Interpublic Group of Companies Inc (IPG) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Interpublic Group first quarter 2013 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. Thank you for joining us. We have posted our earnings release and our slide presentation on our website, www.interpublic.com, and we will 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. These are subject to uncertainties, and the cautionary statement included in our earnings release and the slide presentation, and further detailed in our 10-Q and other filings with the SEC. At this point, it is my pleasure to turn things over to Michael Roth.

Thank you Jerry, and thank you all for joining us this morning as we review our first quarter results. As usual, I'll begin by covering the key highlights of our performance. Frank will then provide additional detail on the quarter, and I'll conclude with an update on our agencies, to be followed by a Q&A.

We are pleased to report a first quarter that represents a solid beginning to 2013. This includes revenue growth consistent with targeted range for the full year, continuing discipline on expenses, and further return of capital to shareholders, including an additional share repurchase authorization and a higher dividend, as previously reported. On top of that, during the quarter, we won a number of new business assignments in highly competitive circumstances. Year to date, we are solidly net new business positive, and our pipeline of opportunities is promising.

Beginning with revenue, our organic growth rate in the quarter was 2.3%. This is on top of 2.8% growth a year ago, and in line with our full year target range of 2% to 3% organic growth. Regional performance was led by double digit organic growth in three important areas of the world, Lat-Am, the UK, and the Middle East. In Asia-Pac, our growth was 4.3%, on top of 16.9% a year ago. Very strong performance in light of that difficult comparison. In Continental Europe, our organic change was a decrease of 5.8%, which reflects the ongoing challenges of that region's overall economic environment.

As we've indicated previously, a recovery in Europe has not been factored into our annual targets. It is also worth noting that the region represents 10% of our total revenue for the quarter. Overall, our International organic growth was 4.9%. In the US, organic revenue growth was 0.5%, reflecting some trailing account losses that are front loaded in the first half of the year. For the full year, we anticipate competitive domestic organic growth. During the quarter, we had a strong performance at many of our agencies, including our marketing services specialist within CMG, our media business, and a number of our domestic integrated agencies.

Turning to operating expenses, results reflect continued capital cost management. Total headcount grew by less than 1% sequentially. It is worth noting that severance expense was elevated in Q1, due to both headcount actions in Europe, and the transition of senior leadership at some of our agencies. Office and general expenses results were very well controlled across all major categories, such as occupancy, T&E, travel and office supplies, while pass-through expenses increased from a year ago. This results from higher business activity, and are directly offset by revenue growth. Heightened activity on the new business front in Q1 meant a level of upfront investment in payroll, temporary labor, and general expenses in the quarter. Our account wins during the first three months of the year position us to leverage that investment going forward.

Another Q1 highlight was continued share repurchases. During the quarter, we bought back 6.2 million shares, using $76 million, and our Board has increased our authorization by $200 million, to a total of $500 million. And in February, as reported, our Board also increased our quarterly dividend by 25%. Since initiating our return of capital programs two years ago, we've returned a total of $1.1 billion to shareholders in dividends and through the repurchase of 81 million shares. We retired an additional 33 million dilutive share equivalents through the redemption of a convertible debt. On Q1, seasonal loss per share was $0.14, compared to a loss of $0.10 a year ago. Our average shares outstanding decreased 5.3%. Over the course of the year, we should continue to see benefits from the reduced outstanding share count in our EPS performance.

A noteworthy trend for us in the quarter was the number of client new business wins that we've begun to see. These were led by our success in securing Chevrolet's branding work in the US, adding to our global responsibilities on that iconic brand, as well the global SABIC assignment, one in a holding company shootout, and the retention of the US Postal Service, and of course the highly competitive Accura win. I'll have more on this in agency-specific closing remarks, but it goes without saying that these were very encouraging developments.

Now I'll turn things over to Frank for some additional color on the quarter, and I will rejoin you after his remarks for an update on the tone of our business.

Thank you, Michael. Good morning. As a reminder, I will be referring to the slide presentation that accompanies our webcast. On Slide 2, you'll see an overview of results. Organic growth was 2.3%. That includes 4.9% growth internationally, where the standouts were Lat-Am and the UK. In the US, growth of 0.5% includes some very strong agency performances, and also has the impact of accounts lost last year, most of which we should cycle through by midyear. Our seasonal operating loss in the quarter is $42 million, compared with the loss of $39 million a year ago. We had $1.65 billion of cash and marketable securities on the balance sheet at quarter end, which includes our pre-funding from last year of this year's debt reduction.

Turning to Slide 3, you'll see our P&L for the quarter. I will cover revenue and operating expenses in detail in the slides that follow. It is worth pointing out that the tax benefit on our seasonal pretax loss was $12 million this year, compared with $19 million a year ago, due to some volatility in our effective tax rate, caused by the jurisdiction of the specific agencies generating the losses.

Our average share count for the quarter was 414 million, compared with 438 million a year ago, a decrease of 5.3%. We had 429 million basic shares outstanding on March 31, which is higher than the Q1 average because of includes the conversion in mid-March of essentially all the 200 million of our 4.75% convertible debt into 16.9 million common shares, which are already in our diluted share count. With the action of our Board to increase our repurchase authorization by $200 million, we intend to address those new basic shares over the balance of this year. The total of our repurchase authorizations remaining at the end of Q1 was $524 million.

Turning to operations on Slide 4, revenue in the quarter is $1.54 billion, an increase of 2.4%. Compared to Q1 2012, the impact of change in exchange rates was a negative 80 basis points, while net acquisitions and dispositions added 90 basis points. Resulting organic revenue increase was 2.3%. By client sector, our first quarter was led by strong continuing growth in auto and transportation. We had mid-single digit growth in several sectors, tech and telecom, healthcare, and financial services.

Our consumer goods sector was up, but only slightly. We had decreases in retail, and food and beverage, the latter due in part to client turnover last year. As you can see on the bottom half of the slide, the organic change in our integrated HD network segment was a negative 0.1%. This reflects the effect of client losses that fall mainly in the first half 2013. At our CMG segment of marketing services specialists, organic growth was 14%, reflecting increases across our events, branding, and public relations disciplines, and double digit growth in both the US and International markets.

Moving onto Slide 5, revenue by region. In the US, organic growth was 0.5%, which reflects strong growth at several of our agencies, offset by the impact of certain account losses lost last year. It is worth noting that the total US growth was 1.7%, which includes our domestic acquisitions over the past year.

Turning to international markets, the UK increased 10.1% organically, reflecting strong growth in marketing services at CMG at our media business and at McCann. Continental Europe decreased 5.8% organically. There was a notable decrease in the number of the smaller national economies across the region. In addition, France decreased somewhat more than recent trend, while Germany was flat. In Asia-Pac, our largest market outside the US, organic revenue growth was 4.3% in Q1. That is on top of two years of double digit increases in Q1. We continue to expect strong growth for the full year.

Among our largest markets in the region, we saw the strongest Q1 growth in Australia and India. In Lat-Am, Q1 organic revenue growth was 16.1%, powered by performances at McCann that includes a number of new client wins. We also had strong growth in our media business. Our other markets group increased 9.1% organically, driven by strong performance in the Middle East.

Moving onto Slide 6, we chart the longer view of our organic revenue change on trailing 12-month basis. Most recent data point is 0.6%, which is updated to include Q1 '13 and the roll-off of Q1 '12. We have targeted 2% to 3% for the full year 2013 on our February call. Our growth in the first quarter and net account wins put us in a strong position to achieve this target.

Moving onto Slide 7, operating expenses, our agency leadership continue to manage expenses effectively, while also investing in growth in areas of the business around the world. Total salaries and related expense was 73.4% of revenue in Q1, compared to 73.3% last year. Severance expense was higher this year by $5 million, or 30 basis points, in the comparison. Again, it bears mention that while Q1 is a small revenue quarter, we recognize expenses relatively evenly across the four quarters, and this is reflected in the seasonality of our results. Our total headcount at quarter end was 43,600, a year-on-year increase of 2.7%. The increase reflects organic investment in our acquisitions to support growing disciplines, such as media and public relations, as well as digital services throughout our agencies.

It also reflects growth in markets such as China, India, and Brazil, and some staffing and investment as a result of increased new business pitches and wins. Offsetting these investments were net reductions in certain markets, such as Continental Europe. Our focus there has been managing our workforce for efficiency and positioning for growth when it does eventually return.

Severance expense was 1.7% of Q1 revenue, compared with 1.4% a year ago. Our incentive expense in the quarter was 4% of revenue, compared to 4.4% in Q1 2012. The decrease was due in part to lower long-term incentive accruals for performance periods that include last year, when we underperformed relative to our targets. Again, keep in mind that Q1 is our smallest revenue quarter. For the full year, we continue to expect total incentive expense 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 $453 million, compared to $441 million a year ago. This increase of $12 million is due almost entirely to higher pass-through expenses, which is offset in revenues, and are profit neutral. Compared to a year ago, we drove 20 basis points of operating leverage in each of the three areas, higher occupancy expense, professional fees, and travel and office supplies. Our teams continue to do a terrific -- do terrific work in maximizing efficiencies. The offset in Q1 was in our other O&G category, which includes the pass-through expenses. In total, O&G expenses were 29.4% of revenue, compared with 29.3% a year ago.

On Slide 8, we show our operating margin history on a trailing 12-month basis. The most recent data point is 9.7%. As we said on our Q4 call, our target level for this year is to improved 50 basis points to 10.3% on the way to our objective of fully competitive profitability. Turning to the current portion of our balance sheet on Slide 9, we ended the quarter with $1.65 billion of cash and short-term marketable securities, compared to $1.59 billion a year ago, an increase of approximately $60 million. The comparison includes over $480 million returned to shareholders in the last 12 months in the form of our share repurchase and common stock dividends, as well as $800 million on the balance sheet this year from our November debt issuance.

On slide 10, we turn toward cash flow for the quarter. Our use of cash in operations was $775 million, compared with the use of $498 million a year ago. As a reminder, cash flow in our business is seasonal. Our working capital tends to generate cash in the fourth quarter, which is followed by the cash use in the first quarter. In this year's first quarter, cash used in working capital was $722 million, compared with the use of $445 million a year ago. In terms of our investing activities, we use $51 million in Q1 for acquisitions and CapEx. Our financing activities used $104 million, which includes $76 million in the repurchase of 6.2 million shares at an average price of $12.17 per share. Our common stock dividend used $31 million.

Slide 11 charts our debt reduction over the last few years. Our total outstanding at March 31 includes $600 million of double-carry from our debt issued in November 2012. That number had been $800 million on December 31. Our $200 million, 4.75% convertible notes were exchanged for equity in March at the election of noteholders, following the exercise of our call. Looking ahead, we plan to call our $600 million, 10% notes in July, which will end the short period of double-carry and result in significant lower interest expense.

In summary, on Slide 12, we are pleased with our operating performance and new business in the quarter. We continue to effectively manage cost, 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. The combination of the solid first three months, new assignments coming onstream, and our proven ability to closely manage the business puts us in a position to achieve our financial targets for 2013 of 2% to 3% organic revenue growth and 50 basis points of improvement and operating margin. Performance from our operations and high growth markets continues to be very good in terms of revenue growth. We're also seeing the benefits of our long-standing commitment to embedded digital talents and expertise across all agencies and capabilities. Whether at our US integrated independents, our global networks, or our marketing service specialists, digital talent accounts for a significant majority of the hiring we are doing throughout the group.

For example, with over 500 professionals from a range of disciplines, the social media capabilities that have been developed organically within CMG are among the most powerful in our industry. This is a key reason why during the quarter we continued to see the group, including Weber Shandwick, GolinHarris, Octagon, Jack Morton, and FutureBrand win market share, lead the industry in terms of creative recognition, and add to their deep bench strength of management talent. At McCann, we've begun to see demonstrable progress from the newly configured leadership team. The consolidation of Chevrolet business at Commonwealth and McCann is a testament to the agency's creative and strategic capabilities.

The IPG SABIC win was led by Weber Shadwick, Jack Morton, and McCann collaboration, and the recent win of the US Postal Service is another sign that the agency is gaining traction. Just last week, McCann New York was named Agency of the Year by the Art Directors Club, following another high profile honors at leading Asian and European creative awards competitions. Similarly, at the Festival and Media Agency Asia, our Mediabrands unit was also the most awarded group of agencies. The new organization model that Mediabrands recently introduced is making more of our top talent accessible to clients, and this has been very well received. We continue to see upside and leading edge capabilities, such as the audience platform, which spans areas such as mobile and social, as well as the Cadreon automated trading desk.

Our recent acquisition of the leading digital media agency in India, Interactive Avenues, as well as a mobile transaction in Australia, will help Mediabrands to further build out these strong capabilities. Of course, having highly competitive visual specialists like R/GA, Huge, and MRM, enhances our overall digital offerings. R/GA recently added offices in Austin and Los Angeles to its growing network, while Huge has expanded into San Francisco and Portland to support client needs. MRM is working closely with McCann on a number of major client initiatives, and was recently named a top interactive Agency by B2B magazine.

Another area in the portfolio in which we have number of outstanding agencies is among our integrated US independents. Mullen's performance in the marketplace has been outstanding, capped by their Accura win. We are also seeing good results and an evolution of the go-to-market strategy at Hill Holiday Deutsch in the Martin Agency. A number of these agencies are combining more regularly with Lowe to collaborate on new business requiring global or pan-regional solutions. Lowe's performance in the quarter was solid. Across the agency's creative reputation continues to grow, and we are looking forward to strong performance from them again at this year's upcoming Con Award competition.

At Draftfcb, we've begun to add to the agency's creative talent base with significant new hires in North and Lat-Am, and the promotion of a longtime top talent to the European chief creative role. This is also ahead of the arrival of Carter Murray, who we named CEO a month back. Despite knowing of the possibility that Carter's starting date could be delayed, we feel strongly that we've recruited the right person for the role, and that he will bring vitality, deep understanding of brands, and client relationships, and new business drive that Draftfcb needs to go forward.

In conclusion, we are pleased with the Q1 results. Of course, we know that this is traditionally our smallest revenue period of the year, and we have consistently cautioned against putting too much weight, whether it be positive or negative, on any single quarter's results. But since the beginning of the year, we've begun to build significant new business momentum. We have a proven track record of controlling costs and managing to the margin. Therefore, we remain comfortable with our full year financial goals for 2013.

The significant deleveraging that we have accomplished, and the strength of our balance sheet, provide additional levers that allow us to support the needs of the business by investing in talent and targeted M&A, while simultaneously returning capital to our owners. This combination of factors, outstanding agency brands with strong capabilities in high-growth areas, such as digital and emerging markets, plus the focus on cost management and strong financial foundation, positions us well to create significant shareholder value this year and beyond. With that, I'd like to thank you for your support, and open the door for questions.

Thank you.

(Operator Instructions)

Your first question comes from Alexia Quadrani, JPMC.

Hi, Thank you very much. Just a couple questions. First, could you give us any color about what domestic organic growth would have looked like if you didn't have those headwinds? I guess even generally, would it look more like the Company-wide number you delivered, or around your target? And then the second question, you mentioned incremental expenses that you are building up in front of the new business wins you recently pulled in. Will we see some of those expenses in front of maybe a lot of the revenues in a second quarter?

Yes, let me talk about the headwinds. We had previously said last year for the full year, the headwinds would be in the 50 to 100 basis points. However -- for the year, but we also said it would be front-ended. So you can assume, and since it was more weighted in the US, about 2% in the first quarter were the headwinds. If you take the 2% and add it to be 0.5%, that should give you a reasonable idea in terms of what the US organic would have been. I might add that the similar headwinds are in a second quarter, Alexia.

As far as the expenses go, there's no question that we had pitch expenses in the first quarter, which fortunately resulted in new business wins, and some, as indicated we had some additional severance in the first quarter. So what we do is we obviously spread out incentives and things like that for the full year, and we built up some expenses in the first quarter that we expect to see convert to revenue for the balance of the year. Obviously, new business comes on over a period of time. It all doesn't come in at one particular time, but certainly the expenses that we incurred in the first quarter will give rise to revenue.

And you still have, Alexia, have some pressure in the second quarter, because of the timing. People are working against these new business opportunities now, and when the revenue comes onstream maybe a little bit disjointed with the expenses being incurred.

So Is not a little bit front end loaded in Q2?

Yes.

Versus the revenue, but should you still see some of the revenues from the new business? And I know you -- I know there's always business coming in and out. I'm talking about more the bigger headline wins. Will you see some of those coming in Q2?

We will see some of it in the second quarter, and the rest in the third and fourth quarter.

Okay, thanks very much.

Thank you, Alexia.

You next question comes from John Janedis, UBS.

Thanks, good morning. Michael, it seems like you've got a much broader auto client base versus a couple years ago. I'm wondering, has the mindset among clients changed in terms of conflicts to compete for the business, and if so, is that a trend across industries?

Yes. No, it is a fair question, John. In the old days, each of the holding companies were sort of wedded to one of the big majors. We still are, candidly. It is by agency, and I think what it shows is the depth of our talent across all the different agencies that we have. So clearly McCann is a General Motors agency, and we'd like to think of that will continue, obviously by adding the additional Chevy work. But the other strong agencies are out there, and yes, the competitive nature of this, and the conflict issues throughout our industry, has been dealt with more on a agency basis than a holding company basis, which frankly is good for us.

Okay, good. Then Frank, can you help us think a little bit more about your margin expansion this year, meaning you've obviously done a great job in O&G over the past few years, but over the 50 bits of margin target for this year, is that split fairly evenly between O&G and SRS?

I think you will see more of it, John, in the SRS line.

Okay, great.

As we convert growth.

Thank you.

Yes, I might add, John, we still have some agencies that are conflict-free on the auto side. So we have room to grow here. But of course, it's on an agency-by-agency basis, and we do have other agencies working on General Motors as well, and we're very cognizant of conflict issues.

Thanks.

The next question comes from William Bird, Lazard.

Good morning. Was wondering if you could just talk about your credit. What has S&P laid out as a requirement to get pushed up to investment grade?

We think that we are there. And the issue continues to be consistency in terms of our performance. And if you just look at the percentages, and debt-to-equity, and all the metrics that are typically used as evidenced by the other rating agencies that do have us as investment grade, we think that they should be there. But again, frankly, last year's results, which had a bit of a hiccup if you look at it from our stated objective, that goes to the issue of consistency. So our goal is to continue to deliver as we promise, show it on a consistency basis, and we would expect to see that reflected.

Separately, Michael, could you talk a little bit about McCann? Can you talk about whether there's been any tweaks our changes in strategy since the change in leadership?

Well, I think the fact that we've seen some good traction on business wins indicates our confidence in the marketplace in new management, as well as the capabilities of McCann. Strategy, I think what we are focusing on is clearly retention of our existing clients. One of the great strengths of McCann is its global client portfolio, and I know Harris and the entire team has been focused on servicing those multinational clients and making sure they are getting the best we have to offer. So that strategy has always been there, but it is much more concentrated now, and now McCann is out there in terms of pitching new business and converting to wins, which we've seen.

The US Post Office, although it was an IPG client at Campbell-Ewald, it is nice to see McCann. There was a competitive pitch among a very -- a number of agencies to see McCann win that. And I think they are on the front foot in terms of new business efforts out in the marketplace. They are in a number of finals in terms of new business pitches. So I think the morale there is much higher, the talent is stronger. Just yesterday we announced some major changes in terms of new people, particularly at McCann Erickson. So I'm very encouraged by what we are seeing in McCann, and the strategy is very simple, service your existing clients, grow from within, and win more than your fair share in new business pitches.

And on severance, do you expect that to be up in the June quarter as well?

We always state that the severance numbers, we use a 1% to model. Of late, we've seen it a little bit higher. We are still sticking to the 1% in terms of the modeling, but as you go through the transition that we've been going through, and when you see the economic environment in Europe, we are always looking to right-size our businesses to match revenue. So, I would say if you're going to see severance slightly higher than 1% possibly, but again, I continue to drive towards the 1%.

Bill, people get compensated on the margin they deliver. So their if severance creeps up, they've got to absorb that through revenue growth or other cost reductions.

Thank you.

You're welcome.

Your next question comes from David Bank, RBC Capital Market.

Thank you. Two questions. The first one, I think there's a decent amount of visibility in terms of what's going on from the domestic side, given the new business wins and the comping against the losses. And so I think we see the progression there. Can you give a little more color on the international side, particularly the growth in regions like the UK, which I think were really surprisingly strong for the quarter? What's sustainability of that trend? What specific drivers, more on the international side?

Then second question, sorry for the long question, but under the no good deed goes unpunished category, the new business momentum has been really good, the margin discipline has been really solid. What has to go wrong for you not to hit these targets? Thanks.

Well, let me answer that one. The easy part of that is macro environment. We always said there's no structural reason for us not to continue to expand margin and attain our goal of competitive margin. So what we look at very carefully, obviously, is the macroeconomic environment, and so we are subject to that. We can't do much about it. We can be, as you indicated, we can be very focused on cost discipline and managing our businesses, but without growth in the overall economic environment, it is tough to expand margins, and frankly that was proven for us in 2012. We've always said that if we see growth, certainly in the 2% to 3% range, we should be able to expand our margin, as indicated by our goal to expand by 50 basis points for 2013.

So again, I think the real -- the answer here is macroeconomics, that can go wrong. You always worry about losing clients, especially given the size of our multinational clients. But I'm very comfortable right now, certainly with the changes we've made in McCann, and the effort that's being made across all of IPG to keep that back door closed. I will say that now, and tomorrow we will find out something, but we're very focused on client retention, because our goal, we've said that so much of our new business comes from organic growth from our existing client base, and that's where we have to continue to be very strong. On your question of International, look, McCann in Latin America is very strong. We've seen strength in Latin America across all of our global networks. The Lowe is very strong in Latin America, Draftfcb.

So what's great about that is what you get is when you have three global networks, like we have, and we see recoveries in certain markets, India is another example where we have very strong global disciplines and agencies, and they're performing well. It is not by accident that when you see one region down and other regions are up, we are participating in that. In the UK, we certainly have a very strong event business. One was last year we had, of course, the Olympics, and that was reflected in our strong growth in the UK.

But if you were to take the event business out of the UK in the first quarter, and again it is just one quarter, but I believe we had a 6% organic growth without the event, special event. So we have McCann, our Media business, are all solid in the UK, obviously Lowe. So we have very strong offerings in the UK. It always has been an important market for us, and I'm pleased to see that kind of result in that very competitive environment.

Okay, thank you.

Thank you.

Your next question comes from Matt Chesler, Deutsche Bank.

Good morning, thanks for taking the question. The momentum that you are talking about shows that you're making really good progress on improving the performance of a number of your agencies and your networks, particularly McCann and McCann Erickson in the US. So presuming that he keep the back door shut and the progress continues into the back year, when you look across your portfolio, what are the other areas of the business that you would want to catch up and still expect some significant improvement from to take you from where you hope to be at the end of 2013 to where you want to be in 2014? And I ask the question, not to focus on the negative, but to think about where the opportunity will be after we get to wherever you hope to be at the end of the year?

Yes. Lowe continues to be -- the progress of Lowe, I indicated we had good solid results from Lowe in the first quarter. We still have room for improvement in terms of the margin expansion at Lowe. So that certainly is one of the things that we've been focusing on very carefully and investing in Lowe to increase. They've done a great job in focusing on their key markets and talent and leveraging their global capabilities where needed. So we are looking for improvement in margin at Lowe. Obviously, Draftfcb is another area, and the fact that we're bring Carter onboard and the investments we are making at Draftfcb in talent is an indication that we are addressing the issues that we did have some client losses at Draftfcb.

And although we are very comfortable with our client base at Draftfcb, we want to make sure it stays that way, and we are backing -- we had some client wins at Draftfcb. We want to continue that momentum, but that's an area, with Carter coming onboard, we expect to see investments in talent and go-to-market strategy. So, I would focus on those two global agencies as opportunities for us. Obviously, media continues to be a very good performer for us. There are a lot of media pitches out in the marketplace, and we certainly have best-in-class media offerings. So, I would look to seeing an expansion in terms of client wins on the media side.

And I think the other aspect that we're seeing, SABIC is a good example of RFPs coming into IPG from the Holding Company perspective. And the marketplace looking for the best of IPG, and that's one area that I think we have proven ourselves, that we are very capable of doing, and that we have a number of IPG solutions in the marketplace.

The SABIC win, it was a head-on competition between us and the other holding companies, and we fared well. We have one other going on right now in terms of a holding company pitch, and where we are cautiously optimistic on that one. So I think those are the trends we are seeing in the marketplace.

The -- you have to bring your best solutions to our clients, and we've been using a notion of open architecture for years, and I think I'm very pleased with the fact that we are starting to see real traction on the ability for our agencies, including our independent. When you see independent agencies tapping into Lowe, for example, for multinational pitches, if you will, and responses to their existing clients, that's a good indication of the depth of our resources.

Thanks, and there was an earlier question that was talking about the onboarding of clients and the contribution to revenue and the relationship with costs. If you think about it for the fiscal year basis, on a net-net basis, these are great wins for you, and it positions you really well. For the full year, do they contribute incrementally on a net basis to the achievement of the 50 bps margin target?

Yes. I mean, they are won't be onboarded for the full year, but certainly their revenue will contribute to our expansion. But again, the point here is when you are onboard new clients, you build up. You have to hire talent, and it is not until they're fully up and running do you really see the margin contributions that you expect to see with a fully service client, if you will. So it will ramp up. It is all not going to happen -- you don't wave a magic wand, and all of a sudden you ramp up and the margins are delivering. It takes over a period of time to do that. But I'd certainly rather be in that position than not have them.

Indeed. Thank you.

You're welcome.

The next question comes from Ben Swinburne, Morgan Stanley.

Thanks, good morning. Two for Frank on some of the numbers. On the cash flow side, Frank, should we assume the buybacks this year sort of pace with your cash flow generation? I think, certainly from a working cap perspective, Q1 usually a low quarter. So any color on that would be helpful. Then maybe another sort of housekeeping one, just on the Olympics. Can you just remind us of the Olympic headwinds this year? Timing, are they all in Q3, or is it more spread out, and any way to size those as we think about the rest of the year?

I think it is a good assumption, Ben, to look up buybacks and the phasing and correlating with our cash flows, which are seasonal, as you know. As you pointed out, the first quarter is usually working capital negative. So they usually track pretty close. With respect to the Olympics and third quarter, which was a big impact, the actual headwinds, I cannot remember what the number is, quite frankly.

Okay, but it's --

(Multiple speakers) UK.

So it's all concentrated in Q3?

Yes, Q3 and it's the UK.

Right, Right.

On the share buyback, if you just take a look at the first quarter, our average price was a little bit over $12, $12.25. So we don't look at it as certain price targets. The way to do this is over a period of time, do it on a program basis. We do have some flexibility to move on blips of our share price, but the right way to do this is consistent with our cash flow, and over a reasonable period of time. Otherwise it distorts the marketplace, and it is not -- it is consistent with what -- the way we've done that in the past, and it has worked well for us.

Thanks, Michael.

Thank you.

Your next question comes from Robert Fishman, Nomura.

Good morning. While your European competitors spend a lot of time discussing digital in great detail, and we know you don't break out the digital revenue specifically. That said, we are wondering if you could try to give us a sense of how much your digital initiatives are contributing to your overall growth? And if you don't want to go there, maybe discuss how quickly some of your more digitally focused agencies, like Huge or R/GA that you touched on in your prepared remarks are growing?

Well, again, you are right, and it is a standard question we get. We don't silo our digital offerings. We happen to have R/GA, Huge, MRM, which are separate, if you want to call them digital agencies. I wouldn't call them pure play digital agencies, but they are viewed that way in the marketplace. All our agencies, frankly, we just had a Board meeting up in Boston, and when we review our capabilities of our agency, you can see all the digital capabilities there, and if you look at, for example Weber Shandwick, the abilities of Weber Shandwick, particularly in the social media environment.

So, it really is across the board. All of our agencies have very strong digital capabilities. That said, R/GA and Huge are expanding globally. R/GA is in Latin America, is in Asia-Pac, it is in the UK, it is in Budapest. So R/GA is expanding globally, and that's consistent with their growth, if you will, and Huge is expanding globally as well. So we are making investments in the expansion of those, if you want to call them pure play digital agencies, but all of our agencies have digital capability, and we don't keep track of it.

I find it hard to believe that people can really keep track of their digital play. Even in the siloed the environment it is hard to keep track of it. So that's the reason we don't put it out there. But it is a significant part of our growth and our future, which is why we are making the kind of investments in talent that we've been making.

Okay, great. Thought we would try. Thank you.

Right. Nice try.

Next question, please, operator.

The next question comes from Peter Stabler, Wells Fargo.

Good morning. Thank you. Question on Europe. I realize it is only 10% of the quarter, but I guess I'm just trying to get a sense of whether you were significantly surprised by the continued weakness here, and I guess put another way, what's your visibility in Europe? Is it more difficult in Europe, given all the uncertainties, to look out multiple quarters than it is, let say, in the US? Even though you might be dealing with similar multinational clients?

And then can you touch on, I think you said that your expectations for the year don't include any sort of estimate for a recovery in Europe? Recovery is probably not the word any of would use. I guess we are trying to understand if your expectations bake in a level of continued decay, or whether you think that there's at least stabilization that might be possible? Thank you very much.

Yes, I think one of the problems you run into in our first quarter is the size of the numbers. It doesn't take much, either in turned positive or negative, to have a material impact on the organic growth, or lack of, all right. And I think we are seeing that in the first quarter. It certainly, 5.8% is a higher number than we would have expected. But again, that's not a material number, if you will. I would expect, absent a further deterioration in Europe, that that number will get more in line with the low single digit negative number, which was similar to what we had in 2012.

So that is a more in line, but again, if it varies from that, it is not going to have a significant impact on us because of -- as that number goes negative, and the other numbers go positive, it becomes a smaller number in relation to our total revenue and profitability. So we don't like to see it go that way, but of course, that's the benefit of a holding company. The visibility, the issue we have there is local business. And we get better visibility into our global clients in terms of what they are budgeting for their spend in those markets, but it is the local clients that are more subject to cutbacks on a short-term basis.

Just one quick follow-up there Michael. Do you think you guys are any more or less exposed to local than your peers who kind of generally talk about 0.5 the business being in these markets being global and 0.5 being local?

Well, frankly, we are not based over there. So certainly some of our competitors have a greater percentage of their business in those markets, and I think you've seen in their results. So I would say they're more exposed to it than we are, if you just look at the percentages. And that's all I can comment. I don't know the rest of their business.

Thanks for the color.

Your next question comes from Tim Nolan, Macquarie.

Hi, thanks. Have another question on margins, please. Just to make sure I understand the shape of operating margins of this year. You've been saying Q2 might be a little bit on the light side, for understandable reasons, with account losses and ongoing pitches. But if you have ongoing pitches and the pipeline is still good, might that continue through, and how much impact does that have? And to make it more of a positive tone, if you're going to flattish on margin, I'm not going to pin a number on you, but if, let's say, it is flattish, doesn't that imply like 100 basis points of pick- up in the second half? And then if that all pans out as such, and you do win some business, and you keep driving costs down, aren't we talking about a lot more than 50 basis points in margin pick-up next year?

Well, the answer to your question is I hope we are that busy in pitches and spending money and converting it later on, okay? I view that as money well spent. So, if the explanation, not that I believe that's in fact going to be a truism, but if the explanation is that the ramp-up of expenses is greater because of pitch activity, and we convert it to new business, I think you'll accept that explanation. But this is the way we manage our Business, and we build up expenses for the pitches, and we onboard people. What's interesting about our Business, since we have some time let me talk about it. (Laughter).

When you win new business, you actually have to go out and recruit a significant amount of people to service those businesses. So that's one of the explanations you see in the mismatch, if you will, on bringing new clients onboard, because you want to hire them as quickly as possible so that you are ready to take on and onboard the revenue stream. So that's part of what we are seeing. And yes, it may give some pressure on margin during that period, evidenced in the first quarter, but it should give rise to a greater expansion of margin, and obviously when that happens, we will build into our forecast.

And Tim, winning some meaningful accounts earlier in the year is helpful to the margin progression.

Sure. Any -- do you dare or care to make a comment on next year?

No.

(Laughter). Okay.

(Laughter) Not this year. I just have to say, the first quarter doesn't make a year.

Yes, sure, but I think you can tell from the tone of most of these questions, we're pretty pleased with the way it looks, and if it pans out, it is looking better.

I can tell you this much. At this point in the year versus last year, we are in much better position. So that's encouraging for us, and like I say, if we keep the back door closed, then obviously that's the way we want to operate our business.

Okay, thanks. Can I ask just one quick follow-up, please, on the UK? I heard your answer before, and you have good businesses and operation there, but the economy in the UK isn't really that much different from the euro zone. Why would you be so strong, so consistently in the UK, versus pretty negative in Europe?

Again, the numbers are not that big. So all we need is one particular client to spend in the first quarter and it somewhat distorts. I'm not putting the UK in the category of an emerging market, like Latin America. It is nice to see a positive, but I don't know whether we can continue to show those kind of organic growth in the UK.

Sure. Okay, thanks a lot.

You're welcome.

The next question comes from Dan Salmon, BMO Capital Markets.

Good morning guys. Michael, you've always take a lot of pride in Interpublic's role in sports marketing and Octagon. Would you ever have any interest in any of the assets at IMG?

(Laughter). I think we are well represented by Octagon. They're doing a great job. They are certainly a force in the marketplace, and we are comfortable with the work that they are doing and their size.

Okay, great. I will leave it there.

Thank you.

Your next question comes from James Dix, Wedbush Securities.

Good morning, gentlemen. With all the new business coming in the door you might have been excused for forgetting about the macro environment. But just turning back to it, how did you performance by region compare to your internal expectations for the first quarter? How do you feel about the overall macro environment now versus a couple months ago, and then I just had a follow-up

This isn't that far from when we did our year-end numbers, and we gave out our 2% to 3%. We haven't changed on that. I think that certainly the tone of the business is better than it was last year, but I'm not raising any flags in terms of victory in terms of turning the corner and getting back to the levels of 4% to 5% growth that we would like to see on an ongoing basis.

So we are still cautious about it. And I think 2% to 3% is a fair number to use, given the macro economic environment that we are in. We still have problems in Europe, and the spillover effect of that is real. The United States, although it is growing, is not growing at the rates I would like to see it growing at. And we still have issues, obviously, in Washington and what impact it has on confidence.

I mean, this business is based on confidence, and until we get all these issues behind us, it is going to be hard for us to put out a number that shows any strength in the economy greater than in the low single digits that we are talking about. So the surprises prices aren't over. Europe was a surprise, but how do you predict small numbers like that and the effect of it? So I think it was pretty consistent with what -- we do are forecasting on a bottoms up. We're not -- no one is really great on a quarter-by-quarter basis in terms of how you can forecast this business. So that's why we look -- we were very careful in saying this is a full year analysis, and that's how we manage our business. So I'm very comfortable now with the numbers we've given, and it looks like, given the fact that we have these positive news, in our ability to achieve it.

Okay, great. And then one follow-up on expense. Just as we see the new business wins come in and the associated expenses, any particular line items we should be focusing on? I mean, is all going to be in base salaries, or are there any other of the subcomponents which you provide all the detail on that we should be thinking about as well?

Yes. Well, first of all, base salaries is obviously an important factor as you ramp up people to service a business, your salary levels go up. We use temporary help during the period until we get our full-time capabilities within it. And sometimes you see a little ramp-up in occupancy, because we actually have to take some space for these people. For example, Mullen is going to beef its presence on the West Coast because of the Accura win. So those are the kinds of things that we are in the process of addressing.

Okay. So temporary help maybe, and maybe some in the O&G line, other than just the base salaries line that we will be focusing on?

Right.

Okay. Great. Thanks very much.

Thank you.

Your next question comes from Brian Wieser, Pivotal Research.

Hi, thanks for taking the question. Quick question on the pass-throughs. I was wondering how much of the organic growth was attributable to that? And secondly, I was just wondering if you could talk about some of the APAC markets? You mentioned that Australia and India were up. By inference, some of the other major markets were not, or they were less up. Just curious if you could talk about that region and your expectations for the rest of the year?

Yes, we had some more difficult comps in China that we had to deal with. We had an event in China. So the growth in China was not consistent with that because of that comp, if you will. Japan was relatively flat, slightly up, I believe. And Australia, as I've said, and India were very solid, and Lat-Am, we talked about. In terms of the pass-throughs, as Frank indicated in his remarks, and I indicated in mine, the pass-through cost, the growth in our pass -- in our expense line is probably similar to what you see on the growth side.

All of the growth, Brian, in the O&G side, as we said in the comments, was primarily pass-through.

So if we stripped out that 0.7% from the organic growth, would that be a more accurate number, if you stripped out the pass-throughs?

Almost all of the growth in the O&G line comes from pass-throughs, so you can --

Got it.

Provide an update in there, you can do that.

Okay, thank you.

Thank you, Brian.

At this time, I will turn the call back to Mr. Roth for final comments.

Okay. Well, my final comments are, we are excited. We're encouraged by what we see this first quarter, and we thank you for all your support, and we still have the rest of the year to go. So we are working hard. Thank you very much.

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