宏盟集團 (OMC) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Omnicom second quarter 2013 earnings release conference call. At this time all participants and 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 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.

Good morning, thank you for taking the time to listen to our second quarter 2013 earnings call. We hope everyone 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've been asked to remind everyone to read the forward-looking statements and other information that's 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 that actual events or results may differ materially. I'd also like to remind you that during the course of the call, we will discuss some non-GAAP measures in talking about Omnicom's performance. You can find a 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. Thank you for joining us on the call. We are now halfway through 2013 and I am pleased to say that our performance continues to demonstrate the strength, diversity and stability of our business. On a global basis our top and bottom line was consistent with our internal forecast. As you can see in our deck, organic growth was 2.8% and margins increased during the quarter. Regionally our performance broadly reflected the different macroeconomic conditions in the global markets. Our business in the United States continues to grow at a steady pace that is slightly faster than the overall economy. In Asia and Latin America we are experiencing stronger growth, and as you might expect the Euro zone remains a key geographic challenge.

Before discussing the highlights of our second-quarter performance, let me start by providing an update on the progress we are making on our key strategic initiatives. More than at anytime in our history, our Company and agencies are aligned around a common set of strategies that are essential to our growth. These strategies share a goal of helping us meet the rapidly changing needs of our clients by giving them access to the best people and the latest technologies where and when they need it. First, is attracting, retaining and developing top talent. Next, is expanding our global footprint and moving into new service areas. Third, is building upon our digital and analytical capabilities by investing in our agencies and partnering with innovative technology companies in key markets around the world.

Finally, by delivering innovative solutions using meaningful consumer insights across disciplines and platforms for the benefit of our clients. Our progress is really a reflection of the caliber and contributions of our people. I'm happy to report our agencies continue the tradition of creativity and innovation with a record year at Cannes. Omnicom won more than 240 Lions across all marketing disciplines, categories and geographies. Let me just mention a few of the highlights. BBDO and DDB were two of the top three networks for the seventh consecutive year. Omnicom Media Group earned the most wins of any media agency holding company in the media category for the second year in a row. OMD Australia was Media Agency of the Year. Ketchum was the only public relations firm to win Lions across multiple categories.

Finally, demonstrating our breadth and depth, Omnicom agencies from more than 35 countries representing 145 brands won Lions. It is also worth noting that many of our winning Cannes entries were the result of multiple Omnicom agencies working together on behalf of our biggest accounts. This reflects an important trend in our industry as many clients are telling us that they want greater collaboration, cooperation, and efficiencies around the world.

On the digital front, we are also benefiting from stronger capabilities that blur the lines between disciplines and geographies. We continue to see a proliferation of new platforms and an increasing desire from our clients to create effective campaigns that work across all media channels, technologies and devices. As I've said before, the way to succeed in this environment is to develop digital skill sets at every agency and partner with the right technology leaders. This allows us, without bias or silos, to develop and integrate the most effective digital strategies.

For example, at Annalect, our primary data and analytical business, we have incredible talent that is developing innovative partnerships and leveraging cutting-edge technologies and tools to collect data in real time and convert it into actionable insights. Accuen, which already operates in the United States, Europe and Asia, is extending its programmatic ad buying system into Latin America to service the growing needs of our clients in that region.

Last month Annalect also announced the global deal with Salesforce.com that will allow us to use the Salesforce Marketing Cloud to build a suite of social tools. This partnership will support social media offerings across all Omnicom agencies and allow them to deliver more dynamic, real-time content. This is just one of many examples of our open-source approach to partnering with media, data and research companies. This strategy allows us to employ the latest technologies and at the same time reduce our investment in technologies that may become outdated.

Now let me turn to our second-quarter results. As I mentioned, organic growth globally was up 2.8%. Revenue growth in the quarter was well balanced between the US at 2.7% and the international markets at 2.8%. With the exception of the Euro markets, all of our regions experienced solid growth. Randy, will provide more details when he makes his remarks. As a result of our top-line performance and focus on expense management, we continue to drive strong cash flow. Our balance sheet remains extremely sound giving us the flexibility to utilize our free cash flow in a disciplined manner for dividends, prudent acquisitions and share repurchases.

Overall Omnicom's performance this quarter reflects our commitment to delivering the highest quality work for our clients, expanding our capabilities to continue to effectively market across the globe in a digital world and building strong agency cultures. I will now turn the call over to Randy, who will take you through the numbers in more detail.

Thank you, John. As John said our agency had an excellent performance in Q2, benefiting from their continuous focus on delivering new, innovative and insightful ideas and services to their clients while relentlessly driving their own cost efficiencies. As a result, revenue came in right on track at $3.6 million. Our EBITA margin for the quarter increased almost 20 basis points to 15.1%, bringing EBITA for the quarter up to $548 million. Operating income, or EBIT, for the quarter increased 3.3% to $520 million. The resulting operating margin was 14.4%. 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 $40.7 million up $5.8 million from Q2 of last year and just about flat with the first quarter. The year-over-year increase is primarily due to the interest cost on the $1.25 million of 10-year notes we issued last year. If you remember, the first tranche of $750 million was issued early in Q2 and the second tranche of $500 million was issued mid Q3. Together they have a blended interest rate of about 3.4%.

On the tax front, our reported rate for the quarter was 33.9%. While the rate was down slightly from last year, there were a few ups and downs in the quarter from discrete items that push the rate up just a bit. For the full year, we still expect our operating tax rate to be around 33.6%, which is about where we are for the first six months.

Net income for the quarter was $289.5 million, which was a solid increase of 2.4% and 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 4.6% resulted in EPS for the quarter of $1.09 which was an increase of 6.9%.

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 strengthened against most of our major currencies except for the euro and the Chinese yuan. The net result reduced revenue in the quarter by $18.7 million or about 0.6%. Looking ahead, if rates stay where they are currently, we expect FX to be negative by about 1% in Q3 and about 1.5% in Q4. Revenue from acquisitions net of dispositions decreased revenue by $4.3 million and in the quarter we completed the sale of our recruitment marketing business. So, for the next few quarters, absent new acquisitions, we could have negative acquisition revenue of between 70 basis points and 100 basis points.

With regard to organic growth we had another very solid quarter up 2.8% or $99 million. As we've talked about before, this quarter we were up against strong comparables, including specific Olympic related revenue of about $50 million. A couple other areas worth mentioning this quarter, we continue to have excellent performance from our media operations, driven by both solid new business activities and new services. Our specialty pharma and healthcare businesses are benefiting from a combination of recent wins and increased activity from clients. And our agencies in many of the emerging markets China, Russia, India, the UAE, Turkey, Columbia and Chile, to name a few, continue to have strong double-digit growth.

Turning to our mix of revenue by discipline 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 4.3% driven by strong growth in our media businesses as well as good new business performance in the second half of last year. However, this was offset to some extent by recent moves of Gillette and Chevy. Our marketing services was up 1.4% in aggregate. Within marketing services, CRM was down 0.5% primarily driven by declines in our sports and events businesses when compared to the second quarter of last year when they have the benefit of significant Olympics related revenues. Our public-relations businesses continue to have very good results, posting organic growth of 3.8%. Specialty communications had an outstanding quarter up 7.8%, predominantly driven by strong results across the board from our specialty healthcare businesses.

On slides 6 and 7, our geographic mix of business in the quarter was split 52% domestic and 48% international. In the United States, revenue increased $44.4 million or 2.4%. Organic growth continued to be very solid up 2.7% and acquisitions net of dispositions was down $6.7 million or 0.3%. International revenue increased $32 million or about 1.9%. FX created a headwind causing revenue to decline $19 million. Acquisitions net of dispositions increased revenue $2.4 million and organic growth, which continues to be very mixed by region, increased this quarter to 2.8% or $48 million.

In Europe, of the larger countries, Russia and the UK continue to perform very well while Germany and France were down. In the UK, increased spending by our consumer products and telecom clients led our traditionally agencies, especially our media agencies, to a solid quarter. The Euro zone markets in aggregate were down 3% organically. In Asia we had strong performances across most of the region with double-digit growth in China, India, Hong Kong, Singapore, Thailand, Malaysia and Indonesia. In Latin America we continue to have standout results in Brazil, Chile and Colombia.

Slide 8 shows our mix of business by industry. As the chart shows, we had strong performances in the quarter in the travel and entertainment sector, which was primarily driven by a couple of recent new business wins as well as the consumer products, telecom and pharma sectors, which resulted from a balance of new business wins and increased spending. Obviously, we were down in the auto sector primarily due to the Chevy move. Turning to slide 9, our cash performance for the first six months of the year was on track and consistent with last year. We generated just over $700 million of free cash flow excluding changes in working capital.

On slide 10, the breakdown of our primary uses of cash over the same six months included dividends to our common shareholders of about $107 million -- the year-over-year decrease reflects the fact that we accelerated our normal January dividend payment to December of last year. Dividends paid to minority interest shareholders of $60 million, and capital expenditures of $69 million. CapEx this year is down year-over-year primarily due to a couple of sizable office moves and a long-term lease renewal that occurred last year that had significant build outs involved. Acquisitions including earn-out payments, net of the proceeds received from the sale of investments, totaled $45 million. Share repurchases, net of the proceeds received from stock issuances under our employee share plans, totaled $492 million. All in, we overspent our free cash flow by about $71 million for the six months.

Slide 11 shows our current capital structure. As we believe everyone is aware, we redeemed $407 million of our convertible notes during the second quarter for a combination of cash and stock. That reduced the amount of convertible notes outstanding down to $253 million. That, coupled with the second tranche of senior notes issued in Q3 of 2012, brings our total debt balance up to just over $4 billion. Also, year-over-year, our net debt position increased by $377 million to $2.63 billion primarily as a result of share buy backs over the past 12 months. As a result of the increased debt our total debt to EBITDA ratio stands at 1.9 times, and our net debt to EBITDA ratio is only 1.2 times. Our interest coverage ratio at 10.8 times remains very strong.

On slide 12, we show our ROIC and our ROE metrics, both of which continue to be very strong. Our return on invested capital for the trailing-12 month period increased to 17.5% and return on equity for the same period increased almost 32%. Finally on slide 13, which tracks the total cash payout to shareholders, shows that since 2002 we've returned just over 100% of our net income to shareholders through the combination of dividends and share repurchases. That concludes our prepared remarks. There are several other supplemental slides included in the presentation materials for your review. At this point, I'm going to ask the operator to open the call for questions.

(Operator Instructions)

James Dix, Wedbush Securities.

Just three things. I guess when you look at the growth within the advertising discipline, are there any longer-term trends you think worth pointing out in terms of organic growth and I guess also margin trends between your media agencies as opposed to the other agencies within that category? Just curious on that.

Then secondly, just your thoughts on what the amount of pending large pitches is in the market at the moment and in particular what's your outlook for picking up some auto business to take advantage of your resources there? Then finally, there has been some trade press on some renewed push by procurement, which I assume is ever present or changes in some types of payment terms. In particular, how quickly they will be paying for certain types of services. Just wondering how we should be thinking about developments there? Is there anything really new there and is there anything we should be thinking about in terms of modeling cash flow going forward? Thanks very much.

That was long enough I forgot the first question. (laughter )

I've got it written down, Randy.

I'm kidding. I will let John go.

We will start from the bottom up. In terms of procurement, there's always been pressure. There continues to be pressure to drive efficiencies. With respect to balance sheet cash flow, we've turned down and not accepted clients that we could have won because we weren't prepared to accept the terms that they were offering. We are not a bank. I think if you speak to my competitors, they'll both -- all three agree with that concept. That's not what we are here for. Anybody wants to treat us like a bank can go to a bank.

The second thing, pending large pitches, there is a couple around. We don't try to aggregate them. We just believe in ourselves and we believe that if we get up to the plate, we will score well. There is no, not to my knowledge, big car pitches up at the moment, but I have great confidence in the capabilities of the people who are on the Chevy business that when one does come up, we will have a very good chance at it.

And then your first question --

And on the car front, we have a excellent roster of auto clients already, three major global accounts. So, it is not like we are short of auto.

We always accept the next one if we can handle it. (laughter ) Then in terms of the first question, which was the distinction in margins between the media agencies and the advertising disciplines, I think?

Yes.

They are roughly the same, but I will let Randy --

The media agencies have strong margins. There is a lot -- there's more investment in the systems and technology, especially with some of the new areas of programmatic trading and also digital marketing, behavioral marketing. I think we get a pretty comparable return on capital in both areas. You guys -- that is probably all that there is to really say about it. On an absolute reported margin basis, the media business are a little bit higher.

Okay.

You also added about growth in advertising, a strong growth in advertising. The way we operate the business, I think a lot of that is being driven by digital, or what other people might breakout as digital. We operate our businesses on a much more integrated basis and we're certainly seeing strong growth with providing services to utilize new technologies.

Okay. Great. Thank you very much.

John Janedis, UBS.

Randy, there has been some concern in the markets that the tone of business in the emerging markets is slowing a bit in both Asia and Latin America. I know you spoke to it briefly, but do you see any sign of that trend in China, India or Brazil as you exit the quarter? Or start the third quarter?

China and India were very strong. Brazil is not growing as fast as China and India right now. Brazil is a much more developed market in many ways.

But there are -- the balance of this year, who knows? Next year you start with a lot of major global events that will run through 2016. So, we are very bullish about Brazil in the near term.

Okay. You had accelerating growth in the UK and it appeared very much in the Olympic's comp. And the European, I guess money looks like it has stabilized, Are you guys feeling a little bit more comfortable about the region going forward?

Well the UK was benefited a little bit by a switch in a packaged goods company, which we were handling out of our French office last year this time and we switched to our London office, that plus the Olympics. France was not as down as much as the reported numbers would have you believe. The UK, which was very strong, was still very strong but not as strong as the reported numbers. Spain and southern Europe it seems to be bottoming out. I think you still have concerns and we still have some concerns in the very short term about France, Germany until after the election. Nothing dramatic, just it is a bit of a headwind.

It does feel like it is stabilizing. It's just not necessarily rebounding yet, but one step at a time.

Thank you very much.

Craig Huber, Huber Research.

A few questions one at a time if you could. Typically, you'll gives us what your net billings number was in the quarter. I think your goal is generally about $1 billion per quarter. What was it this last quarter, please?

We were right about $800 million with Chevy and a couple of other things, Gillette. As I've always said, if a couple of big moves, big changes up or down can affect the quarter. So, I think our base was very strong. Came in pretty much as we would expect, but with the Gillette loss it just pushed it down below $1 billion.

Okay. Then, switching over to the UK, a little bit further on this if I could, Randy or John. The 7.4% organic number there. How much of that impacted an a year-over-year basis of organically from the Olympics of revenue about a year ago? And also, if you could just talk a little bit further about this switch of the business being booked in France over to London? Did that just basically start at the beginning of the second quarter? It's the first time I've heard you talk about it.

I think the Olympics was around $15 million to $20 million in the UK. I don't have the number at my finger tips, but I think it's in that category.

And, I've seen the number for the second quarter of that move, but I do not have it sitting in front of me. We changed personnel in the way of the lead on that global piece of business was from at the client's request. It was neutral to the overall Omnicom but if you are examining microscopically the countries, it had an impact to the benefit of the UK and to the detriment of France.

We've talked about these things a few times. There's a handful of places in the world that are really global centers. That you can really handle global pieces of business out of. I think last year, or maybe it was the year before, were a piece of business moved from the Netherlands to the United States. When you deal in some of those international markets on these global pieces of business, when you have a move, either in or out, it can look pretty impactful in that market. If it happens to go into a place like the United States, it tends to get blended away a little bit because just the size of the market. As John points out, that neutral for overall Omnicom revenues, it just makes these country numbers look different than what the actual market economy is. Many times I think what we talk about revenue growth in the country, people take that as to the strength of the country or the strength of the market in that country. That's certainly one aspect of it. But, wins and losses are at times an overwhelming aspect of it, especially as we get to the smaller markets.

But, I'm sorry, just for the timing of this switch between the countries, did that basically start at the beginning of this second quarter?

I do not know if it was late in the first quarter and just -- well, we did not have an impact -- where I spoke of it in the last call.

I think the move started in the first quarter. Again, it takes a little while to move a sizable piece of business.

My final question, please. When you think about your southeast Asian markets, China and maybe Australia, is the rate of growth in those markets for Omnicom, is the rate of growth slowing there, given the economics slowness we're hearing over there?

I do not think China is. Australia probably is. Last year we benefited -- we finally consolidated Clemenger. With that, quite a bit of activity was going on around it where we were able to expand the business probably a little bit faster than normal. So, that's steady. But, China still remains a very strong double-digit growth market.

You are not seeing it slow at all in the material level?

Not for our business. No.

Thank you.

Alexia Quadrani, JPMorgan.

Thanks. It's Townsend Buckles for Alexia. Can you say how much of an impact the recent account loss has had on the quarter, specifically Chevy and Gillette as you called out? And, what we should expect in coming quarters?

No, that is not something that we really break out, client by client.

Okay, as we look at the US growth, it slowed a bit from Q1. Would you say that most of that would reflect those losses, if you can say?

The problem with the question is, I can pick any bad thing or I can take any good thing and probably account a quarter to any one of them, but there is 100 of them every quarter. So it's -- to try to isolate and say that the quarter is down because of the Gillette move or I can also say it was up because of this move. This stuff balances out. We do not really look at it quite that way. We prefer to never have any account losses. We prefer to only have account wins, but unfortunately, both happen.

Got it. Your sales quotas, I think that's been a bit of a drag on the business in the past. Should we expect this to have a positive impact on organic growth and profitability going forward? Would that be meaningful at all?

It will definitely be positive on organic growth and margins going forward. It is gotten -- three years ago it had a bigger impact. Right now the impact, because of the business, while it was not positive, was starting -- it was stabilizing at a very low number. The benefits of losing its headwind on organic growth, again, will be positive but not significantly positive. And, kind of the same thing with margins. It'll be positive but not noticeably.

Right, if you recall we did not call it out specifically, but implied in what we said in 2010 was that the agencies that we felt were no longer strategic to the business and we wanted to, in a orderly fashion, dispose of them. Hodes was probably the largest of the remaining items on that list and it just took us till now to dispose of it in a orderly fashion.

Got it. Then, just lastly, if you could talk just generally about how you are seeing the second half of the year in terms of client sentiment and spending plans?

Right now we're in the process of re-forecasting for the second half and we are not quite done with the process. We have not seen any major swings in attitude from what we previously had forecasted.

We are certainly comfortable with what we have been talking about going along. Just going to the margins, we are up. Our agencies have done an extremely good job of pressing their own efficiencies. We are certainly more comfortable with the full year than we were -- well I guess we've always been comfortable with it, but it's certainly encouraging to see how this quarter came out.

Okay. Thank you.

William Bird, Lazard.

As a follow-up, just as you look at the second half and you think about how some of your leading clients are behaving. Would you expect a growth profile to be consistent the first half or somewhat different?

We've got a little bit less headwind in the -- certainly at least in the third quarter. We had, as we've talked about a couple of times, some specific Olympic revenue in the first half as a headwind, we're not going to have that the second half. I think all the client conversations that I have heard remain pretty consistent with what we thought at the beginning of the year. At this point, we feel pretty positive about the year.

Thanks. As you alluded to earlier, there's some natural chop in the business from quarter to quarter, is there anything to read into the moderation in the US growth in Q2?

I do not think so.

Finally, can you talk a bit about just your strategy around programmatic buying and Accuen? Thank you.

I'm going to let John do that. I'm going to go back to the other point about the US. I mentioned the Olympics' spending -- the Olympics happened to be in London. All the work that we did was not in London. A piece of it was there, but frankly much more of it was in the United States.

Digital buying of media is done by machines, as if you're standing on the floor of the NASDAQ as opposed to traditional media shop. Increasingly, the capabilities of what we can do -- I hold the long-term believe that eventually traditional media, or a lot of traditional media, will get purchased that way. So, where we have a client need, we have been expanding this service and opening up the capability major country by major country. It improves every day. Because with more volume, more activity, it just expands and will can probably continue to expand for the foreseeable future in terms of what it can do.

And the waver in that space is really in developing the technology and developing the insights. As of right now, while the buying uses a lot more technology, the development of that technology, the programming and insights that we get from one client to the next is still obviously very labor intensive.

As you can imagine, the publishers are changing their algorithms constantly, so we are changing our algorithms constantly.

Just a final question, based on the numbers you gave Randy just on the acquisition headwind from the Hodes sale, is it roughly $100 million business annualized? And just curious what the organic growth was on that business?

You've got the number about right about $100 million. It was costing us $2 million to $5 million a quarter in negative organic growth.

Thank you.

Anthony DiClemente, Barclays.

I have one for Randy and one for John. Randy, just looking at the auto number being down 11% and I know a lot of that is owing to the Chevy move and maybe you can't quantify the exact impact of that. But, I just wanted to hear if there's anything organic going on in automotive? We heard that in the TV up front some of the tone of business was maybe slightly slower, so just want to hear if there is anything that we can isolate at auto? Then the second question for John, I appreciate your comment about growing your digital capabilities at your agencies. I am only trying to figure out, there are these independent ad technology firms that pop up and that have material or legitimate businesses and business models. Do you think that the digital capabilities that your agencies are taking share from the independents? Or not? And so just also want to ask that question in the context of your need to build in digital acquisition as digital matures. The hope would be that more of your growth is organic as digital matures and the need for those bolt on acquisitions actually diminishes. Thanks for taking those two questions.

Sure, I may take a stab at both of them and then John can correct on the second one.

Okay. Great.

So, on auto our major auto clients are doing quite well. I think the bulk of the change this quarter really was the Chevy move. We have a lot of different auto businesses. Our three major accounts are doing quite well. The rest of it is probably -- if there is anything else, it's probably project business. On the media technology front, there is a very interesting ecosystem that is being developed where there are a number of companies that are being established to hopefully knock down roadblocks in the development of the space. As the space evolves, issues pop up and people try to attack those issues. Many of those technologies -- the better ones we're partnering with, we're maybe even buying some of their services. I think that will continue to go on for quite some time. Frankly, as the space evolves, more and more little roadblocks pop up as people move forward.

Our people are obviously also developing solutions around those issues. We are happy to find the best answer for our clients. Inevitably it's going to be a combination of utilizing solutions developed by third parties, developing some of our own solutions. They will inevitably be some places, at least as of right now, that have not appeared yet that we're going to find solutions necessary to keep moving forward.

The only thing I would add to that is with all of the digital channels that are now available to reach the desired audiences, clients understand the complexity and they are actually looking for partners that can holistically handle both their digital requirements and their traditional requirements. While small very successful start ups, when we compare them to size of a company like Omnicom, may win $20 million which may turn to be 10% growth for them. That is not much of a challenge to us. We think the long-term trends is clients looking for people they can depend on to provide insights and to reach those audiences holistically.

Great thanks.

Tim Nollen, Macquarie.

Thanks two questions, please. First, nice to see a bit of margin expansion in the quarter after you had not really promised any necessarily this year. I just wonder if there's any updated thoughts on what we could expect for margins, particularly having seeing you attained your margin target last year? Secondly, might be a little philosophical, but seeing that moderation in economies in emerging markets, I'm wondering if you can gauge whether emerging market ad spending might follow the typical cyclical patterns that we see in the US and Europe. Or if by contrast, I get the sense this is what is happening at least in China, just the structural growth in consumer spending means there just remains strong demand for your services? Thanks.

I would say, on margins we had a really good quarter. Our agencies are making great progress and are very focused on finding internal efficiencies. I do not think at this point we are making promises on margins any different than we said before. We are very happy with the work that's been done in the quarter and are going to continue to put all of the focus that we can on finding every efficiency possible.

The only thing I might add to that is as we look to the third and the fourth quarter, we are not internally forecasting margin improvement, but we are not -- when you compare just those quarters, but we are not forecasting that they'll be down. So, the gains we've had in the first six months will flow through.

Right.

And your second philosophical questions?

Should I repeat the second one? Maybe I shouldn't have said philosophical, it's a scary word. It is just understanding the cyclical versus the structural growth trends in emerging markets. So, whether we get moderation in economies in China, Brazil and do whatever the other countries may be, does that lead to a moderation in ad spending as we typically see in the US and Europe? Or by contrast is there just enough strong structural growth and consumer spending growth in these markets that your business could remain just fine?

I think in our situation it is slightly different. In the United States we are very large, so we are impacted by GDP and track it. In some of those other markets, we do not have much market share. We still have the opportunity to gain new clients as well as be impacted by their economic situation. We have not tried to drill down and understand every nuance about the difference between 7.5% and 8.5% growth in China because, for instance, we still have the opportunity to win new business. Philosophically, we have not spent the energy to try to gauge that impact, because we have not reached 100% market share yet.

Our client -- it depends on the market as well, but our client base, at this point, is largely focused on getting themselves more and more entrenched and established in those markets. I would think that their spending patterns won't exactly follow the economy, which is good for us. It basically is saying that the structural growth outweighs the cyclical growth or cyclical patterns.

I never said this before, but I'm sure one of my competitors is prepared to tell the Chinese what their growth will be for the next year. You might ask the question of him. (laughter)

Maybe privately. No, that is basically the answer I was hoping for. Thanks very much.

I think we have one time for one more question.

Matt Chesler, Deutsche Bank.

Thanks for squeezing me in. Since you're more comfortable with the full year but are still reviewing the plans, you spoke a little bit about how you are coming in slightly ahead year to date on the margins. What is your level of comfort and increased confidence in terms of top-line momentum? Or is it really just the conversion of that in terms of the profitability?

I think we had the toughest headwinds in the first half of the year. If I go through and if we're right about those headwinds and that they just disappear and it wasn't money shifted around. I think we feel pretty good with where we are at through the first six months. So, that gives us more confidence in the numbers that we were talking about for the full year.

You know just from following us, we are constantly doing bottoms-up and then looking at what we are doing. So, whilst confident we are not ones to over promise at this point.

I definitely appreciate that we still have a half a year to go, I am just trying to understand. I mean, things seem to be certainly on track through this first six months, and some of the parts of the business are derisks and you are executing well. I'm just trying to understand what you think the risks are to the back half of the year? What could prevent a situation where we are not sitting here in January and you're telling us that you came in slightly ahead of what your formal plan had been?

There is a fairly big number every year in Q4. At the very end of Q4, that is very difficult for us to predict. If that spending pattern follows, I'll say historic patterns, then we're going to be in -- we're going to have a good year. We're going to certainly be able to achieve our targets in all of the numbers that we've talked about. But, it always makes us nervous, because frankly those numbers do not start to solidify until late in the fourth quarter. Could something effect that? Sure it could. We don't expect it will because frankly the historic patterns are fairly consistent, but it is difficult to forecast.

Okay. You also had mentioned the strong performance of your specialty healthcare practice, how much of that is related to agency performance as opposed to -- try to get a color on whether you think that broadly speaking healthcare marketing has reached a point where its seeing overall growth industry wide at this point?

We have had some new business wins. I think when you get outside the United States, especially in emerging markets, there is a lot of potential growth for healthcare and healthcare spending, especially as people move up into the middle-class or what we call the middle-class. The limitation on our side will be, can we find the talented, trained people to take that business? Not whether it is healthy or not healthy, I believe it is very healthy. It's an opportunity if we can execute against it in the correct market place.

We also won some very good pieces of new business last year, some pitches that were out there, and the revenue did not really come through. The spending did not come through to drive it. I think we are starting to see some of that now. Looking at some of our peers' numbers they're mentioning that healthcare is strong for them as well. I'm not sure if it's as strong as ours are not. I haven't compared the relative numbers, but they are talking about healthcare positively. I would guess, hearing that the market commentary, that the healthcare category is picking up its spending, which makes some sense when I tie together some of the wins we had last year and the numbers not showing up then but they're showing up now and the overall backdrop. It has traditionally been a very good space. It seems like we're back on that track.

I appreciate it. Thank you.

Thank you. And, thank you all for taking the time to listen to our call. Have a great day.

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