宏盟集團 (OMC) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Omnicom first quarter 2010 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 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.

Thanks Sean. Good morning and thank you all for taking the time to listen to our first quarter 2010 earnings call. We hope everyone has had a chance to review our earnings release, both the press release and a presentation covering the information we are going to present this morning. This call is also 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's included on page one of our investor presentation and to point out that certain of the 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 are going to begin the call with some brief remarks from John Wren and following John's remarks I will review the financial performance of the quarter in a little more detail and then both John and I will be happy to take questions at the end.

Good morning. Thank you for joining our call this morning.

We are very happy to announce positive year-over-year growth for the first quarter. Overall revenue increased 6.3% to $2.92 billion. This includes organic revenue growth of 2.1% which exceeded our expectations for the quarter. As we discussed in our last call, the general business environment continues to stabilize and improve. And as we look across, as we look at individual countries and regions we are cautiously optimistic about continued global recovery although we expect significant variation by region.

Turning to our performance, revenue growth was driven by a number of factors including cycling on some easier year-over-year comps for some of our businesses. First, we are starting to see a rebound in some of the hardest hit areas from the downturn. Areas such as CRM and PR showed fairly strong organic growth as did our media business. Recruiting continues to be one area of note that has not yet rebounded. And Randy will take you through some of the specifics in a few minutes when he gets back on the call. Geographically we saw continued strong growth in developing markets -- the Middle East, Africa, Asia, and South America We were also pleasantly surprised by the US growth where organic growth was 5.1% in the quarter. This leaves Europe where performance remains weak and the outlook is still somewhat unclear.

On the cost front we continue to keep a close eye on costs and have asked our agencies to remain mindful of the potential risk to the economy especially in some of our European markets where it is expensive to adjust staffing levels. Our other real state and operating costs will take a little longer to fully absorb but barring any downturns in the economy, we expect some of these pressures to begin to ease as we get in the second half of the year. At the same time, our agencies are now increasingly focused on taking advantage of growth opportunities both through new business efforts as well as growing our existing client accounts. Many of our agencies have adjusted their offerings to respond to the difficult economic environment, and are now both more flexible and better able to serve the diverse needs of their clients. Turning to the balance sheet, at the end of the year last year, we said that in 2010, we intended to use our strong balance sheet to increase our dividend, buy back stocks and make strategic acquisitions. As you all know we increased our dividend by 33% in February and also completed $250 million in stock buy backs during the quarter.

Finally, our business is built on the strength of our management teams and the talented professionals around the world. They have worked extremely hard to help us navigate through last year and I am confident that we are positioned well for the coming year and beyond. I will now turn this back to Randy and then we will take your questions afterwards.

Thanks, John. The short summary is the first quarter was a very positive start to the new year.

While results varied somewhat by business type and geographies which I will cover in more detail later, on the whole our businesses experienced solid sequential improvement from the fourth quarter and performed ahead of our expectations. Versus the first quarter of 2009, year-over-year revenue increased 6.3% to $2.92 billion. Operating income increased 3% to $291 million, that resulted in an operating income or EBIT margin of about 10% down 30 basis points versus last year. And EBITDA margin of 12.1%, down about 20 basis points from last year, which was a little bit ahead of the 30 basis points that -- the negative 30 basis points -- that we had expected. Net interest expense for the quarter was $24.1 million. That was up $2.7 million from last year and down about $4.5 million from Q4. The increase versus Q1 2009 was a result of our issuance of $500 million of ten year senior notes last July, which in effect traded lower cost floating rate debt for higher cost longer term fixed rate debt. That increase was offset in part by lower borrowing levels as we delevered the balance sheet over the course of last year. Versus the fourth quarter the decrease was primarily due to reduced borrowing level.

On the tax front our reported tax rate for the quarter was about 34% which was basically unchanged from Q1 of last year. Net income for the quarter declined 0.7% to $163.4 million, and diluted earnings per share in the quarter declined $0.01 or 1.9% to $0.52 per share. The diluted share count for the quarter was about 311 million shares. Analyzing our revenue performance, while in the current FX -- while in the current period -- the US dollar strengthened versus most major currencies, on a year-over-year basis, the dollar was weaker resulting in a positive FX impact for the quarter of $117 million or about 4.3%. Assuming FX rates remain at the current levels, FX should have a -- should continue to have -- a positive impact of around 1% in Q2 and then turn negative, about 1% in Q3, and then a negative 2.5% in Q4. Overall for the year, at current rates, FX will be about flat for the year. Revenue growth from acquisitions, net of dispositions, reduced revenue by $3.8 million in the quarter, or about 0.1%. It was largely few to the divestiture of our directory advertising business in Q2 of last year, partially offset by the acquisition of a majority stake in Impact BBDO in the Middle East at the end of Q4.

Organic growth, with the backdrop of easier year-over-year comparisons, and continuing sequentially improvement in revenue growth, organic revenue increased $60.2 million or about 2.1% in the quarter. A few areas worthy of note. Our recruitment marketing business, while stabilizing quarter to quarter, has not yet cycled on easier comparisons and as a result, was again down over 30% for the quarter when measured year on year. Our events and sports marketing businesses did turn the quarter, with significant increased activity in both the financial services and technology sectors, as well as activity around the Winter Olympics. So while these businesses didn't fully cycle on last year's revenue drop, they still turned in 20-plus% positive organic growth in the quarter. Our media businesses also had a very strong quarter. While it was one of our better performance areas last year it turned in an even better performance this quarter, driven in part by a few specific clients and a few projects. And field marketing was also quite strong, with high single digit organic growth overall and very strong growth in China. By industry, auto remained the toughest sector. While improving quarter on quarter, this sector doesn't cycle on last year's significant changes until the second quarter. All other significant industry segments were positive for the quarter, which is a good sign.

Revenue mix, as for mix of business, brand advertising accounted for 44% of our revenue and marketing services 56%. As for their respective growth rates, brand advertising increased 5.6% in the quarter with a slight decrease in organic revenue of 0.3% or about $3 million. Marketing services increased 6.9% in total with organic growth of 4.2% or about $63 million. Within marketing services, CRM was up 8.6%, with organic growth of 4.3%. Within the sector of couple businesses had a better than expected quarter, particularly our events and sports marketing businesses, which I mentioned were up over 20%. As John mentioned, public relations was up 5.9% in the quarter, with organic growth of 2.4%, and specialty communications was up 1.2% with organic growth of a positive 5.4%. If you remember, this area was affected by the sale of our directory business last year. Within this sector, health care is the largest area. It continued to have a solid performance, and the other large area in the sector is recruitment marketing which I mentioned doesn't cycle on easier comps until later in the year.

Our geographic mix of business in the quarter was 54.5% US and 45.5% international. In the United States, revenue increased $60.5 million or about 3.9%, dispositions net of acquisitions reduced revenue by $17 million or 1.2%, and organic growth was very strong at 5.1%, adding about $78 million to revenue. International revenue increased $113 million or 9.3%, FX added $117 million or 9.6%, acquisitions were $13.5 million adding about 1.1%, and organic growth was negative 1.4%. Internationally we had relatively strong performances in India, China, Singapore, Australia, the Middle East and Africa. In developed Asia, Korea showed positive growth for the second consecutive quarter and Japan turned in positive growth for the first time in several quarters. Results in eastern and western Europe were mixed with flat performance in the UK, France, and Italy, strong positive results in Russia, and then below average results in Germany, Spain, Portugal and Finland.

Moving to cash flow, our operating cash flow for the quarter, excluding working capital remained very strong and our working capital performance continued to be very good. As everyone knows, our primary sources of cash are net income plus stock-based compensation, depreciation and amortization. Those items totaled $245 million for the quarter, and then our primary uses of cash were dividends which totaled $47 million, capital expenditures which totaled $25 million, acquisitions, including earnout payments, totaled $19.6 million, and as John mentioned, we resumed our share repurchase efforts with purchase totaling about $250 million in the quarter. Our current credit picture, as this chart shows including changes of working capital on a year-over-year net debt position, improved by $1 billion to $1.3 billion, and as a result of the reduction in our outstanding debt balances, our leverage ratio or total debt to EBITDA ratio improved to 1.4 times, and our interest coverage ratio remained very strong at 13 times. Finally, from a liquidity perspective, we finished the quarter in a strong position with cash and undrawn committed credit facilities totaling about $3.4 billion and then we had additional uncommitted facilities available totaling about $380 million.

And, with that, I'm going to open the call for questions. Thank you.

(Operator Instructions) First go to the line of John Janedis with Wells Fargo Securities, please go ahead.

Thank you, can you help us think about organic expense growth going forward. After the 7% headcount reduction last year, to what extent do you think you see an increase in '10 and did you make some hires in late fourth quarter or the first quarter that may have depressed margins slightly during the quarter? Thanks.

I will let Randy take most of it, but most of the hiring we did in the fourth quarter was actually in emerging markets where we started to see revenue growth. There is hiring. We are no longer at the level of lay offs we have had in the past. Right now what we are doing from a severance point of view or -- is we are taking a hard look at Europe because those markets are -- have been declining as Randy mentioned in his comments. So it is a broad mix of answers, and I am not sure that there are any generalizations I can give you to help answer the question because it is different region by region.

Yes, the important thing there is we have to maintain our staff levels, client by client. Where we are growing business, we have to add head count. We have to add people to perform those services for the clients. It is not like we can allocate people from Europe to do growth and activity in the United States, and people in one area of our business aren't able to be fungible across to another discipline. It is an interesting time right now when we have a pretty wide variance of performance -- we have obviously very positive organic growth, especially in many areas across the United States and we have mixed results across Europe. So it is a tricky time to balance our staffing levels. We are seeing some of that going through the P&L right now.

Thank you.

Thank you.

Our next question is from the line of Jason Helfstein with Oppenheimer & Co. Please go ahead.

Hi. Thanks. Two questions. So on paper, advertising is lagging in recovery and marketing services according to your organic figures. How much of this is driven by the easier compares in the sectors you highlighted that were very weak last year. Or do you think that's an underlying theme there? And when would you expect advertising on paper to catch up to marketing services?

And second question, several weeks ago, there was a story that broke about Pepsi and Anheuser-Busch looking to consolidate their media spending. I am curious if you have any comments on that and what you think the impact would be on your business and if you think these types of partnerships would become more prevalent? Thanks.

Let me do the last part first. Some of our clients -- Pepsi being one, Anheuser-Busch also being one of them -- have taken upon themselves to see if they can reinvent the way that they do business. And, they have collaborated now for a while in the purchase of many of the materials and things that they use. And, that collaboration seems from all my knowledge of it, which is somewhat limited, as being very productive for both of those organizations. The media conversations -- we are still doing the same amount of work that we did in the past, and we are collaborating with this joint team. And the first part of your question.

The other question was -- I think about advertising and marketing services. We look at the business more agency by agency, and client by client, rather than in the aggregate. We report the number in the aggregate because we add them up and we report them the way people want to hear them. Right now some of the bigger initiatives were in the CRM areas and we certainly saw some significant improvements in part because there were significant declines last year in areas like events and sports marketing. We saw some pretty significant rebounds in those areas. PR was another area that has a very strong quarter. I think these things will certainly balance out in a -- over the course of this year -- we will see less and less variance and more consistent performance across the different disciplines I think as we go. We'll probably also see more consistent performance across regions as we go. I think right now we are at that strange inflection point where we are getting -- or continuing to get -- some fairly wide differences in performance.

Thank you.

Our next question is from the line of Alexia Quadrani with JPMorgan. Please go ahead.

Thank you. A couple of questions. First one on Europe, if you can give us more color on what you are seeing specifically in the weakness in Germany. Is there any signs of that market stabilizing at all and any sense of when you can give us -- you may see a turn there, I guess if you can tell us how it's performed in the first quarter versus the fourth quarter to give us a sense of the trend line.

The second question is on your comment about the weakness in the auto vertical in the first quarter. If there's any detail on how much of that weakness was related to Chrysler falling off at the end of January versus just weakness in your other client base.

Could you repeat the second -- Randy might have heard it. We were whispering while you were asking the second part of your question. Sorry.

The second part was on the auto vertical, how much of the weakness was from the Chrysler fall off at the end of January or just from the other clients you service in the auto area?

Yes, with respect to Chrysler, Chrysler did not -- we had Chrysler really because of some holdover work for January and February. It contributed to the decline, but not to the full level that it will going forward as is specific --.

The other auto for us in the aggregate actually had almost a little more year-over-year decline largely because we don't cycle on those comps until some time in the second quarter. Chrysler didn't really have that big step change at that same time last year. So it was really more of the -- it was pretty balanced between Chrysler and the other auto accounts.

As far as Germany goes, parts of Europe we actually saw a step down last year in the third quarter. I think sequentially from the fourth quarter to the first quarter I would say it stabilized. We didn't see a real quarter on quarter change but we are measuring all of these numbers really year-over-year, and we saw in parts of Europe, that step change did -- the bigger step change didn't really happen until the second half of last year. So it was almost a -- in the United States in many of these markets, it was a big step that really occurred between the fourth quarter of '08 and say the first quarter of '09. In Europe, there was one step in the first half of '09 and then a second step in the second half of '09. In that second half, the US was stable. So now when we are measuring year on year you get a little bit different results. But sequentially I think Europe's right now pretty stable.

Okay. And just circling back to the auto if I understand it correctly, the fall off in Chrysler, had it been declining significantly throughout the year last year, or did you see a pretty big drop off when just the business moved away at the end of February? I am trying to get a sense for the second quarter it sounds like you are going to have easier comps in auto in some parts of your client base but maybe Chrysler is still a pretty big headwind. Is that correct?

I would think that will be correct.

Chrysler is probably a 1% revenue or so headwind in the second quarter. So, a pretty big step down with that. Many of our other auto clients, there was a pretty big step last year in the first -- in the second quarter. So when we get to the second quarter we will have cycled on that when measuring year on year.

Okay. Thank you.

Thank you.

Our next question is from James Dix with Wedbush, please go ahead.

Good morning, gentlemen. Just three questions. First, you gave us some color on this but I was curious where you are seeing the most surprise -- upside surprise versus your budget so far. And then second looking toward the second quarter and beyond, what are you seeing in terms of the growth outlook given that you have reached positive growth a full quarter before we were expecting. And then one thing John you mentioned that at this point, you're -- you feel like your agencies have adjusted their offerings to the current market environment. I was wondering if you could give a little more color as to what you meant by that.

Yes, let me deal with that first. We went through some wrenching changes last year where there was a lot of cost containment that contributed to our performance in terms of what we were able to accomplish last year but we had to reengineer quite a number of those agencies as well. And typically when you get into a recovery, what occurs on your larger advertising annuity type annual fee clients is -- the clients will come back and there will be a request -- which has occurred in the past -- where you'll reduce the fee and you will reduce the scope of work, so therefore you will reengineer your staffing levels. When you get into the recovery period, what occurs -- these clients will spend more money, you will have to become more productive during that -- when -- in the beginning of a recovery -- and until the client is comfortable that the recovery is fully in place before they will generally increase your fee again. So, it becomes -- we are in that period right now.

Having said that, on projects and some other areas we saw a rebound in spending, which is positive, and having been through two serious recessions, while in leadership of the Company, there's some pretty normal patterns which are developing. So we are cautiously optimistic.

Yes. And to add a little bit to that and try to hit on some of your earlier points -- we certainly saw a broader, I will say pick up in spending across the industry sectors as I pointed out -- other than auto, and these are measuring year on year. Other than auto, all of our major industry sectors were positive -- some very marginally positive but all positive. So that was a good sign of broad recovery. We saw more increase in projects. Some of that may have been a little bit of pumped up demand, trying to get it done earlier in the year and some of that will probably move into normal scope changes in fee renegotiations or changes in contracts, as we go.

So I wouldn't expect the pace of change to continue from -- the pace from Q4 to Q1 won't continue necessarily from Q1 to Q2. So I think we've probably got a faster recovery -- I think we will probably have about the same overall recovery as we were expecting, but it is nice that it happened sooner. We also had a little bit of benefit that the transition work at Chrysler lasted a little bit longer than we anticipated. So all -- we had a bunch of relatively small but they add up to a nice addition -- positive results in the first quarter. Which obviously we are all very happy about it.

Okay. Great. Thanks very much.

Our next question is from Craig Huber with Access 342. Please go ahead.

Just curious given in light of how the quarter must have ended. Was there much of a difference between how the month of March did year-over-year in terms of organic revenue versus the overall quarter and I have some follow ups.

No. Actually, the quarter -- January and February were stronger than what we had expected, and March continued that trend.

So very similar you are saying.

Yes.

Also can you -- typically you will speak about your net new wins in the quarter, I realize you lost Chrysler here. But what were your net new business wins like in the first quarter here -- with or without Chrysler.

Well, I think the Chrysler loss was really a --.

We recognized last year.

We recognized it in Q4. It was about $950 million of net new business wins in Q1. That doesn't have a Chrysler loss in it.

Because we had already reported that.

Okay. Even though you had a couple -- one or two months of their stuff in there.

We record the losses when they're announced and the wins when they're not announced -- not necessarily when the revenue comes in or goes out. Is our normal reporting practice.

Okay. Fair enough. And then last question, please. Was there any one-time items we should be aware of in the quarter, in particular just be curious to hear how much your severance expense was in the first quarter of this year versus a year ago? Thank you.

Give me one second and we will.

There are people scurrying to look. Hold on a second.

Severance was down about $10 million in the quarter year-over-year.

Okay. Great. Thank you.

So we still had lay offs and some strategic cuts made around the world.

Assuming that's in Europe, correct?

It is -- you have to make these things -- you are making the changes, client by client, location by location. There's certainly probably more of it in Europe than there was in the United States and it is more costly and more difficult in Europe than it is in the United States. But the reality is that changes have to be made location by location.

Fair enough, thanks, guys.

Great.

Next to the line of [Tim Nollen] with Macquarie. Please go ahead.

Hi. Thanks for taking my question. You have largely answered what I wanted to ask but I am wondering how you would compare this recovery with the last recovery in 2003, 2004 -- or 2002, 2003, 2004 -- you dropped some comments that it is shaping up quite similar but it seems different to me. You had a big drop in organic growth last time and a really quirk snap back this time. I think that's different from last time and also last time you had a very lengthy period of margin decline year-over-year before that started to pick up and now you are already back to flattish margins. Do you think this assessment makes sense and if so can you explain some of the differences this time versus last time. And then secondly, you used to talk in regular good times about achieving run rates of double digit revenue and earnings growth. Do you think that a year or two out when we are back in normal times again, presumably that that's a likely target again? Thanks.

My comments were referring to the last recession -- were not meant to be completely analagous. I was partially explaining what happens in a fee based account where there has been a reduction in scope of work and a reduction in the fee, and the period of time in which that takes to recover. Many of the lessons I learned in 2003 and 2004 are different than the lessons we have learned this time around. And they're not -- every recession is different and this one in my opinion was a balance sheet recession. So it was quite different than -- in many aspects-- than anything that preceded it.

Double digit revenue in earnings, I am certainly pretty confident that we can and should get back to double digit earnings growth. Double digit revenue growth I think is more dependent upon FX rates and the pace of global GDP. I think when things balance out we can -- we will get back to having organic growth in excess of GDP. But if we had a 3% or 4% tailwind in FX, that certainly helps with the 3% or 4% headwind in FX -- double digit revenue growth would be pretty challenging. Certainly on the EPS line I'm pretty confident we will get back to those numbers.

The only caution I would add to that, I know your question was posed for beyond 2010. Unemployment in the US still remains very high and where we are bullish, we are cautiously bullish.

Just to be clear, my comment was not a 2010 comment. It was a long-term normal business cycle comment.

I meant it as a longer term comment. But just seeing how different this recovery is I think from last time -- that's the starting point, is -- I have been surprised at how quickly we have gotten back on the top line and on the margin line, compared with 2003, 2004. I think it wasn't even until 2005 that you finally had margin improvement year-over-year, in fact. So I am surprised at how quick the rebound has been this time and therefore do you expect that to be sustained and then quickly get back to where we used to be.

We are working on it everyday, we won't make the forecast but when you compare us to the industry, last year in terms of how we were able to manage our margins our people did a fantastic job. And, I think we are well positioned once we get to higher levels of organic growth, we will be able to get to -- stabilize and improving margins.

Okay. Thanks.

Our next question is from Meggan Friedman, with William Blair & Company . Please go

Hi. Good morning. A couple of follow up questions, the first on -- it's a nice segue -- your statement about higher levels of organic growth, getting back to an improved margin profile. Can you give us -- can you help us to quantify what that level would be from organic revenue growth standpoint in order to get back to an orderly progression to the 13% range?

It is -- there's no science to this because as Randy mentioned earlier, we adjust our businesses office by office, location by location. But if you are looking for a generalization, typically, it takes about 4% organic growth before we are able to catch up with the normal inflation and pressures that we have in our cost bays, and then after that we start to see improvement. But I caution to tell you that it is a generalization.

Having a couple of years of 4-plus% of organic growth to -- I will say those are general numbers to balance out the utilization rates. The challenge, and what I was pointing out now it's this inflection point -- you manage your utilization rates and your margins location by location. If having high growth in one area and not high growth in another area doesn't get those margins back in balance. Broad based recovery in that 4-plus% area for a couple of years, certainly makes it a much easier challenge.

Okay. Thanks. Then a couple of follow ups on some of the areas of recent weakness, the first one is and I am sorry if I missed this. Can you quantify what the headwind was in Q1 from Chrysler specifically.

Headwind in Q1.

If you talk about 1% in Q2 --.

Basically, in Q1 the way it turned out, we -- the contract expired at the end of January, we provided some ongoing transition services and things to the client in various spots. The revenue didn't really go away quite as fast as we expected it to. So we ended up losing about 0.33% revenue in the quarter. We didn't also have the step down that we experienced in many of our other auto clients that occurred in the second quarter of last year. So last year's revenue was much more steady. So we probably lost about a third of a month's revenue or so, maybe even a little less in the quarter. When we go to Q2, the Chrysler revenue at this point is gone. So, on a year-over-year basis, it is right around 1% of our total revenue, call it $30- plus million of year-over-year change in revenue in Q2.

Okay. Thanks, and then the other question on sports and events, it sounds like you had a bump in Q1 in part from the Olympics. Are we starting to lap the easier comp in Q2. So should we be expecting similar performance in that segment in Q2 or was that a one time bump and we will see it normalize a bit more?

I think the area is normalizing.

Basically as you get to Q2, the Olympic bump will go away and the cycling will -- the full cycling should be there.

One last question, if you can talk a little bit about the acquisition pipeline. Are we seeing multiple expectations come down, if you can talk a little bit about that. Thanks.

We are out -- we have some very specific areas and targets which we are looking at. We work very hard at it, and there hasn't been a real decline in multiples otherwise we would be reporting more acquisitions. But we continue to have a very specific list of things we believe are quality areas that we need to extend into and negotiations continue in a number of area. But prices have not declined in any great measure.

Thank you.

Thank you.

Next to the line of Ben Swinburne with Morgan Stanley. Please go ahead.

Thanks. A couple of questions. Maybe just at a high level as with you look at Q2 here we are half way through the quarter, more or less and the comps appear to be easing, both domestic and international. Even with the Chrysler incremental headwind is it safe to assume 2Q should accelerate in terms of top line growth versus 1Q organic?

Well, from where I sit I am not yet halfway through the second quarter. But thanks for the thought. No, I mean I believe we have the whole headwind of Chrysler, and I think we will report positive growth but as Randy mentioned earlier, the sequential change that you saw from the fourth quarter to the first quarter, you should not bake those into your expectations just yet. There are still regionally around the world, some areas of uncertainty and we are looking at those every single day.

Just to make sure it is clear. We do expect that the second quarter to be better when measured on a year-over-year basis than the first quarter.

Okay.

But, the impact from Q4 to Q1 was quite dramatic, we will not see that same percentage improvement from Q2 -- Q1 to Q2. It will level out or normalize.

Very clear. Thank you.

But, it will be better.

Got you. And then, Randy, in your prepared remarks, you mentioned recruitment down 30% -- I don't know if you can give us a sense of how big that business is for you, but I think it is -- I am assuming it is a big drag on the EBIT line as well. How we should think about what kind of headwind that is placing on the business today and when you start to cycle through that stepdown as we move through 2010 and is there a secular element to it.

It's probably got both elements a little bit. But we will start cycling on numbers in Q2 and the impact are a lot less now than they were last year. One of the -- I guess one of the things we all learned about the stock market -- things that are down 50%, the second year, they're down or when they're up the impact becomes a lot smaller to get measured.

That business should start to flatten out on easier comps late in the second quarter.

And I made it clear, here we've got a business that's in a very tough sector but we have a solid management team and a very solid Company. They are in a difficult spot obviously. It is predominantly a domestic business and as we all know the US unemployment rates -- or the US employment rates -- are very difficult.

I know that the industry had pulled back on bonus statements and comp over the last few years and now there's an opportunity to normalize that, can you give us a sense for in the first quarter directionally or maybe quantify the incentive comp accrual growth either in dollar terms or how you think about that this year.

Well, I prefer not to talk about specific dollars but I will tell you this. We were able to pay bonuses for 2009 and as we -- that's because our improvement -- we had improved results last year as we went through it. And our accruals in the first quarter exceeded our -- accruals for the first quarter of '10 exceed our accruals for the first quarter of '09.

John, is that your expectation for the year. It will be up year-on-year?

It is my hope. Right. We adjust our incentives based upon what the outlook is -- it is done, at least once a quarter where we look at that and we make whatever adjustments are appropriate. And we are not shy where companies are not meeting their objectives to reduce those incentives from time to time. But for the first quarter, we were able to restore some of those costs.

And certainly our objectives are to get those numbers as high as possible, still delivering for shareholders what we expect and balancing those out.

Yes. The last question, just on free cash flow, I think you've mentioned in the past you'd like to use all of your free cash for either dividend buybacks or for acquisitions -- is that still how you think about things and you are deleveraging slowly free cash flow looks good. Do you want to delever further or are you happy with leverage here. What's your balance sheet from this point.

I will let Randy answer most of the question, but we felt that we -- last year we accomplished all of the delevering we needed to for the Company and our balance sheet is in incredibly strong shape. So our plan going into this year was to utilize our free cash flow for those three areas and Randy can add to it.

We didn't delever in the first quarter for the quarter itself. We probably -- with the share repurchases, we were probably a little bit ahead. Our plan is to utilize all of our free cash flow for the three things that you mentioned over the course of the year. We -- it doesn't mean we are going to match it up quarter by quarter. We are probably a little bit ahead on the share repurchases for the full year, and obviously we can adjust that as we go.

Thanks a lot.

Thank you.

Thank you.

Let's do maybe one more question and then we will call it a day.

That will be from Peter Stabler from Credit Suisse. Please go ahead.

Thank you. Can we quickly drill down on the US, on a Company basis, you reported brand advertising was essentially flat, US at plus 5% suggests some slight disconnect there. Perhaps it was event sports, if you can provide additional color on how the segments did in the US, that would l be great.

I don't know that I have that. I have it in the aggregate, I don't know if I have it by country.

We may have to come back to that answer. I'm not sure we have the analysis done quite that way.

In terms of the fee cycle, is there anyway you can give us a sense of where you stand in term of a renegotiation completion rate right now -- are we at 60%, 70%, 80% of your annual contracts have been renegotiated. What I am trying to get to is we have talked a number of times around the step down going into the pull back -- are we now seeing that step up and is that totally reflected or as you mentioned earlier, have project revenues played really an outside role in this organic growth in the quarter.

We are in the very, very beginning of a renegotiation or an upward adjustment in our fees for many of our clients. We are fantasizing about some of that. We have plans to go in based on the productivity and the scope of work that we ask that the clients have made of us to go in to see if we can increase those fees. But it takes a fair amount of time -- it takes a couple of quarters of sustained growth, not only for us, but for a particular client before we can get those restored to what they were. So that's a long process -- a positive process -- but it's going to be a long process that we are going to continue to go through for the next couple of quarters.

So, really no way to say if there's a completion rate on that it is a rolling process.

No. Yes, I mean the beautiful thing about Omnicom is that there is no single client that is that significant. There's a lot of clients so there's a lot of conversations so there's a lot of conversations that are going on. We don't track -- it's not as if we have five major clients and we are tracking our progression against those five. We don't necessarily track the numbers the way you are suggesting.

Okay. Great. Just one last quick question, maybe I will ask this a different way. In the past couple of quarters you pulled out a couple of operating units and talked about their contribution to the overall performance. When you talk about events and sports being up 20% organically in the quarter, is there a way to size that contribution on a total Company level?

Yes, probably about $20-ish million.

Great. Thanks very much.

Sure. Thank you all. And, as I said, we will leave that as the last question. Thank you all very much for taking the time to listen to our call, and we'll do this again soon.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.