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Omnicom Group Inc. (NYSE:OMC)

Q1 2010 Earnings Call

April 20, 2010 8:30 AM EST

Executives

Randall Weisenburger – EVP and CFO

John Wren – President and CEO

Analysts

John Janedis – Wells Fargo Securities

Jason Helfstein – Oppenheimer & Co.

Alexia Quadrani – JPMorgan

James Dix – Wedbush

Craig Huber – Access 342

Tim Nolen (ph) – Macquarie

Meggan Friedman – William Blair

Ben Swinburne – Morgan Stanley

Peter Stabler – Credit Suisse

Operator

Good morning, ladies and gentlemen, and welcome to the Omnicom first quarter 2010 earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

At this time, I would like to now 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

Thanks Sean. Good morning and thank you all for taking the time to listen to our first quarter 2010 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 are going to present this morning. This call is also being simulcast and it 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 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, I will review the financial performance for the quarter in a little more detail, and then both John and I will be happy to take questions at the end.

John Wren

Good morning. Thank you for joining our call this morning. We are very happy to announce positive year-over-year growth for the first quarter. Overall revenue increased 6.3% to $2.92 billion. This includes organic revenue growth of 2.1%, which exceeded our expectations for the quarter.

As we discussed in our last call, the general business environment continues to stabilize and improve. And as we look across, as we look at individual countries and regions, we are cautiously optimistic about continued global recovery, although we expect significant variation by region.

Turning to our performance, revenue growth was driven by a number of factors, including cycling on some easier year-over-year comps for some of our businesses. First, we are starting to see a rebound in some of the hardest hit areas from the downturn. Areas such as CRM and PR showed fairly strong organic growth as did our media business. Recruiting continues to be one area of note that has not yet rebounded and Randy will take you some of the specifics in a few minutes when he gets back on the call.

Geographically, we saw a continued strong growth in developing markets, the Middle East, Africa, Asia, and South America. We are also pleasantly surprised by the US growth where organic growth was 5.1% in the quarter. This leaves Europe where performance remains weak and the outlook is still somewhat unclear.

On the cost front, we continued to keep a close eye on costs and have asked our agencies to remain mindful of the potential risk to the economy, especially in some of our European markets where it’s expensive to adjust staffing levels. Our other real estate and operating costs will take a little longer to fully absorb but barring any downturns in the economy, we expect some of these pressures begin to ease as we get in the second half of the year.

At the same time, our agencies are now increasingly focused on taking advantage of growth opportunities, both through new business efforts as well as growing our existing client accounts. Many of our agencies have adjusted their offerings to respond to the difficult environment, economic environment, and are now more and more flexible and better able to serve the diverse needs of their clients.

Turning to the balance sheet, at the end of the year, last year, we said that in 2010, we intended to use our strong balance sheet to increase our dividend, buyback stocks, and make strategic acquisitions. And as you all know, we increased our dividend by 33% in February and also completed $250 million in stock buybacks during the quarter.

Finally, our business is built on the strength of our management teams and the talented professionals around the world. They have worked extremely hard to help us navigate through last year and I am confident that we are positioned well for the coming year and beyond.

I will now turn this back to Randy, and then we will take your questions afterwards.

Randall Weisenburger

Thanks John. The short summary is the first quarter was a very positive start to the New Year. And while results varied somewhat by business type and geography, which I will cover in a more detail later, on the whole our businesses experienced solid sequential improvement from the fourth quarter and performed ahead of our expectation.

Versus the first quarter of 2009, the year-over-year revenue increased 6.3% to $2.92 billion. Operating income increased 3% to $291 million. That resulted in an operating income or EBIT margin of about 10%, down 30 basis points versus last year, and an EBITDA margin of 12.1%, down about 20 basis points from last year, which was a little bit ahead of the negative 30 basis points that we had expected.

Net interest expense for the quarter was $24.1 million. That was up $2.7 million from last year and down about $4.5 million from Q4. The increase versus Q1 2009 was a result of our issuance of $500 million of ten year senior notes last July, which in effect traded lower cost floating rate debt or higher cost longer-term fixed rate debt. That increase was offset in part by lower borrowing levels as we delevered the balance sheet over the course of last year.

Versus the fourth quarter, the decrease was primarily due to reduced borrowing levels. On the tax front, our reported tax rate for the quarter was about 34%, which was basically unchanged from Q1 of last year. Net income from the quarter declined seven-tenths of 1% to a $163.4 million and diluted earnings per share in the quarter declined $0.01 or 1.9% to $0.52 per share. The diluted share count for the quarter was about 311 million shares.

Analyzing our revenue performance, while in the current FX, while in the current period, the US dollar strengthened versus most major currencies. On a year-over-year basis, the dollar was weaker, resulting in a positive FX impact for the quarter of a $117 million or about 4.3%. Assuming FX rates remain at their current levels, FX should continue to have a positive impact of around 1% in Q2, and then turn negative about 1% in Q3, and then a negative 2.5% in Q4. Overall for the year, at current rates, FX will be about flat for the year.

Revenue growth from acquisitions net of dispositions, reduced revenue by $3.8 million in the quarter or about one-tenth of 1%, was largely due to the divestiture of our directory advertising business in Q2 of last year, partially offset by the acquisition of a majority stake and impact BBDO in the Middle East at the end of Q4.

Organic growth; with the backdrop of easier of year-over-year comparisons and continuing sequential improvement in revenue growth, organic revenue increased $60.2 million or about 2.1% in the quarter. A few areas worthy of note, our recruitment and marketing business, while stabilizing quarter-to-quarter has not yet cycled on easier comparisons and as a result was again down over 30% for the quarter when measured year-on-year.

Our events in sports marketing business did turn the quarter with significant increased activity in both the financial services and technology sectors, as well as activity around the Winter Olympics. And so while these businesses didn’t fully cycle on last year’s revenue drop, they still turned in 20% plus positive organic growth in the quarter.

Our media businesses also had a very strong quarter. While it was one of our better areas last year, it turned in at an even better performance this year, driven in part by a few specific clients and a few projects. And field marketing was also quite strong with high single-digit organic growth overall and very strong growth in China.

By industry, auto remained the toughest sector, while improving quarter-on-quarter this sector doesn’t cycle on last year’s significant changes until the second quarter. All other significant industry segments were positive for the quarter, which is a good sign.

Revenue mix; as far mix of business, brand advertising accounted for 44% of our revenue and marketing services 56%. As for their respective growth rates, brand advertising increased 5.6% in the quarter with a slight decrease in organic revenue of 0.3% or about $3 million.

Marketing services increased 6.9% in total with organic growth of 4.2% or about $63 million. Within marketing services, CRM was up 8.6% with organic growth of 4.3%. Within the sector of couple businesses they had a better than expected quarter particularly our events and sports marketing business which I mentioned were up over 20%.

As John mentioned, public relations was up 5.9% in the quarter with organic growth of 2.4% and specialty communications was up 1.2% with organic growth of a positive 5.4%. Remember this area was affected by the sale of our directory business last year. Within this sector, healthcare is the largest area. They continued to have a solid performance and the other large area in the sector is recruitment and marketing which I mentioned doesn’t cycle on easier comps until later in the year.

Our geographic mix of business in the quarter was 54.5% US and 45.5% international. In the United States, revenue increased $60.5 million or about 3.9%, dispositions net of acquisitions reduced revenue by $17 million or 1.2%, and organic growth was very strong at 5.1%, adding about $78 million to revenue.

International revenue increased $113 million or 9.3%, FX added a $117 million or 9.6%, acquisitions were $13.5 million, adding about 1.1%, and organic growth was negative 1.4%. Internationally, we had relatively strong performances in India, China, Singapore, Australia, the Middle East, and Africa. In developed Asia, Korea showed positive growth for the second consecutive quarter and Japan turned in positive growth for the first time in several quarters.

Results in Eastern and Western Europe were mixed with flat performance in the UK, France and Italy, strong positive results in Russia, and then below average results in Germany, Spain, Portugal and Finland.

Moving to cash flow, our operating cash flow for the quarter excluding working capital remained very strong and our working capital performance continued to be very good. As everyone knows, our primary sources of cash are net income, plus stock-based compensation, depreciation and amortization, those items totaled $245 million for the quarter, and then our primary uses of cash were dividends which totaled $47 million, capital expenditure which totaled $25 million, acquisitions including earn-out payments totaled $19.6 million, and as John mentioned, we resumed our share repurchase efforts, repurchase totaling about $250 million in the quarter.

Our current credit picture, as this chart shows including changes in working capital, on a year-over-year, net debt position improved by a $1 billion to $1.3 billion. And as a result of the reduction in our outstanding debt balances, our leverage ratio or total debt to EBITDA ratio improved to 1.4 times. And our interest coverage ratio remained very strong at 13 times.

And finally from the liquidity perspective, we finished the quarter in a strong position with cash and undrawn committed credit facilities totaling about $3.4 billion and then we had additional uncommitted facilities available totaling about $380 million.

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

Question-and-Answer Session

Operator

(Operator Instructions). And first in the line is John Janedis with Wells Fargo Securities. Please go ahead.

John Janedis – Wells Fargo Securities

Hi, good morning, thank you. Can you guys help us think about organic expense growth going forward? After the 7% headcount reduction last year, to what extent do you think you see an increase in ‘010, and did you make some hires maybe in late fourth quarter or the first quarter that may have depressed margins slightly during the quarter? Thanks.

John Wren

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

Randall Weisenburger

Yes, the important there – thing there is we have to maintain our staff levels client-by-client. Where we are growing business, we are going to have – we have to add headcount, we have to add the people to perform those services to the clients. It’s not like we can allocate from people from Europe to do growth and activities in the United States and people in one area of our business aren’t able to be fungible across to another discipline.

So it is an interesting time right now when we have a pretty wide variance of performance. We have obviously very positive organic growth, especially in many areas across the United States and we have you know mixed results across Europe. So it is a tricky time to balance our staffing levels. And so we are seeing some of that going through the P&L right now.

John Janedis – Wells Fargo Securities

Thank you.

Randall Weisenburger

Thank you.

Operator

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

Jason Helfstein – Oppenheimer & Co.

Hi, thanks. Two questions; so on paper, advertising is lagging in the recovery and marketing services according to your organic figures. Can you say – how much of this is driven by the easier compares in the sectors you highlighted that were very weak last year or do you think that’s a kind of an underlying theme there? And then when would you expect to advertising on paper to kind of catch up to marketing services?

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

John Wren

Okay, let me do the last part first. Some of our clients, Pepsi being one of them and Anheuser-Busch also being one of them have taken upon themselves to – to see if they can reinvent the way they do business. And they have collaborated now for a while in the purchase of – of many of the materials and things that they use.

And that collaboration seems from all my knowledge although which is somewhat limited is being very productive for both of those organizations. The media conversations, we are still doing the same amount of work that we did in the past and we are collaborating with this joint team. And your first part of the question?

Randall Weisenburger

And the other question was I think about advertising and marketing services. I guess we look at the business in a more agency-by-agency and client-by-client rather than the aggregate. Obviously, we report the numbers in the aggregate, because we have them up and we report them in the way people want to hear them.

Right now, the – some of the bigger initiatives were in the CRM areas and we certainly saw some significant improvements in part, because there were significant declines last year in areas like events and sports marketing. So we saw some pretty significant rebounds in those areas.

PR was another area that that had a very strong quarter. I think these things will certainly balance out in a – in over the course of this year. We will see less and less variance and more consistent performance across the – across the different disciplines I think as we go.

We will probably also see more consistent performance across regions as we go. I think right now we are at that strange sort of inflection point where we are getting or continuing to get some fairly wide differences in performance.

Jason Helfstein – Oppenheimer & Co.

Thank you.

Operator

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

Alexia Quadrani – JPMorgan

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

And then the second question is on your comment about the weakness in the auto vertical on the first quarter. If there is any detail you can give us on how much of that weakness was maybe related to I guess Chrysler falling off at the end of the January versus just weakness in your other client base?

John Wren

Could you repeat the second – Randy might have heard it. We were whispering while you were asking the second part of the question, I am sorry about it.

Alexia Quadrani – JPMorgan

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

John Wren

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

Randall Weisenburger

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

As far as Germany goes – parts of Europe, we actually saw a step down in the last year in the third quarter. I think sequentially from the fourth quarter to the first quarter I would say it stabilized, we didn’t see a real quarter-on-quarter change. But we are measuring all these numbers really year-over-year and we saw in parts of Europe that step change didn’t – the bigger step change didn’t really happen until the second half of last year. So it was almost a – the United States in many of these markets, it was a big step that really occurred between the fourth quarter of ’08 and say the first quarter of ’09.

In Europe, there was one step sort of in the first half of ’09 and then a second step in the second half of ’09. In that second half, the US was stable. So now when we are measuring year-on-year, we are getting a little bit – a little bit different results. But sequentially, I think Europe is right now pretty stable.

Alexia Quadrani – JPMorgan

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

John Wren

I would think that would be correct.

Randall Weisenburger

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

Alexia Quadrani – JPMorgan

Alright, thank you.

Randall Weisenburger

Thank you.

Operator

The next question is from James Dix with Wedbush. Please go ahead.

James Dix – Wedbush

Good morning, gentlemen. I just had, I guess three questions. First, where – you have given some color on this, but I was curious where you are seeing the most surprise, upside surprise versus your budget so far? And then second, looking towards the second quarter and beyond like what are you seeing in terms of the growth outlook, given that you have reached positive growth the full quarter before we were expecting?

And then on thing, John, you mentioned that at this point, your – you feel like your agencies have adjusted their offerings for the current market environment. I was just wondering if you can give a little bit more color as to what you meant by that?

John Wren

Yes, let me deal with that first. We went through some wrenching changes last year, and where there was a lot of cost containment that contributed to our performance in terms of the what we were able to accomplish last year, but we had to reengineer quite a number of those agencies as well.

And typically and typically when you get into a recovery, what occurs on your larger advertising annuity type annual fee clients is the clients who will come back and there will be a request, which has occurred in the past, where you will reduce the fee and you will reduce the scope of work, so therefore, you will reengineer your staffing levels.

When you get into the recovery period, what occurs is clients will be spend some more, spend more money, you will have to become more productive during that when in the beginning of a recovery and till the client is comfortable that the recovery is fully in place, before they will generally increase your fee again, so it becomes – we are in that period right now.

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

Randall Weisenburger

Yes, to add a little to that and trying to hit on some of your earlier points, we certainly saw a broader of a pickup and spending across the industry sectors as I pointed out other than auto and these are measuring year-on-year. Other than auto, all of our major industry sectors were positive, some, some very marginally positive, but all positive. So that was a good sign of broad recovery.

We saw more increased in projects. Some of that may have been a little bit of pumped up demand, some of them are trying to get done earlier in the year and some of that will probably move into normal scope changes in fee renegotiations or fee changes in contracts as we go.

So I wouldn’t expect the pace of change to continue from the pace from Q4 to Q1, it won’t continue necessarily from Q1 to Q2. So I think we probably we got a faster recovery. I think we will probably have about the same overall recovery as we were expecting. But it’s nice that it happened sooner.

We also had a little bit of benefit that the transition work at Chrysler lasted a little bit longer than we anticipated. So all – we had a bunch of relatively small but they add up to it a nice addition, positive results in the first quarter, which obviously we are all very happy about.

James Dix – Wedbush

Okay, great. Thanks very much.

Operator

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

Craig Huber – Access 342

Yes, good morning. A couple of things; just curious, given in light of how the quarter must have ended, was there a much of the difference between how the month of March did year-over-year in terms of organic revenue versus the overall quarter? And I have some follow-ups.

John Wren

No actually, the quarter, January and February were stronger than what we had expected. And then March continued that trend.

Craig Huber – Access 342

So very similar you are saying.

John Wren

Yes.

Craig Huber – Access 342

And then also could you – typically you will speak about your net new wins in the quarter, I realize you lost Chrysler here, but what were your net new business wins like in the first quarter here with or without Chrysler?

Randall Weisenburger

I think the Chrysler loss was really a –

John Wren

We will recognize it later.

Randall Weisenburger

We will recognize it in Q4. I think it was about $950 million of net new business wins in Q1 and it doesn’t have a Chrysler loss in it.

John Wren

Since we had already reported that.

Craig Huber – Access 342

Okay, even though you had a couple – one or two months of their stuff in there, okay. And then my last quarter –

Randall Weisenburger

We record the losses when they are announced and the wins when they are not announced. Not necessarily when the revenue comes in or goes out is our normal reporting practice.

Craig Huber – Access 342

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

Randall Weisenburger

Just one second.

John Wren

There are people scurrying to look. Just hold on a second.

Randall Weisenburger

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

Craig Huber – Access 342

Okay, great, thank you.

John Wren

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

Craig Huber – Access 342

I am assuming that’s in Europe, correct.

John Wren

Well –

Randall Weisenburger

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

Craig Huber – Access 342

Fair enough, thanks guys.

John Wren

Alright.

Operator

And next we will go to the line of Tim Nolen (ph) with Macquarie. Please go ahead.

Tim Nolen – Macquarie

Hi, thanks for taking my question. You have largely answered what I wanted to ask, but I am wondering how you would compare this recovery with the last recovery in 2003, 2004 or 2002, 2003, 2004. You have dropped some comments that’s shaping up quite similar, but it seems a bit different to me. I mean we had a big drop in organic growth last time and a really quick snap back this time. I think that’s different from last time.

And also last time, you had a very lengthy period of margin decline year-over-year, before that started to pickup and now you are already back to flattish margins. Do you think this assessment makes sense? And if so, could you explain maybe what some of the differences are at this time versus last time?

And then secondly, you used to talk in sort of regular good times about achieving run rates of double-digit revenue and earnings growth. Do you think a year or two out when we are back in normal times again presumably that that’s a likely target again? Thanks.

John Wren

My comments which you were referring to the last recession were not meant to be complete analogous. It was only – I was partially explaining what happens in a fee based account where there has been a reduction in scope of work and a reduction in the fee and the period of time in which that takes to recover.

Many of the lessons that I learned in 2003 and 2004 are different than the lessons that we have learned this time around. And there are not – every recession is different and this one is certainly in my opinion was a balance sheet recession, so it was quite different than in many aspects than anything that preceded it.

Randall Weisenburger

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

Tim Nolen – Macquarie

Thanks.

Randall Weisenburger

Certainly on the EPS line, I am pretty confident, we will get back to those numbers.

John Wren

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

Randall Weisenburger

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

Tim Nolen – Macquarie

Yes, I meant it as a longer-term comment. But just seeing how different this recovery is I think from last time, that’s the kind of the starting point this is. I have been surprised how quickly we have gotten back on the top line and on the margin line compared with 2003, 2004.

I think it wasn’t even until in 2005 that you finally had margin improvement year-over-year in fact. So I am just surprised at how quick the rebound has been this time and therefore do you expect that to be sustained and then quickly get back to where we used to be?

John Wren

Well, we are working on it every day. We don’t make the forecast, but we – when you compare us to the industry, last year in terms of how we were able to manage our margins, our people did a fantastic job. And I think we are well positioned once we get to higher levels of organic growth, we will be able to get to stabilized and then improving margins.

Tim Nolen – Macquarie

Okay, thanks.

Operator

Our next question is from Meggan Friedman of William Blair & Co. Please go ahead.

Meggan Friedman – William Blair

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

John Wren

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

Randall Weisenburger

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

Meggan Friedman – William Blair

Okay, thanks. And then a couple of follow-up questions on – on some of the areas of recent weakness. And the first one is, and I am sorry if I missed this, but can you quantify what the headwind was in Q1 from Chrysler specifically?

Randall Weisenburger

Headwind in Q1.

Meggan Friedman – William Blair

If you talk about 1% in Q2.

Randall Weisenburger

Yes basically in Q1, the way it turned out, we – the contract expire at the end of January, we provided some ongoing transition services and things to the client in various parts of the – the revenue didn’t really go away as quite as fast as we expected it to. So we ended up losing about maybe say one-third of 1% revenue in the quarter.

We didn’t also have the step down that we experienced in the – in many of our other auto clients that occurred in the second quarter of last year, so last year’s revenue was much more steady. So we probably lost about a third of a month’s revenue or so, maybe even a little bit less in the quarter.

When we go to Q2, the Chrysler revenue at this point is gone. So on a year-over-year basis, it’s right around 1% of our total revenue, so call that $30 million plus of year-over-year change in revenue in Q2.

Meggan Friedman – William Blair

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

John Wren

I think the area is normalizing.

Randall Weisenburger

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

Meggan Friedman – William Blair

Okay, great. And then one last question, if you could maybe talk a little bit about the acquisition pipeline, are we seeing multiple expectations come down, if you could just talk a little bit about that?

John Wren

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

Meggan Friedman – William Blair

Okay, thank you.

Randall Weisenburger

Thank you.

Operator

And next we will go to the line of Ben Swinburne with Morgan Stanley, please go ahead.

Ben Swinburne – Morgan Stanley

Thanks, good morning. A couple of questions; maybe just at a high level as you look at 2Q, here we are halfway through the quarter more or less and the comps appear to be easing both domestic and international even with that Chrysler sort of incremental headwind. Is it safe to assume 2Q should accelerate in terms of top line growth versus 1Q organic?

John Wren

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

Randall Weisenburger

Just to make sure that it’s clear. We do expect that the second quarter to be better as when measured on the year-over-year basis than the first quarter. But the improvement from Q4 to Q1 was quite dramatic we are not going to see that same percentage improvement from Q2 – Q1 to Q2. It will level out or normalize.

Ben Swinburne – Morgan Stanley

Very clear, thank you.

Randall Weisenburger

But we will be better.

Ben Swinburne – Morgan Stanley

Got you. And then Randy in your prepared remarks you mentioned recruitment down 30%. I don’t know if you can just give us a sense of sort of how big that business is for you and I think it’s – I am assuming it’s probably a pretty drag on the EBIT line as well, sort of how we should think about what kind of headwind that is placing on the business today and when you start to cycle through that step down as we move through 2010 and if there are sort of maybe a secular element to it?

Randall Weisenburger

Well, it’s probably got both elements just a little bit. But we will start cycling on numbers in Q2. And the impact are a lot less now than they were last year. One of the – I guess one of the things we all learned about like the stock markets, things that are down 50%. The second year they are down or when they are up, the impact becomes a lot smaller if we get measured.

John Wren

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

Randall Weisenburger

And I have made it clear, here we have got a business that’s been a really tough sector, but we have a very solid management team and a very solid company. You know therein a difficult spot obviously, it’s predominantly a domestic business, and as we all know the US unemployment rates or the US employment rates are very difficult.

Ben Swinburne – Morgan Stanley

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

John Wren

Well, I prefer not to talk about specific dollars, but I will tell you this. We are able to pay bonuses for 2009 and as we – that’s because our improvement, we had an improving result last year as we went through it. And our accruals in the first quarter exceeded our accruals for – the first quarter of ‘010 exceeded our accruals for the first quarter of ’09.

Ben Swinburne – Morgan Stanley

And John your expectation for the year, they will be up year-on-year.

John Wren

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

Randall Weisenburger

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

Ben Swinburne – Morgan Stanley

Yes. And then last question just on free cash flow. I think you have mentioned in the past, you would like to use all your free cash for either dividend, buybacks or acquisitions. I guess is that still how you are thinking about things, and you are deleveraging sort of slowly, free cash flow looks good. If you want to delever further Randy or you are happy with leverage here, what’s your view on the balance sheet from this point?

John Wren

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

Randall Weisenburger

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

Ben Swinburne – Morgan Stanley

Yes, thanks a lot.

Randall Weisenburger

Thank you.

John Wren

Thank you.

Randall Weisenburger

Still maybe one more question, and then we will call it a day.

Operator

And that will be Peter Stabler with Credit Suisse. Please go ahead.

Peter Stabler – Credit Suisse

Thanks very much. Can we quickly drill down a bit on the US? On a company basis, you reported brand advertising was essentially flat, US at plus 5% to get some sort of slight disconnect there, perhaps it was events and sports. If you could you provide additional color on how the segments did in the US that would be great?

Randall Weisenburger

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

John Wren

We may have to come back to you with that answer. We are not sure that we have the analysis done quite that way.

Peter Stabler – Credit Suisse

Okay, well, then let’s quickly move on. In terms of the fee cycle, is there anyway you can give us a sense of where you stand in terms of a renegotiation completion rate right now, are we at 60%, 70%, 80% of your annuals contracts have been renegotiated? I guess what I am trying to get to is, we have talked a number of times about the step down going into the cycle, into the fall back, are we now in that step up and is that fully reflective or as you mentioned earlier, have project revenues played really an outside role in this organic growth in the quarter?

John Wren

Yes, I think we are in a very, very beginning of renegotiation or an adjust – an awkward adjustment in our fees for many of our clients. But we are not – we are – we are fantasying about some of that. We have plans to go in based upon the productivity and the scope of work that we ask that the declines that’s made of us to go into see if we can increase those fees.

But it takes a fair amount of time, it takes couple of quarters of sustained growth not only for us, but for a particular client, before we can – we can get those restored to what they were. So that’s a long process, a positive process, but it’s going to be a long process that we are going to continue to go through for the next couple of quarters.

Peter Stabler – Credit Suisse

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

John Wren

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

Peter Stabler – Credit Suisse

Okay, great. So just one last quick question, maybe I will try to ask this a different way. In the past couple of quarters, you have fold out a couple of operating units, talk about their contribution to the overall performance. When you talk about events and sports 20% organically in the quarter, is there a way to size that contribution on the total company level?

Randall Weisenburger

Yes, it’s probably about $20-ish million dollars.

Peter Stabler – Credit Suisse

Great, thanks very much.

Randall Weisenburger

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

Operator

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

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Source: Omnicom Group Inc. Q1 2010 Earnings Call Transcript
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