Interpublic Group of Companies Inc (IPG) 2010 Q3 法說會逐字稿

Good morning and welcome to the Interpublic Group third quarter 2010 earnings conference call. (Operator Instructions) This conference is being recorded, if you have any objections, you may disconnect at this time. Now I'd like to introduce Mr. Jerry Leshne, Senior VIce President of Investor Relations. Sir you may begin.

Thank you. Good morning. Thank you for joining us. We had posted our earnings release and our slide presentation on our website. www.Interpublic.com and we'll refer to both in the course of this call. This morning we are joined by Michael Roth and Frank Mergenthaler. We will begin with prepared remarks to be followed by Q&A. We plan to conclude the forward market open, at 930am 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 for joining us this morning as we review our results for the quarter and the first nine months of 2010. As a side note, we are calling you from Richmond, Virginia, the home of the agency of the year, The Martin Agency. We are pleased to be here, and in fact, we had our board meeting here yesterday, as well. I'll begin by covering the headlines of our performance after which Frank will then take us through the financial results. I'll then return with additional detail about what is taking place at our key agencies and some closing comments. As always, we will always leave plenty of time for question-and-answer.

In looking at performance we are pleased with the third quarter that saw strong revenue and profit growth. Revenue increased 9.4% in the quarter, both as reported and in terms of organic revenue growth. It is gratifying that contributions came from such a broad range of our portfolio.

Our US organic revenue growth was 10%. Key emerging markets such as India, South Africa, Brazil and the whole of Latin America posted strong double-digit organic growth rates. Europe, however, continued to lag. In terms of client sectors, automotive, package goods, and financial services all posted strong, double-digit growth.

Health and personal care was up in the mid single digits, as was technology and telecom, including the fact that we are cycling out of some significant assignments lost last year in the category. At the agency level, there was strong organic growth at many of our companies. Draft FCB, Lowe and Partners, Media Brands, Weber Shandwick,Hill Holiday, Mullen, Jack Morton, and Octagon. Digital was also a material contributor to our growth in the quarter, with very strong performance at McCann's MRM unit, R/GA; huge, as well as the digital capabilities within our PR firms and the US independent agencies.

Overall, we are seeing a fair bit of activity on the new business front and the pipeline is solid at most of our agencies across all disciplines. On a trailing 12 month basis, we remain net new business positive through the end of the third quarter. The top line performance in the quarter, and year-to-date reflects the economic recovery. More important, our growth is at the direct result of the investments we made during the past few years in talent and in developing markets and emerging media, as well as the strategic actions we've taken to strengthen and reposition a number of our key agency brands. While the first nine months of the year have been encouraging, and the tone of client conversation s has improved, there is still a degrees of uncertainty. Now, turning to the bottom line. Operating income was $100 million. An increase of 72% compared to a year ago. Operating margin was 6.4% compared to 4.1% for 3Q 2009, which speaks to our continued operating discipline.

The people, systems and tools we put in place to insure that we can effectively manage the business are clearly working. Earnings per diluted share were $0.08, up from $0.03 in the comparable period last year. This performance further confirms that we are confident that we will deliver on our margin objective of greater than 8% for 2010. Our balance sheet continues to be strong, and we have ample financial resources at our disposal.

It is encouraging to see our strength recognized by the rating agencies again, as this morning, Fitch upgraded us to BBB from BB-plus, a rise of two notches. At this point, let me hand things over to Frank for an in depth look at our first half performance.

Thanks, Michael. Good morning, as a reminder, I will be referring to the slide presentation that accompanies our webcast. On slide two, you will see an overview of the quarter. We are pleased with operating results. Q3 revenue was balanced between the US and the International. We continue to maintain effective discipline over expenses. And in producing the strong profit growth Michael mentioned, we realized over 200 basis points of operating leverage on combined base pay roll and temporary labor expenses.

We also leveraged occupancy expense by 100 basis points and experienced lower severance expense. Going the other way, in light of strong year-to-date performance in a number of our agencies, we had higher expenses for incentive compensation, which contrast to a year ago when we decreased the incentive accrual. We ended the quarter with cash and marketable securities of $1.9 billion on the balance sleet, an increase of $167 million a year from the year ago level, while having used $287 million to purchase a majority of convertible preferred stock and a smaller amount of debt earlier this year.

Turning to slide three, you see our P&L for the quarter. I'll cover revenue and operating expenses in detail on the slides that follow. It is worth noting here that our effective tax rate in the quarter was 35%, which is below our current run rate due in part to the reversal of evaluation allowances in Europe.

Turning to operations on slide four, beginning with revenue. Revenue in the quarter is $1.56 billion, an increase of 9.4%. Compared to 3Q 2009, exchange rates had a negative impact of .7% and acquisitions contributed .6%. Our organic revenue change was an increase of 9.4%, due to growth with existing clients and net new business across all of our disciplines.

Regionally, we were very strong in North America, Latin America, South Africa and the Middle East. We had double digit growth in auto, financial services, and packaged goods, as well as a rebound in tech and telecom. For the first nine months, organic revenue was 5.2%. On the bottom half of this slide, you can see the revenue performance of our operating segments. Our integrated agency networks, organic growth was 8.8%. Growth was strong in both the US and International markets, with leadership by Draft FCB, Lowe and Partners, and Media Brands.

At our CMG segment, revenue increased 12.3%, on organic basis, reflecting double digit growth in the US and Internationally. We had growth across the board at all our principal operating units and disciplines, PR, events and sports marketing.

Slide five provides a breakdown of revenue by region. In the US, the organic increase of 10% was driven by broad participation across client sectors and disciplines. We were led by Draft FCB, Media Brands, Lowe and Partners, as well as Hill Holiday, Campbell-Ewald, Weber Shandwick, Jack Morton and Octagon. International organic growth was 8.6%. In the UK, revenue increased 3.9% organically, led by our marketing service specialist agencies.

In continental Europe the organic decrease was 1%, a level consistent with the second quarter and our expectations. Spending by our multinational clients held up better than that of region and local clients. Among our largest markets, revenue increased in France, but decreased in Germany, Spain and Italy. In Asia pack, organic growth was 3.5%. Growth in India, Australia, and China was partially offset by a notable decrease in Japan. Asia pack, ex-Japan grew 10% organically.

Organic growth in Latin America strengthen to 28.8%, an outstanding performance led by our agencies in Brazil where we saw significant increases by multinational clients across several sectors. Our other markets grew 27.1% organically, primarily reflecting strong performance in South Africa and the Middle East.

On slide six, we chart our longer view of our organic revenue change on a trailing 12-month basis. The most recent data point is a positive 1.1%. The trajectory this year indicative of the recovery we are seeing in many markets around the world.

On slide seven, we take a closer look at operating expenses. Q3 operating margin was 6.4%, compared with 4.1% a year ago. Salaries and late expenses decreased to 64.5% of revenue, from 66.1% in Q3 of '09 Total SRS is $1.01 billion, compared with $944 million, an increase of 6.7%.

Underneath that result, there are a number of moving pieces. Base pay roll, benefits and taxes was 53.1% of revenue, compared with 56.3% of revenue a year ago, an improvement of 320 basis points. At the same time, we continued to invest pioneers of growth in portfolio, such as at Media Brands, Draft FCB, R/GA, MRM and Hughes, as well as public relations.

Across our agencies, we are adding digital talent. Head count at quarter end was 41,200 including the consolidation of DLKW. This is an increase of 2.3% from a year ago. Severance expense was $16 million, which is in the normal range for Q3, compared with $23 million a year ago, or 1% of revenue for this year compared with 1.6% a year ago. Incentive expense was 4.2% of revenue, compared with 2.7% a year ago. As I mentioned earlier, the comparison reflects higher expense for our annual and long term incentive programs due to strong performance against budget, as well as a decrease in that expense a year ago due to the recession. Temporary labor expense was 3.8%, compared with 2.9% a year ago to support growth. All other salaries and late expense was 2.4% of revenue, compared with 2.6% last year.

Turning to office and general expense on the lower half of the slide, O&G was $452 million, or 29% of revenue, compared with 29.8% a year ago. Expenses increased 6.3%, largely due to higher pasture expenses, which are offset in revenue. Within O&G, we had significant leverage on occupancy expense, which was 8% of revenue, compared with 9%. This was a result of both revenue growth and decreased rent expense as a result of real estate efficiencies achieved over the past 12 months. Professional fees were 1.6% of revenue, compared with 1.9%.

Expenses due to travel, entertainment, office supplies and telecom increased slightly as a percent of revenue due to the high level of business activity. All other O&G was 15.7% of revenue, 30 basis points above last year, primarily reflecting increasing pasture expenses. On slide eight, we show our operating margin history on a trailing 12 month basis, which was 7.8% at the end of the third quarter. On slide nine, you see our debt maturity schedule as of September 30, with total debt of $1.9 billion. We have a senior note maturing of $192 million maturing in a couple of weeks, which we plan to pay with cash on hand. As a reminder, we also purchased approximately $200 million in debt in both 2008 and 2009. Our August 2011 maturity is now classified as current and is only $36 million.

Turning to the current portion of our balance sheet on slide 10. We ended the quarter with $1.9 billion in cash and short term marketable securities in the balance sheet, an increase of $167 million from a year ago.

On slide 11, we turn to cash flow for the quarter. Operations generated $40 million, compared to $125 million in Q3 2009. Working capital used $60 million a quarter, which is a seasonally normal level for the third quarter. Investing activities used $76 million, which includes our purchase of DLKW, compared with the use of $50 million a year ago. Financing activities used $12 million.

In summary, on slide 12, we are pleased with the performance in the quarter and year-to-date. Alongside strong growth driven by the competitiveness of our brands, we continue to manage expenses carefully. Importantly, we are also continuing to invest in growth and efficiency. This will allow us to continue to deliver on the margin expansion and increased profitability that we believe are achievable going forward. Now, I would like to turn the call back over to Michael.

Thank you, Frank. As you can see, our third quarter showed further evidence of the broader economic recovery and the degree to which we have competitive offerings, including growth areas such as marketing services, digital, as well as a number of the emerging economy. We are pleased with our performance year-to-date.

Our agencies that are seeing growth are investing in talent, but we are also keeping close control on our costs. That is why we are confident in our ability to deliver our stated operating margin objective of greater than 8% for this year. This level of performance would represent a significant step up from 2009 margin, and would put it back on track to meet our ultimate goal of peer level margins within the next few years. Our momentum in terms of profitability demonstrate that we put in place the right systems and people to effectively manage our business. The high quality of our professional offerings has also allowed us to achieve our goal of competitive organic revenue growth in 2010.

Developments at the agencies are key, and ensuring that we'll build on that momentum. So what I would like to do now is cover those areas in greater detail.

For the quarter, and year-to-date, as was the case in 2009, performance at Draft FCB was outstanding. The leadership of CEO, Laurence Boschetto and his team, along with the agency's integrated model, is driving strong results for clients around the world. During the quarter, they posted wins with Electronic Arts and a number of existing clients, including new assignments in Asia with Sony and India's Tata Group.

The appointments of Michael Fassnacht, as President in Chicago and Dana Maiman, as CEO in New York put two of the network's stronger talents in more prominent roles to which they can add even more value to the organization. Media Brands was also a very strong performer in the quarter. UM won MasterCard in the US, its Lodestar unit in India with main agency of record for Coke throughout Asia and Echo chose UM as its global AOR, with regional hubs in the US, UK and China. Initiative continues to grow its business in steps with major clients, such at Hyundai/Kia and Home Depot, as well as posting key regional wins in Europe with Bang & Olufsen and Unilever surge assignments in Latin America.

Media Brand ventures continues to rollout Reprise globally and to launch new business models such as Velociter, which will partner with early stage new media companies and start ups. The acquisition of Cubo is integrating quickly and we are excited about the JV in India with indirect of avenues, a leading local digital agency. The recently launched Media Brand, Shopper Science Practice, won business from Home Depot, Boston Market and Coke during this quarter. Lowe's results continue to improve and the agency will be profitable in 2010.

Headline news included the celebration of our 50 year relationship with Unilever and strong performance on that client's business. A combined Deutsch-Lowe global team won a major B2B assignment for Microsoft's Cloud computing platform, validating the strategy to combine these agencies. Work on that launch will start shortly. We are pleased with the integration of DLKW, as the agencies are coming together in our Sloane avenue space. Lowe has also launched Open, its retail activation unit in China and Brazil during the third quarter.

At CMG, the work of Weber Shandwick and GolinHarris, keeps winning awards and more important, taking market share from our competitors. We see PR as an important growth area for the business in an age of social media and believe we have some of the strongest agencies in the industry. Sports marketing performed well, and the events continued to pick up in Q3. Notable wins included new work with Nestle, Unilever and Verizon. Collaboration is a hallmark of the CMG unit and credit goes to Harry Simon and his team for creating a collegial and successful culture.

The domestic integrated independence are capitalizing on the strength of the US recovery, and we are seeing terrific wins and talent join agencies such as The Martin Agency, where we are today, Hill Holiday, Mullin and increasingly Gotham. Turning to the McCann World Group, I recently attended the agency's meeting to launch its new global strategic division. The work MRM is doing for GM in the digital CRM space globally is growing strongly. The McCann health care offering is also powerful globally. And the addition of W and its creative fire power in Brazil is already leading to new business momentum. Nick Brian and his team are engineered committed to making McCann World Group the world's best marketing solutions network.

There have already been notable additions to senior management. A new CFO for the organization from the Media Brand leadership team, a new global CEO was named for MRM and another promoted into that role at McCann health care. Both will take these units to new levels. A new head of global accounts and a new President for the midwest have also been brought on recently. Additional strategic and personal moves will doubtless be required at the World Group, but we feel confident that we have the right leadership and offerings in place.

Before turning to questions, I wanted to close with some remarks about our outlook for the fourth quarter and to reiterate our commitment to putting the balance sheet to work on behalf of our shareholders. Q4 is important to our overall results. The quarter has always had a significant level of variable project spend. Visibility to that project business carries with it a degree of uncertainty. Nonetheless, we are very confident in the quality of our offerings. The tone of the business is fundamentally solid, and clients' liquidity is strong. However, with comps becoming more challenging and some sectors in client winds cycling stronger 4Q 2009 results, we see solid but moderating growth for the balance of the year.

IPG's performance in 2008 was its best in nearly a decade. Last year, despite the worst recession any of us have experienced, our strong professional offerings and strong conservative financial management allowed us to hold on to much of the margin progress we had made, and positioned us for the recovery. The first nine months of 2010 have demonstrated our ability to achieve competitive organic revenue and get back on track restoring the margin expansion.

The tone of the business as we look to 2011 remains solid. Media and marketing continue to grow more fragmented in technology plays an increasingly large role in consumers lives. Emerging economies such as Latin America, India, China, Russia and Africa are also proving they are here to say and represent long term growth opportunities. All of these factors will work in our favor because a diversified, integrated provider of marketing services like IPG is vital for clients to navigate and succeed in this complex environment. We will share with you in much greater detail the state of our key offerings in our revenue and profitability goals going forward at an investor day to be held in New York in late March of next year.

This fundamental belief in our Company's long term future, coupled with all of the work we have done to bolster our financial infrastructure in recent years, has put us in this strong position. Recent performance, including the impressive results announced thus far this year give us confidence that the strength of our cash flows wills allow us to meet the needs, with disciplined reinvestment in the business, including talent acquisition, targeted M&A and high growth competencies and geographies, and furthermore we will continue to explore additional options for the return of capital our owners, including share buybacks and dividends. We are in a position to consider these actions, because we believe and we see results in recent years as part of a sustainable long term path to achieving our growth of competitive top and bottom line performance. With that, I'd like to thank you for your time and open the call for questions..

(Operator Instructions)

Our first question today is from Alexia Quadrani, with JPMorgan. Your line is now open.

Thank you and congratulations on a great quarter. Just two questions. If you can talk about -- any color you have on how the quarter progressed and any early read into what you are seeing in October. And the second question, maybe for Frank, at this point or stage in the recovery, what do you really see as the leverage for the margin improvement in 2011?

As you know, on a monthly progression basis, we don't look at our business that way. It is certainly a difficult measurement for us given the comps that we were coming off last year. So, I know your question refers to the fact we constantly saw a month to month increase. We didn't quite see that in this quarter, but nonetheless our results stand for itself in terms of our strong improvement.

With respect to going forward, Alexia, we still believe the strongest leverage, or operating leverage is base salaries. We saw dramatic improvement for the three months, we've seen it for the nine months, and as we look into 2011 that will continue to be our area of focus to drive greater leverage in that cost bucket.

And Mike, just going back to your comments, even if you didn't see a month to month improvement, necessarily, you didn't see great variability, either in the sense we shouldn't read into that that you had a --

No.

Okay.

And again, I know your next question Alexia, is what do we see for the fourth quarter? We continue to see a good tone from our clients, so we should expect a solid quarter in the fourth quarter.

You mentioned use of cash. Any sense in terms of timing of maybe a possible announcement on that front?

No -- yes. As we always mentioned, what we wanted to see was the sustainable pattern in terms of the economic recovery. And as we get closer to that and the confidence level in the fact that we are not going to be seeing this large double dip that everyone was concerned about, and obviously the likelihood of that becomes greater for us. But we constantly have to look at that as a possibility.

Okay. Thank you.

You're welcome.

Thank you, your next question is from John Janedis with UBS. Your line is now open.

Thank you, good morning. Frank, you referenced the increase in incentive comps. I'm wondering as we move through the fourth quarter and next year, does that stay elevated above the 3.5% to 4% target as a percent of revenue.

John, the 3.5% to 4% is still a reasonable range. The way it works is, we go through our mid year reviews. We have better visibility in the back half of the year. That happens right after the relief in the second quarter. So as we get a greater degree of comfort level we adjust our accrual and we feel our businesses are outperforming the budget, so we had to move that accrual up. But that's just the phasing of the accrual. It still should in the 3.5% to 4% range.

Yes, I mean we're still converting the revenue, which is the heart of your question John, as an attractive rate. And that one, as Frank indicates is variable but for the full year, we'll be consistent with what we said.

Okay, thanks. Just on the project business, I know it is early and you mentioned that, but can you help us think about where we've come from? Meaning, how much have we fallen from 4Q '07 through 4Q '09?

Well as you remember, if we go back to the calls in '08 where we saw a significant end drop, we put out a number of roughly $75 million in project business in the fourth quarter. So, that will give you a range in bearing in terms of significance in the fourth quarter. Obviously we are not in 2008 now. We are in 2010, so that will give you some level of insight.

Okay. And maybe one last question from an account perspective, have you then fully cycled some of the pieces of losses from a couple of your larger clients?

No. We still have the Microsoft and Verizon businesses is still running off. We had said about a 1% impact on organic and that's still the number.

When does that fully roll off, Michael?

That should roll off by the end of the year.

Great. Thanks a lot, guy.

Okay John, thanks.

Thank you. Our next question comes from the line of Brian Shipman with Jefferies. Your line is now open.

Thanks. Just one question on the revenue picture and then a cost question. If you could just add some discussion maybe as to what kind of visibility you are getting into 2011, spending plans from your clients. It is budget time of year. Is there discussion on increased budgets or increased spending for next year, or do you see things sort of flattening out here?

And Frank, on the cost side, you described the third quarter severance of $16 million as normal for the third quarter. There is always going to be severance every quarter, but $16 million sort of appeared high to us given the 10% revenue growth. Is $16 million a normal quarterly run rate that we should expect going forward?

I will comment on the revenue thing and Frank can comment on severance. The meetings I've been having with our major clients are consistent with what they had said, and that is in a recovering market, and certainly as they expand in the emerging markets and we see growth in emerging marketers, they're going to spend those marketing dollar to support the brands. Although it's early for 2011, I think absent a hiccup in the overall economy, we're going to continue to see that kind of spend. Our visibility, as you say, we're in the process of budgeting and going through the bottom's up budgeting for our numbers, but certainly the tone is solid in terms of '11. We won't really see the -- frankly, once we finish with the fourth quarter, we will have a better handle on '11, but right now, what we don't see is major cutbacks.

On the severance question Brian, we have been out there in a normal environment, 1% of revenues is a reasonable number. Q3 and Q4 at times sees greater activity there as people look forward to the next year and how they're going to meet the continued expansion of our margins. Again, we still believe the 1% is a reasonable number for modeling. Hello?

Thank you.

Okay, Brian, thanks.

Thank you. Our next question is from Peter Stabler with Credit Suisse. Your line is now open.

Thanks, good morning. Nice quarter, guys. Question on Europe. I was wondering if you could drill down a little bit more. Michael, I think you mentioned that multinationals were performing better than local clients in that geography, yet my understanding was, and perhaps incorrectly, was that the Microsoft loss and some other tech losses had disproportionately impacted Europe on an organic growth basis. I was wondering if you could give a little color there because your three largest competitors were able to turn the corner on organic growth in Europe in the quarter.

Well first of all, the UK in particular, we did see positive organic growth. Let me pull that out. You remember in the second quarter we had a difficult comp that we had to overcome, but in the UK, it was positive. We're seeing positive growth in France. And the rest of Europe is lagging, if you will. I don't recall saying that we saw the bulk of that Microsoft running through Europe, and I don't think it's true, actually.

But, again, I think local markets is what is driving the performance there, and we've already said that we made some personnel changes in Europe. We're focusing on our cost profile in Europe and there is work to be done for us in Europe, but obviously we are encouraged by what we're seeing in the United States and the rest of the world. I think Latin America, the recovery there and the spend there is terrific. India -- we are seeing great growth in India. And obviously the other markets are offsetting whatever slowness we're seeing in Europe. And frankly, again, we did not count on a big recovery in Europe, so this is totally consistent with what we had planned.

And in those other geographies that you just mentioned; Latin America and lets say Asia pack, minus Japan, would you characterize the situation there somewhat differently in so much as local clients are contributing equal or better?

You don't get to those strong double-digit recovery if you are not having local client action. So, I think yes, there is a broad range of spend in those economies.

Great, thanks very much.

Thank you.

Our next question from David Bank with RBC Capital Markets. Your line is now open.

Thank you, a little bit of a follow-up, I guess, on that last question. The Latin America and the rest of the world markets, the acceleration was just extraordinary. So the first question would be, did you kind of see that coming last quarter? Did it actually impact the overall investment into the business in any way? In any meaningful way that sort of impacted margins for the quarter. And are you seeing continued strength to that order of magnitude? Any more color you can give on kind of high 20% growth across those regions would be great.

It's always hard to budget with 30% to 40% growth. So, obviously we don't do that. We did expect those to be key markets for growth. Just take a look at two transactions we did in Brazil -- with the acquisition of Cobu on the digital media side and the addition of W to McCann in Brazil, that certainly was an anticipation of a very strong economic environment there. So, did we expect it to be as high as it is? No, it's hard to say.

We are seeing an increase in media, okay? And the media spend obviously is driving that, as well. Everything is all pointing in the right direction in those markets. Therefore we will continue to invest. Same thing in India. We certainly expected India to be a growth market for us. If you remember, two years ago we topped up our ownership in our two major units there to 100%. That was all in anticipation of those being key growth markets for us, so we now have the investment and draft FCB at 100% and Lowe Lintas at 100%. So, those markets were expected to recover and grow certainly strong. To be candid with you, we didn't expect it to grow 30%, but we certainly were expecting it to drive a large growth.

If I could ask one follow-up. In terms of the sustainability, this order of magnitude, and any additional thoughts. And I will leave it at that.

Well remember -- again, look at comps. Comps are a lot easier. So, you don't get 30% to 40% growth in markets without some lightening on the comps, and obviously they're going to get harder for us, So you can't budget those kinds of growths, but we do think those economies are solid, they're leading in terms of recovery and growth on a worldwide basis. So, we think that should continue in certainly Brazil, India -- We are seeing recovery in the Middle East. South Africa is strong. We have very strong offerings both with McCann, as well as Draft FCB in South Africa, and the Middle East is growing. So, those are growth markets for us. We have good presence in those markets and we will expect that to continue.

Thank you.

Thank you, our next question is from James Dix with Wedbush. Your line is now open.

Good morning gentlemen. Just two questions for you. First, I'll take another crack at the growth question, I guess. Any reason to think that the growth for the balance of the year won't be at least as good as it's been the first nine months on a organic basis. Is there much change in trends at least in that sense?

And then I guess, second, on margins. Do you have any expectation over the longer terms in terms of what you are looking for in terms of incremental margins going forward? They were over 30% in the third quarter, and they were a little higher in the second quarter. I am trying to get a sense of some of your peers layout targets along those lines, so I just wanted to see how you were thinking about that?

First of all, the fourth quarter -- remember, our comps get much more harder. So, to anticipate 10% organic growth in the fourth quarter, given where the comps are, I think that is a stretch. Okay?

Yes, Michael. I was actually referring to the year-to-date. If for the first nine months you were like 5% or 5.2%.

Right. I think it's reasonable to assume -- we don't see any big major setbacks. Which is why I said our fourth quarter should be solid, but don't expect 10% organic growth. Okay. In terms of margins, we've indicated we expect our goal is to get to competitive margins which are 12%, 13%. Now, we're not going to have that occur all at once.

So, we think that will be over some period of time, shorter rather than long, but that remains to be seen on the full year results and that's really what we're going to layout on our investor day in March. But certainly we're positioned to achieve competitive margins as we stated.

Okay. Okay, thanks very much.

You're welcome.

Thank you, our next question is from Ben Swineburne with Morgan Stanley. Your line is now open.

Thank you, good morning. Michael, could you put into context, this quarter, year-to-date, sort of McCann versus the overall IPG growth story? I am trying to figure out -- that is an agency that's obviously critical to you guys and somewhat in transition from a management perspective. I guess what my thought process is, where are we in that transition process? And, as we look to next year, where your comps for the company will be tougher, as will the whole industry, does McCann then, if the strategy is working, become a nice sort of lift to overall growth rate next year.

And then for Frank, just on the balance sheet, I know it is complex, but could you just spend a minute talking about the revolver test and how much cash you have available, liquidity available to buy back stock as you move into 2011? And I don't know if the rating agency upgrades -- upgrade and hopefully upgrades -- changes that mask for us as we think about your ability to put money to work on the stock in 2011.

Well, let me talk about McCann. Obviously McCann is a significant part of the IPG story and it certainly accounts for 50% or more of our business. And yes, it is in transition. As I indicated, Nick Brian and the whole group, we just launched a strategic positioning. It was a great event. We had 350 people from all over the world jointly focusing on the go-to-market strategies, where our strengths are, and where we have to build, and how we are going to collaborate in this challenging environment and putting together integrated offerings. So, I was very excited about what was happening at McCann.

And certainly we look to 2010 as a transition year for McCann, as you would expect if you look at just the changes that have already occurred. And we would expect to start seeing improvement in 2011. And that is certainly a key component of our objective of achieving competitive margins, because frankly, McCann is a significant factor in that growth, and I am feeling real good about our offerings. Let's face it. McCann is a global force. Okay. And it's client base and the opportunities just for the existing client base is significant to us. And what we have to do is really focus on our offerings and the use of the integrated offerings with respect to that kind of base. And I am encouraged and excited about what we can -- will see from McCann as it moves forward in 2011.

And Ben, on your balance sheet question, the things we look at are free cash flow generation, cash on hand, of course, and when you look at our current credit facility, it is very flexible. So, we have been pretty thoughtful and conservative on how we've used our balance sheet. And, when a decision is made that we are going to put some of this to work to redeploy back to our shareholders, you can expect us to continue to be relatively conservative in the amount that we allocate towards those programs.

Any update on your expectations, Frank, on the timing of the other agencies -- I don't know if it is logical that if you get one upgrade and the other ones follow, but it would seem to be, anyway.

We're in constant dialogue with the quarter net release. In fact, the agencies are briefed before we release -- the quarters now released. We'll continue to aggressively push and we would love to see the other agencies step up as Fitch has.

Yes, let me add, we believe the agencies are wrong. Frank doesn't want to say that, he is the CFO. I think the fact is that our financial strength on our balance sheet is outstanding. And it's difficult for rating agencies to upgrade. I think Fitch hasn't moved us since 2008. Okay. So, it's harder to go up, it's easier to go down. But I think if you look at our leverage, and you look at our cash, and you look at our performance, I think we should frankly be at investment grade. Now, do I understand why they are holding off? Sure. They are holding off for the same reason that everyone is concerned about the uncertainty that's out there, they want to see if there is a double dip, and is there a change in the business momentum, if you will. But once we start seeing the consistency and the sustainability, I don't believe there's any reason why we shouldn't be integrated. That is my personal opinion.

Thank you very much.

Okay.

Thank you, our next question is from Tim Nollen with Macquarie. Your line is now open..

Hello, thanks. I hope you can hear me okay. I'm traveling so it might be a little bit noisy in the background. Two questions please, one is on your salary, Mike. It looks like you said you raised head count by 2.3% in the quarter, I assume that's point-to-point, yet your organic salary dollar increase in organic terms of 7.4%. I think I understand that right, and that compares with your organic growth of 9.4%. That salary number seems to be getting up to close to where the organic growth increase is. If you could just explain first of all please what the difference is between the head count and the salary increase. How much of that is incentive comp versus base pay, maybe? Also, even if you weren't to do 7.5% in Q4, what should we expect for salaries in Q4 and beyond. I guess, the ultimate question, can you keep your salary's line increases below your revenue increases?

Tim, as we mentioned earlier, the key opportunity for us is to continue generating operating leverage off our base salaries. We had a roughly 300 basis point improvement this quarter. That is on the chart that we provided the material that that went out this morning.

So, from our perspective, we believe we continue to see good, strong leverage being generated out of the base salaries and what you saw this quarter was on the incentive side, that is tracking at a little north of 4% of revenues, higher than our normal phasing, but that's primarily just because we feel more comfortable on the performance of our business for the year, especially against a couple of key agencies that are well in excess of their budgets. So, the challenge for us to get to competitive margins is to continue to generate that operating leverage off our base salaries and that is area focused for us and we are confident we can do it.

Okay. Second question then is about your tax assets. Your tax rate was a little bit low -- lower than the 40% that you tend to guide us to in the quarter. And I gather that was because of using some of your NOL's in Europe if I understood it correctly. Could you please clarify that and also let us know -- you've got about $1.5 billion I believe -- of NOL's. When can we expect to see those really start to kick in and see a tax rate come down?

I think an appropriate effective tax rate is low 40%'s. I think that is what we've guided people to. This quarter was a little lower because we were able to do structural things in Europe that allowed us to reverse evaluation reserve against net operating losses. So, in other words, an asset we now believe is -- will be fully utilized. With respect to the timing, I think it's back to the comments Michael made about Europe and the profitability of Europe because that is the key driver of our NOL's. As we continue to see improvement of our European operations and some of the management changes we've made start to take hold, we'll see greater cash coverage by NOL utilization profitability coming out of Europe. But that's going to be the key driver in our ability to utilize those NOL's in Europe.

Our cash rate was still 25% currently. There is no question that the $1.5 billion NOL carry forward is an asset that we hope to use. And I think you've got to earn your way out of that. And, obviously the moves that we're making, particularly in Europe, should enable us to do that.

Well, that's my point, it seems like you are getting close to the point where you can really start to take full advantage of that.

Exactly. Absolutely. When things are profitable, good things happen all around. And obviously the use of that NOL is something we're looking forward to.

Okay, and we will wait for the share buy back and dividend increase next.

Okay.

Thank you, our next question is from Matt Chesler of Deutsche Bank. Your line is now open.

Good morning and thanks for squeezing my call in here before the bell.

We always want to squeeze you in, Matt, don't worry.

Well, it's clear that one of the areas of strength in your business is on the media side with the traction that Media Brands is having. Can you walk us through how this is going to translate into your ability to generate cash flow in the business, and sort of what impact -- where you think you might end up for the year with working capital? Do you think we should be positive? And then looking into next year, if all continues well on that front, do you think you'll be able to continue to generate cash there? How many more leverage you still have to sort of squeeze out some more efficiencies elsewhere? Thanks.

Let me talk about Media Brands from a business point of view. I will let Frank talk about the cash flow impact of it. I think one of the exciting things that's going on in our company, if you remember a number of years ago, all the changes that we made in the Media Brands and the excellent talent we brought in, Matt Freeman, Matt Seiler, Richard Beaven, Jacki Kelley; all these people that we've added to Media Brands, clearly we are seeing results in terms of new business wins and increase in scope from existing clients is really helpful to us in terms of client relations, as well as profitability, and of course, cash flow.

There is no question that what's happening in the marketplace, is that's what we talk about in terms of integrated offerings. If we're not having an integrated offering that combines the new media, the media offering, as well as creative and all the different things that we bring to the table, that's what clients are demanding and that's the point of making these kind of investments we've made in Media Brands. And we see a number of our clients, the media part of our business is driving our business and then we're using that as a portal, if you will, to bring in the other resources.

So, I think certainly Media has a main seat at the table now. I remember in the early days media was always sort of in the back of the table and the last to present. Now it's part of the front and all the integrated offerings we're having. So, we're very excited about what is happening on the media side and our offerings on the Media Brands, and particularly Initiative, and UM, and Diversified. So, new social media and networking are all part of that and all the new things that are out there, which our agencies use as a key competitive advantage in the marketplace. So we're excited about it.

From a cash flow perspective, Matt, you are very well aware, as media gross, it's cash generative. We are not going to guide to where working capital will be in the fourth quarter, because that is a point in time and it is very volatile. For the year we will be cash flow positive from an operating perspective, and we're also going to be taking care of some maturities this quarter and we (Inaudible) the first in the first quarter. I think the aggregate number of those to us $500 million. So from a cash perspective, we feel pretty good going into the fourth quarter.

Okay, thank you. Back on the incentive topic for just a moment. It looks like in the quarter there was a true up based on the revised expectations for the business. Does that catch you up for the fourth quarter, as well, based on the reset of your expectations for the balance of the year and then position you in good shape to hit your margin targets, or does it stay elevated?

It's 3.5% to 4% of revenue for the year is the right number. So we can see where we are for nine months and that's the way to back into the fourth quarter. It's not a one quarter catch-up, to project where you're going to be for the year and then you step up your accrual, so there will be a piece that carries over to the fourth quarter, but we still believe 3.5% to 4% is a reasonable number.

Alright, thanks very much.

You're welcome.

Thank you, our next question is from Dan Salmon with BMO Capital Markets. Your line is now open.

Hello guys, good morning. I'm going to maybe go away from the earnings report and ask about the reports I think confirmed by one side, at least, that you switched over providers from Donovan to Media Bank for back office software. Can you give us a little of color on that decision? And then maybe looking ahead, maybe give us some thoughts on how those sort of traditional tools can come together with some of those things you are doing elsewhere in technology, particularly on the media buying front at places like Cadreon.

Clearly, I think we've been on the front end and leading the pack -- Cadreon and all the media buying opportunities that we see out there. That's why we formed Diversified Media Brands -- Diversified, and brought Matt Freeman in to focus on the new media. And obviously, these platforms are an important part of us distinguishing ourselves from the competition.

Clearly our relationship with Microsoft and the work we're doing with them in terms of the various platforms that are out there are being very helpful in terms of our growth and servicing our clients. The switch from Donovan -- I mean, we're always looking for best platforms and what's best in the marketplace. We are never wedded from one to the other, but when we make a decision like that, it obviously factors in where we think the businesses is going and which of these platforms are best suited for us in the marketplace. Frankly, the people who are living with that day-to-day are the ones that drive the decision. That is not a decision that comes from Corporate. But obviously to make that kind of switch focuses on the needs of their business and where they see it going.

Again, it is also worth noting from a technology perspective, our strategy is set by our technology board, that is comprised of corporate leadership and participation from the agencies. So, as we move to greater leverage of shared function, shared technology in things like back office, and in some of our other systems, this is a debate internally. And I think, we are now making decision with a collective view as opposed to kind of one offed decisions done at the agency level.

That is great. Thank you.

You're welcome.

Thank you, our final question today is from Rich Tullo with Albert Fried. Your line is now open.

Thank you very much for taking my call. Martin Agency and Mr. Adams, they do great work down there. It is probably one of the more undiscovered agencies in the country. Is it fair to say FX is going to be a favorable downwind in 2011 if rates remain at the current levels?

Rich, I don't think we can even comment on that yet. For the year -- for 2010 it's relatively negligible, but right now, we are just starting -- we are in the middle of the planning process. We haven't formed a view on as of where FX will be as of yet.

Okay, and kind of a related question. As we look at McCann and the turn around and where the growth is going to come from in 2011, is that more of a global story than a US story?

Well, clearly, McCann has a very strong presence in the US, but a significant part of the McCann client base are global, multinational clients. So, I think the answer is both. And obviously their strength in terms of servicing multinational clients, and the distribution and offerings across the world that they provide is critical to its success. So, I think it is both, and certainly the multinationals are leading the pack on that.

Okay. Thank you very much for taking my question and have a great day.

Thank you, you too. And thank you for all participating. And I agree, The Martin Agency is -- I think is no longer a hidden jewel of being recognized as agency of the year, so we were delighted to be down there and we look forward to the next call. Thank you for your support.

Thank you. This does conclude today's conference. Thank you for participating. You may disconnect at this time.