incremental.

And related principally to Sarbanes-Oxley and as you know, even the auditing firms have had a difficult time estimating what is involved in that process as they move through it both in terms of the testing, remediation and the other parts.

This is Mike Roth, let me just add something to that. Obviously this is a very large, diverse organization and as a result of that, with a material control weakness, we are committed to improving and eliminating that and therefore it will cost us dollars on the professional fees side to address and attack that issue, which we are committed to resolving. So I, I-- granted these fees are very high, but our goal here is to provide reliability and improve the material and eliminate the material control weakness, thereby in the future gaining better control, better reporting and in fact, ultimately improving profitability, which is what our goal is.

And that was spoken by the former chairman of the audit committee who is the champion for making certain that this gets done appropriately.

Right.

Yeah, I would like to add one other thing. As part of the overall Sarbanes process, our external auditors have to come in and review our work against Sarbanes. That work has not happened fully yet. It will happen more fully in the third and fourth quarter. So those costs have not been reflected in the current rate of spending.

Okay, and then last question, the shared services initiative, we've heard that multiple times and thought that would be part of the restructuring. Why is that something that's kind of new and is that just kind of a little mini restructuring? What am I missing there?

No. This represents outside help that we've retained to do our shared service and SAP planning. It has nothing to do with restructuring.

Okay. Great. Thank you.

You're welcome.

Sir, your next question is from Lauren Fine with Merrill Lynch.

Thank you. I guess I would like to go back on the revenue side. I guess I'll take a different perspective than maybe one echoed earlier, which I was disappointed. I was not impressed. I guess the question I have is a number of your businesses you are claiming are doing very well domestically, yet your organic growth still is trailing your peer group, and I'm wondering as you look at your peers and look at your performance if you have any insight as to where the real differences are coming from and I guess, specifically, last quarter you were able to identify what you thought had been some of the Lowe's problems in the past that, it had been more focused on advertising rather than broad marketing services. It would seem that there are other issues that you've been able to identify and then very specifically if you could comment on both Lowe and Foote Cone & Belding's performance domestically and overseas and any particular fix you have in mind for either of them.

Yeah, I think Lauren, it's safe to say that although we're pleased that we've had sequential improvement and moved into the positive territory for the first time, our overall objective remains to materially close the delta between us and our competitors. I think there has been strong organic revenue strength coming from our U.S. standalone independents, coming from McCann Erickson, coming from FCB in the U.S.. The struggles have been, as I think I indicated before and some of the companies that made large number of acquisitions overseas, particularly in Europe, and as you look at the organic revenue numbers for Europe, you see that that is the issue and the issue that we're focused on.

Management is working with the business units, both at Lowe and FCB very aggressively to both add the strength that we believe is required to move those into the positive and there are plans under way and in progress to move against both of those issues, both in Europe on the FCB case, et cetera, as well as on Lowe in general. We were pleased, however, at Lowe being given additional assignments [inaudible] as will certainly help.

I guess on the domestic side, if I could just ask, I mean, again, you identify a number of things that were positive yet the performance is still trailing your peer group. Can you give us the range of growth that you saw domestically and are there some units that are still declining domestically?

No, we haven't disclosed that. I would say that, and we don't disclose it of course by individual business unit. But we were pleased with what we saw as the overall growing strength in organic revenue in North America.

Okay. Thanks .

Sir, our next question is from Jason Helstein with CIBC.

Thanks. So I think, I guess you guys have already said that clearly you're behind on your full year margin target. I guess I want to start. Would you say that's primarily due to your disappointment in the organic revenue growth or it's on additional costs that you wouldn't have anticipated at this point during the year? That's the first question.

Well, I think we have tried to be clear that we did not anticipate organic revenue being the primary driver of our margin improvement. There were clearly some unanticipated costs led by the Sarbanes-Oxley professional fees that we believe depressed our margin in this particular quarter.

Okay. So I think there was some comments made and I think it was Michael who made them, just saying how, you know, there are still issues with the, you know, the whole, whatever you want to call it, the, you know, accounting, accountability side. You know, would you say-- I mean were there additional costs that beyond the professional fee that kind of came up in the quarter at the operating level?

No.

The way you expected 90 days ago?

No, no, I would say no, and it's clear that the material control weakness and the Sarbanes-Oxley expenses are high and ones that we had not anticipated, but unlike-- not unlike every other company, these expenses are very high and as we go through the process, which, by the way, is changing as different pronouncements come out, we have to respond to that and it's costing us outside professional fees to meet those objectives. So I think that's the bulk of what you, what you're seeing.

Okay. So two more. Is there any concern that you don't get Sarbanes-Oxley compliance done by the end of the year and if so, kind of what's the, you know, is there an extension and then I've got just one follow-up after that.

Well, I think what we've said is that we, we believe the material control weakness will continue and we believe it will still be there at year end. How that's impacted and what the treatment and what the rules are going to be, that's still evolving and we're going to watch and see how that's handled, but the material control weakness will be present, although we are aggressively addressing it and have thrown a lot of people and professional fees to resolve it and we're committed to getting that off.

And I think, Jason, this is David, as we have discussed before, in a highly decentralized organization that did not have integrated financial systems, which was what we started with at the turnaround, moving toward an appropriate world class material control environment, for us by definition will be more costly, but our real focus is on delivering that kind of environment and making absolutely certain that we have the systems processes and controls and checks in place and so we're going to continue to do that because it's in our interest and that of the shareholders.

Okay. Last question. Clearly, and, you know, I think probably most people would characterize this morning's results as somewhat disappointing and I'm sure people have their range of how they characterize it and we don't know how the stock's going to open up today, but clearly anybody who, you know, believes in the story is taking a longer-term view. Under that view, you know, would you consider saying, okay, numbers are not as good as we would like them to be. Clearly those who are going to stick with the stock are taking longer-term view, why not go out now, invest more in talent and try to make investments in trying to, you know, stimulate your organic growth, you know, through creative hires, talent, et cetera and then taking a longer-term view than we usually take quarter to quarter?

By the way, Jason, I think the two headlines that you talked about are right. I think the real story is moving to positive on organic growth. The professional fees, which depressed the margin, but to your point on moving on talent, we are doing that aggressively across all business units and for you to take a look at our recruiting track record on everything from functional expertise to talent expertise, you would agree that we have been very aggressive.

So would it be fair to say at this point, if you had to give up some margin to make investments in talents in the back half of the year, that wouldn't be-- that shouldn't be a surprise to us.

We think we can walk and chew gum at the same time.

Okay. Thanks.

Sir, your next question is - the final question is from William Bird with Smith Barney.

Thanks. David, just curious, given the highly decentralized nature of Interpublic as you've talked about, just wondering what your general thoughts are on maybe moving to even more of a decentralized approach, possibly breaking up the company. And second wondering if you could talk about the trend in cash flow generation from the quarter.

I'll let Bob talk about the trend in cash flow. I think what we're saying is that we believe there are enormous consolidations to be made in a number of key areas that we've previously disclosed, particularly back room and in financial, which were aggressively on. The breakup of the company is not on our horizon, nor do we think it's appropriate. We think our assets are strong, our position is strong, and we're focused on doing the retro work that is necessary to integrate and put in place world class financial systems while we work as well on the revenue line and moving from an acquisition culture to a growth culture. Bob, do you want to talk about cash flow?

In terms of EBITDA, we achieved a little over $200 million in the quarter. In terms of operating cash flow, we -- and this number is preliminary. We used about $100 million of cash during the first six months. That was principally an increase in working capital in the media business.

Thank you.

You're welcome.

Okay. We thank you for your participation. I'm sure that Philippe Krakowsky and Jerry Leshne will be available for your calls as will Bob and I later on in the day and thank you for joining us.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.