宏盟集團 (OMC) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Omnicom third-quarter 2013 earnings release conference call.

(Operator Instructions)

As a reminder this conference call is being recorded. At this time I would like to now introduce to you 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 third-quarter 2013 earnings call. We hope everyone's 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'll make 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 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'll discuss some non-GAAP measures in talking about our performance. And due to the pending merger with Publicis we'll be giving a few more non-GAAP measures than we have in the past. You can fine the reconciliation of those measures to the nearest comparable GAAP measures in the presentation materials.

John is going to begin the call with some brief remarks about the quarter, as well as a status report and overview of our pending merger with Publicis. Following John's remarks, I'll review our financial performance for the quarter in more detail. And then, both John and I will be happy to take questions.

Good morning and thank you for joining our conference call. We're now three quarters through 2013 and I'm pleased to say our performance for the quarter and for the year to date remain strong. I'm going to start with comments on the quarter and then a brief update on the proposed Publicis Omnicom Group merger. Please bear in mind that are groups are operating independently as we go through the required approval process.

For the third quarter, organic growth was over 4.1%. And operating income and margins, excluding merger-related expenses, improved over the same period of 2012. On a regional basis, our performance reflects the broader macroeconomic conditions in the global market. We continue to experience strong organic growth in the US and the UK. The Eurozone has not yet returned to growth. And our businesses in both Latin America and Asia performed well during the quarter. While we are cautiously optimistic about economic conditions we remain focused on the things we can control.

Our results are an affirmation of the success of Omnicom's strategic priorities to drive growth. First, to invest in and retain the best talent. Next to expand our global footprint, particularly in developing markets, and move into new, fast-growing service areas. Third, to invest in our digital and analytical capabilities and assets around the globe. And fourth, to deliver innovation and integrated solutions using meaningful consumer insights across disciplines for the benefit of our clients.

We are confident that our pending merger with Publicis will only enhance and strengthen these core strategies. It will bring a wider pool of talent, a broader portfolio of best-in-class agencies, and a deeper set of systems integration capabilities. Since we made the announcement, I have visited with many of our employees and clients. There is an air of excitement about the merger and a clear sense of opportunity it creates. For our employees, many of whom are listening to this call this morning, this merger means working for the best companies in the industry. Maurice and I and our leadership teams are committed to excellence. Creativity, innovation and entrepreneurship have always been and will continue to be priorities for our agencies.

And why we share many core values, we also want our networks and agencies to have distinct, unique identities in the marketplace. Our merger will give Omnicom and Publicis employees higher ceilings as there is no group that can possibly offer better career prospects. It will also give employees greater access to talent development programs that lead the industry. Omnicom University is just one example of a leadership program that we will extend to our colleagues at Publicis. And I'm certain Omnicom employees will also reap similar benefits from their talent development programs. As a result, our employees will have access to better training and increased opportunities for self-development. For our clients, as our firms come together, Publicis Omnicom will continue to deliver the work and service they are used to from people who are focused on delivering the very best. There are no plans to merge individual agency brands.

We are in the talent business and people want to work for a company that stands for something. Having an agency that has its own unique identity and culture is very important. What will change and dramatically improve, however, is access to a more diverse portfolio of services, our global reach, as well as a deeper bench strength of digital and creative talent. Together, we will be able to serve our clients with exceptional expertise, collaboration and creativity in an ever-changing environment across a full spectrum of disciplines and geographies at scale.

As all of you know, the pace of change is staggering. This rapid shift has created a new world of extraordinary opportunities. New technologies are changing our personal and business lives, and generating vast amounts of data that we can draw insight from. We are now able to segment our target audiences even more meaningfully and reach them even more precisely, in the right place, at the right time and when they are in the right mood. We can convey messages that are carefully nuanced based on insights derived, in part, from the effective analysis of data.

To realize the true value of this for our clients, Publicis Omnicom will capitalize on our own technology platforms and work effectively with an increasing number of technology partners. Towards this end, there are advantages of scale. Publicis and Omnicom can leverage platforms and the investments necessary to develop and maintain them across a much bigger operation. And when partnering with technology companies, we will be able to extend our relationship across a larger group of agencies.

A good example of this strategy is Omnicom's investment in Annalect, our primary data and analytical business. Today Annalect has hundreds of data scientists and programmers who are working with many of our agencies across disciplines and platforms collecting data which is used to develop actionable insights in real time. These efforts are driving a tangible shift in how our agencies are hiring and developing their talent to ensure that they can use the data effectively to create, target and distribute content across multiple platforms. As an example of this trend, one of our CRM agencies, RAPP, recently named its first Director of Applied Data, a role that will serve the purpose of deriving insights and actions from our data platforms.

However, big ideas and creativity will not be replaced by algorithms any time soon. Clients are looking for ideas and execution that transcend and work across all mediums. This means cutting a 30-second commercial for the Super Bowl or placing an ad on Facebook or a six second video on Vine, a live event, or any number of options. Publicis and Omnicom have the combination of both mad men and math men who are going to be required to win in the future.

As our clients succeed in this landscape, so too do our shareholders. Investors in Omnicom and Publicis will benefit from two very strong publicly traded companies coming together. In fact, Publicis and Omnicom have the strongest track records of financial performance in the industry. We fully expect this to continue after the merger with strong cash flow generations for the shareholders. Today, we each have strong balance sheets and we each have the ability to invest internally in our growth and make acquisitions as they arise. Together, our ability, reach and flexibility grows even stronger.

The proposed merger is the combination of the two best-managed holding companies in the industry. And the reaction from our employees and clients has been very positive. So, there is no doubt in my mind that the creation of Publicis Omnicom Group is the right move, providing best-in-class marketing communication services that will support our clients, develop and attract the best talent, and enable shareholders to continue to invest with confidence in an even stronger communications enterprise.

With respect to the merger approval process, it's moving forward as expected. The process of seeking regulatory approval is now well underway in 16 jurisdictions covering 46 countries. Given the number of jurisdictions involved, it's difficult to predict the exact timing of regulatory clearance, but at this point it is going well. In preparation for joining together, the companies have agreed on an integration approach. And our senior management will be meeting later this month to begin the early stages of determining what the day one business requirements and long-term opportunities for the combined company will be. There is still much to accomplish but at this moment we're on track for closing the deal in early 2014. It is also important to reiterate, until the transaction is complete, Omnicom and Publicis will continue to operate as two distinct companies.

Before turning the call over to Randy, who will go into greater detail on the financials, I'd like to make a few more comments on the business highlights for the quarter. As I mentioned earlier, Omnicom places emphasis on education and training as a key to success. Last quarter we completed Omnicom University's Advanced Management Program at the China Europe International Business School in Shanghai. In partnership with Fudan University we also held a Digital Works session. These sessions demonstrate our commitment to training as a company and to building our skills in greater China. Ask anyone who's been through these programs around the world and you are likely to get the same answer. These are unique experiences to tackle important client and agency challenges. They help create stronger leaders, better teams and ultimately a better product.

In September Omnicom advanced its reputation for creativity and innovation with another great showing at Spikes, which is considered the Cannes of Asia. For the fifth consecutive year, BBDO and DDB were among the top three networks recognized for creativity. All told, 35 agencies in 10 countries contributed to Omnicom winning more than 100 creative awards at Spikes. Many of the winning Spike entries were the result of our agencies working together and collaborating on behalf of their clients behind the scenes. In fact, for a growing number of our clients our people are collaborating across disciplines and agencies more closely than ever. They are sharing insights and ideas and increasingly working together to achieve common objectives for our clients. Sometimes these teams are informal and organic while at other times they are more structured and centralized.

As a client-focused organization, we realized it is not a one-size-fits-all approach to servicing our clients, but rather understanding their unique business challenge and developing creative solutions. A good example is the recent announcement of our partnership with Nissan Motor Company. Together we signed a multi-year agreement for communications, advertising, marketing, media, promotions and digital services. Our success is the result of our teams' ability to present the benefits of integration from both a strategic and execution perspective. And demonstrate the power of this model to the benefit of our clients. This relationship will be managed by Nissan United. The team will include numerous Omnicom agencies such as TBWA, OMD, Interbrand, Emanate and others. This is a unique structure for Nissan as they look to build a consistent brand promise across the globe.

Collaboration and coordination across our agencies is even more important today than ever before. You may have seen in the press that we recently appointed Troy Ruhanen, a top executive from BBDO, to a new position at Omnicom to help drive cross-agency collaboration and innovation for many of our largest clients. Troy is a builder of bridges across agencies and offices, and his global experience makes him well-suited for the challenge.

It has been an exciting nine months for Omnicom with solid, financial results. Our goal now is a strong finish to the year and an on-schedule closing of our merger with Publicis next year.

With that said, I'll turn the call over to Randy for more details on the third quarter.

Thank you, John. It has certainly been an eventful quarter with the announcement of the merger and all of the activities that it's involved. That said, I wouldn't want the upcoming merger to distract from the excellent performance Omnicom's agencies had this quarter and through the first nine months of this year. To make our financial presentation easier to follow we've added a third column of numbers labeled non-GAAP. This column excludes the incremental cost we've incurred in the third quarter related to the merger. These costs, which are predominantly professional fees, totaled $28.1 million. And net of taxes, reduced EPS by $0.08 per share.

As you all know, we do not typically present non-GAAP results, but in this case we think it will help to evaluate the relative performance of our operations. For the presentation I will focus my comments on the non-GAAP column. But, we have the reported GAAP numbers side by side for easy reference and clarity. Again, the only difference between the GAAP and non-GAAP results are the exclusion of the merger-related costs and then the follow-on effects on taxes. And obviously, the summary numbers like net income and EPS.

So, moving on, on the revenue front, as John said, our agencies are continuing to have a good year despite the relatively weak economic environment. In the third quarter revenue came in at just under $3.5 billion. Total growth was approximately 2.5%. While organic growth was 4.1%, FX headwinds and net bid dispositions brought the growth rate down by 1.6%. I'll address our revenue growth in more detail in a few slides.

From an earnings perspective, our agencies had another excellent quarter. The ongoing initiatives that focus on efficiency improvements and streamlining our portfolio, combined with our individual agencies' intense focus on cost control, resulted in EBITA increasing 4.5% to $433 million. The resulting EBITA margin was 12.4%, which was up almost 25 basis points over last year. Operating income, or EBIT, for the quarter increased 5.2% to $408 million. And margins increased just over 30 basis points to 11.7%.

Looking at the items below operating income, net interest expense for the quarter was $42.8 million, up $2.5 million from the third quarter of last year, and up $2.1 million sequentially from the second quarter of this year. This increase is due to the accrual of contingent interest on a remaining convertible bond. During the measurement period in the quarter, the stock price crossed the threshold requiring us to pay contingent interest on the bonds. And in accordance with GAAP we accrued the potential interest to be paid through the next call date, which is July of 2014.

On the tax front, our operating tax rate for the quarter was 33.6%, which was in line with our expectations for the full year. The reported rate was somewhat higher at 34.5% because certain of the merger-related costs are capitalized and non-deductible for tax purposes.

Looking at income from our affiliates and income allocated to our minority shareholders, there were numerous ups and downs from a year ago, as well as currency variances in the quarter, with the aggregate effect being no change year over year. As a result of all of that, our total non-GAAP net income increased 6.8% to $218 million. And net income available for our common shareholders increased by 6.5% to $212 million. The GAAP net income figures, which include the merger-related costs was $196 million and $191 million, respectively.

On slide 3, we compute EPS. First, as a result of stock repurchases we've made over the past 12 months, our diluted share count was down about 8.6 million shares, or about 3.2%, to just under 260 million shares. As a result, our non-GAAP diluted EPS was $0.82, representing an increase of 10.8%. As I mentioned earlier, the costs through the third quarter related to the merger reduced GAAP EPS by about $0.08, down to $0.74 per share, which was flat compared to 2012.

On slides 4, 5, and 6 we present the summary P&L and EPS information for the year-to-date period. But I'm going to leave those pages for you to read.

On slide 7, we take a closer look at our revenue performance. First, with regard to foreign exchange, on a year-over-year basis the US dollar strengthened against most of our major currencies in the quarter except the euro and the Chinese yuan. The net result reduced revenue in the quarter by $21.7 million, or about 0.6 of 1%. As a reminder, 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, thus having a negligible effect on our operating margins.

Looking ahead, if rates stay where they are currently, we expect foreign exchange to be negative between 50 and 75 basis points in the fourth quarter. Revenue from acquisitions net of dispositions decreased revenue by $34.2 million in the quarter, or about 1%. As we mentioned in July, we completed the sale of our recruitment marketing business in the second quarter, so the net decrease was in line with our projections.

In terms of organic growth we had a very good quarter. The growth rate accelerated to 4.1%, adding $140 million in absolute terms. This increase was driven by continuing very strong performance from our media businesses, especially in the United States and in Asia, further acceleration in our specialty healthcare businesses and the pharma sector overall. Another quarter of strong performance from our leading PR brands and then geographically good performance overall in the US, the UK and Russia, as well as the emerging markets of Asia and Latin America.

Turning to our mix of business, on slide 8, brand advertising accounted for 47% of our revenue and marketing services contributed 53%. As for their respective growth rates, brand advertising's organic growth was 4.8%, driven by the strong performance of our media businesses, offsetting a few larger client losses in advertising earlier in the year. Marketing services in aggregate was up 3.5%. And within marketing services, CRM was up 2.3%, primarily driven by increases in our field marketing and branding businesses. And continuing strong performance in public relations posted organic growth of 4.6%. And specialty communications increased 8.3%, again primarily driven by the strong performance of our specialty healthcare businesses.

On slide 9, our geographic mix of business in the quarter was split 52% domestic and 48% international.

Turning to slide 10, in the United States, revenue increased $57 million, or 3.2%. Organic growth was very strong, up 5%, or $88 million. Again, media continued to lead our domestic growth, with most of our other disciplines and industries contributing positively, as well. Acquisitions net of dispositions decreased revenue by $31 million, or 1.8%. Again, this was driven primarily by the sale of our recruitment marketing business in the second quarter.

International revenue increased $26.5 million, or 1.6%. FX created a headwind causing a revenue decline of $22 million. Acquisitions net of dispositions decreased revenue by $3 million or about 0.2 of 1%. Again, related to the recruitment marketing business that we sold. And organic growth, which continues to improve, although slowly, and with quite a bit of variance by region, was positive at 3.1%, adding $51 million. In our larger European markets, consistent with our performance in Q2, Russia and the UK continued to perform very well, while Germany and France were down. Although the Eurozone markets in aggregate were down 1.6% organically in the quarter, it was an improvement from the second quarter. In Asia Pacific we had strong performances across most of the region, with very strong results in South Korea, Singapore, China, India, New Zealand and Vietnam. And in the Middle East and Latin America turned in solid organic results, as well.

We've also provided two additional slides, slides 11 and 12, that present our geographic revenue by regional subsets -- North America, Europe, Asia-Pacific, Latin America and Africa Middle East. It's obviously the same information just organized differently so I'll leave those for you to read.

Slide 13 shows a mix of business by industry. As you can see, there were very slight changes in our mix of the business year over year. In the quarter we had good results in food and beverage, consumer products, pharma, as I mentioned before, retail and telecom.

Turning to slide 14, our cash performance for the first nine months of the year was outstanding. We generated a little over $1 billion of free cash flow excluding changes in working capital.

On slide 15, the breakdown of our primary uses of cash for the nine months included dividends to common shareholders of about $212 million. The year-over-year decrease reflected the acceleration of our normal early January dividend payment to December 31 of last year. And that was offset by our increase in the dividends paid per share. Dividends paid to minority interest shareholders were $81 million. And capital expenditures were $123 million. CapEx was down from last year when we had several large office space buildouts. Acquisitions, including earnout payments, net of the proceeds received from the sale of investments, totaled $89 million. And share repurchases, net of the proceeds received from stock issuances under employee share plans, totaled $492 million. As I believe most of you already know, we have suspended our stock repurchase activity since the announcement of the merger. So, on a net basis for the nine months, our uses of cash effectively equal the cash generated in the business.

Slide 16 shows our current capital structure. As you may recall, we redeemed $407 million of our convertible notes during the second quarter. As a result, our total debt at September 30 declined to just over $4 billion. Our net debt position at the end of the quarter increased slightly, up $30 million from a year ago to $2.52 billion. As a result, our total debt-to-EBITDA ratio decreased to 1.9 times. While our net debt-to-EBITDA ratio is 1.2 times, it stayed unchanged from this point last year. And our interest coverage ratio is 10.6 times. Obviously, all the metrics are in good shape.

And, finally, on slide 17, both our return on invested capital and our return on equity have continued to improve. For the past 12 months our return on invested capital was 16.7% and our return on equity was just short of 30%.

That concludes our prepared remarks. There are several other supplemental slides included in the presentation materials that we'll leave for your review. And at this point I'm going to ask the operator to open the call for questions.

(Operator Instructions)

John Janedis, UBS.

Hi, thank you. Good morning, guys. When you initially announced the transaction, there was a bit of concern about potential account losses or client conflicts. Now that you're a couple months in, what have you heard from clients? And does the risk appear to be somewhat maybe more modest than other deals this size you've seen in the past?

We have seen no difficulties thus far. We've been in the business for a long time, and each one of the holding companies has long had the procedures and firewalls to deal with conflicts. If issues arise in the future, we'll deal with it, but to date we're in good shape.

Good, thanks. Then maybe one other quick one. The euro currency markets, obviously, as you mentioned, improved to levels we haven't seen in a few quarters. I know you've talked about some moving pieces in those markets in the past. But is it your sense that you're moving off of the bottom across the entire region?

No, I think we might be stabilizing near the bottom. We had good performance in a couple markets where we have businesses that are growing not necessarily because of the individual markets. That's in Spain and Portugal. But Germany and France, Belgium, (inaudible) Netherlands -- they were all negative.

Thank you very much

Alexia Quadrani, JPMorgan.

Thank you. Just a couple questions. First, you saw some real nice growth in the US -- an improvement in the US in the quarter, and continued strength in the UK. Any color you can give in terms of how we should view those important markets going into the fourth quarter? Will that strength continue, I guess?

It's hard to say. I think it's down to the individual performance of our agencies, not necessarily economic growth. And you have to remember that this year, the fourth quarter, the retail schedule is shorter than in the past because of the late Thanksgiving.

The fourth quarter is also, as you know, Alexia, the fourth quarter -- every year we've been talking about it for years now, with a year-end project revenue, is always a little bit more difficult to forecast.

Okay. And then also, my second question is -- you've got obviously a very strong balance sheet and very healthy cash flow. And now with the buyback suspended due to the pending merger, I think you have even a stronger cash position whenever this deal gets done, or when you're allowed to step back into the market. Could you give us an update on your priorities of use of cash maybe longer term? Can we expect a more accelerated buyback potentially once you get the green light? Any comments on that front would be great.

As we sit here today, from the Omnicom side of the table, our intention is to follow pretty similar -- follow what we've done in the past. When NewCo comes into existence, there will be a new Board of Directors, and we'll have to sit down with the Board of the Directors, and Maurice, myself, and determine what that Board will authorize. So, I think it's a little premature to be talking about accelerations or changes from our past behavior.

Okay. And just lastly -- thank you for the color you guys gave in terms of where you are on the merger and the outlook there. From the outside, for us that are sitting on the outside, is there something we can look at in terms of a benchmark or points that we can see that saying -- now progress is being made, or these hurdles have been overcome? I don't know if there's an answer to that question, but I thought I'd ask.

I assume you're talking from a transaction perspective?

Yes.

There's really four gating items. There's the antitrust track. At this point in time, as John pointed out, we've done our filings, or at least the preliminary filings in, I think, every jurisdiction. Maybe some small market someplace we haven't gotten done quite yet, but every major jurisdiction we've got the filings in. And we're really in the information stage. We're answering questions, following up, and people are evaluating it.

So, we don't have any news really one way or the other. It's progressing on a very good track. People spend a huge amount of time and effort getting those filings done. We did get clearance in South Korea.

This is Mike O'Brien, General Counsel. We've received clearance, actually, in South Korea. And also in South Africa, we just found out yesterday. So, we have had a couple of minor victories there, if you will.

And everything else that Randy described is the best way to describe it -- it's in process. We're comfortable with the way things have gone so far -- any conversations we've had so far. And we're optimistic, but it's still in process.

The second track is taxes. There's three jurisdictions that we need to get tax approvals on. And we're in process of doing that -- again, still early. And then there's the SEC and AMF or AFM filings. And again, we're also in process on.

It's hard to determine which one of those will be the specific gating item at the end. But I think everything is proceeding as we would have expected.

And as we clear major hurdles, as we go through this, we'll inform the public.

Okay, that's very helpful. Thanks very much

Tim Nollen, Macquarie.

Hi, thanks. Couple things, please. First, just one question on the numbers. You've had some dispositions taking away from numbers a little bit in the last couple quarters. Just wonder when we'll be cycling through that?

And also, I may have remembered this wrong, but I think, as I recall, some of the dispositions actually were profitable. So, my question is -- would your margin have actually been a bit better had you not gotten rid of those assets during the quarter?

And then, secondly, on the merger again, I hear your comments, I understand what you're saying about not shutting down agencies, and this is about size and scale. I'm wondering in particular about your digital businesses though. How will you treat your data and digital operations between Publicis and Omnicom? Is it a question of merging databases? Is it a question of putting teams into larger organizations? It just seems like there's so much opportunity to gain scale. But if you intend to keep things separate, I just wonder how you plan to run it? Thanks.

You're talking about the various platforms that we invest in?

Yes.

As opposed to the agencies. And when I say agencies, I mean the networks and the companies. There's an integration process that Maurice and I, and our management teams, have agreed to. And so, we're going to valuably use the time that it takes us to get through all these regulatory issues to sit and plan what is the most sensible, profitable thing to do? And what the priority in which we should act, once we are allowed to act after the deal is approved. So, that process is just about to begin.

And, intuitively, I know exactly what you're saying. We will go through it in detail with the people who are the experts in it, and make that determination in the coming weeks and months.

As far as your divestitures questions go, the biggest single divestiture we did, we completed pretty much at the end of the second quarter. So that's going to take us four quarters to cycle on that. It was roughly $35 million a quarter of revenue, probably a little bit of variance quarter to quarter.

As far as the margins go, no, if we had those companies in the portfolio, our margins would not have been higher. Those companies that we've divested's margins are less than Omnicom's average margin.

Got it, thanks.

Craig Huber, Huber Research Partners.

Yes, good morning. I've got a few questions, please. Each quarter you generally will give us what your net new business wins were in the quarter. I think your quarterly target's generally about $1 billion. How did that track this last quarter, please?

It's a little bit under $900 million.

Okay. Then, secondly, can you talk a little bit further about your very strong UK performance? Why was it so strong, please?

Again, it's (multiple speakers) specific agency performance. Just people in the right place and the right time, and winning a few pieces of business.

(multiple speakers) [Two of our] agencies there, in particular, had a very good run.

Okay. Because I remember last quarter, the second quarter, you guys mentioned that there was some large French account that shifted from France to London. Did that help this quarter, as well, or no?

It probably added to the overall performance between the two countries, but it's not the sole reason for it.

It wasn't a major -- again, the revenue moved, but it was not a major driver in the quarter.

And then also, concerning your merger, I wanted to ask if you could just give us further clarity or further update here on that $500-million cost savings target? Can you just maybe give us a little more clarity on what's behind that number, in terms of -- how confident are you, you can get the $500-million number? And what's the big nuggets to get to that $500-million cost savings. You've talked about getting there by year five. Thank you.

I believe the $500-million number we used is modest, and comes from a variety of just natural things that you would expect when two groups this size come together. We, together, spend over $4 billion in third-party services and other type of costs. And we should gain quite a bit of efficiency in having a common insurance platform, to be able to utilize what little excess rent occurs in any particular city at any particular time. Our auditors shouldn't cost as much as they do individually.

There is a whole series of things buried in that, that are just natural. There's hard work, and did some work in planning and getting to those results. And sometimes you have to wait until your current policies lapse before you can move to the next level. So, it's not all day one. But there's a great deal of that cost is buried in that number itself.

We went through -- when we were developing, I'll say, the potential efficiencies on that level, we started at our billings numbers, and worked our way down looking at our P&Ls line by line. As John pointed out, there's over $4 billion of third-party cost. There's $15 billion or $14 billion of salary and service cost. We have a number of ideas of how we can get efficiencies across the board.

Obviously, each company has a lot of their own best practices. We're going to evaluate each company's best practices, and move towards them. I think everybody's pretty confident that the $500 million worth of efficiencies is a pretty conservative number.

And then, lastly, if I could ask -- you've mentioned in the past you have to spend, you think, $400 million over, I think, five years to achieve these synergies. Is that still the correct number, do you think?

Yes, I don't think we have any better data than we had when we first put it out. As John also pointed out, due to the process that we are in, the two companies have to continue to operate separately, and can share limited amounts of data information. So we're, frankly, as far as identifying specifics, we're not a lot further than we were, I'll say, pre-deal announcement.

Great, thank you.

Matt Chesler, Deutsche Bank.

Thanks for taking the call. A quick first question on business trends. You came in at 4.1% organic growth for the quarter. Can you comment at all on any major variances versus your expectations for that by geography or discipline?

Just really repeating what Randy said on the call. The US -- we were fortunate. We certainly grew faster than the economy, and that's due to specific performance in specific agencies. And I'd say the same is pretty much true in the UK.

Some stand-out areas -- our media companies have, frankly, for a few quarters at least have been doing a great job. I think that's predominantly driven by their performance, just good business practices at this point, and good new business wins. The pharma and healthcare area is rebounding pretty well, also.

And based on September, are those statements as true based on how September came in, which I understand is generally a large marketing month for the industry?

September was good, first -- no question. We don't dissect this analysis down to that microscopic level.

We're the first guys to tell you that we even think the quarter-to-quarter analysis has flaws if you're trying to draw conclusions at this level of granularity. When you get month to month, you're really trying to find something that's really not there.

Okay. Then just, can you comment a little bit on some of the emerging markets, just in general terms, what you're seeing going on in markets such as China and Latin America? And just maybe emerging markets in general?

Our performance continues to be strong. Those markets aren't growing this past six months in the same way that they were growing two years ago. But there's still good growth, and there's still plenty of opportunity because there's a lot of share opportunity in those markets for us.

And they're extremely impactful because they've gotten bigger, as well. So, while the maybe growth percentage numbers were bigger a couple years ago, when I look at the rank order of who's adding dollars of organic growth, because that's ultimately what counts, China and Russia are in the top four, top five. That's impressive to me.

The US is always the most important market because of the size, as well as combine it with 5% growth. So, certainly not an emerging market, but an extremely important growth market.

And, Randy, finally -- so you're not buying back shares currently. Are there any prospects that you may be able to buy back shares at all before the merger closes? Or should we just presume that you're out of the market until it does?

Prospects, yes.

I think you have to presume that we're out of the market until the merger closes because that's right now what our agreement says.

Okay. Thanks a lot.

Brian Wieser with Pivotal Research.

Thanks for taking the question. I have two. First, on the merger costs, I was wondering if you can give any color as to how much you expect to incur prior to the closure -- if any costs are coming out of the normal operating expenses? Just any extra color on how you expect that to proceed.

And a separate question, I was just curious -- production decouplings -- I think a fascinating new space. We've seen [Pootfa's] just announced [Prodigus]. I'm curious how much interest you're seeing from clients on the topic, and how you expect that to play out going forward?

There's a couple of questions there. We're in the process, actually, of sitting down with our production companies to see -- because we are global -- we're not yet globally branded or managed globally. I suspect that will occur in the coming months as we see the benefits of it.

Clients are, in fact, pitching or requesting bids on larger areas of its production. It used to be done more regionally; now they're getting outside of regions. So that's an opportunity for us before we close, and it certainly will be an opportunity post-closing for us.

With respect to merger-related costs?

I didn't actually get the question, if you'd repeat it?

Sure. I was curious if you have a sense of what your costs will be through the remainder of the merger process? And are all those costs associated with the transaction incremental? In other words, are there any costs that you're normally incurring that are incorporated in those costs?

The answer to the second part is no. The answer to the first part, unfortunately, I don't have a great estimate. It's a lot. A lot of attorneys running around nonstop.

This is a fairly large and complex transaction. As we mentioned, on just the antitrust alone, we did economic studies on something like 47 different markets. So I suspect the transaction fees will be at least 1.5, 2 times what we have already spent, I would think.

Just to follow up on the production decoupling topic, if I may, I'm curious if you have a point of view on the net economics of it? In other words, the notion of a stand-alone production decoupling business -- is it a higher return-on-capital business? Is it a lower one, but it's something clients just increasingly want? I'm curious on your thoughts on the economics of that trend.

We actually have three -- at the moment, three stand-alone businesses, which are really serving different regions of the world. We're looking to see whether or not we should be expanding that, and combining to respond to pitches. I suspect when we're done with that evaluation, the answer is probably going to be yes. It's good business -- it's a growing business. I don't quite understand where you're going with the economics of it?

What we've heard from the procurement trade, certainly, is the substantial savings that comes out of the creative agency fees paid, although it's possible that the savings that come out of what they're spending, you recoup with a higher-margin business essentially. I'm just curious if that's something that is accurate or if it's not at all?

We joke internally -- production is a fat word. Production means a lot of different things because we have a breadth, whether it's print production or creating digital websites or doing banner ads or doing TV commercials, doing post-production. There's a lot of different aspects to production.

So, when you're saying creating -- when we talk about creating a production unit, we basically have been globalizing and creating three separate production companies for the last several years. There are also a number of other production capabilities we have internally. And we also manage a very large amount of third-party production. I think it's well over $4 billion or $5 billion.

So, in looking at that whole space, it's a very interesting business. It's a business where we're managing a lot of client spend. And we're doing a lot of different pieces of the work. So, we think there's a very significant opportunity bringing those businesses together, and focusing on it in a more aggregated, global way going forward

Okay, thank you very much.

Doug Arthur, Evercore Partners.

Just going back to Europe for a second, I was struck by your comment on Germany still being down. There have been some economic indicators saying that market is starting to turn. Are you seeing any hope there, near term?

It was down; it was down slightly for us in the quarter. Post-elections, confidence is there again. But we haven't seen signs of -- tangible signs of it really coming back in the manner that it performed in the past.

But it has stabilized, as Randy said. And so we're cautiously optimistic that at the center of Europe coming back at all is going to be Germany's performance. And we're optimistic that we'll see it.

Also, just to make sure we're consistent, don't read too much into one quarter's set of numbers, especially when you cut it up by one country at a time. Our numbers are our numbers. New business activity, wins or losses, individual performance of our clients in that country, year-over-year timing, and the economy affect the number.

A lot of people read those numbers or hear the number and think it's just a straight indication of the economy -- the economics in that specific market in the quarter. And are also generally thinking of that sequentially from last quarter. The numbers we're presenting are year-over-year numbers, and have a lot of different things in that mix.

Okay, great, thank you.

James Dix, Wedbush Securities.

I think we probably ought to -- we're getting pretty close to the bottom of the hour, so I think we'll have this be our last question.

Okay, Randy, I will make it a two-parter, then. Hopefully I don't make it too long a two-parter. How have you been explaining to clients the potential for better service and/or pricing in the media-buying and planning businesses as a result of the merger? Because where I'm getting at is -- you've talked about, say, $4 billion in third-party spending that you're doing. And you came up with a synergy number on that. So I'm just curious as to whether there's any way of thinking about synergies in the much larger amount of third-party spending you do on media platforms on behalf of clients?

And then, secondly, as you've gone through the merger process, to the extent you have so far, has your outlook on what margins should be for Omnicom just on a stand-alone basis over the next few years changed at all? Thanks very much for squeezing me in.

In the first question, because we are still functioning as two completely separate companies, we, and as I -- in answer to an earlier comment on the digital side in platforms -- we have not yet sat down and done an evaluation to determine what we might do in the areas of platforms. We just have not.

When you get into media, if you look in the traditional medias, it's a supply-and-demand business, no matter how large you are. And clients have specific needs. So, I don't see seismic moves in pricing or ability to control anything because of us combining.

In the digital area, I think there are grand opportunities even if we weren't combining because there's an awful lot of media. And more and more budget is being shifted that way. And when that happens, if you get to a point where you can aggregate certain aspects of it, and get a full library of premium digital inventory, there's more and more you can do with it. Those benefits get shared with the client currently. That will only increase, I think, as we move forward.

As far as margins go, we've been committed for decades of using the power of the Holding Company to drive the efficiencies that are possible at each individual agency. We want to make sure our agencies, each of them, are operating at the right margin for their business, or their optimal margin. And using the Holding Company to make those margins continuously a little bit higher, and hopefully to reduce the volatility of performance.

Mix of business is also an important driver in evaluating margins overall. Not every business in every geography has the same potential margin. So, as we move forward with greater size, we certainly believe there's new heights that we can drive margins -- greater efficiencies to be had. I'm sure we're going to learn quite a bit from the standpoint of best practices. I'm sure that some of our agencies and some of the way we do things is fantastic, and I'm sure a lot of the ways that we're going to learn from our new partners, what they do is fantastic. And the combination should get us to a new level.

Great, thanks very much.

Okay, thank you all very much. We appreciate your time.

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