宏盟集團 (OMC) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Omnicom second quarter 2012 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 and Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead.

Good morning. Thank you for taking the time to listen to our second quarter 2012 earnings call. We hope everyone has had a chance to review our earnings release. We have posted to our website, both the press release and a presentation covering the information that we will be presenting 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 is included at the end 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.

I would also like to remind you that during the course of the call, we will discuss some non-GAAP measures in talking about our performance. You can find the reconciliation of those measures to the nearest comparable GAAP measures in the presentation materials. We are going to begin the call with some brief remarks from John Wren. Following John's remarks, we will review our financial performance for the quarter. And then both John and I will be happy to take questions.

Good morning, and thank you for joining us on the call. I would like to spend my time this morning by starting with our latest business results, give you my thoughts on the current environment, and discuss our expectations for the rest of 2012. I am happy to say that we had another strong quarter, especially when you consider some of the economic head winds out there. We continue to deliver above average organic growth, and we remain very much on track to achieve our margin objectives for the year. For the second half, we are cautiously optimistic about revenues, but recognize that there are risks in a number of regions that could impact global growth.

On the risk side, the situation in Europe remains tenuous. In the US, continuing fiscal concerns, unemployment, and the upcoming elections create uncertainties. In Asia, even though overall growth is still quite attractive, the pace of their economic growth is also moderating. On the plus side, central banks in the US, Europe and Asia are acting in a manner that supports growth. And in our conversations with our clients, their focus remains on building their businesses around the world.

We continue to keep an eye on the macroeconomic picture, but as I said last quarter, we are most focused on the things we can control. Even as we tightly manage our costs, we are making smart investments in our people, our service capabilities, and our geographic footprint. These investments don't always make headlines themselves, but they are helping us to consistently win new business, and to extend our existing client relationships. Across all of our networks and agencies, we are investing in talented people who are helping us to broaden our capabilities and service offerings, and to fulfill our commitment to differentiating, creative, and executional excellence on behalf of our clients. This is most recently illustrated by our outstanding performance at the International Festival of Creativity in Cannes, where Omnicom agencies from 34 countries won more than 200 Lions, representing over 90 clients. I want to congratulate all of our agencies on their performance.

The future of our industry belongs to those organizations that can deliver integrated solutions for clients. The marketplace is getting more complex. Consumers are blurring the line between offline and online. New technologies offer greater opportunities to effectively communicate with customers, and in my opinion, we're only at the beginning. We are just learning how to effectively utilize social media and smartphone technology.

To be successful, agencies must increasingly blend all of these media, together with a deep understanding of data and analytics, to help their clients find and serve customers where they are and the way they want. And our agencies must be agile enough to keep learning and changing as technology does. Our entire digital strategy is built around this idea, build the expertise in every agency, make sure we are not we are wedded to any single technology, and integrate these capabilities to better service our clients. As a recent example of our approach, in late June TBWA announced the formation of the Digital Arts network. Digital Arts Network unifies TBWA's proven digital talent, encompassing over 700 digital specialists within the network, and initially rolling it out in 18 markets, a global footprint to rival any pure play digital shop. This talent will remain fully integrated within TBWA's existing business.

Now, I would like to turn my attention to the second quarter. Organic growth for the quarter was a very strong 5.1%. We experienced positive growth in every major region around the world, with the exception of the Euro market. Organic growth in our international markets outside of the Euro was almost 9%. Our advertising business continues to perform very well, and our CRM business also had solid growth. Looking more closely at revenue by geography, we saw continued strength in the US with organic growth of 5.4%. US growth was driven by strong results in advertising, branding, media, and sports and event marketing. Offsetting this, was a decline in our healthcare and specialty businesses.

The UK experienced organic growth of 3.2%. The UK has been a consistently strong market for us. And during the quarter, we further improved our position through the acquisition of Adam & Eve, which is being combined with DDB UK. Adam & Eve's creativity and vision align perfectly with our culture, and adds world-class talent to what is already one of our premier offices and markets.

Given the continued challenges in Europe, the Euro region growth was negative, although the performance by market again, varied. Germany and France were relatively flat. The more troubled Euro market also had a difficult quarter, with Portugal being the exception. Outside the Euro currency area, Russia and Turkey had very strong performances. In Asia, we had double-digit growth, with Australia, China, Japan, India, and Singapore all exhibiting very strong performance. Across our industry segments, we experienced solid results with auto, consumer products, retail and technology among the better performing sectors. And net new business was over a $1 billion for the second quarter.

Turning to our capital structure, we are delivering on our commitment to maintaining a strong balance sheet, while making shareholders the major beneficiaries of Omnicom's strong cash flows. During the quarter, we raised $750 million in new debt at today's historically low rate, and we spent more than $550 million in share repurchases, bringing the total for the year to over $800 million. Even with this new debt, our balance sheet remains extremely solid, giving us the flexibility to pursue smart investments and acquisitions. We continue to seek acquisitions that allow us to further our strategic goals, and that meet the test of fit and price that we deem necessary for our success. We are committed to maintaining this disciplined approach.

Before I finish, I want to reiterate that we are on track to delivering our 2012 margin target. At the same time, we continue to balance these improvements with smart investments that will drive our growth, with a focus on delivering greater value for our clients and our shareholders. Overall, I am extremely pleased with our performance during the quarter. Despite the broad challenges in many regions of the world, our agencies are delivering solid growth, with a sharp focus on costs and margins. They are doing this by continuing to provide their clients with world-class services, using new mediums and technologies that integrate digital into their core capabilities. I will now turn the call back to Randy, who will take you through the numbers in more detail, and then be available for questions. Thanks.

As John said, our agencies had an excellent performance in Q2, benefiting from their hard work, and the delivery of innovative and insightful services to their clients. As a result, revenue came in at $3.6 billion, which was driven by very strong organic growth of 5.1% in the face of a stiff FX head wind of 3.7%. I am going to address our revenue growth in more detail in a few minutes.

EBITDA increased 3.7% to $530 million. The strong organic revenue growth in the quarter, combined with the benefits of the many cost initiatives that our agencies have undertaken, result in our EBITDA margin expanding about 20 basis points this quarter to 14.9%. As we have previously stated, our objective for the full-year is to match our 2007 margin performance, which was 13.4%. With the combined results through Q2, we are right on track to achieve that objective. Operating income, or EBIT for the quarter, increased 3.7% to $506 million, and a resulting operating margin of 14.2%, was also a year-over-year improvement of about 20 basis points.

Looking at the items below operating income, net interest expense for the quarter was $34.9 million, up $7.3 million from Q2 of last year, and up $5.7 million from the first quarter. During the second quarter, we issued $750 million of 10-year senior notes, with an annual coupon of 3.625%. Both the year-over-year and the quarter-over-quarter increase in interest expense is predominately due to the interest paid on the new bond. On the tax front, our reported tax rate for the quarter was 34.3% in line with Q2 of last year, and in line with our expected operating tax rate for this year. As a result of that, net income for the quarter increased 2.8% to $282.7 million. On slide 3, we show the computation of diluted EPS. The increase in net income, combined with the year-over-year reduction in our diluted share count of just over 4%, resulted in diluted EPS for the quarter of $1.02, which was an increase of 6.3%.

Now on slide 4, we take a closer look at our revenue performance. First, with regard to FX, on a year-over-year basis, the US dollar continued to strengthen against most of our major currencies in the quarter. The net result reduced revenue in the quarter by $130 million, or 3.7%. As we have discussed in the past, the majority of our costs are incurred in the same currency as our revenues. As a result, the FX impact on our revenue flows pro rata through to our earnings, having a negligible effect on our operating margin. Looking ahead, if rates stay where they are currently, we expect FX to be negative by about 4.3% in Q3, and negative about 2.3% in Q4.

Revenue from acquisitions, net of dispositions increased revenue by $25 million in the quarter or 0.7%. In addition to a handful of smaller acquisitions, this quarter we continue to benefit from the Mudra, Marina Maher, and DDB Turkey acquisitions that we completed in the fourth quarter of last year. I should also point out that Q2 was the first quarter that we fully lapped the Clemenger and Comunispace acquisitions which we completed in 2011. There are also a number of dispositions that we completed during the second half of 2011, that will continue to offset our acquisition revenue through the balance of the year. At this point, if we don't complete another acquisition or disposition for the balance of the quarter, net acquisition revenue will be positive about one half of one percent in Q3.

And finally, with regard to organic growth, we had another excellent quarter of 5.1%, or $179 million. This quarter, organic revenue was driven by a combination of factors, but three that are worth noting. Our first, our agencies have continued to successfully develop innovative services utilizing the many new technologies and communications platforms being created in the market. Second, very strong new business wins over the past two or three quarters, and again this quarter, with net wins just over a $1 billion. And third, our agencies in many of the emerging markets, in particular in China, Russia and India, have continued to generate exceptional growth.

Turning to our mix of business on slide 5, brand advertising accounted for 48% of our revenue, and marketing services, 52%. As for their respective growth rates, brand advertising's organic growth was 7.1%, driven by strong growth in our media businesses, emerging markets, and the development of our digital capabilities, as I mentioned. Marketing services was up 3.3%. Within marketing services, CRM had a strong 5.8% organic growth. And within CRM, events, driven in part by Olympic-related activities and branding, were the fastest growing subcategories. Public relations posted organic growth of about 1%, and specialty communications decreased 5.2%, primarily due to generally reduced spending by a number of our leading pharma accounts.

On slide 6 and 7, our geographic mix of business in the quarter was split 52% domestic, and 48% international. In the United States, revenue increased $95 million, or 5.4%. Organic growth continued to be strong, generally across disciplines and industries, generating 5.4% growth, or again, about $96 million. Acquisitions, net of dispositions was effectively neutral. International revenue decreased $22 million, or about 1.3%. FX provided a strong head wind, causing revenue to decline 7.6%, or $130 million. Acquisitions, net of dispositions increased revenue $25 million, and organic growth, although very mixed by region, continued to be strong overall at 4.8%, or adding about $83 million to revenue.

In Europe, of the larger countries, Russia continued to perform very well. The UK remained steady with 3.2% growth, and Germany and France were basically flat. Overall, the Eurozone markets were down about 1.5% organically. In Asia, we had strong performances across the region, with double-digit growth in each of Australia, China, India, Japan, and Singapore. And Latin America continued to turn in solid results, with stand-out performances in both Mexico and Chile this quarter. Slide 8 shows our mix of business by industry, but as the chart shows, there is no significant changes in either the year-over-year or quarter-on-quarter analysis, which is generally what we expect, given the large, diversified base of business that we have. As for growth rates, we had strong performances in the quarter in the auto, retail, and consumer product sectors.

Turning to slide 9, our cash performance for the first six months of the year was very good. We generated $664 million of free cash flow, excluding changes in working capital. On slide 10, the breakdown of our primary uses of cash for the six months included dividends to our common shareholders of about $154 million. The year-over-year increase reflects the 20% increase we made to our quarterly dividend at the beginning of the year, dividends paid to minority interest shareholders of $57 million, and capital expenditures of $113 million. As I pointed out last quarter, CapEx this year is up a bit year-over-year, primarily due to a couple of sizable office moves and the long-term lease renewals. Acquisitions, including earnout payments, net of the proceeds received from the sale of investments totaled $99 million, and share repurchases net of the proceeds received from stock issuances under our employee share plans totaled $570 million. All in, we overspent our free cash flow by about $329 million for the six months, which is in line with our expectations.

Slide 11 shows our current capital structure. As everyone is aware, we issued $750 million in 10-year senior notes, with annual coupon of 3.625% interest early in the quarter. As a result, our total debt increased to $3.9 billion. However, our net debt position at the end of the quarter was basically flat from a year ago at $2.24 billion. As a result of the increased debt, our total debt to EBITDA ratio increased to 2 times, although our net debt to EBITDA ratio due to increased EBITDA improved to 1.1 times. And our interest coverage ratio also improved due to our higher EBITDA to 12.4 times.

And finally, on slide 12, as we continue to successfully build the Company, through a combination of prudently priced acquisitions, and well-focused internal development initiatives, our return on invested capital and return on equity have remained very strong. For the last 12 months, our return on invested capital improved to 16%, and our return on equity improved to 28.2%. This concludes our prepared remarks. There are several other supplemental slides included in the presentation materials for your review. But at this point, I'm going to ask the operator to open the call for questions. Thank you.

(Operator Instructions)

Our first question today comes from Alexia Quadrani from JPMorgan. Please go ahead.

Thank you. Just a couple questions. I guess, one for John, and one for Randy. John, could you give us a bit more color on what advertisers' tone is for the second half? Are [they] nervous, are they generally comfortable with their existing spending plans, both in the US? And then if you saw anything directionally interesting or different in the larger Euro markets, France and Germany? And then, Randy, just a follow-up question, if you could touch -- update us on your priorities for use of cash, if you think you'll be more acquisitive in the back half of the year?

Most advertisers are still comfortable with their spending levels for 2012. Although with the currencies acting the way they are, and all the uncertainties out there, it's always subject to -- a good portion of their spending is subject to review. Most clients are focused on revenue growth, and especially in those areas of the world where there is a rising middle class. And the United States performed, as you know, from our numbers, performed better than probably what GDP will come in at. So, on balance, I would say there is cautious optimism, but everyone's aware of the headwinds that exist.

And as far as acquisitions, I don't know that we will be that much more acquisitive in the second half. We completed a couple deals in the first half. Right at the beginning of the third quarter, we completed an acquisition called NIM in China; it was a good-size acquisition, a good size for us, a digital business. We're always focused on -- I think John's terminology was fit and price. Obviously, any acquisition we look at has to culturally fit, and fit with our strategy. And keeping with our character, we believe in creating value for our shareholders, so, pricing is pretty important.

And any incremental data points on what you're seeing in the Eurozone? I mean, is there anything that you saw in the quarter that would make you particularly more concerned about Q3, or is it, do you think at this point more of the same?

Europe continues to kick the can down the road. So, there is constant uncertainty. If there is anything that is true every morning, it is that you don't know what today will bring. So, we're cautious. We remain cautious. We remain in contact with our clients. Many of them based in Europe are multinational, so, their spending is not exactly in Europe. They are able to move it around to where there is growth. So, Euro is going to be a question, I think, for a long time, and just learning to live with it.

Okay. Thank you very much.

Thank you.

And we do have a question from the line of John Janedis from UBS. Please go ahead.

Thank you. Randy, you highlighted the autos being up about 20%, which was an acceleration from first quarter. With some of the weakness in the European auto sales, what are you hearing out of the market for the category? And maybe from a creditor client perspective, do you see any early parallels today in Europe broadly to the US back in '08?

Well, I think in the auto sector in particular, I think most of it was our performance. I think our agencies did a good job. I think our clients are doing fairly well, and I think we're gaining some market share of our business with them. I don't really see, as far as your second part of the question, I don't see the analogy going back to 2008. Frankly, I think the big dip in auto at that time was really availability of consumer credit, and I don't see that contracting at the current time. I don't necessarily see it expanding rapidly, but it seems fairly stable at this point.

Overall, if I might -- this is John. If I could just remind you, this time last year, Japan was still suffering from the tsunami. So, there wasn't as much product to meet demand, and that's been restored for the most part. Some of our clients are actually Japanese. So, it's contributed a little bit to the growth that you have seen.

Thank you.

Thank you.

And we do have a question from the line of Craig Huber with Huber Research Partners. Please go ahead.

Yes, good morning. Old subject here, but can you talk a little bit further about the flattening out of margins over the four quarters for this year, versus like what happened back in 2007? What is sort of driving that, please?

The world is a different place than it was in 2007, but I'll let Randy go.

I think our margins will track over the course of the year along with 2007. We were a little bit ahead in the first quarter. We've brought it, I think, perfectly in line through the six months. I think the balance of the year will largely track. I mean, the third quarter has traditionally been a lower-margin quarter, because it's a smaller revenue quarter. We could have 20 or 30 basis points laying around the third quarter, I would guess. But again, we have committed to hitting the number for the full year. We're right on track to doing that. I am very confident that we'll be able to.

Then also, just further on margins, if you think about your traditional business versus the digital technology work that you guys do, what's your updated thoughts on the margins for the two different areas? Are they still pretty similar in your mind? Or longer term, do you think there's more upside on the digital technology side?

I would say that currently there's not a great deal of difference between the two. Technology, digital as you are referring to it, is integrated into every single campaign, everything that we touch. It requires different skill sets. And it also adds to the pace of the work, and how long the work can exist before it has to be refreshed and redone. So, the world is a complex place, and not everything digital has a perfect ROI yet. It will. So, until we get to then, I don't see any grand distinction between one or the other. Matter of fact, we don't see any distinction between use of digital, and some of the -- what you had referred to as the more traditional channels to reach consumers.

I think if there is a difference in -- digital is, again, a broad word. It means obviously lots of different things. On our labor-related businesses, we're going to get very similar margin. In some of the new technology spaces, we're making investments in technology platforms. We expect to get a return on the investment in the platform, as well as a return on the labor. In those circumstances, because we'll make a bigger investment in that platform, maybe the margins will actually appear to be higher, because we're getting that joint return. But that's just a matter of timing. We're really focused more on a return on our capital, and I think that will be pretty similar.

And also, just two quick housekeeping questions if I could. Could you break out salary in the office and general line for us? And then also, what was your actual shares you bought back in the quarter? Not the net, but the actual number, please? Thank you.

Let me get those -- let's keep going on. We'll get those answers, and we'll say them following one of the other questions.

Thank you.

Okay. Thank you.

And we do have a question from the line of Leo Kulp with Citigroup. Please go ahead.

Hi, good morning. Could you talk a little bit about how you think recent privacy initiatives, notably the potential for IE 10 to have -- do not track set as default -- could impact your digital businesses and the broader digital market?

We do have privacy experts who follow this, and certainly send me an e-mail every day as to the state of the state. There is no question that we've always been conservative, in terms of what technology will permit you to do, and what you do do, in respecting the privacy laws, which are different market-to-market. It's a big unknown question as to what the future of that is, especially as mobile technology starts to take hold, and we start to utilize it more to reach consumers.

But keep in mind, those are the rules that you practice under. It's not going to change our business. These are very interesting communication mediums or platforms. Our clients and our firms will develop services to reach consumers over those platforms under the appropriate rules. That shouldn't change our business. It will just change, again, the engagement rules. It's not going to change the desire of those mediums, or our profitability.

Going back to answering Craig's question, it looks like we bought almost 11 million shares during the quarter. And as far as the break-out of salary and service in office and general, it was $2.541 billion in salary and service, and $513 million in office and general.

Sorry, Leo. Go ahead.

Thank you.

And we do have a question from the line of James Dix with Wedbush. Please go ahead.

Thanks. Good morning, gentlemen. Three things. As you sit here now, and compared to three months ago, are there any variances in your outlook for organic growth by geography that are worth calling out, versus what you thought they would be three months ago?

And then secondly, are you seeing any more volatility in any of your more cyclical client categories? For example, I noticed the travel and entertainment spending was down in the second quarter, although there may have been some client-specific things driving that. But I was curious on that point.

And then finally, it sounds to me like you continue to have more confidence in what your full-year margin will be, as opposed to exactly what your organic growth is going to be. Correct me if I'm wrong on that point. But I'm just wondering, at this stage, in going through the rationalization of your business and closing things down and adjusting costs, what do you see as kind of the flex that you have, in terms of managing your operating expense to adjust to any changes or surprises in organic growth? Thanks.

I think I said in the first-quarter call, and I think I repeated it earlier, we remain cautiously optimistic about our revenues. As macroeconomic areas change, as governments, which are increasingly important in the outcome of how economies in regions perform, get involved in the action and the pace at which they get, this is a constant process. My overall feeling guiding the Firm hasn't changed. My input changes every morning. And so, we make appropriate adjustments where we can.

It's a difficult time, given the level of global growth. And it's going to remain that way, I think, for a little while, before it gets straightened out. But I think historically, you can look at the performance of this management team, not only the people talking to you today, but the people running the companies, and see that even in more dire times, we've been able to do a superb job in adjusting our costs to whatever economic conditions we seem to face.

And I'm sorry, I missed the middle of your question?

Sure. Are you seeing any more volatility in some of the more economically cyclical client categories? And then I noted, in particular, travel and entertainment spending was actually down in the quarter.

I didn't look at it.

I don't think so. I think we see some stronger sectors. Some of the technology areas, when clients are coming out with new products, I think we'll see marketing spend following those. The other sectors, I think, are driven more by our operating performance, business wins and/or losses. We're growing our share, growing our revenue different than the economic growth in those underlying sectors.

If it's all right with you, we'll go on while we look for the travel explanation. It could be client-related. I don't know it off the top of my head. And then we will --.

Okay, thank you.

And we'll answer it, if we find it.

And we have a question from the line of Anthony DiClemente with Barclays. Please go ahead.

Great. Good morning. One for Randy, and one for John. Randy, on the buyback, your net repurchases really stepped up in the quarter. I'm wondering if we should expect, or you expect your pace of repurchases to more track the first half of this year, in terms of overspending free cash flows you mentioned in your opening remarks? Or should we expect that pace to sort of mirror last year's, where I think the second half wasn't as -- didn't have as much repurchase activity as the first half did? And a follow-up for John.

I think we'll probably track more last -- like we did last year. That's what we said all along that, that we would probably get to about this level. We'll probably, through the third quarter, which is somewhat of a smaller quarter, see how the year plays out, utilize most of our free cash. And then, we'll see what's happening in the fourth quarter.

Just two things I would add to that is, number one, there are a number of acquisitions out there, that almost meet all of our criteria, with the possible exception of fantasy pricing, from my point of view. So, we'll see how it goes. There are things that I would invest in, if I thought we would get the proper return. So, that enters into our thinking. And what we do is -- we have a Board meeting later this week. We discuss this with our Board, and when it comes to share repurchases, we have their authorization, but we seek their guidance constantly, in terms of where we should be.

Thanks. I would just -- that's an interesting point about -- I was trying to figure out why there isn't more of a surge in M&A with the credit market so accommodating, John. I was just wondering, this fantasy pricing, do you think it's more because the credit markets are so accommodating, the sellers don't feel a sense of urgency? It just feels like these private market multiples are off the charts. What gives there, since you bring it up, wonder what you think is going on?

I wish I could give you a very crisp answer to that, and I can't. Some people are paying for, to strategically broaden their platforms. Or they look internally, and they see deficiencies in the service capabilities that they have. And so, I've seen quite a number of recent deals where there's no competitor in the bidding for these companies. And the buyers are, I think, overpaying.

Now, I've been the CEO, and I've been with this Company for a long time, and I never celebrate the purchase, as much as I figure out how I'm going to repay my shareholders for the investment that I'm making. So, it enters very heavily into our equation. And we have been pretty consistent over the years. And when you compare our results and what we've been able to do organically by investing in our Company and our people, we haven't really been deficient, and we haven't missed much. Or I would say that we haven't missed anything. But I'm sure there's something we've missed. So, I'm sorry, I probably [would do] something else, if I could answer that question better.

Okay. Thanks. Just one last one for me, John, within advertising, a couple folks have asked about digital. You've said the spending on mobile just isn't there yet, I think you said in the past. And just even in the past quarter, it feels like we've had this explosion in handsets and devices globally. And so, I'm wondering, from your clients, if you have seen any sort of pick up in interest and activity in mobile ad spend? Thanks for the questions.

I haven't seen a shift in the dollars yet, just an awareness level that it's coming, and we're getting better. Our clients are getting better at the use of mobile. And I think as we get better in the future, it's going to garner a greater share of budget.

Fair enough.

Going back to the earlier question on travel, it wasn't due to the sector, as much as it was due to a specific client loss that we are cycling through.

And we do have a question from the line of William Bird with Lazard. Please go ahead.

Good morning. I was just wondering if you could just talk about severance, and just how you're managing, kind of given the uncertainty in the climate? And whether there was a meaningful change in severance year-over-year in the June quarter? Thanks.

There wasn't a meaningful change. I think it was pretty much flat, maybe up a couple million dollars.

Yes.

Basically flat.

To my great disappointment.

We're managing it -- we're trying to manage our cost structures, our headcount and staff alignment, extremely cautiously. As people know, it's quite expensive to adjust headcounts, especially in Europe. But our agencies are trying to manage as close to their current business levels as possible.

Just to clarify on a prior question on buybacks, would you borrow to buy back stock?

What was the question?

So, you talked about some of the trade-offs in buybacks and acquisitions and so forth. Would you borrow to buy back more stock?

As a separate decision? Is this -- I mean --?

We've kind of already done it, Bill. I mean, we've added the $750 million worth of debt at the beginning of the quarter. We came into the year, certainly prior to that, like with most years, saying that we would use all of our free cash flow on the combination of dividends, acquisitions, and share repurchases. The debate, I guess, this year is -- how does that alignment work between acquisitions and share repurchases, and do we add leverage?

We talked over the last quarter a little bit about going into -- potentially over the course of the year, utilizing some of that $750 million as additional leverage. Through the six months, we've overspent our free cash by about $330 million. We'll see where we end up for the full year, but it will be obviously someplace between utilizing all of our free cash, and increasing our leverage within that $750 million zone.

The only thing I would add is -- the motivation and the timing of borrowing the $750 million had more to do with pricing, and the attractiveness of it than for any of the reasons -- we were going to do what Randy just said, whether we borrowed the $750 million or not. So, I don't know if that's answering your question.

No, that's helpful. And do you expect to get any lift in your business in the September quarter from the Olympics?

It will be muted, if it is. A lot of work that is done on the Olympics, except for specific travel and entertainment, is work that's already been incurred, and is already running. So, I think the significant benefit from the Olympics has been -- we've already received a lot of it. The other side of that equation is -- people who are spending in July and early August tend to flatten out in the third month of the quarter, post the Olympics. So, I'm not anticipating any great lift as a result of the Olympics in the quarter itself. I don't know if Randy has a different view.

Yes, I mentioned it; I think we got some lift in the second quarter from the Olympics. I could see in some of our event businesses. I know they do quite a bit in the Olympics, maybe $10 million or $15 million of revenue in the quarter. As John points out, I think most of the work associated with the Olympics has certainly already been done. And I don't know that there is a huge increase in spending in aggregate across marketing disciplines just because it's an Olympic year. I certainly think people focus on the Olympics as a marketing theme. But if their overall spending increases dramatically, that one's harder to predict.

Thank you.

Thank you.

And we do have a question from the line of Peter Stabler with Wells Fargo Securities. Please go ahead.

Thanks very much. At the risk of beating this topic to death, I want to go back to the results by industry. And I think one thing that's intriguing to us here is the really wide gap across the different -- the performance gap across the different sectors here. And going back to second quarter of 2011, I don't think you guys provided this break-out of growth by sector. So, it's difficult for us to look at kind of year-on-year comps, to see if there are any particular events driving this. So, given the fact that Other is such a substantial -- it's a fifth of your revenues, and we saw a pretty substantial deceleration there quarter-on-quarter. And then we see what's happened in telecom, and I think James mentioned T&E. Can you give us any more color, or do you have any more color, as to whether this is a different type of world situation that you are seeing here?

And finally, is this organic growth, just remind us, I should know this -- is this organic or is this total reported and, therefore, subject to FX issues? Thanks very much.

The numbers here are total reported growth. I always caveat these numbers, because frankly it's difficult for us to have them be meaningful as well. We are dealing with year-over-year changes that include new business wins and losses, as well as the underlying industry spend. And it is quarter-on-quarter, which, if a company or a client moves spend from one quarter to another quarter, it can make a difference in these numbers when you're cutting up our totals into industry sectors, which are relatively small numbers. So, relatively small changes can make a change in these year-over-year growth rates. As well as, John pointed out in the T&E area, if a client loss, that can move the needle, they just haven't cycled on. So, I don't personally put a lot of emphasis on thinking that, that this gives us an analysis of what's going on in the economies.

Or no growing concern that a category such as Other sees the deceleration, and it's such a sizable piece of the business, it's not any bit of a forecasting tool for you in any way?

No.

No, not at all.

I mean, we look at it. But you are looking for -- over a much broader period of time than simply a quarter. I mean, 1% of growth is only $30 million for the entire corporation in a quarter. So, once you start to break it down into these segments, the numbers, as Randy mentioned, get pretty small.

Right. Last quick one, can you offer any comments on the PR business? Are you feeling comfortable with the assets there? And is there any one-time events that are impacting the trajectory of growth there? Thanks very much.

Very comfortable with our PR assets. Now, I don't know how well you know me -- I am very comfortable and never satisfied. So, there is always more to do. We have great brands, and we have a couple of things which we could improve on. But the direction and the management teams, the products, I'm very comfortable with.

Thanks very much.

Thank you.

And we do have a question from the line of Tim Nollen with Macquarie. Please go ahead.

Hi, thanks. A couple more follow-ups on the quarter, and one on the outlook, please. Could you explain in the US why your Q2 organic growth accelerated versus Q1, even on a difficult comp? Was that account wins, or what might have been driving that?

Secondly, in Europe, is it possible to estimate or say what the contribution from the football championships was? I heard what you said in the Olympics. Just wondering if the soccer made a difference on your Europe growth in Q2?

And lastly, just to make sure I understand on Q2 margins, the expansion is quite a bit less than it had been in previous periods. Why was that? And just to come back on a previous question, what sort of buffer do you have to get your target for full year, in case things get materially worse on the top line in the second half?

Well, a lot of questions. So, the US -- obviously it's our business performance, not the underlying economy. I don't think in the second quarter, the underlying US economy improved in any meaningful way, maybe even it was flat and certainly sideways to down.

Yes, the only thing I would add to that, and I'll chime in and do a Huntley Brinkley here is -- some of the wins last year, which are cycling in now, have an impact on that. Plus there is an increasing trend on the part of clients to reduce the number of suppliers, vendors, advertising companies that they deal with. And oft times, we become the beneficiary of that.

Yes, that is certainly the case. Also, I was going to say, I think our strategy around new technologies, and basically making sure that we're building those capabilities and insights into all of our agency platforms is becoming evidently the right strategy. I think we are seeing good results across a lot of our agencies because of that.

As far as the -- you had a question about benefits of the World Cup in Europe -- I don't know. I mean, it wasn't something that stood out in the aggregate. I'm sure some of our agencies benefited because of that, but how much, I don't know.

And I would have to admit, out of all the concerns I've had in Europe, I wasn't looking at the positives. I was looking at potential downside. So, we didn't focus on it. And so, we don't know the answer to that.

And margin?

Margin.

We're very comfortable with being able to achieve our margin objectives for the full year. With the first quarter, we were a little bit ahead. This quarter, we managed our margin to make sure we were right on track. We are very confident that we're going to be able to achieve the number for the full year. And given that we're right on track through six months, it means we have more flexibility of making sure we're going to achieve that number in the second half. It's not that it's not without a challenge. Certainly our agencies have to focus every day on controlling their costs and managing their margins to keep that flexibility in place. But incentive compensation is the primary flex point, at this point. And I think we're in good shape, or good position.

Okay. Thanks.

We can take one more.

I think we've got time for one more question, given the timing.

And that last question then comes from the line of Dan Salmon with BMO Capital Markets. Please go ahead.

Hi, good morning, guys. John, you mentioned in your opening comments how you're still early days in learning how to use mobile and social to benefit your clients. And I know it's always a little difficult to parse integrated work. But maybe at highest level possible, I would be interested to hear your thoughts on how the economics to your agencies may change, as you do more earned and owned media work for your clients, particularly around social and mobile platforms? And where there is no media company on the end usually to buy the impressions? And again, how that changes economics for your agencies?

Sure. If there's a formula, I don't possess it, not yet. There's a lot of learning that goes on, which means that you're making investments as people learn and practice in these areas, to find out what's effective and what isn't effective. Longer term, I think we will get a greater correlation between ROI and the effectiveness of some of these new capabilities. But it's still early days, and most mobile phone advertising, up until now, has taken the form of banner ads, or not truly integrated into the social fabric of what the product is. I see that changing very, very rapidly. And our ability to use phones to motivate, especially at the point of sale, what a consumer would do is also increasing every day, as we speak. So, it's early days.

I've highlighted it. I start most of my CEO meetings by saying, mobile first, even though the budgets and the here-and-now spending hasn't yet shifted into these areas. And social is an experiment at the moment, in that there's a lot of impact. There's a lot of chatter. And I don't think there is great science behind -- motivating the discussion of it, and tying that directly to the purchase of an individual product. But that will increase as time goes on. So, it's early days, and I don't have the answer.

If our people are innovative, which they are -- I think we have the most innovative people in the industry globally -- these new communications platforms provide us opportunities to create enhanced services for our clients. That's going to create opportunities for revenue enhancement across our agency platforms. So, this is all, all exciting opportunities for us, and we're at the very beginning of it.

And just one final point on it, as a generalization, complexity is good for our business, because our clients require us to be able to help them simplify and direct their spending. So, in the aggregate, all these new opportunities are just that -- opportunities for us.

So, with that, I think we will thank everyone for taking the time to listen to our call. Hopefully, we answered most everyone's questions, and we'll talk to you soon. Thank you.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, and for using the AT&T executive teleconference service. You may now disconnect.