宏盟集團 (OMC) 2004 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Omnicom Group 2004 second quarter conference call. At this time all participants are in a listen only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. If you need assistance during the call, please press the star and then zero. As a reminder, this conference call is being recorded.

At this time I'd like to introduce you to today's conference call host, executive vice-president, chief financial officer, of Omnicom Group, Mr. Randall Weisenberger. Please go ahead, sir.

Good morning, thank you all for taking the time to listen to our second quarter 2004 earnings call. We hope everyone's had a chance to review our earnings release. We have also posted to our website, both the press release and a presentation covering the information that we'll present this morning. This call is also being simulcast and will be archived on our website.

However, before we start we need to provide two reminders. First, certain of the statements in this document constitute forward looking statements. These statements relate to future events or future financial performance, and involve known and unknown risks and other factors that could cause our actual results, level of activity, or achievement, to be materially different from those expressed or implied by any forward looking statements. These statements are present expectations, actual events and results may differ materially.

Second, as mentioned during our first quarter call, effective January 1st, 2004, we adopted SFAS number 123, that is accounting for stock based compensation. As a result, we're including the costs of employee stock compensation in our reported results. In connection with the adoption of 123, we've also restated our 2002 and 2003 annual results, and our 2003 quarterly results to make them more comparable. Therefore, today's earnings release and our comments reflect the impact of that restatement. A copy of the form 8-K can be found on our website.

Now, if with those reminders or commercials out of the way, we'll begin the call with some brief remarks from John Wren. Following John's remarks, we'll review our financial performance for the quarter in more detail and then both John and I will be happy to take questions.

Good morning and thank you for joining us. Once again we're pleased with our operating performance for the quarter and for the six months ending June 30th. Our revenue growth for the quarter was in line with our projections with strong performance in the United States, South America, Asia and Africa. The recovery in Europe is a bit slower with moderate growth in Germany, France and the Netherlands during the quarter. It was slightly flat, probably during the year, which Randy will cover later on in his comments.

Taking a second and looking at the expense side, our financial performance is beginning to really reflect the actions we've taken over the last 18 months to adjust the cost structures of our agencies. We made significant progress in restoring our incentives during the quarter, despite severance costs which were a bit higher than we expected. Randy will cover these items and others in detail as he takes you through the quarter.

On a few other notes, we have some- - our performance remains very strong. We continued to increase our investment during the quarter and during the first half in the training and development of our people, and we also continued to maintain our - - the leadership position of our brands. This is most recently reflected in our performance at com this year which had more client participation than ever before and our performance, I believe, was outstanding.

Finally before I give it to Randy, I just wanted to note that we completed the long planned management succession at BBDO Worldwide this quarter with promotion of Andrew Robinson to CEO, Allen Rosenshine, who is stepping down as the CEO, will remain as chairman and work closely with Andrew as we have done with other divisions when we've made such important changes. We're very pleased with our performance and with the group and Randy will take you through the details.

Thanks, John. I'll say it as well, we're very pleased with the performance of of our agencies in the second quarter.

We believe the company's financial performance is beginning to reflect the significant progress that our agencies have made over the past two years in adjusting their cost models, as well as the success that we've had in gaining market share. In summary, revenue for the quarter increased $258 million, to 2.408 billion, that was an increase of 12%. Net income increased 14.5% to 206.1 million and diluted earnings per share increased 14.6 cents - 14.6% or 14 cents to $1.10 per share. For the 6 months, revenue increased 13.5%, to 4.639 billion, net income increased 15.6% to 341.7 million and diluted earnings per share for the six months increased 23 cents to $1.81.

Analyzing our revenue performance, organic growth continued to be strong, increasing 6% in the quarter and accounting for 128.3 million of our revenue growth. Acquisition revenue in the quarter totaled 54.7 million, that's up from 52.2 million in Q1 and it added about 2.5% to our revenue. Based only upon the acquisitions that we completed through the end of Q2, acquisition revenue growth will be approximately 1.9% in Q3 and .5% in Q4. We do, however, expect to complete additional acquisitions before the end of Q3 and Q4. FX continued to have a significant positive impact in the quarter, adding 75.3 million to our reported revenue, or about 3.5 %. While this is still significant, it's down from 6.7% in Q1. Based upon current FX rates, we would expect the FX impact in Q3 to be similar to the 3.5% impact that we felt or experienced in Q2, and we would expect Q4 to be between 0 and 1%. Obviously these rates could change.

As for our mix of business in the quarter, traditional media advertising accounted for 44% of revenue and marketing services accounted for 56%. As for the respective growth rates in the quarter, driven in part by the strong performance of our media buying and planning businesses, traditional media advertising grew 12.3% and marketing services grew 11.8%. Breaking down our marketing services revenue for the quarter, CRM was 33.6% of our revenue, public relations 10.9, and specialty communications 11.5%. As for their respective total growth rate, CRM continued to be strong and steady, increasing 10.3% in the quarter; public relations, which began to recover in the second half of 2003, continued to gain momentum growing 10.5% this quarter, that's up for 7.8% in Q1 and; specialty communications, driven by the strong performance of our health care agencies, increased 17.8%.

Our geographic mix of business in the quarter was 54.5%, United States, and 45.5% international. Those numbers are basically in line with the first quarter. In the United States total revenue growth for the quarter was $130 million, or 11%. That was made up acquisition growth totaled 45.8 million and organic growth totaled 84.2 million. For the 6 months total revenue growth in the U.S. was 251.6 million, also up 11%. Acquisitions accounted for 89.4 million of that growth, and organic growth totaled 162.2 million.

The international side increased 128.3 million or 13.3% in the quarter, acquisitions accounted for 8.9 million of that growth, organic growth was 44.1 million and FX had a positive impact of 75.3 million. For this six months international revenue increased 300.8 million, or 16.7%; acquisitions made up 17.4 million of that, organic growth was 78.3 million, and FX was 205.1 million.

On the new business front, aggregate new business wins in the quarter totalled 952 million. A few of the significant wins and losses in the quarter, Mitsubishi Motors, which was a media-only win, Walgreen's, GlaxoSmithKline of India products, Megablocks and Economeca (ph) Federal which was in Brazil. Couple of losses with the media planning for HFVC and Staples.

Moving down the income statement, operating income for the quarter was 343.7 million. That's up 7.6%. Operating margin of about 14.3%, which was a year over year decrease of approximately 60 basis points or about $14 million.

Now while we strongly believe it is most appropriate to evaluate our cost structure taken as a whole, a few of the larger items that impacted our margins in the quarter included the following: First, as we've discussed previously as our business continues to improve, we expect to increase aggregate incentive compensation levels. We've made good progress towards this goal, and this quarter on a year over year basis total incentive compensation expense increased approximately $36 million. While we believe we made excellent progress in realigning our agency cost structures in the aggregate, we continued in the quarter to take targeted cost actions primarily in Europe. As a result severance costs in the quarter remained flat year over year. At the same time due to generally improving market conditions in the U.S. as well as the success of our new business initiatives, recruitment increased $3.3 million in the quarter.

As we explained on several prior occasions, every quarter we expect to have both severance costs and recruitment fees, however, given the actions that we've already taken, and where we are in the overall business cycle, we expect severance costs to decline and recruitment costs to increase modestly. As we explained last quarter, we also continued to absorb increased costs, estimated to be approximately $10 million per quarter, associated with the implementation of Sarbanes 404. At this point, these costs are primarily internal costs, and while they're likely to be permanent, they're not expected to increase much further. These increased costs were offset by the benefits derived from the increased utilization rates that we've achieved as a result of our prior cost actions and the generally improving business climate. For example, in the quarter compensation costs, excluding incentive compensation, increased less than 9% and rent and other occupancy costs increased less than 2%, at the same time revenues increased 12%.

On the interest expense front, net interest expense in the quarter was approximately $7.3 million, that's down from $13 million reported in 2003. The decrease from prior year is a result of not having to pay a sweetener this past February of our 2031 convertible bond, as well as a reduction in our average outstanding borrowings. This is offset by the FX impact on the euro denominated interest that we pay on outstanding euro notes. Our tax rates for the quarter 33.6%, that was in line with full year 2003 rate and was in line with Q1 rate. Net income and EPS is a final result, net income for the quarter increased 14.5% to 206.1, and diluted EPS, as I mentioned, increased 14.6%, or 14 cents to a 1.10 a share. For the six months net income increased 15.6% to 341.7 million and diluted earnings increased 14.6%, or 23 cents a share to $1.81.

We've been asked a few times over the past couple of weeks, the potential impact of the proposed of the EITF-0408, assuming it goes through as currently proposed. First, and most importantly, the change has no economic impact and it would have no impact on a reported net income or on our free cash flow. The change would, however, impact the number of shares used in our computation of adjusted net income on a historic basis. That is, the proposed change is expected to be applied on a retroactive or restated basis. On page 4 of the investor presentation that we posted to our website, we provided a preliminary analysis, which shows the pro forma impact of applying EITF-0408 to our convertible notes for 2002, 2003 and first half of 2004. The net result of the change would be dilution of about 6.5% in 2002, 5.3% in 2003, and 7.2% for the first half of 2004.

Going forward, we expect to make a couple of minor changes to our existing bonds, that would require us to account for the bond using the treasury method. We believe this method more accurately will reflect the economics of the bonds and was in fact a method under which we had expected to account for the bonds when we issued them. However, these changes would only be effective going forward.

As a result, if the holders of our 2032 bonds consent to the changes we proposed to them last Friday, the dilution in the second half of 2004 would be reduced significantly, bringing the estimate for full year 2004 dilution resulting from applying 0408 down to approximately 5.5%. We would expect to propose similar changes to our 2031 bonds next February, and to the 2033 bonds potentially in the fourth quarter. As a result, assuming that we are successful in making those changes, the dilution in 2005 would be minimal. Thereafter, the bonds would not be dilutive until our stock price exceeded conversion price of the bonds which is approximately $110 per share, for the 2031 and 2032 issues and $103 for the 2033 issue. As you would expect all these estimates are subject to change based upon the EITS, reaching a financial consensus on 0408 as currently drafted, et cetera.

Now I'll ask the operator to open the call up for questions.

Thank you, and ladies and gentlemen, if you do wish to ask a question, press the star followed by the 1 on your touch tone phone, you'll hear a tone indicating you've been placed in queue and you may remove yourself from queue by pressing the pound key. If you are using a speaker phone, you may need to pick up your hand set before pressing the star and then 1. So once again, if you have a question, please press star, then 1 at this time.

And our first question comes from the line of Michael Russell with Morgan Stanley. Please go ahead.

Good morning, John and Randy. It was a very solid quarter, congratulations. I wanted to look at the PowerPoint presentation on pages 12 and 13. Just want to understand, your earnouts after the first 3 months and after the six months went from 11 million to 121 million, and then on page 13 your potential earnouts for 2004, went from 162 to 72 million. Can you give us the story behind those changing numbers just to get a handle on that?

Sure. I'm not sure the question.

I was just comparing the pages that you had - -, page 12 and page 13 this quarter with last quarter, and just trying to understand the earnouts that were mentioned, 121 million after six months year to date, 2004, that compared to 11 million in the first quarter? Just wondering if there was something in terms of the businesses that you've got on earnouts that would change that number?

This reflects the payments that we make during the year on earnouts. Normally auditor required after--if an earnout, if it is a multi-year earnout, we might have to make annual payments on that earnout. So if you look at the acquisition of related expenditures schedule, we made payments of earnouts which were done in the past of $11 million in the first quarter. That's what you're referring to.

Um-hum.

Well, a lot of the audits that were required were individual company audits were made during the first six months, and soon as they were completed , the appropriate earnout payments were made to those individuals, and that increased the number for the six months from 11 in the first quarter to 121 as of the six months. And normally the cycle is very little in the first quarter, second quarter is when we settle these things up, there might be something in the third, but there is very little in the fourth, because of the arrangements that we have with these individuals in terms of the way the payments are made.

Great, and that see saws then and brings down the potential earnout obligations down?

Exactly.

As we make earnout payments, obviously the potential reduces.

And then if we do deals it would increase it, but it would be in the out years.

Okay, great.

The other things that impact these numbers, are things like FX rates, et cetera. I mean there are quite a few number of transactions in these numbers.

Okay. And then one other financial question: The goal--I guess, the net debt to EBITDA is 1.7 times down from 2.0 times. Is there a long-term ratio that you're trying to focus on? And one of the new focuses of Wall Street is also on a payout ratio. Have you given thought to- -you have a very high payout ratio now because of the share repurchases that you've done and the dividends that you've paid, is there a long term-target a couple of years now that you've be thinking in terms of leverage and payout ratio?

No, we basically want to manage to an A or A-minus credit rating. We like those levels. We think that's - - those are reasonable levels and a good solid financial base at the same time. At the same time, we're trying to drive the highest return on equity for our shareholders. You know, we'll - - we'll manage that capital structure through a combination of, you know, dividends, stock repurchases, acquisitions.

Okay. Thank you.

Thank you. Thanks, and we have a question then from Lauren Fine with Merrill Lynch. Please go ahead.

Thank you very much. A couple of quick questions. One, what was share repurchase activity in the quarter?

(INAUDIBLE) 35 to $140 million.

Okay. You've indicated in the past that you thought your revenue and earnings growth would more or less match each other, yet through the first half your growth is outpacing your revenues. Given that you've given some positive indications of the cost structures, where you think it should be, would you expect that to continue that in the second half, that earnings could outpace revenues? And I guess maybe more precisely, would you expect margins to maybe stabilize or expand in the second half?

Yeah, we give long-term statements with respect to earnings and I'll say revenue growth, you know, we think those on a long-term basis we continue to think that's pretty reasonable. As far as margins go, yeah, we do expect them to stabilize as we rebuild the incentive compensation pools, we think the margins will come back in line. Obviously this quarter, while it's 60 basis points it's really $14 million, is the difference year over year in margins, the compensation- -the incentive compensation pools alone increased in the quarter $36 million. So, obviously we try to manage the cost structure as a whole, not these individual line items.

And then just two other quick ones, if you could estimate what you think the FX impact was on earnings per share in the quarter ? And you mentioned that severance was flat versus a year ago, but I don't think we have the severance figure from a year ago, if you could provide that.

Severance was about $20 million in the quarter.

This year and last.

I'm not sure the FX impact on EPS. I would guess it is in the 2 to 3 cent range.

Okay, great. Thank you very much.

Thank you.

Thanks. And we have a question then from Joe Stauff with Schwab Soundview. Please go ahead.

Good morning. Thank you.

Randy, you had mentioned the incentive comp pool went up 36 million in the quarter. What does that represent in terms of, I guess, the current incentive comp pool in the second quarter versus a fully accrued level, just to get a sense of that?

Second question was, when did you first sort of begin to spend and implement and incur costs associated from Sarbanes?

And then third question please. Sort of commentary on the business climate in Europe and specifically Germany, please.

I'll do the easy one, Sarbanes, we started some spending money probably in the middle of last year. The pace of that spending, increased pretty substantially, and, you know, really over the last, you know, six or nine months, probably, the predominance of the costs have been internal costs. As we move forward, KPMG will obviously be more involved and they'll have to do their attest work which will shift some of the costs, although the majority of the costs will stay, internal costs, due to all of the internal testing, at least is the approach as we have taken, to doing Sarbanes, but those external costs will increase a little bit as we go forward.

Would it be fair to characterize just real quick on that, that, you know, that in the third quarter it would be fair that looks like the year over year your Sarbanes costs most likely will increase and then somewhat stabilize, maybe in the fourth quarter.

My guess is Q3 and Q4 the costs, you know, continue to rise probably in that same $10 million a quarter range. That is actually not our fault. Sarbanes cost. My estimate of our internal cost on Sarbanes is probably $50 million a year. And then we're gonna have the external costs which, you know, won't be anywhere near, you know, those numbers, it will be a fraction of those numbers. So I would think our year over year increases will be about at that $10 million level each quarter this year and then it will be pretty much flat year over year next year.

Incentives, the way that works, is that we have internal objectives, which each one of our operating units have to make, before we- -before we start to accrue and pay for- -accrue incentive compensation. In an ideal world, where we're meeting our targets and things are making the proper investments in our future, we're looking to record incentives at approximately 20% of pretax preincentive income. We're achieving that as of the six months of this year and we're back on track, having not been there in the prior years. So we're tracking very strongly towards getting the incentive levels back to where we want them to be.

But, again, just to figure out exactly where we are today in terms of getting to those levels which you just sort of outlined, I mean, is there a measure of sort of about 50% of, you know, of - of sort of the fully-accrued compensation levels or something? Is there a metric you can give us?

I'm not quite sure what you mean, what the question is.

Yeah. We think we are where we ought to be given the current level of performance of our agencies, but you got to keep in mind there is all kinds of layers. I mean, you got to start with performance of each individual agency and then it works up into various groups, and regional managements and network managements and obviously Omnicom as a whole.

Given the combination of performances that we have, we're comfortable with the incentive compensation levels that we, you know, have to date. Obviously, you know, we would like to see the performance improve and like to see those pools grow from here.

But they adjust with the performance of the company, because we have internal targets which we reach first, which are the outward reporting to the shareholders and then people who achieve those objectives, which allow us to make that reporting, are then entitled to certain discretionary bonuses once we've accomplished those tasks. 2004 we're tracking way ahead of where we were this same time last year in terms of being able to put those incentives aside.

Okay. And then finally on the business climate in Europe, specifically Germany.

In the second quarter business was flat. We had been down a little bit revenue in the first quarter. And as Randy had mentioned, the severance costs which were flat to last year in the second quarter, were a little higher than we had originally projected because we continued to make adjustments to our businesses in those markets. I have the impression, although it has not been going on long enough, that those businesses have stabilized. I mean those countries (INAUDIBLE) economies, our businesses within those economies have stabilized where we're not expecting robust growth any time soon. We're not expecting the kind of declines that we have seen in the past. And so as that evens out, as our businesses are properly sized, that will not require us to make further adjustments in our further severance costs. And then if this recovery follows others, the (INAUDIBLE) will come back into line over the course of the coming quarters.

Thanks, very much.

At least it is stabilized at this point.

Thank you and we have a question then from Jason Helfstein with CIBC World Markets. Please go ahead.

Thanks. A few questions. First, were there any investment gains in the numbers and operating income as there was in the first quarter?

No.

Okay. Can you quantify the actual option impact in millions of dollars, Randy, in the quarter?

Yes. If I can get a number here.

And then while you're looking that up, just as far as the way you think about acquisitions going forward, is there- -what was that?

The option expense in the quarter was 12.1 million.

Okay. When you think about expanding the business going forward through acquisitions, is there a specific discipline or area that you think you're going to be more focussed on over the next 12 or 18 months? And then just, lastly, do you think- -I think what you said as far as on the convertibles is quite clear as to how you envision that playing out going forward. Do you see, kind of, how much risk is KPMG telling you relative to how you think you can handle it, relative to what the ETIF will come down with? So I guess, is there a way to kind of handicap what you guys think, or what KPMG thinks will happen? If you can give us some more color there. Thanks?

We never speak for KPMG.

We certainly have a lot of discussions with KPMG. Based upon- -lets seethe - -assuming the EITS, 0408, goes through as proposed, which I think most people think it will, but we certainly aren't the guys to, you know, to be asking the question. A lot of other smarter people on that than we are. Assuming it goes through the way it's stated, then KPMG is very comfortable with what we stated here. They believe- -they've already - -we have to run it up through national, but the change we proposed to bond, which are very modest changes, are in line with the EITS intent. They think it - - they think, basically this pushes the bonds into treasury method. They think that the treasury method properly reflects the bonds, properly reflects the economics of the bonds, and is, you know, at the root is much as anyone can tell, somewhat the intent of what the EITF is getting at. Although that's certainly, you know, it is hard to determine people's intent. KPMG does have a person that sits on the EITF, and so, you know....

So that helps. And does this change the contingency payment of the sweetener option to make it a on going payment option, or it more has to do with just the way that the bond amendments are written?

No, it has nothing to do with the contingent payment. The change is that upon conversion we would pay the principal amount of the bond in cash versus stock.

Okay. Alright. And that's what - - that language is what changes it and allows you to use the treasury method. Okay. And then just - - if you can comment, John, how you think about acquisitions, looking forward?

Well, there has been a lot of discussion in the industry about acquisitions. It is important to just take a second to explain how we look at them. They are acquisitions which can be put into two broad categories. Acquisitions which change the nature and the makeup of the holding company and the major brands within it. And then there are acquisitions which support the brands and the extension of those brands, which make up the holding company. We've always- -we've been very happy with the profile of the holding company for a long time now, nearly a decade. So we haven't looked to large acquisitions at any point, which would change that composition. We have focussed completely on extending the value of our brands through geographic extension and through private extension. And through being able to better service our top 250 clients.

So with that in mind, that's what we focus on in the business plans of each one of those individual units, and what their requirements are. Rather than looking at a discipline, or making a comment on a discipline, it's easier to make a comment towards a broader geographic area, which says that our focus increasingly is in Asia, in terms of increasing the size and the depth of our operations in that region. Whilst we look at other acquisitions as they come up which support our key CRM businesses, our PR businesses and our specialty advertising businesses.

Thank you.

Thanks. And we have a question then from William Bird with Smith Barney. Please go ahead.

Just two quick questions. First, just on acquisitions. I was wondering, you know, if the first half's relatively slower level of acquisition activity is likely to persist, do you think will be next year will be at a similar kind of run rate? And then just secondly, I was wondering if there is anything in particular driving the 5 million swing in equity and minority interest? Thanks.

We don't budget for acquisitions, and I haven't looked at this, but I would say the first half is probably very low historically, very, very low. I mean, I'm going back to the creation of Omnicom. And it's for a multitude of reasons. I fully expect that acquisition activity will pick up. There is- -there are some very good potential candidates in the pipeline. We've been looking at them. We continue to look at them. And that pace will pick up as we go later into the year and certainly into next year.

One thing that we said all along, we don't do acquisitions until we've completed, pretty much the same, pretty in-depth process of review. Down through the organization, I mean, we get a lot of people involved in the due diligence, and integration efforts on these deals. And while there is a lot of activity going on, a lot of our financial staff for the past, you know, six months, effectively being consuming, implementing Sarbanes, a - - the amount of time and effort that they'll have to expend it on Sarbanes, that will start to dissipate a little bit. I think that the pace of acquisitions will likely tick up, or at least the bottleneck on the pipeline will start to open up. But we are committed to one thing. We're not going to do acquisitions until we think the acquisitions are right, until we have done all of the work that we feel is prudent to close the deal. We prefer to miss a deal than do bad deals or do them, you know, in a manner that we didn't think was professional.

The other thing, with the understanding that these will probably pick up, I'm very happy with our performance, given the lack of acquisitions and any contribution from acquisitions because of the low level. So I'm very pleased with the operation the way it is working. We've gone through also, and I mentioned it in my comments, we have completed management transitions which are not always simple. In our case they have been, but they take a lot of time and a lot of- -a lot of thought in order to accomplish them and you don't want to confuse too much activity while you're accomplishing some of those important moves, which if you do them right, will last for decades. Oddly enough we take the top 30 executives in this company, we've completed the transitions now in all of the places that we have to, and I think at the old age of 52, I think I'm the third oldest man in those 30. So we've very pleased with the team we have on the field, and our performance has been, and we're ready to get involved in things that will extend the value of our brands.

Second question related to the change of equity affiliates and adjustment in minority interest. Equity affiliates, there is quite a few number of companies that are affiliates and there are larger number of companies that we own where we have minority owners or local owners. On the equity affiliate front, there are not too many that stand out, too many changes that stand out significantly. Generally it is improving operating conditions across a broad number of companies. There were 1 or 2 I'll say negative impacts last year that were improved since last year to more of a neutral level, so I would say generally better economic conditions on the affiliate front. Minority interest front, there were a couple increased ownership stakes that reduced the minority interest in those circumstances, offset by generally improving performance across the broad number of agencies. Again, nothing really stands out as one off items. I think just improving business conditions, or improving performance.

Thank you.

Thanks. And we have a question then from Alexia Quadrani with Bear Stearns. Please go ahead.

Good morning. John, could you follow up- -just following up on your comments about Europe. Could you comment a bit on how U.K. was in the second quarter and what you're seeing early in the third quarter with respect to the second half?

Sure. U.K. U.K. was up I believe 1% organically in the quarter. I shouldn't say- -it was up around that. They're looking for a number. It's a solid business. It's stable. It's not growing. There is still uncertainty in the marketplace. It was up a little higher- -excuse me- -higher than I just said, by a couple of percentage. But it's- -so it's not harming us in any way, it is growing modestly, but we're not seeing robust growth there, yet.

So a little stronger than what you're expecting for the continent but not much?

Yes. I mean U.K. is, you know, the trouble, if there has been trouble, which has caused us to restructure our businesses, as opposed to be disappointed in maybe the growth, has been in places like Germany, France and Netherlands where we have, over the course of the last 12 to 18 months, had to reorganize some of the things internally which has caused severance costs to be part of our P&L. England is stable. And we expect it to continue, to grow. The second quarter's growth was slightly- -was better than the first, so if that pace continues, it will start contributing soon.

On then on your new business, you've done a great job particularly the last six months pulling in clients. Are you seeing the spending from those wins coming in as planned? And then maybe if you can comment on your - for the same type of question, your existing business or existing business coming in as budget?

Yes, as I said, it is businesses coming in as we expect it to. And in all the markets, except for France, Germany and the Netherlands, the growth has been in line with what our internal projections were from the revenue in terms of what we expected clients to spend. In terms of what our internal projections are for each one of those people individually and each one of those clients individually, each one of those countries. We've been hitting the mark going through the year.

And the same is true for the new business?

I can always win more new business. Nothing bothers me more than when we don't win something. So we can always do better.

Okay. Thank you.

Thank you, Alexia. Thanks. And we have question then from Troy Mastin with William Blair. Please go ahead.

Good morning. I'm curious if you've seen any unusual slow down in the business as you progress through the quarter, particularly in June, given some of the headlines out there. And do you have any read on how the environment has been so far in July? And then finally, the third quarter of the Olympics coming, do you expect to see impact to your business, positive or negative from that?

Our business doesn't follow the headlines, Troy. Marketing plans are generally put into place and the noise that you see in the marketplace really hasn't had any impact in terms of what the projections have been for our clients who are aggressively starting to market their brands again. So - - with growth in the United States has been strong and we expect it to continue to be strong.

So the Olympics don't really move the needle much for us one way or the other. The clients, you know, the total increase in client spending around the Olympics from a broad-based marketing perspective really is relatively modest. It certainly has an impact on those companies that are more involved with sponsorship of the Olympics than the companies that don't. So things shift around a little bit. So it (AUDIO QUALITY CHANGE) shouldn't have a significant impact on the (INAUDIBLE).

Okay. And then one more if I may. Given the expected drop in acquisition growth, should we expect to see your earnout obligation change materially from where they came in this quarter or does the pipeline that you've got potentially keep those flat, or will those go up going forward?

Earnout obligations are tied to the acquisitions that we close. If we continue to have a low in new acquisition activity, the earnout numbers will decline, as they have been for the, I guess, the last 18 to 24 months. We do expect acquisition activity to pick up from the levels we had in the first quarter. Those are pretty abnormally low numbers for the reasons that I explained.

So we should see continued declines until the acquisition activity picks up?

Yes.

Okay. Thanks.

Thank you and we are nearing the end of our time, but we do have time for one last question and that question comes from Steven Barlow with Prudential Equity Group. Please go ahead.

Thank you. Have your pitch related costs been higher in the first half of the year than originally expected? And how do you look for those in the second half or full year 04? And secondly, has public relations just been stronger in the U.S., or is there anything going on in Europe or Asia on that side of the business?

Our pitch costs - - we don't forecast our pitch costs. And I guess there's a fundamental belief that if we get up to the plate, we're going to bat like Barry Bonds, so those costs become incidental to what we're trying to accomplish in growing our organic growth. So we don't forecast them. And we don't budget them. We incur them based upon the opportunities that arise that our companies can go in and seek the opportunity to gain new clients or new assignments. And that's always been the case since the creation of the company.

With respect to PR. PR in the U.S. is strong, PR in Asia is very strong. In Europe it's been spotty, although the recently there has been signs in Germany that the PR business is picked up a bit from what it's been in the past. But most of our PR activities are concentrated in the U.S. I don't know the percentage, but a significant portion of the PR revenues that we general are U.S.-based, so the growth you see is really reflection of the U.S., and to a lesser extent the Asian growth.

Then lastly on specialty has been a good winner here for the last several quarters, particularly health care, I guess. Is there any way to forecast what market share you have in health care or whether that market share is going up?

We don't try to forecast that number, so I don't have knowledge of what the market would be. I know we're extraordinarily well represented in both our ability to service effical (ph) pharmaceutical drugs, all the support training for both patients and for physicians on those. And then, because of the embedded knowledge we have from that long history and the great strong franchise, we're very well positioned to aid our consumer agencies when these drugs go over the counter and the pharmaceutical companies start to market them to the broader public. So we have a very strong franchise, and it grows and it continues to grow and expand within that industry and with activities to bring pharmaceuticals and to educate the people using them. So we're very happy with that, and we're very well- -very stable management, very stable companies in that area.

Thank you very much.

Thank you. And thank you all for taking the time to listen to our call this morning. Bye-bye.

Thanks. And ladies and gentlemen that does conclude our conference for today. Thanks for your participation and for using AT&T's executive teleconference. You may now disconnect.