Omnicom Group Inc. Q3 2008 Earnings Call Transcript

Oct.21.08 | About: Omnicom Group (OMC)

Omnicom Group Inc. (NYSE:OMC)

Q3 2008 Earnings Call

October 21, 2008 8:30 am ET

Executives

Randall Weisenburger - EVP and CFO

John Wren - President and CEO

Analysts

Craig Huber - Barclays

Alexia Quadrani - JPMorgan

Jason Helfstein - Oppenheimer

Troy Mastin - William Blair & Co

Catriona Fallon - Citi

Dan Salmon - BMO Capital Markets

Operator

Good morning, ladies and gentleman, and welcome to the Omnicom Third Quarter 2008 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct question-and-answer session, and instructions will follow at that time. (Operator Instructions).

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

Randall Weisenburger

Thank you and good morning. Thank you everyone for taking the time to listen to our third quarter 2008 earnings call. We hope everyone has had a chance to review the earnings release. We've posted to our website both, the press release and our presentation covering the information that we’ll present this morning. As the commentator mentioned this call is also being simulcast and will be archived on our website.

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

We are going to begin the call with some brief remarks from John Wren, and then following John's remarks, we'll review the financial performance for the quarter in a little more detail and then John and I'll be happy to take questions at the end.

John Wren

Good morning and thank you all for joining our call. We were pleased with our third quarter performance and we characterized the results as being in line with our expectations. As Randy just mentioned, we'll take you through the details of the quarter in just a couple of minutes. But I'd like to share with you what we see today.

No one could have anticipated the current credit crisis or the unprecedented volatility that's created in the financial markets. We are in the process of trying to assess the impact these events we have on advertising spending for the first half of 2009.

At this point, our clients generally remain very cautious. The only two sectors which have cut back in fourth quarter spending are automotive and some of our retail clients.

We expect the fourth quarter to be a challenge as many normal year end marketing projects may not be authorized if financial markets continue to be volatile. As many of you know, as in past recessions offsetting part of the uncertainty in revenue is a flexibility we have in our cost structure. In the short run, incentive gens (ph) are based on achieving our objectives for the full year.

Longer term, as we've always done, we'll adjust our cost structures to reflect our best estimates of revenues going forward.

The one thing I can promise you is the company continues to be focused on the fundamentals, which have always seen us through good times and challenging times alike. These fundamentals are leading portfolio of global advertising and marketing brands, which are the best in the world.

A well balanced mix of business diversified by discipline and across geographies, and a broad based appliance and industry served; unparalleled creativity, which is the core of delivering value to our clients; in cost disciplines that allow us and have allowed us to invest in growth and productivity.

Finally, as we set around and we look past the current crisis. I am hopeful that acquisition pricing will finally come back in line with our historic expectations. As many of you know, we've been very disciplined as we've always look for appropriateness in strategy, fit and especially in the past several years sensible pricing.

One benefit of the current crisis should be more realistic pricing expectations from sellers as there will be fewer strategic and non-strategic bidders for qualifying targets. We are hopeful that, this crisis will be short-term, but we are planning as you might expect for whatever our clients indicates us to future we'll hold.

I'll be glad now to turn back to Randy and then we'll be happy to answer your questions.

Randall Weisenburger

Thanks, John. As we mentioned, we're obviously in a very unusual capital markets environment. That environment has created an economic softness and widespread caution, at least for the near term.

While our businesses have performed well to the third quarter, we have far less visibility going into the fourth quarter and in the next year, then, we've historically had at this point in the year in the past. But our agency management teams are highly focused on managing their staffing levels and creating as much flexibility as possible in their cost structures to better manage through whatever economic conditions develop.

For the third quarter, revenue increased $215 million to $3.32 billion. That was an increase of 6.9%. For the nine months revenue increased $920 million to just under $10 billion and that was an increase of 10%.

Operating profit for the quarter increased 6.6% to $373.4 million. That was an operating margin of about 11.3%, which was roughly flat with last year. Year-to-date operating profit increased 10.1% to $1.2 billion, and that was a margin of 12.4% and also consistent with last year.

Net interest expense for the quarter was $20.7 million. That was up $1.4 million from last year and up about $2 million from last quarter. Both the increase versus last year and versus last quarter was primarily the result of having to make supplemental interest payments on our 2031 and 2032 convertible nodes in 2008, as well as generally higher interest rates on short-term borrowings partially offset by increased interest income on our foreign cash balances.

On the tax front, our reported tax rates for the quarter was about 33.5% bringing the full year rate to 33.6%, which is down a little bit from last year. The net income for the quarter increased 5.6% to $213.6 million, bringing net income for the nine months up to $729.3 million. That was an increase of about 10.2%. And fully diluted earnings per share increased to 11.3% to $0.69 per share bringing the nine-month total of 15% to $2.30.

Analyzing our revenue performance, although the US dollar strengthened significantly versus most currencies as Q3 progressed. FX in the quarter remained positive at 2.1% adding $66 million to our revenue and bringing the year-to-date impact to a positive 4.1%.

Looking ahead based on current spot FX rates and our current mix of business we would expect FX in Q4 to be negative almost 4%. Using that same approach for next year, FX would be negative about 5% in Q1, negative about 6% in Q2, negative about 4.5% in Q3 and by definition flat in Q4. For the full year that averages out to a negative 3.75% to about 4%.

Growth from acquisitions net of dispositions in the quarter added about $23 million to our revenue or about seven-tenths of a percent. And I have to say the pipeline of interest in potential investments at prices that at least at this point appear to be reasonable as strong as we have seen in several years. So maybe there is some good that can result from the financial mass that's out there.

Organic revenue growth in the quarter was solid, especially given the overall economic back drop at 4.1%, bringing the year-to-date total to 5% adding about $457 million to revenue. Our new business performance was also strong in what was a fairly slow new business quarter with net wins totaling $930 million.

As for our mix of business, traditional media advertising accounted for 41.7% of our revenue and marketing services 58.3%. As per their respective growth rates, advertising was up 6.9% and marketing services 7%.

Within marketing services; CRM continued to be very strong growing 12% in the quarter, public relations was down 1.2% experiencing some general softness, and specialty communications was down 3.2%. As you probably know this category consists primarily of specialty media, recruitment advertising and our healthcare businesses.

The specialty media category has been impacted by the continuing decline in Directory or Yellow Pages business, we have talked about that for a couple of quarters. Recruitment advertising is probably our most economically sensitive business and has been feeling the effects of the economy for a couple of quarters now. And healthcare growth while positive slowed in the quarter due to a lower number of new product releases and cuts in medical education.

Our geographic mix of business in the quarter was 51.8% US and 48.2% international. In the US revenue increased $63.1 million or 3.8%. Acquisitions were $16.2 million of that or about 1% and organic growth was 2.8% adding about $47 million to our revenue. Internationally, revenue increased $152 million or 10.5%.

As I mentioned FX was $66 million of that, acquisitions added $6.7 million or about four-tenths of a point, and organic growth was pretty strong at 5.5%, adding $79 million. Internationally we had strong performances in the emerging markets of Asia, especially China, as well as in Eastern Europe, the Middle East, and Brazil. Growth in Western Europe was generally slow with the exception of Germany.

Operating cash flow for the nine months was quite strong and consistent with our historical trends. Our cash management programs continue to perform well, especially given the financial markets. And on the working capital front, we didn't experience any meaningful decline in our overall performance. We have significantly increased our focus in this area to ensure that our performance stays on track going forward.

For the nine months, our primary source of cash, again net income adjusted for basic non-cash charges like our stock-based compensation charges and the related tax benefits and then depreciation and amortization, these items totaled $963 million. As for uses of cash in the nine months, dividends totaled $145 million, CapEx was $152 million and then acquisitions including earn out payments on prior acquisitions totaled $388 million.

Share repurchases for the year-to-date period totaled $846 million. We also received about $78 million in proceeds from option exercises in stock sold under our employee stock purchase plan resulting in net repurchases of about $768 million.

I should note we did suspend our stock repurchases back in August and don't expect to resume until after the capital markets have stabilized. As a result of our repurchase activity over the last 12 months, our average diluted share counts was reduced from last year by about 5.3% to right around 3.11 million shares.

Current credit picture, we finished the quarter in a strong capital markets position with net debt totaling just under $2.7 billion. As you would naturally expect in the current environment, we have received a number of questions regarding our capital structure and our big credit agreement. To make sure everyone gets the answers to those questions, we've made a few changes to the presentation.

The first is on the top of this slide, we changed the credit statistics that are shown to correspond with the two covenants that exist in our current Bank Credit Agreement. Those covenants are first, EBIDTA to gross interest of not less five times and we finished the quarter at 17.4 times, so quite a bit of room. And then total debt-to-EBIDTA of not greater than three times and there we finished the quarter at 1.6 times.

I should also point out that these are the only two covenants in the agreement and there is a not a materially adverse change clause. I am also suppose to point out that EBIDTA or earnings before interest, taxes, depreciation and amortization is a non-GAAP measure. And on page 21 of the presentation, we reconcile EBIDTA to the GAAP operating income.

Turning to current liquidity, from a liquidity perspective, we finished the quarter in a strong position with cash and undrawn committed credit facilities totaling almost $2.9 billion and we had uncommitted facilities available totaling an additional 331 million.

Following this slide, while I think its page is 11 to about 20. We've included some supplemental information summarizing the specific terms each of our outstanding securities and our bank credit agreement as well as a schedule listing to some 32 banks that comprise our current bank group.

I have to say while it's almost impossible to predict the kind of volatility we've seen in the financial markets over the last few months, we do believe that we are fairly well-positioned from a liquidity and capital markets perspective.

And with that, I will ask the operator open the call for questions.

Question-and-Answer Session

Operator

Great. Thank you. (Operator Instructions).

And our first question this morning comes from the line of Craig Huber with Barclays. Please go ahead.

Craig Huber - Barclays

Yes, good morning. A few questions. Can you just go through how each of the individual months did from an organic revenue basis around the world. A particular one to get down to how did the month of September do from organic growth, clearly was worse in overall up 4.1% number.

Randall Weisenburger

I just don't have the numbers, Craig. We don't collect it that way.

Craig Huber - Barclays

Okay. And maybe, is your sense though that September was down now from a year ago?

Randall Weisenburger

No, I don't. I just don't have enough data to tell you one way or the other. Certainly, there were changes over the quarter in consumer spending that our knowledge of that information is really coming from the economic reports that you probably get 10 times as many of as we do. As far as our business goes, I didn't see that kind of volatility on it.

Craig Huber - Barclays

Okay. And then on page seven, you have those two pie charts we break out your revenues across 10 different broad sectors, but I was just wondering if you could maybe quantify how each of the maybe top three did in the quarter versus a year ago, and how the worst three did? Just give investors a sense of what was really good and what was really poor. Organic revenues by autos financial but just in the top three and bottom three, if you would, you have that?

Randall Weisenburger

I will in a minute. So why don't we go on and I'll get that information.

Craig Huber - Barclays

Okay. And then just lastly if I could ask, cost leverage and you do have a lot of flexibility on the cost, one as you alluded to. But could you maybe just quantify round numbers, incentive compensation pool, what it typically is, I mean, how much potentially you could save there if you hit the strong headwinds here on a temporary personnel fund? How your cost base that represents and also maybe investments spending, how much you potentially have to cut that back if you needed to in order to help stabilize margins? Thank you.

John Wren

Well, our incentive compensation normally runs between 20% of and 22% of pre-tax pre-incentive income. It's not all actionable. We can take it down if we must, but we would be very specific and very deliberate in going through where it was earned, who earned it, what the help of those particular subsidiaries or sectors were and we would adjust more to where people hadn't achieved internally set objectives.

So we do have a lot of flexibility. In the long-term in terms of the goals and objectives that we set. So needless to say, we will take a look at it. A lot of it adjusts automatically depending upon what the performance is because it's embedded into the expectations that the individual subsidiaries have. So we have a good deal of flexibility there.

At the core of our business, when you get out a little longer term is talent. At this point, what we've done in anticipation of the slowdown that we see is we've instructed in our companies who are doing this to cut all discretionary type of spending where it's possible; to delay where it makes sense, the hiring for opening positions, and this is not 100% across the Board, this is where it's sensible to do this; to delay the planned first quarter; salary increases that we were looking at until we get a better handle on what the marketplace is and what clients are going to spend into next year.

So those actions have already been put in place. We'll start to specifically look company-by-company as we get into the fourth quarter and as we get into finishing the planning cycle, which will go on now for the next six weeks for 2009. So we are very deliberate in the sensible way, that I think will approach our business in the way that will adjust accordingly.

Ultimately, if we handle it right and there is a sustained recession, it will create opportunity for us to go out and acquire talent that's available in the industry that would have under different circumstances may not have moved from where they currently are working. So, we'll make lemonade out of lemons that we were served, and we will do it in a very deliberate manner in the way that we've faced other recessions.

Randall Weisenburger

Back to your questions for the quarter for the sectors. Now slight of a fair of caveat just a little bit. The presentation that we’ve put together includes our top 1,000 clients. This analysis I'm giving you is for our top 250 clients. I don't think its going to be any material difference in the numbers.

Well as the auto was the weakest it was down about 0.5% and this is total growth this isn't organic growth. Retail is next at about 2.3% growth and financial services was about 3.5% growth. Some of the stronger sectors were consumer products and certainly as the consumer products Telco (ph) and services and they were all up actually over 20%. Well, I think, that Telco was only up 15% so obviously a big range in activity for the quarter.

Craig Huber - Barclays

And just if I can one last one little bit tick. How many shares did you buy back in the quarter and at what average price? Can you just give us little more flavor for why you just suspended your share buyback? I mean given what the stock prices are at, given your outlook is here?

Randall Weisenburger

It's really a matter of conservatism. Why we suspended is the conservatism with respect to overall capital markets. Obviously there was pretty significant deterioration in capital markets as we went through the quarter. We didn't want to create any additional stress than we needed to on our bank groups or anybody else out there. While we think the stock is probably the cheaply priced, there is no sense in trying to create more stress on what's already a pretty stressful situation.

John Wren

And in the near term cash is king.

Randall Weisenburger

Yeah. We bought about 10.3 million shares in the quarter with the bulk of that being in July and the very beginning of August and the prices were around, I think the average price is about $42.5.

Craig Huber - Barclays

Great. Thank you.

Randall Weisenburger

Thank you.

Operator

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

Alexia Quadrani - JPMorgan

Thank you. Could you just give us a bit more color I guess what you have been hearing from your divisional heads or from your larger clients that really how spending has changed now in October beginning in the fourth quarter? Was it a dramatic pullback or is your business just not that volatile and maybe you then compare, how you saw it in October 2001.

John Wren

My division heads are all optimists, which is a great thing. There is caution out there. There is caution and confusion I mean the chatter for the last month has been Congress financial crisis the world collapsing. So there hasn't been a lot of clear actionable information drive from clients other -- above that chatter level at the moment.

As I said we have seen an express cutback in some of those spending plans for automotive and for retail sectors. Everybody else remains very cautious, but they haven't indicated they are cutting back as of yet, but that is a day-to-day assessment at this point given where the markets are.

The more experienced clients are the ones that are not affected by the credit crisis, know full well that these times once they stabilize allow them if they are strong enough to continue to spend the great opportunities are often created to increase share. So but we haven't got the full assessment yet, because there has been just way too much noise in the marketplace Alexia.

Randall Weisenburger

A couple things of our business is we have, yeah, I will say longer term contracts, if they are not necessarily longer term, but they are contracts that don’t allow that aren't being adjusted sort of day-to-day. What we do in the fourth quarter is our largest quarter for project revenue. John mentioned in his comments an increase lack of visibility with respect to that project spending.

Alexia Quadrani - JPMorgan

And just following up on your comments about the flexibility and the cost structure. Do you think it's possible to see flat or even slightly positive margin improvement without if there wasn't any revenue growth in '09?

John Wren

At this point we are still assessing the situation Alexia. We will do as we have done in the past. We'll assess the situation. We'll set targets to keep our employees actually motivated for the near-term and the long-term and get through. Every recession is different. Many ways we are much better prepared than we were the last time around, but it depends on the depth of it.

Alexia Quadrani - JPMorgan

And just last question on your top clients, I think new business has been relatively slow but I guess how would you describe the current pipeline for new business. And is there any of your, sort of top, I don't know how you want to quantify the top 10, top 20 clients, in short about risk right now?

John Wren

There is a limited amount of activity out there at the moment. Our media companies in the UK one Boots, yesterday morning I think so there is some activity still going on as you might expect. Again I think everybody is just focused on their own business at the moment. And I don't see a lot of change going on today. And normally the fourth quarter is not the greatest period of activity and sort of holidays even in normal times

Alexia Quadrani - JPMorgan

And any big clients in review?

John Wren

Not that I'm aware of.

Alexia Quadrani - JPMorgan

Okay, thank you very much.

Randall Weisenburger

Thank you.

Operator

Thanks, and our next question comes from Jason Helfstein with Oppenheimer. Please go ahead.

Jason Helfstein - Oppenheimer

Hey, thanks. I'll only ask two. So, Randy you said that the company suspended buybacks in August, I guess, you said July was the big month for it. But in the comments you guys talked about attractive acquisition targets. So, thinking about next year assuming no additional buybacks, what would you expect the impact of acquisitions to have on annual revenue growth?

And then secondly, based on your experiences kind of thinking back to the last cycle, when we see large mergers between key clients perhaps automotive or consumer products, what are the ramifications, both positive and negative? Thanks.

Randall Weisenburger

First of all, thanks. My comment on share repurchase activity was, we suspended it in August and we won't resume until the financial markets stabilize. I fully suspect they will stabilize at some point. So when you talk about 2009, that's hopefully the financial markets are going to stabilize before that.

As far as acquisitions, based upon acquisitions that we've closed to date, I think it's probably somewhere around 1% for next year. The pipeline looks very good. It looks the best I've seen in a long time and the pricing discussions look reasonable at this point. It's not to say that they are going to close until acquisitions close, they don't close. Anything can always seem to derail them. But right now that activity looks pretty good. And your last question, I'm sorry. I forgot it.

Jason Helfstein - Oppenheimer

So in the last cycle when you've seen large mergers between clients like just right now or thinking about, let's say, something happens in the automotive sectors between any of the big companies, what are the ramifications historically from a combo of positive and potentially negative from large mergers between key clients.

Randall Weisenburger

It depends if you are on the winning side or on the losing side. It's going to vary situation by situation. Certainly, we think the best agencies in the industry. The quality of their work is second to none. So on average we generally do fairly well in that kind of environment. But, obviously, its going to be dependent upon specific relationships that different people have.

Jason Helfstein - Oppenheimer

And given your focus on marketing services, some of your competitors you think that gives you a leg up in those types of situations or in many cases, politics can override what maybe sound decision making?

Randall Weisenburger

Well, all people make good decisions. Our clients are some of the smartest marketers in the world. We believe the best agencies in their disciplines. And on an average, the best companies are generally are going to do better than the other companies. So I feel pretty confident in the quality of our people. In specific situations we have good competitors as well.

John Wren

I would say that once you get passed the immediate short-term of these unknown situations occurring, I can't think over the years of too many situations where we lost a client in a sector and then over a reasonable period of time following that we weren't able to replace it. And that just gets down to the quality of our brands and the fact that we're always focused but we're especially focused on the fundamentals right now.

Jason Helfstein - Oppenheimer

Thank you.

Randall Weisenburger

Thank you.

Operator

Thanks. And our next question comes from the line of Troy Mastin with William Blair & Co. Please go ahead.

Troy Mastin - William Blair & Co

Thank you. Good morning. First question relates to project-oriented revenue in the fourth quarter. I'm curious if there have been any cancellations or delays you've seen yet and how much of the spending in the fourth quarter do you feel like you have some visibility into today if it's 0%, 10%, 50%? And can you give us a rough idea how much project-oriented revenue you have in the fourth quarter?

John Wren

In a normal year, it runs about $200 million. And in a normal year, it wouldn't be fully confirmed for us until about the second week in November. So we're still in that Netherland of time here, where we know what could happen and we're waiting for approval. Some of those projects will definitely come through, but we're not certain and we're not able to sit here today and tell you with any certainties to what's going to occur.

Randall Weisenburger

And I would suspect it will probably be even later where people are probably trying to create as much flexibility as they can in their own budgets.

Troy Mastin - William Blair & Co

Has any portion of this been executed yet or are these all really oriented towards November and December?

Randall Weisenburger

Yeah.

John Wren

Well, the stuff that was scheduled for October is in the process of happening. So we're talking about…

Randall Weisenburger

There's a large number of….

John Wren

Little things.

Randall Weisenburger

…projects. So statistically, some of it has to have happened. What and how much, I don't know. We can't collect. We're not collecting weekly data at that kind of a level.

Troy Mastin - William Blair & Co

But it does sound like there haven't been wide scale cancellations or delays at least yet. Is that a fair assessment right now?

Randall Weisenburger

I don't think widespread cancellations. The sense that I get from a qualitative standpoint is that clients are very cautious, taking a wait and see attitude or wait and see perspective. So I would suspect there probably have been delays.

Troy Mastin - William Blair & Co

Okay, great. And then regarding the flexibility you have in your cost structure and how your accruals work, can you just give us some idea on how much flexibility you have in the fourth quarter? I'm assuming you've got some non-cash accruals that runs through the P&L in the first three quarters that might give you some extra wiggle room in the fourth quarter if plans come down substantially.

John Wren

Financially, from an accrual type of point of view, we have a great deal of flexibility. Qualitatively, what we elect to do based upon the individual performances we see, we haven't gone through that assessment yet. I mean, there I think you have to depend on our history and that we will make a very sensible effort to adjust appropriately with the flexibility that we have.

We're not prepared to sacrifice the long-term for short-term gain because we're running the business on a long-term basis and the center of it is talent. Having said that, we're very realistic about what performance is? What the goals and objectives were? And what's fair and not fair? So, we haven't gone through that detail assessment yet because we don't yet know the outcomes.

Troy Mastin - William Blair & Co

And maybe put in context for me the 10% EPS growth that you've talked about in the past. I imagined in this environment that's not a sacred cow. You don't feel like that's something you have to strive for in the fourth quarter, given the environment and your need the balance short-term and long-term.

John Wren

We're not forecasting it at this point. I mean, Randy indicated fourth quarter is kind of unusual. During that negative currency, hit anticipated by the sudden spike of the US dollar plus the uncertainty that's there. Again, we are going to run the business sensibly from a servicing our clients, from a retention and acquisition of people, and we'll make whatever short-term flexible moves we can make. And then we'll make sure that business is in the right shape going out into the future.

Troy Mastin - William Blair & Co

Yeah, not giving forecast, but with looking at '09, right now you've got negative 3.5% or 4% FX. I think, we can on an organic growth basis, there is only a range of what you can achieve in that environment without a change, 10% EPS growth can't be a sacred cow.

Troy Mastin - William Blair & Co

Okay, great. And then I'm just curious if you could give me some qualitative or quantitative sense as to how this recessional I call it feels today versus at a similar time in the '01-'02 timeframe? Does this feel like its going to be more severe, have a bigger impact on the business than what we saw back then which really wasn't a consumer recession at all I suppose.

John Wren

Yeah, the last one really wasn't a consumer recession. If you could get people to go into auto dealerships they could still get credit to buy cars, whereas that fully hasn't been unwound in this one. Probably the biggest change is the last recession just hit us and we were in a mode where we were just responding to it. This one, we had a little bit longer period of time to anticipate it. It doesn't necessarily make it better. It just makes it feel more realistic.

So I think credit and the availability of credit to the consumer makes this different than the four recessions that I have been able to manage through in the past. And there will be open questions until we see the credit markets come back and some of that credit start to flow more easily.

Troy Mastin - William Blair & Co

Okay, good and then if I could ask just one final question. The February convert, I wonder if you could walk us quickly through the range of possible outcomes here. What has to happen for there to be the opportunity to keep the convert in place? I don't know if the spread that exists today is too wide and would undermine your ability to make supplemental interest payments, just if you could let us know what would have to happen? Maybe in today’s credit environment you could keep that outstanding. Thanks.

Randall Weisenburger

Well, I don't think it's a credit. My understanding today is that the convertible bonds market that there is significantly liquidity problems in the convertible bond funds. As such, I'm not sure there is much you could do today to keep the bond outstanding. We are willing to pay a -- or reasonable cost of financing for the bond, where the stock prices currently traded.

The conversion feature of the bond has minimal value and therefore it’s a one year zero we should be willing to pay our one year cost of money to keep the bond outstanding. And we will be willing to do that. I don't know. I don't believe today that would be enough to keep all of the bonds outstanding.

If the bond comes back, we will fund it by drawing down under our bank facilities and look at our options in the capital markets for refinancing that or paying it down with our cash flow. We obviously prefer to keep the bond outstanding, but that preference is conditioned upon our normal cost of debt not an exorbitant cost of debt.

Troy Mastin - William Blair & Co

Okay. Thank you.

Randall Weisenburger

Thank you.

Operator

Thanks. And our next question comes from the line of Catriona Fallon with Citi. Please go ahead.

Catriona Fallon - Citi

Yes, thank you. A lot of my questions have been answered. Could you comment, Randy, on the net new business of $930 million. What does this mean for organic growth next year? It's a little less than what we saw last year.

Randall Weisenburger

I don't think one quarter alone means much one way or the other. Historically I will say in sort of a normal environment if we looked at kind of our trailing four quarter, net new business wins, if we applied sort of a 10% or 12% revenue rate on that. That would be a pretty significant piece of our organic growth in the following 12 months.

Now again that's in a normal environment, because organic growth consists of the revenue off of net new business wins, but it also consists of increases and decreases in existing accounts or existing account activity.

So in an abnormal environment the existing business may shrink and the organic and the net new business wins accounts for a much higher percentage of your organic growth than in a regular environment. So it's certainly an important piece, but I think it's hard to predict what's going to happen one year certainly from one quarter's net new business wins.

Catriona Fallon - Citi

Okay. So just doing that math then 10% to 12% on the low-end would be in the 2.5% organic growth for next year and that's just based on the net new business wins and not the ups and downs of the existing clients?

Randall Weisenburger

Right, in a normal environment the net new, if you apply that 10% or 12% revenue rate, that's someplace maybe around 70% of organic growth in the following 12 months. In a bad economic environment because your existing base could be coming down, it could be 200% of organic growth. In these kind of environments a lot of those normal factors really just don't compute.

Catriona Fallon - Citi

Okay. And then is that really what you were implying when you said that you have less visibility into Q4 and into the future? Does this mean that you have actually less revenue that's kind of on the books already or that clients are more resistant to sign these long-term contracts?

Randall Weisenburger

No. The contracts aren't really long-term. The contract current base hasn't changed. The Q4 visibility is really more around project revenue.

Catriona Fallon - Citi

Okay.

Randall Weisenburger

There is a couple of hundred million dollars of project revenue in Q4. There is always a little bit of lack of visibility with that revenue in Q4. Fortunately, we don't go through too many recessions. How that projects revenue acts in a recession is going to be different recession-to-recession and its different year-to-year, but it's certainly a lot less visibility given this economic backdrop.

Going into next year as John pointed out, there is a lot of wait and see and a lot of caution. So budgets are getting developed, I think later this year than normal. Going into any year, we probably have some place between 85% and 90% of revenue is pretty well known, which I think for most industries is pretty high. But with 10% of your business not known and sort of that new business and project category, if you're expecting plus or minus 1% accuracy, 10% is a lot of variability.

Catriona Fallon - Citi

Okay. And then my last question is just on the digital spend. Could you give some color as to what percentage of your revenue has to do with digital projects? And how are customers changing the way they are looking at where to spend their dollars going forward?

John Wren

I have interact that they will spend in the quarter to tell you the truth. I think we might have to get back to you on that answer. Typically, digital is a very large spectrum of definition. I think everything is going digital or there is a huge digital component to it. Maybe this doesn't answer your question exactly, but what we've seen in prior recessions is that budgets which are allocated to new areas of technology and testing the marketplace tend to be the first that get cut back and people rely on traditional proven methods if a recession is deep enough. Doesn't mean it doesn't get eliminated. It just doesn't get funded or grow as fast because people have other priorities. But I don't think in the first nine months we've seen much movement in terms of what the existing budgets were. But I don't have the forecast going forward.

Randall Weisenburger

And the definition of digital is, frankly, blending a lot. Our PR businesses have significant digital capabilities now to execute PR strategies in a digital or Internet world. Our traditional agencies have fairly significant percentages of their business executing their ideas in the digital media. Then we have standalone digital firms, maybe, mostly focused on, I will say, digital CRM and maybe some of the heavier technology websites. Again, those are broad statements and all of them.

So it's hard for us to separate out what's digital and what isn't. We get into media buying and planning, there is certainly buying media on online or on the Internet that certainly can be separated out.

Catriona Fallon - Citi

Thank you.

Randall Weisenburger

Thank you.

Operator

Thanks. And our next question comes from Dan Salmon with BMO Capital Markets. Please go ahead

Randall Weisenburger

I think this will be our last question. Go ahead, Dan.

Dan Salmon - BMO Capital Markets

Okay. Thanks. I wanted to just dig in for a little bit more detail on the other category in your revenue by territory. The growth rate came down a little bit there and still remains pretty strong, but hoping you could give us more color on -- with the growth slowing there how much of that as currency, how much is that organic and then likewise how much is that we think is traditional emerging markets be that the brick economies or southeast Asia or the Middle East versus some of the more established markets in that grouping?

Randall Weisenburger

It definitely includes the brick economies. I think in general the brick economies did very well in the quarter from an organic growth standpoint. FX certainly could be a piece of this. FX in places like in Brazil over the quarter changed fairly dramatically.

I think going into next year or, frankly, going into the fourth quarter, I think the currency from Brazil moved 20 plus percent negative going through some the other -- organic growth in the brick markets was very substantial. Organic growth in the Middle East was very substantial as I mentioned. South Africa may have slowed in the quarter, but again that some of these changes are relatively small on a dollars basis.

Dan Salmon - BMO Capital Markets

That's helpful. Just maybe a little bit more of a broader way to look at it is maybe just get your thoughts on how that revenue stream we hear the phrase decoupling from the US economy, how much, it looks as if, that may correlate to any weakness in the US, UK and the Western European markets going forward?

John Wren

I don't think we necessarily buy into the decoupling theory. Having said that, you can go from China which is still expected to grow in the high single-digits to the US, which you tell me is probably in negative growth. So I think the US consumer and his lack of vitality will have an impact on a lot of these manufacturing and exporting nations which are commodity based.

Randall Weisenburger

I think...

John Wren

So there will still be a lot of growth there and still very encouraged by those markets especially in the long run. But it has to be a short-term impacts.

Randall Weisenburger

I think given our international client base in many of the emerging markets, we have a higher percentage of revenues from our multinational clients than we might normally have. As a result, we're probably even more coupled than the economies are coupled in general.

Dan Salmon - BMO Capital Markets

Okay, great. Thank you.

Randall Weisenburger

Okay. Thank you all very much. With that, we'll call it a morning. Thank you for taking the time to listen to our call.

Operator

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

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