宏盟集團 (OMC) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Omnicom fourth quarter 2008 earnings release conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions). As a reminder, this conference call is being recorded.

At this time, I would now like to introduce you to today's conference call host, Executive Vice President, Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead.

Thank you. And thank you all for taking the time to listen to our fourth quarter 2008 earnings call. We hope everyone has had a chance to review our earnings release. We have also posted it to our website, both the earnings release and an investor presentation that will cover the information that we will present this morning. This call is being simulcast and will be archived on our website.

Before we start, I have been asked to remind everyone to read the forward-looking statements and other information that is included on page one of our investor presentation. And to point out that certain of our statements made today may constitute forward-looking statements and that these statements are our present expectations and actual events or results may differ materially.

We're going to begin the call with some brief remarks from John Wren, and then following John's remarks, we'll review the financial performance for the quarter.

Good morning, and thank you for joining our call this morning. The fourth quarter was probably the most challenging quarter the Company has faced since 1992. The combination of a sudden decline in economic growth worldwide and the rapid strengthening of the US dollar, caused a decrease -- a quarterly decrease in our revenue.

As all of you know the pace of the economic decline in the fourth quarter was caused by many factors. The banking system meltdown in November, the freezing of credit to companies and individuals, rising unemployment, and a decline in consumer confidence and trust. Looking forward, we think the first nine months of this year are going to be difficult. At this point we expect to see some improvement late in the year with easier fourth quarter comparisons and positive gains from the significant stimulus actions by the US in most major countries. Our hope is that these programs will spur recovery and add to spending late in 2009 and into 2010.

As in past recessions we expect to outperform GDP, offsetting any decline in client spending and the uncertainty in revenue we are reducing our cost structure. In the fourth quarter we eliminated many open positions and implemented targeted staff reductions in many of our agencies. We also cut back non-client, non-essential travel and discretionary costs. We also reduced incentive compensation for senior executives, but preserved incentives for most other employees. And finally we froze or delayed salary increases in order to reduce layoffs.

Looking to the longer term, I am very confident in our ability to adjust to the changing environment. The Company continues to be focused on the fundamentals which have seen us through good times and challenging times alike. These fundamentals are, number one, our leading portfolio of global advertising and marketing brands are the best in the world.

We continue to have a very well balanced mix of business diversified by discipline and across geographies, and also a broad base of clients and industry served. I don't think there is a question of our unparalleled creativity which is at the core of delivering value to our clients. And finally, we are focused on cash and cost disciplines, and in order to allow us to invest in growth and productivity in the future.

Finally, I would just -- before I turn it back to Randy, I just want to add that our focus during this crisis will be -- will be helping our clients grow their businesses. That is our number one priority. Thanks, and I'll turn it back to Randy for now.

Thanks, John.

Although it is certainly a difficult quarter, overall we think our agency has accomplished a great deal in the quarter, and the financial out were fairly strong given the economic environment.

That said, for the first name a very long time, due a combination of the overall economic environment and FX rates, revenue declined in the quarter by $254.7 million, to $3.7 billion, that was a decrease of about 7%. Despite the fourth quarter, for the full year, revenue increased $665.9 million, to $13.36 billion. That was an increase of 5.2%. Operating income for the quarter decreased 15.7%, to $448 million, and that was an operating margin of 13.3%, which was down about 140 basis points from the year earlier. To put that in dollar terms, the margin decline translates into roughly $46.1 million of operating income.

As everyone knows, the pace of economic change in the fourth quarter was fairly unprecedented. Almost all of our agencies experienced some loss of revenue, mostly in project revenue, which is traditionally larger in the fourth quarter, and for us, heavily skewed to the United States. Given the time of the year, our only ability to adjust costs was to reduce discretionary spending as much as possible, and to reduce our incentive compensation pools, which we did. These actions were in fact sufficient to offset the loss of operating income associated with the lost revenue. However, we also took aggressive severance actions in the quarter to align our cost structures with the -- with the decline in revenue forecast for 2009.

As a result, we had a year-over-year increase in severance of about $55 million in the quarter, which was about $10 million more than the dollar translated decline in operating margins. We estimate that the annual -- annualized savings in salary-related costs of the actions taken in the fourth quarter is approximately $215 million. As we move through 2009, we will continue as and if necessary to aggressively manage our costs to keep them in line with revenue forecasts.

While we can't control the economy, we do expect to manage our own costs to the extent possible. For the year, operating income increased 1.8% to $1.69 billion, and the operating margin was 12.6%, down about 50 basis points from last year, almost all of which was from the fourth quarter. Net interest expense for the quarter was $23.9 million, that was up about $9.6 million from last year, and up about $3.2 million from the third quarter. For the year, net interest expense was $74.3 million, that was basically flat with 2007.

The increase in the quarter versus the fourth quarter of 2007 was primarily the result of increased interest expense, due to supplemental interest payments made in 2008 on our 2031 and 2032 convertible notes combined with increased average debt levels resulting primarily from our stock repurchase activities in the first half of 2008. Versus the third quarter, the increase was primarily due to a reduction in income resulting from a combination of lower interest rates earned on cash balances, held primarily in emerging markets, and then the FX impact on those earnings. For example, the currencies in some of those markets, weakened against the US dollar by as much as 40%, and that significantly reduced the US dollar translated interest income.

On the tax front, our reported tax rate for the quarter was about 33.5%. That brought the full-year rate to 33.6%, which is lightly lower than what we reported last year, due primarily to lower tax rates in various foreign jurisdictions. Net income for the reason mentioned earlier, net income for the quarter decreased 13.7% to $271 million. That brought net income year to date or for the full year up to just over $1 billion, which was an increase of 2.5%. Fully diluted earnings per share, decreased 8.3%, to $0.88 per share in the quarter, and for the 12 months increased 7.5% to $3.17 per share.

Now analyzing our revenue performance, as everyone is aware, the US dollar strengthened significantly versus most currencies in the quarter, causing a significant FX impact. In the quarter that impact was $210.7 million of decline in revenue. For the year even after the major move in the quarter, FX remained marginally positive at 1.3% or $164 million. Looking ahead, if rates stay where they are, we expect FX will be negative between 8% and 9% in Q1, and then between 6.5% and 7.5% for the full year. Growth from acquisitions net of dispositions added about $39 million to revenue in the quarter or about 1%. Our acquisition activity has been fairly minimal over the past six months.

It's been our first priority to focus on our existing businesses, making sure our own house is in order before buying a new one. And while we have seen a number of potentially interesting businesses, for the most part it would appear that many seller's expectations have not yet fully adjusted to the current economic environment, but that does appear to be changing. Organic growth for the first time in a very long time declined by $83.2 million or about 2.3%. However, qualitatively, we think our agencies are in very good shape.

Our agencies were again were the most highly recognized and awarded agencies in each of the respective fields last year. And our overall new business record was excellent. So while we can't expect our agencies to control the global economy, we do expect them to continue to outperform the economy overall, and more importantly, to outperform their peers. For the year, organic growth was positive 2.9%, adding about $374 million to revenue.

As for our mix of business, traditional media advertising, accounted for 43.3%, CRM was 38.5%, PR 9%, and specialty communications 9.2%. As for their respective growth rates advertising declined 7.6% in the quarter, but excluding currency impacts was down only 1.4%. CRM, while negative overall, continued to be the strongest-performing sector with a 3.3% overall decline. And again excluding the impact of currency changes increased 3%. Public relations was down 10.2% continuing to experience general softness in the quarter, and specialty communications was down 15.3%. As people recall from prior calls, this category consists primarily of specialty media, recruitment advertising, and our healthcare businesses. All three difficult sectors in the quarter.

Specialty media is primarily our directory or YellowPages business, which in addition to being impacted by general economic conditions is facing some significant technology changes. Recruitment, advertising, which is probably our most economically sensitive business, was down almost 30% from last year. And healthcare continued to slow in the quarter due to a lower number of new product releases and cuts in spending from the large pharma companies.

Our geographic mix of business in the quarter was 52.2% US, and 47.8% international. In the United States, revenue declined $86.4 million, or 4.7%. Acquisitions actually added $20 million to revenue or about 1.1%, and organic growth was a negative 5.8%. International revenue decreased $168.3 million or 9.5%. As I mentioned before, FX was very significant. It reduced revenue by $210.7 million, or about 11.8%. International acquisition added $19 million or 1.1%. And our international organic growth in the quarter was positive 1.3%.

Internationally, we had strong performances in the emerging markets of Asia, especially China and India, as well as in Eastern Europe. Developed Asia, specifically Japan and Korea, were down sharply, and Western Europe with the exception of France and the UK were consistent with the US. The results in France and the UK were more a factor of new business success and weaker prior-year comparatives rather than better economic conditions in those markets.

Operating cash flow for the year was strong. While as a result of the current economic environment, we are experiencing pressure from certain clients on working capital. To date our performance has been good. The measure of our operating performance in this area is the average relationship between our receivables and payables. To date, we have not experienced any meaningful decline in our working capital operating performance. We have, however, significantly increased our focus this area to ensure that our performance stays on track.

Absent our own operating performance, FX has had a negative impact on our working capital, as did, although to a much lesser extent, declines in client spending at year end. As you know we operate with negative working capital. Meaning working capital is a source of cash for us, about half of which comes from our media operations. With the significant FX moves in the quarter, we experienced a dollar translated contraction in working capital of about $350 million. In addition, we experienced some contraction in working capital as a result of reductions in client media spending near year end.

Our primary sources of cash, net income, adjusted for basic non-cash charges, primarily stock-based compensation charges, and their related tax benefits, then depreciation and amortization, those items total $1.3 billion. Our primary uses of cash for the year were dividends which totaled $192 million, CapEx totaled $212 million, acquisitions including earn out payments, totaled $441 million, and then share repurchases for the year totaled $847 million.

We did suspend our repurchase initiatives back in August, and don't intend to resume until after the capital markets have fully stabilized. We also received $86 million of proceeds from option exercises, and stocks sold under employee stock purchase plan. That resulted in net repurchases of about $760.8 million. As a result of our repurchase activity over the last 12 months of our average diluted share count for the fourth quarter declined 6.1% to about 307.2 million shares.

Our current credit picture. We finished the quarter a very strong capital markets position. Our operating leverage ratios, EBITDA to gross interest and total debt to EBITDA were very strong at 15.4 and 1.6 times respectively. As a reminder, our debt facilities contain only those two covenants, EBITDA to net interest of not less than five times and net debt to EBITDA of not greater than three times.

From a liquidity perspective, we finished the year in a strong position with cash and undrawn committed credit facilities totaling just over $3.6 billion, and we had an additional uncommitted facilities available, totaling $354 million. As many of you know the put date on our 2031 convertible bond was the end of last week, and as expected we received puts on 841 million of the 847 million outstanding bonds.

To fund the put we drew down from our revolver. And of the 841 million bonds put, we retired $295 million, and then a partnership controlled by Omnicom was formed to purchase the remaining $546 million of notes with the intent in the event that the capital markets and specificly the convertible bond markets, recover over the next year, the partnership will look to sell those bonds back in to the market.

And finally, on a new business front, while new business activity in the quarter was fairly light, our agencies fared pretty well overall with net wins totaling approximately $780 million, with the most significant win being OMD's win of the combined global media account for Nissan and Renault. They already had the Nissan account, so this was both an important safe and an important win.

Now with that, I am going to ask the operator to open the call for questions.

Great. Thank you very much. (Operator instructions). And we do have a question from the line of Jason Helfstein with Oppenheimer. Please go ahead.

Hi. Thanks, can you hear me?

Yes.

Okay. Two questions. So can you tell us what project revenues were last year in the first quarter of '08? And then if you can just talk about near-term business trends? Has the weakness hit non-project spending yet?

And then secondly, do you expect the benefit of the new business wins in the UK and France to help drive those countries on a -- the next six to nine months? And then when you combine that with the growth of emerging markets do you think organic growth can continue to outpace the US or remain positive or is there just a lag and eventually it catches up with the US? And then just lastly, how keeping, what was the impact of currency on EPS? Thanks.

Wow. You can going to have to cut those up in to a few more things. Let's --

First, projects, in the first quarter. I don't believe we have the number. It's -- there are projects in every quarter. As Randy indicated, the fourth quarter always seems to be more significant, and that's -- we tend to track that more closely. I think that was your first question.

I think across the board, clients are evaluating and looking at their marketing spend. Until the banking crisis is resolved, and liquidity starts to flow back into the system, I think we're in an unusual -- we continue to be in an unusual period of time. And client spending patterns haven't fully settled down yet. I think what you could expect is what is normal. Automotives are being very, very cautious and cutting back because of the decline in volume and credit availability to consumers on a global basis.

Package-good companies are spending. We don't see increases in their spending, but we see them being more efficient in trying to gain market share during this period. So things haven't yet settled, but the normal patterns, I think will prevail as we get further out in to the year.

Couple of other questions that I remembered, and then you'll have to fill in where we missed. FX impact on EPS, FX just pretty much flows straight through on a percentage basis through pretty much all of the lines of the P&L. I don't think it's any -- it's not significantly more or less impactful, anywhere. Your other question was France and the UK's performance in the quarter, is it going to carry over? Our operations in those markets from a business standpoint are performing well, but from the economies there I don't think are in any better shape than anywhere else in the world. So they are certainly going to get impacted by the economies as well.

Okay. And then just the last piece was when then you combine that with the emerging markets obviously the emerging markets helped the international organic. I mean, do you expect that to continue?

Yes. Yes, absolutely. I mean, what we -- what we expect over a -- a longer period of time is that we should be able to outperform whatever global GDP happens to be. That's been our history. That's been what our ability has been in the past.

Difficult to get granular and tell you what January is going to be or the first quarter, but that's -- that's something that the Company has been able to do throughout its entire history. The other side of the equation is adjusting our costs while there's uncertainty, while there's a less-than-stable environment, which is where we're at.

In terms of emerging markets, you have to remember, that China, where it's very important, and contributes a lot, is only 6% of the global economy. So if it grows in excess of where it is projecting to be, it's the equivalent -- if it grew 10%, it would be adding 6/10th of a percent to the global growth. So everything is important. All of those markets will important, they will continue to be important. But in the very near term, I think the developed nations are where most of the action is going to occur.

A couple of the emerging markets that have been very strong over the last couple of years, Brazil, and Russia in particular. Those economies have been -- especially Russia has been hit fairly hard with the change in oil prices. We'll see how that ultimately flows through. We have very good operations in both of those countries, so I expect we will do well on a relative basis, but, again, those economies may be harder hit, even than the United States.

Thank you very much.

Thank you.

Thanks, and our next question come from the line of Alexia Quadrani with JPMorgan. Please go ahead.

Thank you. Just a couple of questions. First on the fourth quarter, could you give us some color, I guess how organic growth performed in the fourth quarter, specifically how much of the pullback came from the project base business loss of project base business versus sort of a general pullback in client spending or specifically maybe the auto category? And then secondly did the European, trends, did they worsen as the quarter progressed?

The auto sector was clearly impacted in the fourth quarter. I -- with as many operations as we have around the world, there wasn't a wholesale reduction in any one place that we could point to. But there were clients where they could eliminated or curtailed plans in the fourth quarter and cut back on some spending.

Project revenue was pretty significant. Each year in the fourth quarter we hit kind of a incremental couple hundred million dollars of revenue that we have explained in the past is always difficult to forecast because it's that kind of that last-minute project revenue. A substantial portion of that doesn't appear that it came in. That $200 million is -- accounts for over -- would be 4% organic growth in and of itself. We were negative, what 2.3% organic growth in total.

Okay. And then just a follow-up question. In terms of the, the first quarter, should we the -- do you have any sense of I guess how much severance expense we might expect in Q1 just given your current plans?

We were able to do quite a bit of trimming based upon what we saw in the fourth quarter. The $55 million was the year-over-year increase, the actual severance number was greater than that in the fourth quarter. We will have some severance costs, but it will be very targeted in the quarter. And it depends upon clients finalizing their spending, which in many instances we're waiting for, and we'll know about in the next couple of weeks. So we don't expect anything to the level of what we experienced in the fourth quarter, but we don't have a targeted number at the moment.

But --

At this point, [touch of] surgical going forward based upon what happens in the business.

And just another house-keeping point. Tax rate for the year, should we assume that Q4 is a good run rate for '09?

No, I would probably assume 33.7 to 33.9. That's -- that's safer.

Okay. Thank you very much.

Thank you.

Thanks, and our next question comes from the line of Craig Huber with Barclays. Please go ahead.

Yes, good morning. Just wanted to talk a bit about your cash level. Could you explain a little further, Randy why it was about $1.1 billion here in the fourth quarter, down from $1.7 billion, $1.8 billion, each of the last two fourth quarters? And then more importantly, how much of that in the $1.0 billion, $1.1 billion of cash do you view as your own money; can do what you want with it?

Okay. Two questions. Let me give you the first one. Two pieces to the year-over-year cash. On a spending bases, when you go through what I'll describe as our primary sources and uses of cash, so excluding working capital. We spent about $300 million more than our cash sources. So that should have increased our net debt levels or decreased our cash balance by about $300 million.

The rest of it is really a conversion, FX conversion difference. Basically we're converting all of our international balances back in to US dollar, and those conversions basically shrunk the US reported dollar amounts by about $350 million. So that's basically the bulk of those changes. As far as our cash, I mean, as a technical matter, it's -- it's our cash. Now, we use that cash to operate the business. We have large daily swings in working capital balances, depending upon the timing of client flows. Our -- over the course of, say, 2008, our daily average cash balance was roughly, say $100 million. It wasn't $1 billion.

On high cash days -- so, cash flow coming in to the treasury system, it could have been as high as $1.5 billion. And on low-cash days, meaning we would have had -- all cash payments out, maybe as much as $500 million or $600 million drawn under our facilities. So, I hope -- I mean, I'm trying to answer the question fully. The cash is ours, but we use it in the business. It's -- we couldn't take that cash and go out and make an acquisition it with, and not replenish it somehow.

And you didn't ask this, but I think if you look at 2008 and then you start to think about 2009. In 2008, we bought back about $800 million net of our own stock program, which we suspended in August, and Randy indicated, we won't start up again until the world returns to a more normal world. And I think the acquisition number of $400 million plus last year was a -- was higher than what our requirements are going to be in 2009 at this point unless we do anything new. So as you go forward, you have the operations, and then those uses, and some of those uses are curtailed pretty seriously at the moment.

And also housekeeping question, those 2031 conversion of $295 million that you guys retired, is there a cash hit that you have to take on that in the coming quarters?

Well, we'll see, there -- there is some interesting legislation proposed in the Senate bill, that would significantly push out that potential tax payment. We'll see if that comes through. If it doesn't come through, that would be about -- I think it is going to be about $50 million to $60 million.

Okay. And then lastly, just following up on Alexia's question, can you give us, if you would, how much the project-related revenues were in the fourth quarter versus what they were a year ago? I mean I think that's what you were saying the major swing was here in the US; is that correct?

Yes. We don't -- let's see how to do this. We don't track specifically all of our project revenue, versus all of our non-project revenue. What we do know is that in the fourth quarter of each year, there is a couple hundred million dollars of -- I'll say project revenue that comes in that is unforecasted revenue each year when the quarter starts.

That revenue tends to be last-minute projects, clients that have anything left in their budget, they'll -- projects will come out of the -- out of the agencies, or out of the clients, finishing off the year. Those projects tend to come up because people have budgets left to spend. This year, we didn't expect given the overall economic client -- climate, that there would certainly be as many projects or as much of that spending as normal. As we suspected that didn't come in, or at least a large percentage of that didn't come in.

Okay. Then lastly, can you quantify how much money you saved from lower-incentive cost in the quarter versus a year ago?

Yes, but it's a going to take me a second.

If there was another question while we get this, and we'll come back to this one, if we could.

That's all I had. Thank you.

When we get it, Craig. We'll just say it.

Actually -- and this is rough -- our incentive system is based upon individual performance and targets throughout the group. So if a particular unit doesn't perform, it's incentives automatically are declined -- declining . So we will -- we will get back to you in a minute, as soon as we have the

Great. Thank you. Then we're going to go on to a question from the line of Ben Schachter with UBS. Please go ahead.

Hi, guys a few questions. Randy, you talked about the partnership buying the convert. Wondered if you could explain a bit more about how that structure works, why it's in place? And then also if you could talk about how we should think about the overall net interest line for the year going forward? And then a few follow-ups after that. Thanks.

Okay. Let's see, let's start with the net interest line. I think a good starting point will be our fourth quarter interest expense. I think it will go -- our interest expense should go up from that number, probably in the $3 million to $5 million per quarter range, depending upon, again, what happens with short-term interest rates, and what happens with the July '32 bond.

Now a bigger piece of our -- I'll say capital structure is going to be 30-day floating rate, versus having the rate fixed. Last year on the 2031 bond, I think we paid just under 1% interest rate to keep it outstanding. So frankly what we refinanced that with, by drawing down on the revolver at least based on current rates is expect in the same spot. On a year-over-year difference, because of FX differences, and lower interest rates on invested cash, we will have, or we expect to have less interest income in 2009 than we did in 2008. And then also the translation of that back in to dollars will be less. So from there, I think the fourth quarter is probably a -- a pretty good view.

We do cycle for the first half of 2009 with higher interest expense on the 2032 bond. The first half of 2008, that number was lower than it will be in the first half of 2009. As part as the partnership goes, we -- we formed a partnership to hold the bonds, and that partnership will look to resell the bonds back in to the marketplace. We think the converts are very good security for Omnicom. They fit well in to Omnicom's capital structure and tax planning. We -- we would like to keep the bonds outstanding on a long-term basis.

Right now, or in the current market conditions, the convert bond market is not -- I'll say not acting at least normally. Our hope is that the convert bond market stabilizes or recovers or how ever you want to phrase it over the course of next year. And that we are able to reissue those bonds back into the marketplace. We'll see if that's possible.

Okay. In the past when we have spoken before this macro meltdown, we talked about having 80%, 90% visibility on the revenue for the year by November or December. Now I assume obviously that is not happening now to the same extent, but could you talk about visibility into '09 in terms of you obviously have a severance cost, you are laying off for a certain expectation. What is going on with that visibility, what kind of flexibility are in contracts now to change the way you are able to see the year? Just overall how are you looking at the revenue picture and how can we think about that?

Well, I think even at this point, we till have probably 75%, 80%, maybe even 85% visibility into 2009. The challenge is obviously even 15% not visible, given the accuracy that we -- that we would like to have with our forecast and planning, is a pretty big swing. I used to somewhat joke that investors thought plus or minus 1% organic growth might have been significant, and even if we knew 90% of our business, if people thought 1% was significant. That was ten times. Right now we certainly have less visibility than we have had in prior years at this point.

In terms of the severance and the actions we have taken in the fourth quarter. That was very targeted in -- in -- we went unit by unit around the world. Looked at what the revenue expectations were down at that office level, and then made determinations as to what severance -- I mean, what reductions we could incur without impairing our ability to continuing to service our clients.

So, that was a very targeted exercise, which started early in the -- in the fourth quarter, and was acted upon when we -- when we realized that project revenue wasn't coming through. We -- we'll continue to assess our business at that level as we go forward, but it's -- there is a bit of fog out there. And I think until the -- until some of the broader economic things settle, we're going to continue to feel our way through on part of our revenue base.

Okay. And then, also John you started out the call mentioning things haven't been this tough since the early '90s. And if my model is correct, looking back then the operating margins were 11%, 11% to 12%. Is there any reason to think it should be similar to that looking into 2009 or is that just ancient history and the business is different today?

That's ancient history. Our mix of business today is far different than it was back in '92. I think what I -- well, what I was referring to is '92 is the last hard, serious recession that the Company faced. The one in earlier -- in this decade happened very quickly and seemed to pass very quickly. '92 is a -- was a little longer slog, and that's what I was referring to.

So you don't see any scenarios where your operating margin can get below 12?

We were about 12.6% margins for '08. I said a couple of times certainly our objective is to try to manage and hold those margins. Depending on the overall economic environment, thinking flat to say minus 50 to 100 basis points of margin I think would be pretty strong performance. Again, depending on that overall economic backdrop.

We do have -- we do continue to have quite a bit of flexibility in our cost base.

All right. Thanks, good luck.

Thank you.

Thank you. And our next question comes from the line of Michael Nathanson with Sanford Bernstein. Please go ahead.

Thanks, let me follow-up the last question, then I have one for Randy. John, can you give us a sense of how much flexibility is? How much of your salary and service let's say cost are -- of flexible nature?

Well --

Well, two things happen it with. First of all at a -- I describe it as product level, so the people that are actively engaged in clients, they are somewhat of a direct cost. The client is looking for people to execute on work if the work isn't there those costs are as painful as it is, somewhat flexible. With depreciational people and senior management, the incentive comp pools are highly flexible. If business is down, those numbers can be adjusted. For senior people, the incentive compensation can be a much greater percentage change in their compensation than the change in revenues. A 4% or 5% decline in revenue could mean a 40% or 50% cut in pay for some of those senior people that their overall positions aren't necessarily flexible, but their pay certainly is.

Randy, on that point is incentive comp -- what is incentive comp as a percentage of revenue? Is it in the 5% to 10% range?

I think it's in the 5% to 6% range.

Yes.

Okay, that's more -- okay great. And then on the convertible partnership does that structure mean you can still enjoy the tax and accounting benefits at Omnicom parent co? By keeping the bonds outstanding?

Well, there are no accounting benefits of those bonds. The full tax savings of those bonds none of that is a P&L benefit for us. From a tax standpoint, there -- there will be very minimal current-year or -- while they are in this partnership, current tax benefits. It does preserve the ability to issue those bonds back into the marketplace and preserve the long-term benefits, and to keep the specific bonds alive.

Okay. Let me ask you, what happens if -- you said if conditions improve, let's say be skeptical and say if conditions in 12 months don't improve, is there anything magical about 12 months and who decides the course of action at that point?

No, I don't think there's anything magical about the 12 months. If these bonds are something that the market finds acceptable, then they that we would like to preserve. I think the structure is designed what as a bridge knowing that the current market environment is disrupted. What the new reality is I don't know. But we're -- this is a bridge to finding out what the new reality is, and if the new marketplace thinks these securities are a good security, we would like to have them outstanding. If they don't think it is a good security, then we'll probably dissolve the partnership and retire whatever bonds are still outstanding.

Thanks.

Thank you, and our next question comes from the line of Matt Chesler with Deutsche Bank. Please go ahead.

Hi, good morning. A few questions. You mentioned the severance, the year-over-year increase was $55 million, and the run rate savings will be substantially larger than that. What was the actual amount that you were able to record in the quarter, and were there any additional charges, whether it's office related or otherwise that might be considered nonrecurring in nature?

Well, I think the total severance number was about $75 million in the quarter.

Yes.

One time in nature charges. I mean there's -- the only thing that -- that seems to always recur is charges that are nonrecurring. So we don't tend to call things nonrecurring charges -- in a Company of this size depending upon the agency, there's inevitably a handful of things that are -- only happen to that agency once. They just happen to another agency in a different quarter.

Yes, and in terms of the other costs, it's complex because of its size, but there is a specific strategy and analysis done city by city or our real estate throughout the world. And in every -- just virtually every place in the world, leases coming up on an annual basis. So as we have to flex our staff down, we do over a period of time have the ability to adjust other costs when we have reductions. Similarly, as we increase, we can flex our costs. So --

And in economic environments like this there are certainly costs and things that -- that come about that are not normal. I mean there's definitely increase in bad debts. There's --

Write-offs.

-- much, much greater increase and hours spent focusing on client credit and working capital, and renegotiating contracts, et cetera. So economic times like this certainly have an increase in certain costs that come with it.

So would it be over doing it to assume that the combined total of those costs exceeded $100 million in total, or it is somewhat less than that?

No, my guess is that it certainly exceeded -- exceeded $100 million.

Yes.

Okay. Another question would be while the world changed dramatically in the early fall, at what point did it become clear that this wasn't your run of the mill, ad market slowdown? At what point in the quarter was it that you really got a sense that you needed to take some other action?

What happens in -- what happens in most quarters, it happened this year a little bit differently, is year-end projects, you never get real clear visibility as to just how much is going to come through. You are basing a lot of your assumptions through the quarter on history. I think this year when the bank system froze in November, it shifted almost everybody's attention to their balance sheets and -- and behavior followed. And so many projects -- which could have happened, and would have happened in a more normal basis just didn't materialize as you -- as you went through the quarter. You -- the other thing which is difficult to explain is we probably have over 2,000 operating offices and facilities around the world.

They don't have to have much of a decline in revenue per location to add up to $83 million or $100 million. So -- so the micro management of this gets a bit difficult, and it gets reflected or highlighted in a quarter. But when you look at spending over the course of a year or patterns, it's not necessarily a very clear indication that develop -- that causes a trend which you can project.

From your perspective did you feel that as we exited December, that spending patterns were slower than they were in November than when the freeze first sort happened? Or was there any trend that you could sort of get a sense of anecdotally there?

Well, I think there is a sense of caution on the part of most companies at the moment and we are still sorting that out.

The advantage of having an incredibly diversified group of very smart clients is you get a -- there's a diverse reaction. I hear stories, anecdotal stories of clients using this as opportunities to be aggressive in building the brands and trying to gain market share. You hear other -- other stories of clients trying to freeze everything they can freeze. They are obviously face -- each client is facing different realities in their own business, own balance sheet, own distribution channels, et cetera. Our agencies have to react to each of those situations specifically.

The final question is a follow-up on the partnership structure. As I understand it's a 12-month duration of the partnership. Who is the investor? Did you need to get your -- did the banks have to agree to this transaction, and are you considering this structure for the 2032 put if credit markets don't improvement?

Let's see it -- it's a small group of investors. I don't believe they have an interest in being named. The banks didn't have to approve the structure. We're the controlling partner -- we're the general partner in the partnership. It's a fairly simple structure. We basically just drew down under our bank lines to fund the bonds that were put. The partnership is a consolidated, controlled entity of Omnicom. So it's not really any different than any one of our existing subsidiaries buying the bonds. The structure was designed to preserve the bonds for later or potentially later reissuance to the marketplace, keeping the specific bonds alive in their structure, et cetera. So we don't have to reinvent them and go through are whole reissuance process. So it's really not a very complicated thing. From an Omnicom perspective, it's basically like buying treasury stock. The bonds are effectively treasury bonds at this point.

Are you considering the same structure for the June puts?

Well, June -- well there aren't June puts. There is end of July for the 2032 bond. Hopefully the market is going to be dramatically improved by then. If it's not, then I think it's something that we will consider.

30. I guess we're running longer than normal. So I'm going to cut it off at this point, because I know a lot of investors want to be there -- or a lot of analysts and people want to be there for the opening. Thank you all very much for taking the time to listen to our call.

Great and thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.