Interpublic Group of Companies Inc (IPG) 2016 Q2 法說會逐字稿

Good morning and welcome to the Interpublic Group second-quarter 2016 earnings conference call.

(Operator Instructions)

This conference is being recorded. If you have any objection, you may disconnect at this time. Would now like to introduced Mr. Jerry Leshne, Senior Vice President of Investor Relations. Sir, you may begin.

Good morning. Thank you for joining us.

We have posted our earnings release and our slide presentation on our website, Interpublic.com. 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 opens at 9:30 AM Eastern [time].

During this call, we will refer to forward-looking statements about our Company. These are subject to the uncertainties and the cautionary statements that are included in our earnings release and the slide presentations and further detailed in our 10-Q and other filings with the SEC.

We will also refer to certain non-GAAP measures. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance.

At this point, it is my pleasure to turn things over to Michael Roth.

Thank you, Jerry, and thank you for joining us this morning as we review our results for the second quarter and first half of 2016.

I'll start out by covering highlights of her performance, Frank will then provide additional detail and I will conclude with an update on our agencies and the tone of our business to be followed by the Q&A.

We are pleased to report a quarter of solid revenue and profit increases. Our second-quarter organic revenue growth was 3.7% on top of a very strong 6.7% in Q2 2015. Excluding the impact of lower pass-through revenues underlying Q2 organic revenue was 4%. Our acquisitions had a positive impact of 30 basis points while FX was a negative 1.8%. As a result our total revenue growth was 2.2%.

We continue to see positive momentum from a broad range of our creative marketing services and media offerings. Our digital capabilities also continue to be significant drivers of growth for us. We grew organically in every world region, with the exception of AsiaPac and we saw growth from nearly every client sector. Our operating profit in the quarter increased to $225 million and operating margin expanded 20 basis points to 11.7%. Diluted EPS was $0.38 a share and was $0.33 adjusting for certain below the line items which is an increase of 14% compared to last year's second quarter.

For the first half of the year, organic revenue growth remained very strong at 5.1% and 5.4%, excluding the impact of pass-throughs. Our operating margin increased by 40 basis points and operating profit was up 10% for the six months in which we also saw a similar 14% increase in adjusted diluted earnings per share in Q2. This performance continues a record of accomplishments in which our people can take great pride.

In terms of client sectors, leadership categories were tech and telecom, retail, food and beverage, US organic growth was 4.6% in Q2. A very solid result given that it came on top of 7.7% growth a year ago. We saw growth in most of our agencies. Led by R/GA and Huge, as well as McCann, MullenLowe, Weber Shandwick and Mediabrands. Internationally, LatAm grew 15.9% organically in Q2. An outstanding result.

Organic growth was 1.2% in the UK where we did not see an impact from Brexit, while continental Europe was approximately flat. In AsiaPac our organic decrease was 3.2% but was actually flat excluding the impact of lower pass-through revenues relating primarily to a major event in Hong Kong. This performance compares to Q2 2015 organic revenue growth of 11.8% in AsiaPac.

In our other markets regions organic growth was 7.3%. A result of strong increases in the Middle East and Canada.

Turning to share repurchase, during Q2 we used $59 million to repurchase 2.5 million shares. While over the trailing 12 months we have utilized approximately $296 million for share repurchases.

We had $346 million remaining on our authorization at the end of the quarter. Since instituting our return to capital programs in 2011, we have returned over to $2.6 billion to shareholders in dividends and share repurchases, as well as reduced our dilutive share count by 27%.

To summarize, our performance continues to underscore the strong competitive position of our agencies across the full spectrum of advertising and marketing disciplines, in our digital expertise and in the world key markets. At the midway point of the year we believe we are well-positioned with respect to our full-year 2006 financial targets. You may recall that on our last conference call we upgraded our growth target to the high end of our original 3% to 4% organic growth range along with 50 basis points of more of operating margin expansion. We continue to be comfortable with these targets for the full-year.

As expected, organic growth in the second quarter showed some moderation from our very strong first-quarter increase. Within the quarter, we saw growth in June that was a lower rate than April and May. It bears noting that this was in part due to the timing of revenue related to a couple of the new business winds that we headed in 2015.

Based on client work already underway, we are confident that we will realize this revenue during the second half of the year. As we have always stated, revenue is variable by quarter, where our total operating expenses are recognized more evenly across all four quarters. As a result, we expect to see higher rates of profit conversion on revenue growth in the second half of the year, compared to the first six months. This would be consistent with our performance the last couple of years and it is why we feel that we are solidly on track with our objective to grow operating margins by 50 basis points or more this year.

At this stage, I will turn things over to Frank for additional details on our results and I will join you after his remarks.

Thank you, Michael. The morning. As a reminder, I will be referring to a slide presentation that accompanies our webcast.

On slide 2 you will see an over of results. A number of which Michael touched upon. Organic growth was 3.7% in the second quarter and was 5.1% for the six months. Q2 operating profits of $225 million with an operating margin of 11.7%. For the six months operating profit grew 9.9% and operating margin expanded 40 basis points.

Second quarter diluted EPS was $0.38 and was $0.33 as adjusted mainly for tax items which is comparable to $0.29 a year ago. That is an increase of 14% and for the six-month adjusted diluted EPS also increased 14%. Q2 average fully diluted shares decreased 1.9% from last year due to our share repurchase program.

Turning to slide 3, you will see our P&L for the quarter. I will cover revenue and operating expenses in detail in the slides that follow.

Slide 4 has more detail on our revenue growth. Revenue was $1.92 billion in the quarter, an increase of 2.2%. Compared to Q2 2015 the impact of the changing currency exchange rates was a negative 1.8%. Our net acquisitions added 30 basis points of revenue. Resulting organic revenue increase was 3.7%. Organic growth was higher at 4% when excluding the decrease in our pass-through revenues which occurred mainly in our events and direct marketing businesses. As you can see on the bottom half of this slide, at our integrated HT networks, the organic increase was 3.9%. This was led by digital offerings R/GA and Huge and by McCann and Mediabrands. IAN's first half organic growth was 5.6%.

At our CMG segment, organic growth was 2.8% but was 5.1% excluding the decrease in pass-throughs that have no profit impact. We again had strong performance in public relations led by Weber Standwick and in Sports Marketing and Octagon. For the six months, organic growth at CMG was 3% and 5% excluding pass-throughs.

Moving on to slide 5 revenue by region. In the US Q2 organic growth was 4.6% led by a range of agencies and disciplines, including R/GA and Huge, as well as McCann, MullenLowe, Mediabrands and Weber Shandwick. In the UK organic growth was 1.2% which reflects growth at McCann, R/GA and Weber Shandwick, partially offset by client share in other parts of the portfolio. Our UK operators are not citing any specific impact on client spending during the quarter related to the run up to the vote on Brexit.

Turning to continental Europe, organic growth was 0.5% in the quarter. We continue to see mixed performance in our largest markets, with organic increases in Italy and Spain offset by decreases in Germany and France. For the six months organic growth was 1.1%. In AsiaPac, our organic decrease in Q2 was 3.2% and was flat excluding the decrease in pass-through revenue. This comes on 11.8% growth a year ago.

In our largest regional markets we had mid single-digit growth in China and India while revenue decreased in Australia and Japan. For the six months our organic revenue decrease in the region was 0.5%.

In LatAm Q2 organic growth was 15.9% with increases in nearly all of our largest national markets including Brazil, driven by increases in spend by existing clients and by new-client wins. We had notably strong performance from McCann, R/GA and Huge. Where the six-month organic growth was 13.9%.

In our other markets group organic growth continued to be strong in Q2 at 7.3% driven by Canada and the Middle East. Growth was also 7.3% for the six months.

On slide 6 we chart the longer view of our organic revenue change on a trailing 12 month basis. Most recent data point is 5.6%.

Moving on to slide 7, our operating expenses. In the second quarter total operating expenses increased 2% from a year ago, compared with our reported revenue growth of 2.2%. The FX impact to operating expenses was a negative 1.8%, which was the same impact we saw in our top line. Underneath our margin improvement in Q2, the ratio of salaries and related expenses to revenue was 64.1% this year compared with 64.2% a year ago.

The comparisons driven by leverage on our expenses for incentives and other SRS, partially offset by increased base payroll and severance as a percentage of revenue. A total headcount at quarter end was a proximally $50,100, an increase of 3.5% year on year. This reflects both organic hiring and acquisitions in support of growth in areas such as digital, creative, media and PR.

Turning to ops and general expenses on the lower half of the slide. O&G expense was 24.2% of Q2 revenue compared with 24.3% a year ago, an improvement at 10 basis points. There were a couple of moving pieces worth noting of comparison. Compared to last year, with a very strong leverage, this year on our other O&G category. Recall that a year ago, we had a higher reserve expense for certain contingencies, which we took in other O&G. Offsetting that, last year we also had a one-time lease buyout credit in our occupancy line. As a result, we delevered on occupancy this year. The net result was an operating margin expansion of 20 basis points in the quarter and 40 basis points for the first six months.

Slide 8 depicts our operating margin history on a trailing 12 month basis. The most recent data point of 11.6%, which is an improvement of 70 basis points from a year ago.

Slide 9 is provided for clarity on our year on year over earnings-per-share comparison. This is the adjustment to diluted earnings per share of $0.38 we reported in the quarter to $0.33 per share for comparability to last year. Starting on the upper half of this slide, our reported pretax results includes a below the line loss of $3.7 million, mostly non-cash related to the sale of small, non-strategic agencies.

Our tax provision, included a benefit of $2.7 million from our adoption earlier this year of the new accounting guidance on share-based compensation. We are presenting this adjustment as long as we are comparing 2016 to 2015 but it falls way next year. The more significant adjustment in the quarter is from the conclusion and settlement of a tax examination of previous tax years. That was $23 million, as you can see, and benefited our reported EPS by $0.06. Total adjustment in Q2 is $0.05 per share due to rounding.

On the lower half, we show similar items covering the first six months, and also include one of the reversal tax evaluation allowances as a consequence of the disposition of certain businesses. But at six months, we are adjusting from $0.40 as reported to $0.33, again as adjusted for comparability to 2015.

Moving on to slide 10, the current portion of our balance sheet, we ended the second quarter with $675 million in cash and short-term marketable securities. In comparison to December 31 reflects that our cash level is seasonal and tends to peak at year end.

Slide 11 is our second-quarter cash flow. Cash, provided by operations was $94 million compared with $260 million a year ago. The comparison reflects the use of $128 million in working capital this year compared to a $42 million generated working capital a year ago.

As we have pointed out previously, working capital can be validated by quarter. Both this year and last year are within our historical range for Q2. Vesting activities used $48 million, mainly from acquisition and capital expenditures. Financing activities used $67 million, chiefly for share repurchase. Our common stock dividend and payments related to previous acquisitions somewhat offset by an increase in our short-term borrowings. Our net decrease in cash and market for securities for the quarter was $5 million.

On slide 12, we show our debt deleveraging from a peak of $2.33 billion in 2007, to $1.82 billion at the most recent quarter end.

In summary, on slide 13 we are exiting the first half having achieved 5.1% organic growth and 40 basis points in margin expansion which represents very solid progress toward our objectives for the full year. We are seeing growth in areas where we have focused our investment in both people and acquisitions. Our operators are focused on the appropriate cost disciplines and margin expansion and our balance sheet is an important area that we continue to deploy for value going forward.

With that, let me turn it back to Michael.

Think you, Frank.

Our Q2 results contributed to a strong first half that positions us to achieve our financial objectives for 2016. Across the group, our strategic, creative and digital capabilities are highly competitive.

This was evident at the recent Cannes Festival, which, as many of you know, is the industry's most prestigious, creative award show. Standards are so high that fewer than 3% of entries even make it to the short list of contenders. Yet we won over 200 trophies. Our agencies were responsible for two of the three most awarded campaigns in Cannes and we won one of only five coveted titanium lions. By our count, IPG was the most awarded holding company in terms of honors won per dollar of global revenue.

Our long-standing commitment to integrated services through our open architecture model, continues to be a strong differentiator for us because it puts the needs of our clients at the center of the solutions that we craft and deliver from across IPG assets. We are also proud that IPG and our agencies remain a destination of choice for so much of the industry's top talent and as we have been a long-term leader in the industry in terms of diversity and inclusion.

During both the quarter and the first six months we further demonstrated disciplined cost management. We will stay focused on conversion so as to ensure that we can deliver on our margin improvement target for the year. We also continue to show that the work we have done over a number of years in both through the Company's financial fundamentals, including a substantially strengthened balance sheet and credit ratings are significant drivers of value creation.

For sometime now, our results have shown that investing in talent and focusing on a culture of accountability and performance are key drivers of success. We used strategic acquisitions to supplement the very high level of expertise and service delivery for which our agencies and our holding company have become known. Increasingly, we also invest internal programs that promote innovation, such as the very successful accelerators we operate with R/GA with a trial and partnerships with startups that take place through Mediabrands emerging Medialab. [With] costs, we also remain committed to substantial return of capital to our shareholders as a way to build value.

Moving on to the tone of the business. We have just completed our regular financial reviews with all of our operating leadership and the environment remains sound overall. While results in the quarter reflects slower growth in June, there does not appear to be a market change in client sentiment. Instead, a couple of the large wins we posted in 2015 saw some revenue being deferred into the second half, though with full-year scopes of work that remain in line with our expectations, given that the work is already well underway, we have a high degree of confidence in this revenue. Certainly there is a high degree of volatility due to Brexit and the geopolitical tensions we are seeing play out in places such as Europe and the Middle East. Brazil is also experiencing some turmoil, due to both the political situation and public health concerns.

Globally, we are keeping a close eye on our event and other project businesses which are often the first to see cancellations. While it seems that the situation in the UK will lead to slower decision making and may affect certain client sectors, to date, our teams on the ground report limited impact from the referendum. As you saw, our performance in continental Europe was essentially flat, with some markets seeing modest growth. The situation in that part of the world continues to be challenging, which could weigh on consumer sentiment and business activity. As previously indicated, we built our plan for 2016 with very limited growth expectations for Europe and in this sense, we further benefit from our limited disclosure to the region.

Turning to the new business pipeline, there is a fair bit of overall activity. Media continues to be most active sector, followed by marketing services. These are both areas in which we have had good success in recent years. A major global advertising base networks are also seeing opportunities and we are seeing quite a number of integrated RFPs coming into the holding company for which we field cross agency teams with our open architecture approach.

Other than the few situations where a client has decided to limit participation to incumbents, we are active in most of the major pictures that are out there. Our performance in new business has been strong the past few years, which is very gratifying. You have all heard me say that I also want our agencies and our people just as focused on providing great service to existing clients and growing with them organically, which we continue to see.

At the agency level, highlights in the quarter included very strong performance from R/GA and Huge, which continue to be among the industries most innovative agencies, providing the full range of digital marketing services, including consulting with clients on digital business transformation, the connected space as well as storytelling across a range of new mediums and platforms. McCann once again posted strong performance across all disciplines. Notably in its Momentum unit, which won a major global sponsorship brief from SAP and at MRM which remains one of the leading global digital networks in industry.

The World Group is also growing its relationships and with recently won clients, notably Reckitt Benckiser. McCann saw further strong results in a range of awards competitions, including Cannes, where McCann Health was named network of the year and McCann New York had a stellar performance. MullenLowe, showed strength in the quarter. Notably, domestically as its Royal Caribbean campaign earned attention and acclaim and the agency won JetBlue's Barclay card. MullenLowe also had a very active on a number of integrated open-architecture teams, both domestic and internationally and we hope to be able to announce some wins connected with those efforts in the near term.

At Mediabrands, results remain strong. The digital and accountable offerings within Mediabrands continue to be best in class and to power much of that unit's success. The performance of UM and its leadership has also been outstanding in recent years. On that front, we are pleased to confirm today that we have retained BMW Media AOR in the US and Canada. Another important win for UM and Mediabrands. Cannes was also a highlight for the group with a high degree of recognition for our work in the launch of the G100, a new brand assessment metric has gotten a lot of attention in the marketplace.

Of course on the media front, during the quarter we saw the publication of the K2 report commissioned by the A&A. This relates to an issue that we at IPG have consistently handled in a highly proactive and transparent manner. As such, our conversations with clients relating to the report and the practices it alleges have been constructive. We continue to encourage dialogue on these matters and we stand behind our record of transparency in our contracts as well as our dealing with clients and media vendors. IPG's performance in this regard has been consistently validated by a range of third-party expert employed by our clients.

We are also proud of our long-standing commitment not to take inventory media positions. These practices allow us to bring our highly informed and wholly objective perspective to our engagements, so that we can consistently represent the best interests of our clients.

Another operating unit that posted strong performance in the quarter, was CMG. We benefit from exceptionally deep and experienced leadership teams at all of our units within this group. Furthermore, if capturing consumers' attention becomes more difficult and valuable in a world of fragmented media, disciplines such as public relations, sports marketing, experiential campaigns and brand design will continue to increase in prominence. Notable wins in the quarter at Weber Shandwick included being named as the lead global public relations agency for General Motors, Chevrolet brand. As well as their recent notable win at GSK.

FCB also showed further progress during the second quarter. The Global Clorox win was an important step for the network. FCB's healthcare and shopper marketing capabilities remain among the industry's best and for the second consecutive year, the agency posted its stronger ever performance in terms of awards won at Cannes. The benefits of investing in talent, embedding digital expertise throughout our portfolios, as well as raising our game strategically and creativity continues to be evident in the strength of our offerings across the portfolio. We are pleased with the high caliber of our people and capabilities. This is what has fueled a strong organic revenue performance during the first half of 2016.

Looking forward, despite increased macro uncertainty, and the revenue timing that impacted our second quarter, we continue to believe that we will deliver on the high end of a full-year target of organic revenue of 3% to 4%. In terms of cost, we will stay vigilant as the year progresses and we remain closely focused on achieving the appropriate levels of conversion.

Profit performance during the first half of this year show meaningful improvement and we are on track to expand full-year operating margin by 50 basis points or better consistent with our stated goals. Combined with our Company's financial strength and commitment to capital return, which has been and will continue to be the source of significant value creation. This will allow us to further enhance shareholder value.

As always, we thank you for your support and we look forward to keeping you posted as the year unfolds. With that, I'll open it up to questions.

Thank you. We will now begin the question and answer session.

(Operator Instructions)

Alexia Quadrani, JPMorgan.

Thank you very much. On the new business front, you guys have highlighted its strength and we clearly have seen the strength as well in the press in recent months, actually recent years as you put it, but there is obviously so much more that you guys see internally that don't make the headlines here. Is there anyway, given that you can give us a bit more color in terms of kind of what sort tailwind from the new business we might see in the back half of this year? Then I have a follow up, please.

Well yes, you are right. It somehow seems that our client wins do not get announced, while some of our competitors do. The answer to your first part of your question is we continue to be new business positive, which is an indication of the strength of our offerings.

I did indicate a number of our recent wins in my prepared remarks, notably the recent retention of the BMW work at Mediabrands which is a very good retention for us, obviously in the wins at McCann and Weber with respect to Reckitt Benckiser. We do expect to announce a nice win coming up in the next couple of weeks. We hope that will happen, which will be a global engagement. We hope. Using the integrated open architecture approach. We do not like to give out tailwinds.

Let me just comment here. It is so hard in this business. When we lose clients, it is very easy for us to know the impact of when that revenue is going to be coming off. So when we talk about tailwinds and headwinds, the headwinds are easy. We do not like them, but we can specifically know when that comes off because the contracts provide for that and we know our staffing requirements and so on.

Our new business wins coming into 2016 -- a number of them came at the end of the year. Frankly, we win the business and then we have contract negotiations and scope of work is divulged as we go through. That is one of the contributing factors in the fact that -- as we said, we had good tailwinds coming into the first half of the year and some of that work is slipping over into the second half of the year.

So yes, we have some tailwinds now in the second half of the year and the timing of those tailwinds and when they are recognized is a function of when the work is shown. There are a whole bunch of issues that go into that. So the answer is we have some tailwinds in the second half. All of that gets factored into the overall forecast that when we say our target is 3 to 4% on the high end of 4%, we take into consideration a year performance. As I said before, our clients do not know what our quarterly requirements are for financial reporting, which is why we stick to our notion that given the macro environment, we are comfortable with what we set out as a stated goal, which includes the revenue performance and our conversion. The fact that our conversion will be stronger in the second half, is consistent with the way our business is rolled out in prior years.

Okay. Just one follow up, if I may. I know, Michael, you touched upon this a few times in your opening comments. With one of your peers citing cancellations and event businesses hurting their performance, I want to be clear that you guys are not seeing that kind of widespread cancellations at all, outside of the normal business where you may see one event in Hong Kong are something like that, adjust in terms of timing. For you it is more normal course of business, not any sort of trends in terms of cancellations for whatever reason.

Yes, believe me that is the first place we look. Frank and I, actually we met with the leaders of those businesses to make sure that they are comfortable with the pipeline. And the events that were canceled, we reflected particularly in AsiaPac, that had a big impact on us. That was in Hong Kong. We saw some other -- these are one-time events and the affect us. But the pipeline on the event side of the business is very solid. And we have not seen wholesale cancellations.

Now that said, we are still unclear what this Brexit is going to do. We challenge, we ask, and obviously everyone is nervous about it but yet, when we sit down and look at our plans for the rest of the year, our business operators -- with some risk obviously, are comfortable with our plans and consistent with what I said our objectives are.

Thank you very much.

Thank you, Alexia.

John Janedis, Jefferies.

Good morning. Michael, you talked about your philosophy acting as an agent and not taking inventory. So post A&A report, I was wondering if you think this provides an incremental revenue opportunity for IPG or does the industry move away from the arbitrage model?

Well, what they do is their business, our competitors. There is no question that the A&A reports focused on equity positions, inventory positions, particularly on the problematic side of the business. You correctly point out that we do not do that. Therefore, we view that as more consistent with an advisory model that is agnostic. Yes, as we go through -- there is no question when we are pitching new business obviously we distinguish our positions versus our competitors in those pitches. Frankly, some clients do not care and obviously our competitors will have strong performance in those markets reflect that. But I think overall, the more there is in terms of scrutiny of these types of positions, I think it will have an impact on the business. That has been our strategy. I said this before, in the end, clients really don't care and it does not turn out to be a competitive advantage to us, then we will continue to look at whether we should be doing it. Right now, we view it as a differentiator in the marketplace. And if you look at our net wins and losses on the media side of the business, although I cannot point to it as being a specific reason, I think the transparency and the reputation we have on treating our clients fairly on an advisory basis, is reflected in those wins.

Okay. Thanks, Michael. Then maybe, Frank. I just wanted to clarify was the uptick in base and that eventually related to staffing the new business wins and that will see the improvement later this year as revenue kicks in? And maybe also, is the pullback in the incentive comp any read through to your outlook for the rest the year?

There is no doubt John that the onboarding of these new clients has put pressure on BBT. There is a bit of a mismatch between expenses incurred and revenue. We think over the back half of the year that will self-correct. On the incentive side, for the six months we are at 3.8 % of revenue. The exact same number as last year. And our incentives have been tracking between 3.5% to 4% for the last few years. I think we are not looking at the quarter we're looking at for the year. Every quarter we forecast what the year is going to look like. I think we are right in line is where we were last year.

Okay, great. Thank you.

You are welcome.

Thank you, John.

Ben Swinburne, Morgan Stanley.

Thank you. Good morning, guys. I wanted to just come back to the UK. I don't think any of us know how Brexit may or may not impact spending there but it has been a very good story for IPG for a number of years. Let me talk about -- you look at the last, 2014 and 2015 were big years for you organically in the UK. How much of that was agency driven or market share gains versus market expansion, market strength? So that we can think about IPG's assets in that market and your ability to outperform even if the market slows, which I think we are all trying to figure out if that is going to happen.

Yes, it is a fair question. Yes, we have been on a good streak, particularly on the event side of the business over there, as well as our networks.

Frankly what you're seeing in the UK this quarter, is we are cycling through some losses. We had both on the media side of the business as well as the creative side of the business. We are seeing an impact of that. Absent that, we think our offerings in the UK are very strong. Notably, R/GA, McCann, you know, all of our networks, MullenLowe. We believe that we will continue to be strong in terms of our performance in the UK absent something weird happening as a result of Brexit.

Got it. As a follow-up, you mentioned, I think organically, mid-single digit growth in some of the key emerging markets in Asia, China, India, as you went through your agency reviews. What does the outlook look like there? There is obviously a lot of press particularly around China and the economy. I know your business skews multinational but maybe give us a sense for how those markets look for the outlook?

Yes. China was up mid- single digits. India was a little stronger than that, particularly at MullenLowe in India. We continue to sense that type of environment. Obviously China, we are not as big in China so variations on client wins and losses, and specific client spend in those markets affect those numbers more dramatically. But the overall tone, although everyone is concerned about it, we see that type of growth in our plan.

Thank you.

Dan Salmon, BMO.

Good morning, everyone. Maybe, Michael, a couple questions on a few specific agencies. You mentioned MRM continues to be a really strong performer. I think we've seen some news reports about some executive level changes there and I was just hoping you could add some color to that and whether a different trajectory for the agency is trying to be struck? Secondly, once again, R/GA and HUGE continue to be real leaders for you. I am just curious if you could shed some light on how you are able to leverage that for broader new business activity through the flatter open architecture more these days?

That is a mouthful. Look, obviously MRM is a very strong component of the world group and IPG and we are always looking to add talent and strength in our offerings. We see there is a big opportunity at MRM at the world group, in terms of cross disciplines, as well as potentially using that in the open architecture environment. Yes, we are beefing up our expertise in that particular segment and we believe that those opportunities will come as we strengthen their offerings.

R/GA and HUGE are very interesting examples of competency. They started out as pure play digital agencies. Obviously, with the growth of digital they have expanded dramatically. R/GA is a great textbook story of growing globally with success in the markets that they have opened in. R/GA you can put up a shingle and all of a sudden you have strong businesses. Their reputation is second to none, in terms of their space. R/GA has done a great job of expanding their offerings focusing on the connected environment. They are doing design. They are doing business transformation. They have expanded their offering well beyond the typical digital play, if you will. That is why we are seeing the great growth out of R/GA.

Similarly, HUGE has expanded. Remember when we acquired HUGE we had 80 people in Brooklyn, New York. Now we have some 1,100, 1,200 people on a worldwide basis. They have expanded their offerings as well in terms of different offerings and their go to market strategy in terms of business transformation. Frankly, expanding upon just the pure play digital offering.

If you plug those two agencies in our open architecture model, frankly, there is hardly many companies that compete with the strength of our global networks plugging in our digital place to supplement their own expertise. That is frankly the whole concept of open architecture. It is a challenge for us, obviously, because those individuals are focused on growing their wonderful businesses. But again they also see opportunities partnering with some of our agencies.

Some of the wins that we have seen, we've seen partnering of those digital -- whether it be HUGE or R/GA with whether it be McCann, FCB or MullenLowe, although MullenLowe has Profero, which is another digital agency that is performing extremely well on a global basis. It is not by accident that we see our digital agency grow in double digits. Of course the embedded digital expertise we have at Weber Shandwick and experiential marketing and all of our networks themselves have very strong digital offerings. That is why we do not break out digital. Frankly, digital is really throughout our offerings. The concept of our open architecture is to provide the best talent we have, within the expertise and bring the best to our clients. Frankly, it is working quite well. Hopefully, we will see another win that reflects that in the next couple weeks.

Great. Thanks, Michael.

Thank you.

Peter Stabler, Wells Fargo.

Good morning, thanks for taking the questions. One for Michael and a couple housekeeping questions for Frank.

Michael, going back to the pass throughs, can you characterize a little bit more what the reductions were? It sounds like this was almost exclusively related to CMG. Wondering if there was any IN impact in there and was this entirely event driven or were there some production reductions from existing clients as well? Was this a surprise to you? It sounded like this kind of came in June or is this mapped more directly to what you were expecting for the quarter?

And then quickly, for Frank wondering if you could give us a little bit more color on working cap? Understand that this quarter was within range, but was there anything there worth calling out? And then, just wanted to quickly check with you on the impending changes to the overtime rules and whether that is fully contemplated at this point by all your agencies and whether that's kind of diminimus impact going forward? Any color you could offer on that? Thanks so much guys.

First on the overtime, we have been doing work on it and we are obviously looking at ways to mitigate it. But to the extent, it does effect us, it is not a significant number. Obviously, we are working towards reducing it. We will in fact implement whatever we need to do to minimize the effect of it.

On a pass throughs, yes, the answer is basically all of our pass throughs have to do with our events. It has nothing to do with media ownership, which obviously is one of the confusing parts of pass throughs from our competitors and us. Throughout the years what we have been trying to do is change the contracts on these event engagements. Because whether we act as an agent or not affects the accounting. What would happen is we will go out and outsource a lot of the people that are used in that engagement and it is treated as a straight pass through but the accounting has it in our revenue and in our expenses, so we back out the pass through. So it's not something that is a surprise to us. In fact -- and those pass through numbers are actually coming down because when we enter into contracts, we know that it is confusing from an accounting point of view. So we try to structure the contracts to reflect it properly, so that we don't find this. So if you look at it on a global basis, we had 30 basis points of pass throughs, which is why if you looked at our overall organic, we would increase that organic by 30 basis points.

Peter, we started this about three years ago -- four years ago, to move away from being a principal and become an agent in the events business. Every quarter for the past three years you've seen her pass throughs coming down.

On your working capital question, you know how volatile it is around quarter end, with respect -- primarily it is cash flows around media. Nothing stood out. We had a couple clients who were in some inefficiencies in our payment streams so it tripped over into third quarter. For us, it was normal course and there was nothing that was a surprise.

Thank you.

You are welcome.

Brian Wieser, Pivotal Research Group.

Thanks for taking the question. I'm curious to hear your thoughts. There has been some speculation that perhaps this year might actually turn out to be a bigger year for media reviews than last year in some ways. I realize it seems kind of late in the year for this to happen but as everyone is digesting the K2 report and the recommendations, I'm curious to hear how you think the rest of the year plays out on the new business front, industry wide perhaps?

Yes, Brian, everyone started the year thinking it was. If you remember, I did not think so. The reason for it is we did not know of any big media reviews or existing clients. That is basically why I answered the question the way I did. I still do not see as big -- there are two big reviews out there. Obviously AT& T and of course McDonald's on the creative side.

But yes, I suspect as always we will see -- probably around September, we will see some media reviews. But certainly it will be pretty hard to compete with what we had last year, Brian. What is happening -- some of our clients are just asking to look, as far as the A&A report. Of course, we have dialogues with our clients, going over contracts and making sure our language is as tight as it has been. We had all these provisions in our contracts before whether it be the ability to audit, transparency. Clients will ask questions like that but I do not see any big upheaval in terms of reviews as a result of the A&A. I know there is one particular company out there. Not a client of ours, that has brought in their outside auditors to look at this kind of stuff. I am knocking on wood, we have not seen any of that.

Okay. Thank you very much.

Thank you, Brian.

Tim Nolan, Macquarie.

Your US growth has been quite solid and stable for the past -- really every quarter last three years or so. I'm wondering if you might be able to speculate if there is any slowdown in the UK or Europe if advertisers might simply shift those dollars to a region like the US, where you are strong and where the economy is pretty good and where the ad spending has been consistent. Secondly, one of your competitors that reported this morning mentioned receivables were going up because some clients were pushing out payment terms. It does not look like you are reporting that in your Q2 numbers. Another peer that reported earlier also looks like they did not show that in their numbers. I'm wondering where this is coming from? It goes back to this issue of a year or more ago where there is talk about advertisers trying to push out payment terms to their agencies. I was just curious what your perspective is on that?

The reason you do not see us talking about it is because we do not see it.

Yes.

We are in the camp of that one versus the other one. Interesting question on -- look 62% of our business in the quarter came from the United States. There is no question that is a strength of IPG. We have very competitive offerings across all of our networks. Plus let's not forget our independent agencies in the US. We have Deutsch. We have Hill Holliday. These are very strong -- the Martin Agency. We have strong independent agencies in the US. And frankly, if there are UK or European companies looking to break into the US market, we have more than enough competitive offerings to pick up that business. And obviously, the digital components in the US is exceptionally strong. We can really field a great team to get that business.

The other side of it, the US side of the business is very competitive, particularly on the CPG side. We did see some of our clients shift some business to us in the US and as they do acquisitions in the US, they want to beef up the offerings. There is some of that and our growth in the US. I view that as an opportunity. I think the fact that we have 62% of our business in the US is a strong positive for us. I know this goes through waves, if you will, in terms of being better off in other countries but we have been consistently very strong in the US and frankly, we like the position.

Yes, great, thanks.

Thank you, Tim.

James Dix, Wedbush Securities.

Thanks, good morning guys. I guess, two questions. First, kind of following up on Lexi's question about new business lift. I think you said coming into the year you expected around a point and a half or 150 basis point of lift for the first half of this year. Any assessment of how that actually turned out and how that phased in, in 1Q versus 2Q especially given what you said about June?

Then, with BMW under your belt, are there any major pieces of business which you are defending, that you would flag? And then I guess secondly, I do not normally ask a lot about awards, but with Canne occurring this quarter, I guess this would be the time to do it. Do you have any expectations every year as to how you want to do at Canne or awards more generally? And, if so, did you perform against his expectations? Do you see these awards correlating to revenue growth or profitability over time?

How much time do we have left in this call?

Seven minutes til the open.

First let me talk about the accounts in review. The most significant item, it's not in review, but, well it is in review, it will be, is the Army. There is a mandatory review every five years. We've been extended through September of 2017 on that one but there will be a review of the Army coming and obviously we have done this before and hopefully we'll be able to retain. [C-OT], a client of MullenLowe is in the midst of a review and we hope to hear from that in the next couple months. And TD Bank is in review. Those are the significant items of review from existing clients.

And our existing wins, -- I think it goes to the offering and a comment that we have always said that we want to treat our existing clients as if we are pitching them all the time. The retention of BMW is significant. Obviously, it is a good client for Mediabrands, but it is also an indication of verification of the work that we have been doing and the fact that as the market changes, we are able to field it with talented people, tools, and data, analytics that are necessary and we are very competitive in the media space. What was the other question?

Just on the business, how the lift from new business wins actually ended up phasing in, in the first half of the year. I think you talked about 150 basis points.

A good portion of the tailwinds phased in within first quarter and second quarter. Some of it spilled over to the second half of the year, which is what I talked about. Obviously, with new wins and so on we will have some additional business issues. Wins hopefully and tailwinds in the second half. But it is too soon -- we are not going to give out a number on that yet because frankly, some of our wins have not been announced yet.

The answer is yes, we have tailwinds, not as big as the first half of the year and it certainly tails off in the second half of the year. Although, the timing of these things -- again, I have to reiterate, the timing of these tailwinds and when they impact, we really don't have much control over that. It happens to be in the hands of our clients. We are very conservative when it comes to whether we answer the question of when is the timing of our tailwinds and for good reason.

They are all baked into the revenue forecast right here.

Okay, any sense as to how they came in, in the first half? Was it roughly the 150 bips that you were expecting or was it a little bit less, based on some of the push?

It was a little bit less, because obviously we had some in the second half of the year.

Okay. And then any comment on Canne and awards generally, in terms of their impact on your business?

Canne, as I said before in my comments, on a revenue basis, we outperformed -- we are not as big as some of our competitors so if you throw a lot of money in Canne, you can win more awards than anyone else. We think a good way of looking at it, is comparing awards per revenue and when you do that, our agencies performed better. That is the way we look at it. Of course we are gong to look at it that way.

McCann was very strong this year in Canne. And that is not by accident. McCann had a very strong emphasis on creativity. Rob Riley and his team working with Harrison and part of the McCann World Group had a very strong effort in Canne. The results are reflective of that. McCann New York in particular. It was great to see the awards they were winning and of course McCann helped -- won the healthcare agency. It is an important factor.

Every year we look at the question of risk/reward in terms of spending the kind money that we do in Canne. No one asks for the person who performed the poorest in Canne. (Inaudible) I believe you will continue to see a strong effort in terms of awards and to reflect the creative power. Creativity and effectiveness is a critical component of what we do, which is why FCB, MullenLowe, all of our agencies participate in it but we pick and choose the work we want to put in. We are very proud of all agencies and the awards that we one.

Thanks very much.

You're welcome.

Tom Egan of Kelsey.

Great, thank you very much. Another agency holding company this quarter indicated that the ad budget migration from TV to digital was slowing. Still occurring, but the pace was slowing as a result of client concerns about digital ad fraud and viewability. I'm curious to know what you are seeing or hearing from clients?

Yes. I think that was a big talk in Canne. A lot of it was coming from the media owners, the TV owners and a lot had to do with the upfronts. Remember last year's scatter -- a lot of companies were caught flat in the scatter and had to pay higher pricing. We saw an uptick in TV in the upfront. And a lot of people read into that therefore the money going into digital is slowing and it's going back to TV.

You know in the US in terms of spend, we see 2016 sort of equal between digital and TV. Frankly in 2017, we believe digital will pass TV. The growth of digital is slowing a bit, because look, it keeps getting bigger and bigger but TV is not going away.

So our expertise is to help our clients decide where to put it and some clients are happy with digital and they spend more in digital. Other clients are concerned about the ad fraud and visibility and are they getting the right ROIs in terms of box and all of the ad blockers and so on and they are more comfortable with TV. It is a question of what gives the clients the best ROI. Frankly, that is what we get paid to do in terms of helping our client understand it. We continue to see that as the opportunity for our business.

Great, thank you.

Thank you very much for the participation and I look forward to talking to you again in our third quarter results. Bye now.

That concludes today's conference. You may disconnect at this time.