Interpublic Group of Companies Inc (IPG) 2010 Q1 法說會逐字稿

Good morning and welcome to the first quarter 2010 conference call. All parties are in a listen-only mode until the question and and portion. (Operator Instructions) This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Mr. Jerry Leshne, Senior Vice President of Investor Relations. Sir, you may begin.

Good morning. Thank you for joining us. We have posted our earnings release and our slide presentation on our website Interpublic.com, and we'll refer to both in the course of this call. This morning we're joined by Michael Roth and Frank Mergenthaler. We will begin with prepared remarks to be followed by Q&A. We plan to conclude before market opens at 9:30 a.m. Eastern. During this call we will refer to forward-looking statements about our Company, which are subject to uncertainties in the cautionary statement included in our earnings release and the slide presentation and further detailed in our 10Q and other filings with the SEC. At this point, it is my pleasure to turn things over to Michael Roth.

Thank you, Jerry. And thank you all for joining us as we review our results for the first quarter of 2010. As is customary, I'll begin by covering the headlines relating to our performance. Frank will then take us through the financial results in detail. After his remarks, I'll return with some agency specific observations and closing comments before we move on to the Q&A.

As reported, revenue increased 1.2% in the quarter and the organic revenue decline moderated to 2.9%. We were pleased to see another quarter of significant sequential improvement in our organic revenue change which further supports our belief that the broader economic conditions have stabilized, and we'll keep seeing progress as we move through 2010. Importantly, revenue performance improved as the quarter unfolded. March was significantly stronger year over year than January or February . In the US where we had seen over a year of quarterly decreases, our business grew 3% organically in Q1 as clients began to increase investment in marketing activity. This was evident at a broad cross-section of our agencies.

Turning to our key client sectors, it's also worth noting that looking at our standard client industry breakouts, we saw five of the seven client sectors that we tracked grow in the first quarter compared to a year ago. So it's fair to say that the improved tone of the business that we shared with you on our last call has begun to translate into revenue improvement in a number of markets and industry sectors. This gives us greater confidence that 2010 will be a year in which we can achieve organic performance that is flat to slightly positive and deliver on a stated goal of operating margins of 8% or better.

Since there will be so many moving parts to the economic situation, it's worth looking at our client sector results in more detail. In the auto sector revenue increased by over 20% during the first quarter, excluding the benefit of currency. This is, of course, significant because of auto size in our mix, and the severe decreases our entire industry experienced last year. On balance we like what we are seeing in terms of how our agencies are performing in the category. We've had major wins in media with Chrysler and BMW. At MRM, which is building out the digital marketing infrastructure for GM globally at Deutsche LA which won the very competitive Volkswagen review, and draft FCB which won Volkswagen's CRM business. We were sorry to see Chevrolet impact its 91-year relationship with Campbell-Ewald, but change is the name of the game at GM these days and we have to respect that.

CE will continue to work on Chevy dealer business and other GM products such as Onstar, and will handle Chevy national assignments for the balance of this year. Of course, all of our agencies, notably McCann WorldGroup, will keep looking for other ways to build on the already existing important GM relationship going forward. It's interesting to note that during the first quarter CE represented a very small contributor to our more than 20% growth in the sector and for the full year 2010 will remain on course to show growth in the auto sector.

We also had double-digit increases with our largest financial service clients as a group. While a smaller sector, financial services also had turned negative early in the recession, but it now appears to be well on the way to recovery. As we've previously indicated would be the case, the tech and telecom sector continue to weigh significantly on our top line in Q1 due to lost assignments for some large clients to the first half of 2009, which had a disproportionate affect on certain world regions. This is worth repeating.

The cost of tech and telecom sector was responsible for our entire revenue decrease in the first quarter. Without that impact, our overall organic revenue performance would have been up slightly. Revenue from new business wins played an important part in the Q1 results as we won a number of sizeable new assignments in the latter part of last year. While it's true that we had a few client losses that made news in recent weeks, our pipeline is strong, and we remain net new business positive on a trailing 12-month basis through the end of the first quarter. As a direct result of recent wins, we added to our employee base in Q1 following five consecutive quarters of reductions. This is another point that signals the potential for 2010. In all, our head count grew during the quarter by about 1.4% and was 6.2% below the year-ago levels at March 31.

Across the business we continue to demonstrate strong management discipline. Net net compared to the overall organic revenue decrease of 2.9%, head count decreased 6.3 % organically from a year ago. As you can see in our results today, the effect of the cost actions we took last year continue to be evident as salaries and related expenses decreased organically by 5.7% compared to the first quarter of 2009. This improvement also reflects the normalization of severance expense this year. As a result, our seasonal Q1 operating loss was $59 million this year, and improvement from the $82 million loss in Q1 2009, and our operating margin was negative 4.4% compared to negative 6.2% last year.

Even though we see the micro -- macroeconomic situation improving, we continue to believe that a conservative approach to the balance sheet will serve us well and provide maximum flexibility going forward. That's why I'm pleased to announce two important developments on that front this morning. One is an updated $650 million revolving credit facility maturing in July of 2013. This amends the $335 million facility that had been scheduled to mature in July of next year. It's great to see that all of our banking partners in the previous facility increase their commitment as part of this updated agreement and to have five new lenders join our team. We thank them for their support.

The amendment facility has improved flexibility with respect to covenants. While the details are available in our 10Q filing today, you will see that the updated agreement is also more flexible as relates to our ability to increase uses of cash if we surpass certain defined credit metrics. This is consistent with our long-standing goal of moving the business forward so as to be able to put some of the cash on the balance sheet to work more directly to enhance shareholder value.

Consistent with that, this morning we are announcing a tender to purchase up to 370,000 shares of our Series B preferred stock for a purchase price of up to $400 million. This transaction will reward our shareholders by reducing overhang and removing from our capital structure a significant source of potential delusion that comes from the convertibility feature of these securities into approximately 27 million common shares as well as reducing the annual amount we spend on dividends on the preferred shares by about $20 million. We plan to use cash currently on our balance sheet to pay for any preferred shares that are tended. It's also our intention to use the cash on our balance sheet to meet our November debt maturity as we have stated previously. At this point, let me hand things over to Frank for an in-depth look at our

Good morning. As a reminder, I'll be referring to the slide presentation that accompanies our website and is available -- on our webcast and is available on our website. On slide two you'll see an overview of the quarter that captures many of the points Michael made, from our growing confidence in the recovery to improvement and operating performance in the strength of our financial condition.

Turning to slide three, you can see our P&L for the quarter. I'll cover revenue and operating expenses in detail in the slides to follow. At this level, I will point out that operating results include approximately $5 million of expenses related to the transition to inflationary accounting for Venezuela. We had flagged the likelihood of this expense in our 10K filing. I would also point to the tax line. Our effective tax benefit rate in the quarter was 18% compared to last year's 25.5% rate. The lower benefit rate this year is mainly due to the establishment of a tax valuation allowance for market in Europe. In addition, the expense for inflationary accounting that I just mentioned received no tax benefit, also lowering our effective rate. Earnings per share were seasonal loss of $0.15 compared with a loss of $0.16 in Q1 2009.

Turning to a closer look at operations on slide four beginning with revenue. Revenue quarter is $1.34 billion, an increase of 1.2%. Compared to Q1 2009 exchange rates had a positive impact of 4.2%. The impact of acquisitions and divestitures was negative 0.1%. Our organic revenue change was a decrease of 2.9%, primarily result of lost assignments in the technology sector. We also continue to see the impact of scope reductions in certain markets outside the U.S. The biggest story in the quarter for us, as Michael pointed out, is that we return to growth in the US.

Globally, in terms of client sectors, the top performers were auto, retail, financial services. Food and beverages and packaged good increased mid to high single digits on a constant currency basis and were also significant contributors. At the other end of the spectrum, the tech and telecom results continue to weigh materially on consolidated revenue.

Regionally, we were pleased to see growth in Lat Am as well as the US while other regions continue to show the effects of the recession and certain lost assignments in the technology sector. I'll have more detail in a moment.

On the bottom half of this slide, you can see the revenue performance of our operating segments. At our integrated agency networks, the organic change was negative 3.8%. IAN grew slightly in the US on the strength of VD brands, Draft FCB and Hill Holliday. IN decreased outside the US. At our CMG segment revenue increased 2.1% on an organic basis. Growth in the US was partially offset by decreases internationally. Our PR discipline group mid single digits organically while sports marketing had double digit percentage growth. The events business, which had a very tough time last year, has stabilized and was slightly negative on a worldwide basis.

Slide five provides a breakdown of revenue by region. At a high level, performance in the quarter was bifurcated between growth in the US and Lat Am on the one hand, and the rest of the world, which did not. In the US, the organic increase was 3% was due to factors we have already touched on. Broad participation across client sectors and agency leadership by media, Draft FCB, Hill Holliday and CMG. The negative impact of the tech and telecom sector was significant in this region.

Internationally, revenue decreased 1%, which includes a significant lift in currency in the quarter. The organic decrease was 11.3%. The UK decreased organically by 17.5%. While the market remains fundamentally soft, the decrease was exaggerated by two large event assignments in Q1 2009 which did not repeat this year. Together they accounted for over half the decrease on the quarterly small Q1 base.

Continental Europe has decreased 15.6% organically. The performance gap widened against the US consistent with the perspective of our operators that the recovery is lagging there. Of our top ten markets, seven saw double-digit decreases.

In Asia Pac our organic decrease was 6.5%. Here again a single tech client accounted for most of the change. We had solid growth in India while China reflected the impact of lost assignments with certain multi nationals. In Japan we had a significant presence as the overall economy continued to weigh on performance. Organic growth in Lat Am was 10% lead by growth of existing clients at Lowe and Draft FCB. Our other markets region decreased 13.6% organically with softness in the Middle East only partially offset by growth in Canada.

On slide six we track a longer view of organic revenue change on a trailing 12-month basis. The organic change was negative 10.4% March 31. As you can see, performance by this measure turned up, and we anticipate that we will continue to move this trend in the right direction for the balance of the year.

On slide seven we took a closer look at operating expenses. In Q1 total operating expenses decreased 4.7% organically. A significant lower severance, base payroll, and occupancy expense were the primary drivers. Excluding the change in severance, operating expenses decreased 2.3% organically. Q1 salaries and related expenses were $979 million compared with $997 million a year ago, a decrease of 1.7% and 5% organically. Excluding the change in severance expense, salaries and related expense decreased 2.3% organically.

There are a number moving pieces though as we invested in a disciplined manner behind agencies and capabilities that experienced growth. Our acquisition of CUBOCC, a highly traded Brazilian digital HD brought on approximately 100 new employees at quarter end. Organically, we hired behind winds at Media brands, the Martin Agency, Deutsche in Los Angeles, MRM and RGA. We also added head count in our major PR firms and stepped with an unmistakably improved trend in that business.

Importantly, base salaries, benefits and tax decreased 6.6% organically as a result of head count actions taking over the preceding four quarters and decreased 260 basis points as a percentage of revenue. This is a critical parameter for us. Head count at quarter end was 6.2% lower than a year ago. Severance expense was $10 million in the normal range for Q1 compared with $42 million a year ago or 0.8% of Q1 revenue compared with 3.1% in Q1 2009. Incentive expense in Q1 was 4% of revenue compared with 3% a year ago. The comparison reflects higher equity related long-term incentive expense due mainly to a one-time credit in Q1 2009. Temporary labor expense was 3.6% in Q1 compared with 2.7% a year ago with the increase supporting new business wins and an improving business trend in the US. All other salaries and related expense was 2.9% of revenues, a seasonally normal level that reflects some performance-based expense. This was unusually low a year ago to [0.1]% when business was slowing due to the recession.

Turning to ops and general expenses on the lower half of the slide. O&G was $421 million in Q1, an increase of 2.5%, but decreased organically by 2.4%. O&G expenses were 31.4% of revenue compared with 31% last year. Compared to a year ago, we're able to drive some incremental leverage on occupancy due to the real estate actions we took in 2009 and professional fees also decreased slightly as a percent of revenues. T&E and related expenses and all other O&G increased slightly as a percent of revenue. The latter includes the $5 million expense related to Venezuela.

On slide eight we show our operating margin history on a trailing 12-month basis. This tracks first the turnaround, then the recession, and now we trust the beginning with significant margin recovery.

On slide nine you can see our debt maturity schedule as of March 31. This picture is substantially unchanged from the beginning of the quarter with total debt of $1.9 billion. The $214 million that remained of our floating rate notes at quarter end have a scheduled maturity of November this year and are classified as current. In early April, not reflective in this chart, we took advantage of an opportunity to repurchase $20 million of the November maturity slightly below par, so $193 million remains.

Turning to the current portion of our balance sheet on slide ten, we ended the quarter with $1.94 billion in cash and short-term marketable securities, a strong cash position which is an increase of $283 million from a level year ago. You'll recall that in the interim we used $200 million to retire debt in June and July last year. In addition to cash on hand, our total liquidity position was enhanced by $650 million committed revolving credit facility that Michael described. Also, you'll recall that in December last year, we established new specialized letter of credit facility which was separately supported by $63 million of LCs at quarter end.

On slide 11 we turn to cash flow from the quarter. Cash used in operations way a seasonal use of $556 million compared approximately equal to last year. Cash used in working capital is $483 million, also approximately the same as Q1 2009. As a reminder, we typically use cash for working capital in Q1 due to the seasonality of our business while typically generating cash from working capital in Q4. In the fourth quarter of 2009, for example, we generated $426 million from working capital. Investing activities provided $15 million compared with the use of $25 million a year ago. You may recall from our fourth quarter discussion that we sold an investment from an employee benefit trust and in Q1 we collected on that receivable. Financing activities used $16 million. Seasonal net increase in cash and marketable securities in the quarter was $565 million compared with $616 million in Q1 2009.

In summary, on slide 12, we continue to see business trend in the direction of recovery, albeit with important regional variance. We've begun to grow again in the US which gave us the opportunities to leverage some of the structural efficiencies we created last year. There is still reason for caution given the global economic situation, so we will continue to manage our business carefully with a focus on cost containment at margin expansion in order to support our positioning for the strong profit growth that we believe is achievable as the recovery continues. Our financial resources remain strong. This makes it possible -- this makes possible value creating opportunities, such as what Michael described earlier with respect to our tender offer for the preferreds. Cash on the balance should increase from a year ago and our committed standby credit has grown. Now I'd like to turn the call back over to Michael.

Thank you, Frank. As you can see, the first quarter provided additional indications that we've come through the worst of the impact of the economic crisis on our business. You will remember then our last conference call we indicated that we thought organic growth would likely resume in late Q2 of this year. I can tell you that performance this quarter was better than we expected coming into the year, and that we are feeling increasingly confident about the prospects for growth in 2010.

There remain regional challenges. Some client sectors will take longer to recover than others, and we'll feel the drag of tech and telecoms for most of the year, but the potential for growth has clearly returned. In recent meetings with our senior operating leaders and their key clients, the conversations are consistently about building brands and investing for the future which is a marked change from last year. We're being asked to create big ideas that can serve as platforms for multi channel communication. We are, of course, engaged in discussions about how digital technology fits into every aspect of marketing, which is why we've been embedded digital talent in all of our companies, from advertising agencies and media companies to activation, PR, and CRM specialists. Client are particularly eager to participate in and capitalize on dynamic areas such as the social web and word of mouth marketing. And our agency leaders are very focused on making a strong digital capability central to their go-to-market strategy. But, above all, an important area of focus we believe can differentiate IPG is in the delivery of seamless integrated marketing solutions.

As the fragmentation of media and the importance of technology continue to increase the complexity of engaging with consumers, the key is to be truly holistic in our approach to marketing. For every brand and every project, there's a distinct solution that best meets the clients' business objectives. Each of these solutions must incorporate deep consumer insights, both traditional and emerging media, as well as an increased emphasis on accountability and measurement. Delivering against this mandate is something that all of our companies have at the top of their list. It's what's fueling draft FCB's successful, fully integrated model, which, once again, delivered very strong results that lead the way in Q1. Lowe is partnering with a broad range of IPG agencies. The integrated approach is at the heart of what sets our US independent agencies apart and, as a group, they posted a strong first quarter. Bringing together best in class specialist capabilities above, below and online is also what McCann WorldGroup is all about. We have very strong leadership at all of our agencies, terrific brands in every one of the marketing disciplines, and the capacity to deliver customized teams that bring the best of IPG to bear on a clients' needs. That is the integrated offering that's required to win in business marketplace today.

We are fortunate in that we also have outstanding special capabilities to include in our multi discipline teams. At CMG we have leading firms in areas such as sports and event marketing, branding and PR. As I've said before on our calls, we see our PR assets consistently winning market share. Weber Shandwick is not only the world's leading PR agency, it is that agency's strongest global network. Both Weber and Golden Harris saw good growth and strong results in the quarter.

Within our media brands offering, we have two highly competitive global networks and strength that all of our companies can tap into in communications planning, retail, hyper local marketing as well as search and new media capabilities. Our digital specialty agencies are off to a strong start this year. MRM has started to see the benefit of new business wins, RGA and [Huge] posted double-digit revenue increases. We will look to scale RGA and Huge on a regional and global basis during the balance of this year.

Internationally, we have leadership positions in India and the Middle East where we are well positioned to capitalize on economic recovery. We further added to our capabilities in Brazil with the acquisition of CUBOCC during the quarter and earlier this week we announced that Washington Olivetto, a creative icon in Latin America advertising, has joined McCann Brazil. The agency will be renamed WMcCann.

For the balance of the year our focus will increasingly turn to China, which currently represents a small percentage of our business than at a number of our competitors, but we will see the potential for growth into Russia, where we have a longstanding partnership with a powerful local player that we can increasingly seek to leverage. We'll continue to be open to opportunities that are good strategic fits for our clients or our networks in terms of capabilities and bolstering geographic strength. As we've said previously, the combination of forward-looking agencies and highly disciplined financial management will be the keys to our long-term success.

Our financial results in Q1 showed improved revenue performance, which reflects a stronger economic climate and new business wins in the latter part of 2009. Improvements on cost were also evident in our results. As our sector merges from the recession, however, our expectations going forward are that we feel we are well positioned to deliver on our margin objectives for the full year and beyond. Revenue stability and growth are clearly coming back into the picture.

The decision to tender for the preferred shares means that we're beginning to put our cash to work to enhance shareholder value, and that we believe the positive trajectory of the business is sustainable. We have the talent and the tools to benefit from the recovery and achieve no worse than flat organic revenue performance in 2010. This will allow us to deliver on our goal of operating margins of 8% or better, and having re-established the aggressive course of margin expansion that we were on in 2008 before the recession hit, continue to significantly grow profitability and further increase shareholder value in the years to come. With that, I'd like to thank you for being with us and open the floor to questions.

(Operator Instructions) First quarter comes from Alexander Quadrani with JPMorgan Chase. Your line is open.

Thank you. Alexia Quadrani. A couple of questions, first, when you said March was much better than earlier in the quarter, can you tell us did March actually come in positive for you? And then on the loss, the tech loss that you guys suffered from last year, what month actually did you see the bulk of the revenue fall off in?

Well, the answer to March, the answer is yes, organic was positive and not insignificant either. As far as the first -- the month -- I think it's been rated all year, but, Frank --.

We started to see it. It hit us in Q2 of 2009, Alexia, and we're going to feel the affects through most of 2010. It will start to taper off in the back half of the year but for Q1 and Q2, it will present consistent headwind.

And then can you talk a little bit about McCann? You have contended with some losses there over the last 12 months, I guess is tech loss being one of them, a few which are in your top client relationship. You also changed leadership there. I guess can you address the stability of our client base right now at that agency?

Yes. Look, I think McCann WorldGroup and McCann North America continue to be very strong competitors in the marketplace. We are in the process of introducing [Nick Ryan] to all of our clients, and that is being very well received. I think clearly you reference the loss in tech and telecom, but McCann continues to be very competitive. One of the interesting things about McCann is that they have a very strong existing client base. o a number of of improvements that we're seeing in our company are not necessarily from increases in client winds, but increases from existing clients, which is the base of the McCann WorldGroup. Nick is off to a fast start in getting the group together and collaborating in terms of what has to be addressed on a global basis, most recently I met with him and the whole team and I think everyone is excited about the opportunities. And we're very confident that the McCann WorldGroup is going to continue to be the strong contributor to the IPG success.

And just the last question, the good growth you saw in PR, is that pretty broad based or is it really just from one vertical?

No, I think PR is pretty well across all bases. Incidentally, it's both Weber Shandwick and Golin. I think both of those offerings are quite competitive in the marketplace and we're fortunate to have two such strong brands.

Thank you.

You're welcome.

Our next question comes from John Janedis with Wells Fargo. Your line is open.

Hi. Thanks. Good morning. Can you guys talk a little bit more about Europe? How do you envision some of of the credit down rates affecting advertising budgets in those specific countries and surrounding region if at all, and what are your people on the ground telling you about the outlook?

Look, I think the credit downgrades affect the overall economic environment. What's important is the significant client base we have there are companies that have very secure financial positions. And I think they -- I've been abroad there meeting with them, and their view is that this is an environment that they have to continue to invest to build their brands and gain market share in the marketplace and, frankly, those are the conversations we're having with those clients. So I think they have the cash on their balance sheet, and we're starting to see them spend it. Now, that said, they are cautious and let's make no bones about it. And I think they'll be very careful in how they deploy their capital which -- and cash, which makes it that important for us to continue to provide solutions on an integrated basis and that's what we're doing. So I think those clients that have the cash will spend it very carefully, but they will spend it and they do have the cash. The overall economic environment eventually affects the consumer confidence, but I do believe right now our client base is looking to expand and grow their brands.

John, on the cost base disproportionate amount of our Q4 severance came out of Europe at the end of 2009. So our folks have been on this throughout '09 and got more aggressive against it in the fourth quarter.

Okay. And so just to try to get a little more deep in terms of organic, if we take out a couple of events you guys mentioned, should we assume that kind of 1Q should mark the bottom in terms of your expectations for the year?

Yes, we would hope so, but, again, it's soft. And every day something new is happening out there. So it's hard for us to say what it's going to be, but we would hope it would be the bottom.

Okay. And one other quick question and somewhat related to Alexia's. Over the last year or so you lost some pieces of larger accounts. Is this a trend that you expect to continue over at IPG and to what extent has it allowed you to pitch for business that you ordinarily would maybe have a conflict doing?

It's an interesting question. It raises a whole bunch of areas. I'm glad you brought it up. First, let me address as the economy gets stronger, what we're seeing at our clients is they're now taking a very strong and hard look at their marketing capabilities. We're seeing changes in CMOs, we're changing -- we're seeing changes in CEOs. So whenever you see that kind of activity in the marketplace, it's obviously fair game for clients to be looking at their marketing partners on a going-forward basis. Now that's good and that's bad news. Obviously it's good news when we're participating in new business pitches and we win our fair share. It's bad news when we're the recipient of change. And I think as the economy starts to unfold we're going to see more and more of this activity and I view this as an opportunity. It just happens to be that the last couple of them that we participated in we were on the short end.

On the other side just recently yesterday we announced a win at the [Deloreal] medial pitch in terms of North America where we were up against a big competitor, Publicis, which we share that client with and we won. So there are circumstances where we're going to win our fair share, and there's circumstances where as the clients look at these things we're, unfortunately, going to be on the short end of it. I think the key here is making sure we're paying attention to our clients and offering up all of the best offerings that we have as a company. And I think we're going to see that goal through the entire year. So some clients will be putting us up and our competitors up for review. We'll be in the pitches. I'm highly confident that in the big pitches we will have a seat at the table and we're going to have to share, you know, in terms of some wins and some losses. And the other part of it is that a lot of clients share their marketing services among, frankly, the big four holding companies and some of the wins that we have we can announce. We pick up additional business from a competitor, whether it be over in Europe or in domestic, and we don't announce those wins. So it t goes to the point of the strength of our relationship with our clients, and that continues to be very strong.

Thank you.

Next question comes from Matt Chesler with Deutsche Bank. Your line is open.

Yes. Good morning. Michael, a question for you, or Frank even, would be as you see growth come back into the business in certain parts of the regions, have you begun yet to have any discussions about expanding scope? And can you address whether the environment for recalling back some of the pricing concessions, if you will, if you view it that way, that you had to make during the downturn, what's your view on the ability to recover some of that? Would it be client willingness to accept some cost increases?

Yes. That's a fair question. And I do think although it's anecdotal that as the business is getting stronger, the business folks are taking a stronger position versus the procurement side. That said, procurement is going to be sitting at that table and that hasn't gone away. I think the client base has gotten a taste of the fact that procurement is a very important part of the pricing mechanism. But I do believe that we're seeing some semblance of reasoning from a business perspective coming back to the table. And I think that bodes well for us in terms of scope increases. And the answer is yes, in order to see growth from our existing client base and in order to put forth the organic numbers that we're putting forth and we expect to see for the rest of the year, we're going to see scope increases at our major clients. And that's the key focus of where growth is going to come from, frankly. And I do think that the business aspects of this are taking a broader picture versus just the cost savings in it.

And then on the cost side, as marketing communications goes from analog to digital, does the cost structure of your business need to fundamentally change as we emerge from the downturn? Is there -- what are your comments about the margin profile? And what are you doing specifically to take advantage of the technology enhancement that's available to leverage the cost base?

Well, first of all, there's no question that the talent issues concerning digital puts pressure on salaries. All right. And we know that it's very competitive. RGA, for example, won a significant amount of new business at the end of 2009 and they had to go out and recruit over 100 people, for example. And so, therefore, it was very competitive in the marketplace from a salary point of view. The other side of that is once you get the talent in there, digital is much more labor intensive and, therefore, we're getting a bigger piece of the pie in terms of the dollars being spent. And what we have to focus on is the efficiencies of how we produce those products. And so you see, for example, RGA, MRM and Huge and all of our agencies focusing on retaining as much of that money internally as opposed to going outside in terms of production. So I think you're going to see a focus on the production side which will enable us to recover some of the increased cost as a result of the talent. But it is very competitive out there, but I do believe that if we focus on smart ways of doing this, for example, the WorldGroup has launched EXP which is a global production capability where we can be much more efficient in terms of meeting the demands of global clients. It's those kind of structures and those kind of things that we're looking at to increase margins.

Just one more question. One of your competitors stated recently that he thought potentially greater amount of digital work could potentially accretive to margins. Do you share that view?

Yes. As long as, as long as we continue to keep the dollars and be smart about how we handle the production and content and all of the parts that go into it, yes, I think the potential is there. But we have to be very careful in terms of how we manage our costs and -- but no question that that's where the dollars are flowing, and we have a very critical view on how we look at the expenses that relate to that.

All right. Thanks.

Our next question comes from Peter Stabler with Credit Suisse. Your line is open.

Thanks. Good morning. I was hoping you guys could compare and contrast the expense pressure on the salary line related to growth coming from existing clients, in other words scope increases versus new business wins. I guess to put it another way, you're seeing growth from existing clients as scopes increase, is there an opportunity to increase capacity utilization and not necessarily go out and hire new heads?

I mean, you put your finger on the whole story in terms of the leverage that we get from our existing head count. Yes, that's why I say a critical component on our growth is through existing clients and scope increases because, yes, obviously it's incumbent upon us to be more efficient in utilizing existing talent. So as that scope increase occurs, we don't hopefully have to go out and hire a lot of people behind that. But there's no question that we have taken hard looks at our salary components evidenced by the actions we took in 2009, which is why you saw the increase in hires in the first quarter because there is a certain amount of hiring that we have to do to support the new revenue. But what's important here is that the people we're hiring, are a, relate to the revenue stream, and that's an important component, and, two, the disciplines of the people we're hiring are much more focused on the new type of projects and revenue that we're seeing, ie, the digital components. So it's a, it's a balancing act in terms of using existing efficiencies as well as hiring into the revenue stream. And that's really what the leverage opportunity for us is. If we can grow the revenue without proportionally increasing our salary and SRS costs, then that's the level of the margin expansion. Incidentally, when we tell you that we think flat or slightly up for 2010 will give 8 or better margin, that assumes that we're going to be able to leverage those efficiencies in terms of margin expansion.

Okay. And a quick followup, on the incentive accrual I think you said it's running about 4% in the quarter. Is that a safe run rate to assume the remainder of the year?

3.5% is probably the right number for the year, Peter.

Thanks, Frank.

You're welcome.

Our next question comes from Craig Huber from Access 342. Your line is open.

Yes, good morning, Craig Huber here. Frank, in the past I've asked you this before. This billion -- $1.95 billion of cash in your balance sheet, how much of that do you really think is your money to do what you want with it in light of the fact that you are increasing your credit line basically doubling it to $650,000, which tells people that you feel you need that. All of that cash is not yours to use. In the past you said you think it was $600 million to $700 million on average over the course of the four quarters? What do you think it is? I have some followups.

Nice to hear from you again, Craig.

Likewise.

As we've said in the past it's all cash. What we've said on this call today, which is a very bullish statement, two things that we're out there tendering now for a very costly secured balance sheet in our preferreds up to $400 million. We've also said that we've got the wherewithal to deal with the maturities FRNs that mature in the fourth quarter for another $200 million. So there's $600 million coming off our balance sheet right there to clean up and to deleverage a balance sheet that we've been working with as this turnaround has taken hold and we are more comfortable with the direction of where we're going and where the economy is.

Yes, Craig, let me just add to it that one of the things that you can see, and, frankly, one of the reasons we were holding off employing that excess cash has been consistency in our balance sheet. And I think what you've seen is if you look at our cash line over the -- even during a very difficult environment, the consistency in our levels of cash has been present. And the fact that we've been winning some media pitches recently bolsters that assumption in terms of the sustainability of our cash position. So, therefore, we wouldn't launch the type of transaction that Frank just alluded to and we announced this morning if we didn't feel that that was sustainable going forward. And let me just reiterate, if the cash is on our balance, sheet it's ours. Okay? And I know you ask that question every call and I think we've given you the same answer. There's a certain level of cash that we have to maintain on our balance sheet, but obviously what we announce this morning further enhances our flexibility and our comfort levels of those positions.

And, Mike, I'm sorry to ask this again, what but what is that number roughly out of the $1.95 billion you feel you have to leave on the balance sheet? Certainly you can't go out there and repurchase all of your debt for the entire $1.95 billion. We both know you can't bring it down to zero, your cash, right? I just want to get -- in the past you guys have thought about $600 million to $700 million. That was roughly a year ago. It's obviously a little bit higher than that I assume now just from your free cash flow. But you obviously paid off $200 million in debt last year. What do you think that true number is right now?

Let me put it another way, okay? Right now we announced a tender for the 370,000 shares, which would equate to if we get every bit of it $400 million. And we've also said that we will use existing cash, and we also said that we have enough cash to meet the FRNs, all right, the flowing rate notes, of $195 million. So if you put the two of those together, our view is that we have enough cash to do that. So why don't we use that as a minimum number that we think is cash that we can use to deploy. Now, whether that number is higher as we go forward will be a function of how the overall economic environment flows through.

Okay. And then my totally separate question, please, and I appreciate that. In Europe your performance that you talked about the two events in the 1st quarter last year to explain half of the organic revenue decline in the UK. Even if you do adjust for that, of course, still lagged your peers. I just wanted to get a little more granular, what else exactly hurt the UK versus your peers year over year. Also, just as importantly, can you talk a little bit more about what happened in the continental year. We all realize the economy is bad there. It also lagged generally versus the peers as well. It's just want to get a sense of what the differences are. Is it just the telecom -- tech and telecom spill over, over there as well? What else can I give us, please?

Yes. Certainly the tech and telecom spilled over there. Frankly, which gets to the question of McCann, McCann UK is a very solid offering. They've had some business wins there. And we've made some changes there in personnel and we're pleased with what we're seeing there. So, I think the affect of tech and telecom and the one-time events we're referring to are the key to it, and the rest is going to be just general economic environment.

Yes, there's no other events out there, Craig, that are worth calling out. So it's client specific by market.

And then lastly, please, in China you mentioned a couple multinationals there. Was that the entire reason for the decline over in China?

Certainly that's a key component of it. We did win some -- it hasn't been publicized, we did win some business out of China. Again, as I indicated in my opening remarks, we are smaller compared to our competitors there. We have over 1,000 people there. We service our multi national clients there. We have strong offerings both Lowe, Draft FCB, Weber Shandwick, McCann WorldGroup. So we do have strong offerings in China, and it's going to be a key focus on us for the balance of this year to see what we can do to bolster our offerings, obviously our media business as well. We have to bolster our offerings in China. It's a key priority for us in 2010.

Great. Thank you.

You're welcome.

Our next question comes from James Dix with Wedbush. Your line is open.

Good morning, gentlemen. Just if you get a little more color into the sequential improvement you saw in your organic growth, I don't know whether you have this number, but if you stripped out the tech telecom category, how much would that -- how much would you have improved in the first quarter from the fourth because a lot of people have been trying to compare the realm of improvement over the various agency holding companies and trying to gauge what the overall industry inflection is. And then I have one followup on that.

Now, I'm glad you asked that question. It was a point that we were discussing. On the US side if you stripped out just in the first quarter, if you stripped out the tech and telecom, we would have been over 5% organic growth in the US. So one of the questions was how are we comparing to competitors? So if you pulled that out, we're quite competitive in the US and we're excited about this number on the global basis --

It's about 1% organic growth.

Do you know what those figures would have been in the fourth?

We do not. We do not. Due to seasonality of the business that's a tough one.

I understand it's picking and choosing, but the fact is it has such an impact on us, and will continue to have an impact on us for the rest of 2010. I think it's fair for us to break that out.

Okay. And just one followup, just looking at Europe in particular, do you have a breakout as to what your revenue exposure is from Portugal, Ireland, Italy, Greece and Spain. I wouldn't use the acronym, and do you have any sense just as you look forward in the year, how do you see the progression of other markets returning in growth now that you've seen it in the US? Just who do you think is going to be next, just any color you can give on kind of geographic recovery.

Well, certainly US -- the question was does the rest follow the US and obviously we have a bias on the US a bit. But clearly Latin America, India, China and particularly in Brazil we've seen some strong numbers and we believe that will continue to be strong. And, frankly, Europe -- Western Europe will lag that group.

And when you look at Western without disclosing specific countries, our largest markets are the UK, France, Spain, Germany and Italy. So your other markets you're referring to are at the lower end of the size scale for us.

Okay. Would you say that on a consolidated basis under 5% for those countries?

That's fair.

That's fair.

Okay. Okay. All right. Thanks very much.

Thank you.

Our next question Dan Salmon with BMO Capital Markets. Your line is open.

Thanks, guys, for taking my question. I'll just ask for Frank's sort of broad outlook on a few expenses and cash flow items, namely stock comp, CapEx and severance.

On the expense line items, we're one quarter in. When we look at how we performed versus our budget, we're pleased. We saw base salaries down organically north of 6%. We saw a little creep in temporary labor, but that's reflective of some of the new business pipeline we've seen. We have to continue to monitor that. We're seeing some normalcy come back into incentive compensation. That gives you some view that operators feel the operating plans for the year are still on track. So all in all I think we feel pretty good about the expense line. But, as Michael had made in the opening comments, we need to continue to be diligent about it. I think on the stock based comp number, I'm not sure I have that in front of me, on the CapEx number for the year of working capital, probably $100 million is a good number to model.

And on severance specifically obviously down considerably there to about $10 million. Are there any major sort of management moves at specific regions or agencies that would cause that to change?

As of -- the 1% of revenue, which we've kind of guided people to, still seems like a reasonable number.

Yes, and the other side is if we start seeing that we're -- the particular region or discipline is not performing the way we are, we -- I think we've indicated a pretty good example of we'll take -- we'll be quick to take actions to reflect our cost base in that area.

Got you. Thank you very much.

You're welcome.

Next question Matthew Walker with Nomura. Your line is open.

Thanks very much. Good morning. Just a few questions, please. First is in terms of the UK and Europe, in which quarter would you be expecting a return to organic growth? The second question is on tech and telecom, is that the effect from one client or how many clients is that the effect from? And then, lastly, on your margin expectation you said that the business has got off to a stronger start overall than you expected. Would you be willing to say that you can do better than 8% margin for this year?

Let me answer that one first. What we said we expect -- this is the first quarter. So we're not about to, as I always say, raise flags and say happy days are totally here again. Right now what we say is that we should be able to do 8% or better given a flat or slightly up organic. Obviously if we do better on the revenue side, we would hope to be able to do better on the margin side. We can't tell you specifically when Western Europe is going to turn positive. The issue is -- the way we look at it is on a global basis obviously things are better and we would hope to see us return to growth sooner rather than we -- later than when we had said before, but I can't tell you specifically. Maybe you can tell me when is Western Europe going to turn positive. But I think overall the trend is what we say, and that's what we're comfortable with.

The tech and telecom question, it's not just one account.

Right.

It's probably six or seven accounts of which more than half of it relates to one account.

Right. It's three big accounts, bigger accounts I think is the way to look at it.

Thanks very much.

Our last question comes from Tim Nollen with Macquarie. Your line is open.

Thanks. It's Tim Nollen at Macquarie. I have two questions, please. First on the Chevrolet loss, could you explain a bit more what that was? My understanding was it was a number of the Chevrolet brands on the creative side. If so, it sounds like a pretty big loss. And if that's the case, do you feel like you have been able to offset that with some of the wins you've had in auto recently or conversely does it position you for some other potential wins in autos. Secondly, on the new or extended credit facility, you've got a slide showing the $335 million. I guess that's the one that's now been replaced. What are the new covenants, if they are different and if you could comment on any use of cash, please?

Let me address the Chevy. The Chevy loss was actually North America and it was the creative in North America. As I indicated, we retained the dealership business. So in order of magnitude we had said it's not a significant number compared to our overall revenue. I know it sounds like it's big, but if you look at it from a North American point of view and the fact that it's narrowed to that specific -- those specific projects, look, we don't like to see it being lost at all, but it's not significant. And, frankly, the numbers that have been out there with respect to the estimated revenue impact are, frankly, a little bit high, especially since we retained the dealership business which initially there was a question as to whether that business went over. And we've had confirmation recently that it's their intention to keep the dealership business with Campbell-Ewald. So the number is not that significant. The other question had to do with covenants.

It's all in the 10Q we just released.

That's in the Q, and frankly we'll leave you looking at those numbers in our Q.

Okay.

Well, thank you all for participating. Obviously a lot has happened in the first quarter. We're excited about all of the opportunities that we have and, frankly, we appreciate the support, and we look forward to our next call in the second quarter. Thank you very much.

This concludes today's conference. We thank you for your participation. At this time you may disconnect your lines.