Interpublic Group of Companies Inc (IPG) 2012 Q1 法說會逐字稿

Good morning, and welcome to the Interpublic Group First-Quarter 2012 Earnings Conference Call. All parties are in a listen-only mode until the question-and-answer 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, and thank you for joining us. We have posted our earnings release and our slide presentation on the 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 before market open at 9.30 AM Eastern.

During this call, we will refer to forward-looking statements about our Company, which are subject to the 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 first quarter results. As usual, I'll start out by covering the key highlights of our performance. Frank will then provide additional detail on our quarter. I'll conclude with an update on our agencies and full-year outlook, to be followed by a Q&A.

Beginning with revenue, in the first quarter, our organic growth rate was 2.8%. Our comparison to last year was the most challenging among our peer set because of our industry-leading 9.3% organic revenue growth in Q1 a year ago. Given this difficult hurdle, our 2.8% organic growth represents a solid result.

Regionally, we were led by double-digit growth in Asia-Pac, fueled by a broad cross-section of our agencies, followed in turn by growth in LatAm, the US, and UK. Revenue decreased in Continental Europe, where macroeconomic conditions, not surprisingly, continue to pose a challenge. We saw growth at our IAN sector, which consists of our global advertising networks, our media operations, the US integrated independents, and our digital specialty agencies. CMG's strong performance reflects the continuing growth of our marketing services specialist agencies in public relations, that is Weber and Golin, experiential and sports marketing, as well as branding and identity.

Once again, digital services made a very strong contribution to our growth. This was true for the embedded capabilities at all of our global advertising networks -- within media brands, at the US integrated independent agencies, and across the marketing services agencies that are part of CMG. It was also the case at our digital specialist agencies, which continue to show strong growth, and are making good progress in extending their service offerings, and broadening their geographic reach.

Turning to our client sectors, we had double-digit growth in the auto and transportation, and retail sectors, as well as growth in financial services, and food and beverage. The tone of our continuing business remains solid, but we did experience the negative revenue impact related to last year's account activity that we identified on our last call. Those headwinds were mainly felt in our consumer goods, and tech and telecom sectors, both domestically and internationally.

Turning to operating expenses, results in the quarter reflect continued careful cost management. This type of discipline is something that we trust you've come to expect from this management team. Our Q1 seasonal operating loss was $39 million, a 13% improvement compared to a loss of $45 million a year ago. On a trailing 12-month basis, our operating margin was 9.8%, maintaining our performance for the full-year 2011, a level of profitability that Interpublic had not achieved in over a decade.

Other Q1 highlights are continued progress in decreasing outstanding shares and reducing our debt. During the quarter, we repurchased a further 5 million shares, using $53 million, along with our quarterly common stock dividend of $26 million. Given the seasonality of our cash flows, we chose to moderate the pace of our repurchase activity in the year's first quarter. For the 12-months ending March 31, we have returned over $550 million to our shareholders via common dividends and the repurchase of 46 million shares. This is an accomplishment of which we are proud, and one that speaks to our confidence that we can continue to build on the strong performance and positive momentum of recent years.

Another area in which we've taken significant strides is in strengthening our balance sheet and overall financial position. In late March, we took another positive step in this regard by retiring our $400 million 4.25% convertible notes, which eliminates 33 million shares from our diluted share count. Concurrently, we issued $250 million of new 10-year senior notes with a 4% coupon, thereby lowering our total debt by $150 million as a result of these two transactions. With the first quarter behind us, we remain solidly on track to deliver on our 2012 targets, as we continue to drive value for our key stakeholders going forward.

I'll turn things over to Frank now, for some additional color, and join you after his remarks.

Good morning. As a reminder, I'll be referring to the slide presentation that accompanies our webcast. On slide 2, you'll see an overview of our results. Organic growth was 2.8% in Q1, which, as Michael pointed out, was on top of industry-leading organic growth of 9.3% a year ago. We continue to narrow our Q1 seasonal operating loss, which was $39 million this year. Compared to last year's first quarter, we drove 50 basis points of operating leverage from our office and general expenses, primarily on occupancy costs.

Trailing 12-month operating margin was 9.8%. The conversion rate on our constant currency revenue growth to operating profit for the trailing 12 months remains in excess of 30%. Our Q1 earnings per share was a seasonal loss of $0.10, the same level as a year ago. We maintained strong liquidity with $1.59 billion of cash and marketable securities on the balance sheet at quarter-end, compared with $1.85 billion a year ago. That comparison includes having used over $700 million to repurchase shares, pay common dividends, and pay down long-term debt over the past 12 months. The retirement of our convertible notes in the first quarter dramatically reduces our diluted share count, while our deleveraging is the latest step in a series of moves that have seen us lower our debt by $730 million over the past four years, significantly strengthening our financial position.

Turning to slide 3, you'll see our P&L for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow. Our average basic share count for the quarter was 438 million, compared with 476 million a year ago, a decrease of 8%. During Q1, we repurchased 5 million shares at an average cost of $10.61. We had $298 million remaining on our Board authorization as of March 31.

Turning to operations on slide 4, beginning with revenue -- revenue in the quarter was $1.51 billion, an increase of 2.2%. Compared to Q1 2011, the impact of change in exchange rates was a negative 110 basis points, while net acquisitions and dispositions added 50 basis points. The resulting organic revenue increase was 2.8%. The tone of business was solid across most of our businesses and regions of the world, although our growth rate also reflects the revenue headwinds that Michael mentioned earlier.

As you can see on the bottom half of this slide, our integrated [HG] network segment grew 1.7%, on top of 9.7% a year ago. Organic growth at our CMG segment was 8.6%, with solid performance across the marketing services portfolio, led by strong regional growth in Asia-Pac, the UK, and Latin America.

Moving on to slide 5 -- revenue by region. In the US, we had 2.7% organic growth. Our independent agencies -- Lowe & Partners, World Group, and our speciality digital agencies all had a strong quarter. Turning to international markets, again, focusing on organic growth -- UK increased 2.5%, on top of 9.2% growth in Q1 2011. Growth was fairly broad-based across our agencies and disciplines, as well as client sectors. Continental Europe decreased 5.5% in Q1. Macro conditions continue to weigh on client spending, while last year's account losses also weighed on performance.

Asia-Pac organic revenue growth was 16.9% in Q1, which is a terrific result on top of double-digit growth a year ago. We saw strong growth in media, marketing services, and at McCann. We had double-digit increases in Australia, China, and Japan. Reported growth was 21.7%, which includes revenue of our recent acquisitions in that region. In LatAm, Q1 organic revenue growth was 4.4% on top of double-digit growth in Q1 2011. We were led by strong regional offerings of McCann, Lowe, and CMG. R/GA offices in Sao Paulo and Buenos Aires also contributed. Our other markets group decreased 2.8%, due to decreases in the Middle East and Canada, partially offset by growth in South Africa.

On slide 6, we chart the longer view of our organic revenue change on a trailing 12-month basis. The most recent data point is 4.7%, which is updated to include Q1 2012.

Moving on to slide 7 and our operating expenses. Total operating expenses increased 2.2% organically compared to last year. Our operators continue their effective focus on expense management. For the trailing 12 months, operating expenses increased only 3.1% organically, well below organic revenue growth of 4.7% during the same period.

Total salaries and related expenses were 73.3% of revenue in Q1 compared to 73.2% of revenue last year. On a trailing 12-month basis to March 31, total salaries and related expenses were 62.8%, compared to 63.5% for the same period a year ago. Again, we tend to recognize expenses relatively evenly across the four quarters, while Q1 reflects the seasonality of our revenue.

Our total headcount at quarter-end was 42,500, a year-on-year increase of 1.6%. The increase reflects our investment in growing disciplines such as media and public relations, and in digital services throughout our agencies. It also reflects growth in markets such as China, India, and Brazil. Offsetting these investments were net reductions in certain markets, such as Continental Europe, where our focus has been managing our workforce to the appropriate revenue base. Severance expense is 1.4% of Q1 revenue compared with 1.6% a year ago. Incentive expense in the quarter was 4.4% of revenue, both this year and a year ago. For the full year, we continue to expect incentive expense to remain in the range of 3.5% to 4% of revenue.

Turning to office and general expenses on the lower half of the slide, O&G was $441 million, an increase of less than 1%, both organically and reported. O&G expense was 29.3% of revenue compared to 29.8% a year ago. Underneath that 50-basis point improvement, we drove 40 points of leverage and occupancy expense, which is due to both our revenue growth and lower lease expense.

On slide 8, we show our operating margin improvement on a trailing 12-month basis, with the most recent data point of 9.8% for Q1 2012. As we said on our Q4 call, our target level for this year -- to improve at least 50 basis points on the way to our objective of fully competitive profitability over the next few years.

Turning to the current portion of our balance sheet on slide 9, we ended the quarter with $1.59 billion in cash and short-term marketable securities, compared with $1.85 billion a year ago, a decrease of approximately $270 million. The comparison includes over $550 million returned to shareholders over the last 12 months in the form of share repurchases and common stock dividends, as well as net debt reduction of $150 million in our long-term debt. We also had cash inflow last year of $134 million from the sale of approximately 50% our interest in Facebook.

On slide 10, we turn to cash flow for the quarter. Cash used in operations was $498 million compared with a use of $801 million a year ago. As a reminder, cash flow in our business is seasonal. Working capital tends to generate cash in the fourth quarter, which is followed by the use of cash in the first quarter. In this year's first quarter, cash used in working capital was $445 million compared with a use of $736 million a year ago. We pointed out on our last conference call that we expected to see more moderate cash use in Q1 this year, as the follow-on to more moderate cash generation in the preceding fourth quarter.

In investing activities, we used $21 million in Q1, primarily for CapEx. Our financing activities used $229 million, which includes net debt reduction of $150 million. We also used $53 million for share repurchases, and $26 million on our quarterly common stock dividend. The net decrease in cash and marketable securities in the quarter was $729 million.

On slide 11, you see our total debt outstanding at quarter-end and at year-end from 2007 through Q1 2012. This depicts our reduction of total debt, which is seen as [taking] total debt from $2.35 billion at the end of 2007, to $1.62 billion at the end of March 2012, a decrease of $730 million. By retiring the convertible notes in Q1, we eliminated 33 million shares from our diluted share count. For EPS purposes, since the retirement occurred near the end of the first quarter, you should be aware that we will show a reduction for the full year of approximately 0.75 of that total, with the entire 33 million out for next year.

It is also worth noting that at the end of February, S&P upgraded our outlook to positive. And just last week, Fitch reaffirmed our investment-grade rating with an outlook stable. Looking ahead over the next 12 to 18 months, we will have additional opportunities for debt reduction, and to further improve our balance sheet and reduce our effective cost of debt.

In summary, on slide 12, we are pleased with our performance in the quarter. We saw organic growth that reflects the strength of our offerings, and our globally diverse businesses. We continue to effectively manage costs, and believe we remain on track to deliver our financial objectives for the year.

Now, let me turn it back over to Michael.

Thank you, Frank. As you can see, our first quarter performance represents a solid beginning for 2012. Organic revenue growth, on top of the very strong Q1 last year, demonstrates that our agencies continue to be highly competitive in the marketplace, and contributions came from across our portfolio. The companies within CMG continue to win market share, and we are leading the industry in areas such as PR, experiential, and sports marketing. Other growth drivers in the quarter included our US integrated independents, media brands, and Lowe. Across the group, digital services were strong.

During our recent talent review meetings with our major operators, one of the recurrent themes has been the speed at which we continue to adapt our various offerings to meet the demands of marketing in a digital world. Whether it be at Mullen or Deutsche, Weber Shandwick or UM, at least half, and as many as three and four new hires coming onstream, are individuals who bring digital expertise into our agencies. We continue to see the benefits of our digital strategy, in which the primary pillar is embedding digital talent at all of our agencies. Of course, having best-in-class digital specialists like R/GA, HUGE, and MRM, as well as leading-edge offerings such as Cadreon and the audience platform, further enhances our digital capabilities and our overall performance.

Since the beginning of the year, we've begun to build new business momentum. We are net new business positive for the first quarter. The Commonwealth win at McCann will see us add meaningful incremental GM markets and revenue internationally. Worldgroup has also added a number of wins in its healthcare group. Draftfcb made good strides in replacing its SCJ revenue domestically, with digital and CRM wins on Cox Communications and Discover Card, and also had significant assignments on the healthcare front. Our US independents and media brands had strong new business in the quarter.

The new business pipeline is solid. At this time last year, we had a number of major clients in review. That is not currently the case. Instead of defending, we're involved in a number of new business opportunities, in which there is significant upsides.

It also bears mention that our performance in the emerging economies remains strong. Coming off combined organic revenue growth greater than 25% in Brazil, India, and China in Q1 of 2011, we saw additional double-digit growth in this group during the first quarter. This result was led by China, where our CMG agencies, McCann and Mediabrands led the way.

Draftfcb also won a number of important new clients in the market. In Brazil, performance was led by Lowe, CMG, and R/GA. McCann also performed well in LatAm. In India, we've had a very significant market presence overall, with Draftfcb, Lowe, and McCann all having outstanding agencies.

As you saw last year, we've begun to be more active on the M&A front. We do not see any area of vulnerability in our portfolio, but we are committed to investing in targeted transactions that enhance our agency brands; particularly in high-growth capabilities, such as digital and marketing services, as well as high-growth geographic markets. There has never been a greater need for informed advice, as companies in every industry and all regions of the world seek to navigate an increasingly complex digital, media, and consumer ecosystem. We are well-positioned to capitalize on these opportunities.

In summary, we're pleased with the Q1 results. We know that Q1 is our smallest revenue period seasonally. And while the headwinds we are facing will be less pronounced in the second half of the year, we have consistently cautioned against putting too much weight on a single quarter's results. That said, we remain comfortable with the full-year 2012 goals of 3% organic revenue growth, and at least 50 basis points of operating margin improvement that we shared with you on our last call. We are solidly on track to deliver on those targets.

The significant deleveraging we've undergone, and the strength of our balance sheet, provide additional, powerful levers that should allow us to continue to support the needs of our business, return capital to our owners, and drive shareholder value. The challenge for our management teams and for our people is to remain focused on the needs of our clients and building their businesses, which, in turn, will allow us to build on our success and create sustained value going forward.

I would now like to open the floor for the Q&A.

(Operator Instructions) Alexia Quadrani, JPMC.

If you could give us a bit more detail on the impact of the client losses you were dealing with in the quarter. Was January the first month of the revenue loss with from SC Johnson? Do think we'll be hit with the same magnitude in the second quarter? When do circle past any other notable client losses that are still impacting the quarter?

We started to see the loss of SC Johnson in December of last year. It didn't wait until January before we saw the impact. What we said in our call, that we expected about 2% to 3% of headwinds for the full year. What we indicated, it was overweighted, if you will, in the first half of the year. We will continue to see those headwinds, certainly, through the first six months, but we will continue to see some headwinds for the balance of the year.

What's interesting about the headwinds, is it's somewhat overweighted in the US, Lat Am and Continental Europe, which explains some of the lower organic growth numbers that we're putting out there with respect to those markets. If we use the first half of the year, if we use anywhere from 3% to 3.5% in terms of headwinds, that should give you a good idea. That should start trailing off towards the end of the year.

Was there anything else sizable, above the normal course of business, that also impacted Q1, or is it really the SC Johnson?

Obviously, that was a big factor. Of course, we had the Microsoft Media and we did have the Home Depot Media flowing through. But again, Alexia, if we look at it from a full-year perspective, when we say we're comfortable with 3% organic, that takes into account the headwinds and basically, how we see the flow-through impact of that throughout the year.

It sounds like if the headwinds are the same and not getting any worse, maybe even getting a little bit better in Q2 and comps get a little bit easier, we should see -- I know you don't give quarterly guidance, but there's reason to believe things get a little bit better in the second quarter in terms of top line?

It only took a few minutes, already, before you asked about the second quarter, Alexia. We, again, we don't give quarterly results, forecasts, we look at it from a full-year. Obviously, there are some opportunities and new business wins. That will factor into our results. All we can say is that you see the existing headwinds that we have. We're comfortable with our overall objectives. I hope to see some good positive announcements on some of the new business opportunities we're seeing. All of that will impact our second quarter results.

One more of a big picture question. On McCann in the US, I know you highlighted in some of your prepared remarks about the strength you're seeing outside the US. In the US itself, did you see growth year-over-year at McCann? Any color on where McCann is versus where you hoped it to be at this point?

McCann, obviously, we've made continuing investments in new talent in McCann. Just recently, I met with the senior management team there. I'm feeling real good about our leadership at McCann and where that's heading. They have terrific plans in terms of opportunities that are out there.

Of course, once in a while, you see some losses. I'll anticipate the question before it comes, we just recently saw movement of some business out of McCann LA; not significant in terms of dollars but it is with Nestle. On the other side, you'll see an announcement recently of McCann US winning a new project with Nestle Water. That's the nature of our business. We win some business. We lose some business. When we give your our full-year forecast, it factors in all the business opportunities and potential issues we see.

All right. Thank you very much.

David Bank, RBC Capital.

Two questions. The first is, if you look at the growth that you generated in the first quarter and then extrapolate it to your guidance for the full year. Could you talk about how much of that organic growth or how much growth is a function of new business wins versus existing clients? Did that surprise you at all in the first quarter? The second related question, if you think about the agency business, you win some and you lose some. We obsess about these headwinds and stuff, but the reality is, sometimes you win, sometimes you lose. If you look at the 200 to 300 basis point headwinds, how much of the 200 to 300 basis points is really above and beyond, in your mind, the win some/lose some? Thanks very much.

Let me talk about the first quarter. This is the first quarter, so it's hard to pinpoint exactly how much is new business versus not. But the fact is, in the first quarter, the growth that we're seeing is from our existing clients. The roll-off of our losses, we know and how that's going to impact is and that's why we give you the numbers that we've given you. But we won't see new business wins impact until later on in the year. We're starting to see some of it in the second quarter, but it should be through the rest of the year. The other thing to keep in mind is that, if you look at the organic changes in our first quarter last year, we had some very impressive organic growth in the quarter.

For example, in the US, we had an 8.8% organic growth in the first quarter. That's a very difficult hurdle with some headwinds to overcome. We're pleased with the change that we're seeing in the United States, facing that kind of organic growth. The same when you go to Lat Am, Lat Am we had almost 14% organic growth in the first quarter last year. To show growth on top of that, is fairly impressive.

That's exactly why, when we give guidance, if you will, we talk about it from a full-year perspective. Because we look and anticipate some lost business. We know what our existing client base is. We've always stated that our strength is in our existing client base. We win some, we lose some. The bulk of our organic growth from existing clients is what drives our business. That's how we operate our businesses.

If I could just follow-up, I think we understand that, and you guys have been really transparent in pointing out the headwinds. If you look at the year, normally, what is the normal range of headwind, is what I'm asking. Where would you point it out, if it was like 100 basis points in either direction?

Fair question. Last year, we had about 2% headwinds. To put one on top of the other, if every year, we're going in with 2% and last year, we had terrific organic performance versus our sector. We were able to, on a full-year basis, overcome 2% headwinds. Obviously, we're driving to do the same for this year. It's only the first quarter. We'll be announcing some positive wins. We have a whole year ahead of us. If you want to keep that in mind, we've been able to overcome those kind of headwinds before.

Thank you.

And still show very strong performance.

John Janedis, UBS.

Frank, can you talk a little bit more on the leverage in the occupancy line? I think you've got a team working on that, but is that a good run rate on an absolute dollar basis going forward or were there some one-time items in there?

John, there was no one-time items. We've seen progress in that line for multiple quarters. I think our centralized real estate team does a terrific job. We're constantly trying to co-locate agencies in markets, take advantage of scale, drive competitive pricing in markets on lease terms and we've been seeing that benefit consistently. There's not a real estate transaction that can get executed anywhere in the globe that doesn't go through that group, and the group's doing a terrific job, and we expect it to continue to do a terrific job.

That wouldn't move very much for the next couple quarters?

Again, we want to see consistent progress, John. But if we go back and track it, there's a magnitude of progress over the last 8, 10 quarters, we're starting to hit a ceiling, especially as the global real estate market starts to turn and pick up.

Okay. Can you guys talk a little bit about how your multinational clients are thinking about their spending in Continental Europe; meaning are they reallocating to other faster growing markets outside of Europe? Or are they just taking the money and pulling back on that budget? Do you think we're bottom in Europe yet?

I wish I knew the answer to the question, I hope we've bottomed in Europe. We had good results in the UK. That's a positive sign. But, obviously, the rest of Continental Europe is challenging. There are pockets of light in there and there are still issues. Our multinational clients are focused on emerging markets, period. That's not news. Frankly, they go where the money is and where the opportunities are.

That's why it's so important for us to have very strong offerings in those markets, whether it be Lat Am, whether it be Asia-Pac, the rest of China and India, but also in markets like Indonesia, and Africa, and Turkey. These are markets that our clients are looking at to invest money and gain market share. That's where we're going to see significant growth in the years to come. It's not a question of taking money and cutting back here and investing there. They are investing in growth. If there's an opportunity to invest in growth, they will spend those dollars.

Thank you.

Peter Stabler, Wells Fargo Securities.

I wanted to get a little bit more color on CMG, if we could. First of all, any one-time items in there? I know it tends to be more of a project-based business. Secondly, could you give us a sense of the components there? Is this really being driven by, predominately, PR? How does the visibility for you, for CMG, compare to IAN? Thank you.

Yes. You're absolutely right. The CMG business tends to be more of a project-based business. We're trying to get that to a model of recurring revenue stream. We're making some success, there. But clearly, it's always interesting when we do forecasting for those businesses, because it's a project-based business, most of their business is to be generated, as we say. But they consistently outperform, so we're very comfortable with those numbers.

We've had a very strong market, particularly on the PR side. Weber Shandwick and GolinHarris continue to be best-in-class. They win awards that reflect that. More importantly, their results reflect that. Our sports marketing group, Octagon, is having a very good year, as well Jack Morton, which is our experiential marketing. Although Weber Shandwick and PR and Golin are the biggest piece of CMG, we're seeing good performance across all the businesses within CMG.

Great. I'm wondering, you might be reluctant to provide this, but in terms of looking at Europe, if CMG is, call it 17% of your revenue globally, are we talking about a distribution in Europe that is radically different? Is CMG 5% of the business over there?

Without getting specific numbers, Peter, the distribution is smaller in Europe. But they've actually invested and are growing, especially in the UK.

Great. Thanks, Frank.

Matt Chesler, Deutsche Bank.

It was a good start to the year. Can you give us a sense as to, if you wouldn't mind, revealing how this compared to your internal budgets? Whether it was revenue or profitability or both? Just trying to get a sense whether, you know you gave guidance -- it's only been a month and a half, and this is just the first quarter of the year. But whether you're feeling incrementally positive in terms of hitting your full-year target? Or whether your confidence is pretty equivalent to what it was when you first offered the guidance one month ago?

I wouldn't say that we're solidly on track to deliver on these targets if I wasn't comfortable with those numbers. I hate to do this, because all the accountants are going to look at me funny, but take a look at our incentive comp as an example. We base our incentive comp on a full-year basis and then we have to amortize it through the year. That is one line, if you want to look at it, I don't particularly like looking at it, but I know you're going to ask for examples, so I'll use that one. Our incentive comp is in line, frankly it's a little higher, but it's in line with what we forecast for the full-year.

In order for us to do that, we have to be comfortable with the full year and we have to show that where our plans are coming out are consistent with that. That's the simplest way I can tell you that. We're comfortable with the full year. Look, we want to drive to beat that. That's our objective. We set targets that we think are a bit of a stretch, but are attainable. All our business units put together plans on where they think they can do better. We're comfortable where we are right now, for the first quarter. Certainly, we've got a lot of time left in the year. The tone of our business all indicates that we should be able to deliver on these results and hopefully, we'll do a little better.

Quick question for Frank -- can you lay out your thoughts as to deleveraging further from this point in time? The way that you handled the transactions in the quarter are somewhat indicative of, at least a current desire to delever a bit so far this year. I'm really not clear what your thoughts are beyond that point?

Matt, you can expect to see further deleveraging for us. I don't want to put a number on it. We've got material opportunity one year from now, when we've got some more converts out there, depending what share price is. We also have some expensive securities that mature in 2017 with a coupon at 10%, that we can buy in or refinance at a slight premium. Those are things you can expect this Management team to be aggressive in looking at options and driving the cost of our funding down, plus probably deleveraging along with that.

When you talk about deleveraging, Frank, are you talking about the multiple or are you also referring to absolute paydown of gross debt? On those 10%s, when's the first opportunity that you're able to go at them?

Second quarter of next year, we can go at that with a locked-in premium, which is manageable, because right now, they're trading at a very expensive premium. We probably won't touch them until that strike price is locked in. You can expect actual gross debt to come down, somewhat.

A good example of our approach to the balance sheet is look at our debt offering. We borrowed $250 million, we were very pleased with our ability and our reaction in the marketplace. It was oversubscribed many times over. Frankly, we could have loaded up on debt there, at a very attractive rate. We chose not to. We chose to take that $150 million and reduce our debt. That should give you a good indication, one, of our confidence in our ability to perform in the future. Two, where we look to see where we put our capital.

The board authorized the new share buyback program of $300 million, which we are now starting to eat into. We finished the $450 million authorization. From a balance sheet point of view, we're very comfortable, but, as Frank said, we're going to be very opportunistic in terms of the marketplace and where do we use our capital and what are the right objectives. Our objectives are to grow our business and enhance shareholder value. That's the analysis we go through every time we see an opportunity.

Thank you both.

Michael Nathanson, Nomura.

I have a couple. Let me start with China, for a second. If you look at your Asia-Pac number for this quarter, how big is China within Asia-Pac? In terms of the business you're winning, what's the difference there between your CMG offerings and IAN? What's driving China and how big is it?

We don't give out specific numbers by country. In Asia-Pac, we do give out numbers. Obviously, Asia-Pac is becoming a bigger piece of our business. Overall, let's assume Asia-Pac is 11% or so. Clearly, China is an important part of that, although it's certainly not the largest part of Asia-Pac.

How do you get bigger in China? It's now the third biggest advertising market in the world. How do you get into China more aggressively?

The first thing you have to do in China, is make sure you have new talent and good talent. If you look, for example, we just beefed up our talent in McCann in China with the addition of Jesse and some other people. CMG has repositioned its offerings in China. Talent is what drives the business in China. It's illusory to go out and buy businesses in China that, frankly, one year from now, they're not even going to be there.

We will be a strategic. If we see some attractive bolt-ons, if you will, to any transactions in China, we will look at them. We'll try to get comfortable with the retention of people and the book of business. Our primary focus in China is to grow organically through getting great talent, and working with our multi-nationals, as well as focusing on local clients. For example, some of our business, because of our multi-nationals have a good core agency and they're growing locally. Which is, eventually, as we go out beyond the key cities, we have to be able to have talent to focus on that growth locally and that's how we're going to grow it.

One for Frank. The deleveraging happened a little bit less aggressively than maybe I would've thought, given how much cash you had on the balance sheet. So, can you walk me through your thinking, for both of you guys? I know the rates are low, you took advantage of that, but why even go to the debt market if you have so much cash on your books? Is there just a level of cash you want to always want to have, just in case? Walk me through why you even tapped into that market at this point.

As Michael pointed out in his comments earlier, there are a bunch of cash calls around trying to drive shareholder value. We're trying to manage our way through where we put our money against M&A, where we put our money with respect to share repurchase, where we put our money in dividends, so we're looking at multiple uses for our cash.

When we evaluated our options, the two things we concluded on was, one, we wanted to deleverage and we will continue to delever. We wanted to do it in way that was thoughtful and take advantage of very, very attractive markets. I think the transactions we did, delevering by $150 million and also tapping a very attractive debt market, I think, was a very well-balanced, thought out, strategy. I think going forward, you'll continue to see us in a similar path. We'll look at all options and I think we'll be fairly thoughtful around what we're going to do with respect to delevering further and also tapping very attractive capital markets.

It's the same kind of conversation we had on whether we do share buybacks versus dividends. Frankly, one of the issues that we have to address is whether the tax law is going to change and what impact that will be. We want to make sure we're flexible in terms of our cash and basically to meet the objectives of our shareholders. Certainly, there is an argument aside from not tapping the debt market at all. There's an argument that given rates being so low, we should have borrowed as much as we could and be opportunistic and then figure out what to do with the money in terms of whether it be share buyback or whatever.

We don't want to be a knee-jerk reaction to that, but we want to make sure we're participating. I think the message you should take away from what we did in the debt offering, is we were opportunistic, we saw some good rates, and we took advantage of it. We were conscious of our investment grade rating and we still have one more to go. We want to make sure, by the end of the year, we are positioned, so we finally get them to move on that. We're hopeful that they will. All of our various constituencies are affected by whatever decision we make and by our dividend policy, by our share buyback policy, by deleveraging, all of that rolls up into how we enhance shareholder value. We will continue to make those calls as they come up and as we see opportunities. I think that's what you want us to do, in terms of our Management team.

Thank you. Thank you both.

Tim Nollen, Macquarie.

Two questions, actually, please. First is following up on the cost questions. I think its nice to see staff costs organically rising, just about in line -- just below in fact, organic revenue growth. Even better to see the O&G line remaining very, very low. Do you have specific targets in mind that gets you what you're considering a peer level performance a few years out in terms of those two lines? I think I know what they are, but I just want to make sure you're on track and what those numbers are.

Secondly, could you please talk about what you're seeing in terms of shifting budgets from TV whether broadcast or cable into online video? Industry-wide what you're seeing and more importantly for you, how that impacts you, if at all? Thanks.

The shifting is the ongoing question. Every year, everyone says TV is dead, everything's going online, yet, you see organic growth in TV. Here I go, I'm just going to tell you and I said it in my remarks, advice in terms of where you spend your money, right now, is critical. Analytics, in terms of where you spend your money, are critical, which is why we are investing our money in talent and resources and tools to make that decision. Clearly, online spending and video and the web are all significant growth opportunities. We have the resources and talents to work it. But traditional TV hasn't gone away.

You can look at the forecast and say that the rate that it's going, eventually Internet is going to overtake it. Who knows? But, right now, we have to be able to be responsive to all of that. In some cases, traditional TV works. Some cases, it doesn't. We do see a considerable amount of our clients' dollars focusing on digital and web-based video. Certainly, the issue of the over-the-top and all these things are issues that we have to be able to address. Frankly, that confusion is good for us, because that's where we earn our stripes in terms of advising our clients.

Tim, on a cost profile, as we close the difference between where we are and competitive margins, we hope to continue to see progress against the ONG performance, although we're starting to bottom out. The real leverage is going to be around staff costs. When you look at a fully loaded staff cost ratio, that number has got to be less than 60%. Right now, we've made significant progress, but there's still room to go.

When you look at the various components, it's getting greater operating leverage out of our base salaries and being very aggressive in things like temporary labor. It's an area that all of our operating groups have been extremely focused on for years, have invested aggressively against technology and tools to allow them better visibility into things like staff utilization. It's the metric, quite frankly, every time Michael and I meet with our operating folks, we spend most time on, other than revenue. That's the area that, if we are going to close the gap or when we close the gap, that's the area we need to see the greatest leverage.

Okay. Even with staff costs currently rising about the same pace as organic revenue growth, you're looking for efficiencies there that can keep that ratio down?

Sure. Again, I think, the real estate discussion, or the comments we made earlier, is a good case in point.

The reference I made to the people we are hiring had digital expertise goes to that issue. What you have is an employee base that, some of whom haven't gotten the experience or really bought on to the new digital environment and when you bring in talent that is, it makes it much more efficient. By the way, our staff cost ratios are going up but organic is going up more. It's not the same. That's a good sign when that happens. That's where you see the leverage on our people. To the extent we're able to see talent in the marketplace and bring them on board, that's how we become more efficient going forward.

That's great color. Thanks.

Anthony Diclemente, Barclays.

It's clear to me that your clients, your existing clients, need the advice on what to do in the environment. But I'm wondering if your clients are looking at digital as a way to use earned media as opposed to paid media with respect to new projects. That's okay for you guys, you're still providing the consulting. But I'm just wondering, are they looking to do more with less? People talk about that in the context of social media -- dollars estimated on social media understating true activity. I want to know your thoughts on that. (multiple speakers) Then I have a follow-up for Frank. Thanks.

Absolutely. That's the holy grail. If they can start shifting that and we can provide the tools and resources and content, because you need content to be able to do that, then that is certainly a key objective. Frankly, if we're a part of making that happen, that's what our tools and resources are supposed to be able to do.

Making what happen, exactly? Allowing them to do more with less paid media dollars? Making that possible? Is that what you mean?

Yes. Yes. That's the game on the social media. But, you still need content, you still need things that measure it, you still need access to the consumer and that relationship and what else are they looking for? How you build that platform? That's what we do.

Got you. Thanks, Michael. Frank, what I'd love to get is a better feel for incremental margin in the model. I'm not sure if there is a clean way for you to help us with this. For example, if after all is said and done for 2012, if you were print 4% organic revenue growth, how would that flex your 50 basis point improvement in operating margins, for example?

We have said going into '11, incremental margin on growth of 30% was a reasonable assumption. We reiterated that in our last call. When you look at trailing 12-months incremental margin as of March 31, its north of 30%. If we, in fact, exceed the 3%, is there opportunity to expand that 50 basis points margin improvement? Sure. The 30% assumption is still a good assumption.

I think that using your current numbers, it's actually more like -- I could be wrong -- but it's more like higher than 50% incremental margin, as it stands.

Again, if I look at what my trailing 12 is after March 31, it's 38%.

When we model out -- and we had our Investor Day -- when we showed our glide path, if you will, to achieving competitive margins. If we use a 30% conversion rate, that's how we're going to get there. If we do better, we get their sooner.

Okay. Thanks, guys.

James Dix, Wedbush Securities.

First, when you last reported, the big account review out there was Chevy, where you got a win. I'm just curious, at this point, what are the big account reviews out there for you, both where you can pick up business and any significant ones where you might be defending? How do you look at your position on them and the likely timing of when you'll find out?

Then, second, your severance for the quarter was really dead in line with what I was expecting. I just wanted to know if you could give a little color as to where you are expecting severance for the year as a percent of revenue, especially given geographic trends -- growth trends you're seeing? In particular, with the declines in Europe, although you've been fairly vocal about saying you have not expected a lot of growth in Europe this year. Thanks.

The two biggest pitches out there, frankly, are opportunities for us. One is Unilever Media. As you may know, right now, the bulk of our Unilever Media is in Latin America. We're very comfortable with where we stand on that. We view our opportunities, with respect to inroads on the global Media pitch, hopefully, we'll be positive and more actively engaged in that discussion as we speak. The downside on that one is not significant. The upside we think could be very beneficial to us.

The other one is Bank of America. Hill Holliday is leading our pitch there. We have an existing relationship with Hill Holliday and Bank of America, which is outstanding. We certainly are comfortable. We believe our existing business is solid and we view that as an opportunity, as well.

We don't have any other big pitches. We have the post office, with respect to Campbell-Ewald and Draftfcb that, as you may know, has been extended. That will play out towards the end of the year. The other two pitches we would hope to see in the first half of the year resolved. We don't have any other big clients up for review. Frankly, which is why my comment was, I think our opportunity is on the upside in terms of new business.

James, on severance for the first quarter, the majority of the severance was in Europe. For the full-year, we historically guided people at 1%, we've trended over that for the last few years. Probably 1.5% of revenue is a reasonable number. I think the variable on that discussion, again, is Europe.

Okay. Great. That's what I was looking for. Thank you.

Well, thank you very much for joining us. We look forward to our call with respect to our second quarter results. Thanks for joining us. Goodbye.

This concludes today's conference call. Thank you for your participation.