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Interpublic Group of Companies, Inc. (NYSE:IPG)

Q1 2014 Earnings Conference Call

April 22, 2014 08:30 a.m. ET

Executives

Jerome J. Leshne – SVP of IR

Michael Isor Roth – Chairman, CEO and Chairman of Executive Committee

Frank Mergenthaler – CFO and EVP

Analysts

Alexia Quadrani – JP Morgan

Tim Nollen – Macquarie Research

Peter Stabler – Wells Fargo

Brian Wieser – Pivotal Research

James Dix – Wedbush Securities Inc.

Tracy Young – Evercore

Richard Tullo – Albert Fried Company

Operator

Good morning and welcome to the Interpublic Group First Quarter 2014 Earnings Conference Call. All parties are in a listen-only mode until the question-and-answer portion. (Operator Instructions). This conference call is being recorded. If you have any objections, you may disconnect at this time.

I'd now like to introduce Jerry Leshne, Senior Vice President of Investor Relations. Sir, you may begin.

Jerome Leshne

Good morning. Thank you for joining us. We have posted our earnings release and our slide presentation on our website, interpublic.com and will refer to both in the course of this call. This morning, we are joined by Michael Roth and Frank Mergenthaler. We will begin with prepared remarks, to be followed by Q&A. We plan to conclude before market open at 9:30 a.m. Eastern.

During this call, we will refer to forward-looking statements about our company. These are subject to uncertainties and the cautionary statement included in our earnings release and the slide presentation and further detailed in our 10-K and other filings with the SEC. We will also refer to non-GAAP measures. We believe that these measures provide useful, supplemental data that while not a substitute for GAAP measures allow for greater transparency in the review of our financial and operational performance.

At this point, it is my pleasure to turn things over to Michael Roth.

Michael Isor Roth

Thank you, Jerry, and thank you for joining us this morning as we review our results for the first quarter. As been our practice I'll start out by recovering highlights of our performance, Frank will then provide additional details and I'll conclude with an update on our agencies to be followed by a Q&A.

We're pleased to report our strongest growth quarter in two years despite the year. Organic revenue growth in the first quarter was 6.6% driven by implement. Our seasonal Q1 operating loss includes significantly the 12 million from 42 million a year ago, reflecting effective operating leverage on our principal expense categories.

As a result, diluted EPS was a loss of $0.05 per share compared with the loss of $0.14 share a year ago. Our growth reflects both increases with existing clients as well as new business wins. We will led by double-digit increases in the auto, healthcare and financial service sectors.

In the U.S., organic growth was 4.8% comprised the growth across most of our businesses notably McCann, Mediabrands, our digital specialist agencies, many of our U.S. integrated agencies and public relations.

It's worth noting that U.S. organic growth would have been 6.5% excluding the decline in past through revenue during the quarter. This was primarily from our event business. International organic growth was strong at 9.1%, we had double-digit increases in LatAm, Asia-Pac and the U.K. as well as a welcome return to growth in Continental Europe, which was up organically by 3.8%. International performance was strong across the portfolio. All of our global networks contributed as did our digital agencies and our marketing service specialist at CMG.

Turning to expenses and margins, total operating expenses increased 4% compared with our 6.1% reported revenue growth. Operating leverage on our salaries and related expenses improved by 80 basis points. While leverage on our office and general expenses improved by 130 basis points. As a result, Q1 operating margin improved by 200 basis points and our operating loss in Q1, which is seasonally our smallest revenue quarter improved by $31 million.

As we indicated on our last call, cost discipline and margin enhancement are our top priority for this year and we were able to execute against that objective during the quarter. Our capital structure and financial strength continue to be a source of value creation in Q1. As previously announced in February, our Board approved the 27% increased to our quarterly dividend and authorized an additional 300 million share repurchase program.

During Q1, we repurchased 3 million shares using $45 million. Over the trailing 12 months, repurchases were 28 million shares using approximately $450 million. We have approximately 375 million remaining in our authorization. But there is noting that this is the first quarter and also our smallest revenue quarter, so the results we are sharing today need to be kept in the profit perspective.

However, we are encouraged by the fact that performance in the quarter speaks to the competitiveness of our agencies and the quality of our global assets in key growth markets. We therefore remain well positioned to deliver or exceed our financial targets for the full year.

At this stage, I'll turn things over the Frank to some additional detail on our results and I'll join you after these remarks for an update on the tone of our business and an update on our agencies to be followed by the Q&A. Frank?

Frank Mergenthaler

Thank you, Michael. Good morning. As a reminder, I will be referring to the slide presentation that accompanies our webcast.

On slide 2, you'll see an overview of results, a number of which Michael's touch upon. Organic growth was 6.6% in the first quarter. We typically have a loss in our seasonally small first quarter which was 12 million this year a significant improvement from a year ago. Operating margin was negative 0.7% compared with negative 2.7% in Q1 2013. We drilled operating leverage on both of our principal operating expense lines compared to last year.

Turning to slide 3, you'll see our P&L for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow.

Here, it's worth noting that interest expense was dramatically lower from a year ago. You will recall that in Q1 13, we carried temporary higher debt balance having issued new data ahead of debt redemptions later in the year.

In addition, the comparison also reflects the lower underlying run rate of our interest expense this year. Also worth noting here is a very low tax benefit in Q1 compared to last year. The Q1 rate this year was only 7%, which is result of our mix of profitability in the quarter by tax jurisdiction around the world. We continue to expect that our reported tax rate will be in the range around 39% this year, while our cash tax rate should be 20% to 22% of pre-tax income.

Turning to revenue on slide 4, revenue was 1.64 billion in the quarter, an increase of 6.1%. Compared to Q1 2013, the impact of the change and exchange rates was negative of 140 basis points while net acquisitions added 90 basis points. Resulting organic revenue increase is 6.6%.

As you can see on the bottom half of this slide, we had very solid growth in both segments. At our integrated agency network segment organic growth was 6.8% with strong increases in both the U.S. international markets. At CMG, organic growth was 5.7% led by continued and outstanding performance in our PR agencies and growth and sports marketing.

Moving on to slide 5, revenue by region, in the U.S. Q1 organic revenue was 4.8%. Leading client sectors were auto and healthcare pass-through revenues as well as related direct expenses will lower than a year ago which was a drag on U.S. growth with most of the decrease occurring in our events business.

Turning to international markets, the U.K. grew 10.7% organically. We had growth in nearly all client sectors paced by auto and telecom. Among our agencies, we are notable increase in our marketing and service specialist including our event specialist Jack Morton and that McCann.

Unlike the U.S., we have higher pass-through revenue expense in the U.K. due to growth of our events business. This increased our growth rate in the region which would have otherwise been organic of 3.7%. It’s worth noting that our total growth was 21% including acquisitions in the region notably FCB Inferno and Lowe Profero.

Continental Europe increased 3.8% organically, marking our first quarter of growth in the content over two years. We were led by low Mediabrands and CMG. We had growth in several of our largest national markets on the content including Germany, France and Spain. In Asia-Pac, our largest international region Q1 organic growth was 11.9% led by double-digit growth in China and Australia and solid growth in many other national markets. Our media business is very strong across the region as were McCann, CMG and RGA.

In LatAm organic growth was terrific at 18.3% on top of 16% a year ago. We had strong growth across all agencies led by McCann, Lowe, FCB and our marketing service specialist. We had double-digit growth in Brazil, Mexico, Colombia and Argentina. Our other markets group made up of Canada, the Middle East and Africa increased 1.4% organically in Q1.

On slide 6, we chart the longer view of our organic revenue change on a trailing 12-month basis. The most recent data point is 3.8%.

Moving on to slide 7, operating expenses. In the first quarter, total operating expense increased to 4% from a year ago which is relative to our reported revenue increase of 6.1%. Our Q1 ratio of salaries and related expenses to revenue was 72.6% this year compared with 73.4% a year ago, an improvement of 80 basis points. Our base salaries benefits in tax was 60.3% of revenue in Q1 an improvement of 100 basis points leveraging our growth and benefiting for restructuring actions. Temporary labor was 3.9% in revenue compared with 3.8% a year ago. Incentive expense improved 10 basis points and severance expense improved 50 basis points as a percentage of revenue.

All other related salaries and related expenses was 3.3% of revenue compared with 2.6 a year ago.

Total headcount at quarter end was approximately 46,000, headcount increased during the quarter by 1.2% nearly half of which was due to acquisitions. A little more than 50% of our new hires were in expanding areas of the portfolio such as digital, media and higher growth regions in the world.

Turning to office and general expenses on the lower half of the slide, O&G was 28.1% of Q1 revenue an improvement of 130 basis points from a year ago. Underneath that improvement, we had 110 basis points of operating leverage and other office and general expenses mainly due to lower pass-through expenses.

On slide 8, we share our operating margin history on a trailing 12-month basis. The most recent data point is 9.6% which excludes our Q4 restructuring expense.

Turning to the current portion of our balance sheet on slide 9, we ended the first quarter with $777 million in cash and short-term marketable securities. Our cash level seasonal intends to peak at year-end. We will recall that on March 31st a year ago, we are carrying approximately $800 million of cash that we raised to prefund debt redemptions in 2013. In the bottom half of this slide on the current liabilities, the current portion of our long-term debt reflects our $350 million, 6.25% notes.

On slide 10, we turn to cash flow. Cash use in operations in Q1 was $726 million compared with $775 million a year ago. The comparison includes $723 million used in working capital this year, which is a similar to last year's level. As a reminder, our operating cash flow is seasonal. Our business tends to generate significant cash and working capital in the fourth quarter and uses cash and working capital in the first quarter. Investing activities in Q1 used $49 million for acquisitions and capital expenditures. Financing activities used $91 million mainly for share repurchase in our common stock dividends.

Typically the pace of our share the first is geared to our fourth quarter when our cash flow strongest. Our net decrease in cash and marketable securities for the quarter was $866 million compared with $940 million a year ago.

On slide 11, we show debt deleveraging from a peak of 2.35 billion in 2007 to 1.66 billion at the end of the most recent quarter end. Note that subsequent to the end of the quarter, in early April, we should 500 million of new 10 year debt at 4.2%. We'll apply a portion of the proceeds towards the early redemption of our 350 million 6.25% notes in May.

In summary, on slide 12, the quarter represents a good start in terms of achieving our financial objectives for the full year. Growth was strong in those areas of the business where we have focused our investment in both people and acquisitions that is to say high growth regions the digital and marketing service disciplines as well as the U.S. market.

We are also seeing the appropriate return on the investments made at the end of last year to one expenses. Our operations are focused on margin expansion and our balance sheet is an important area that will continue to deploy going forward.

With that, let me turn it back to Michael.

Michael Isor Roth

Thank you, Frank. Well, as you can see our quarter featured fully competitive organic revenue growth and we converted at the levels that we want to see. Our strong financial position will allow us to continue to invest in talent and targeted acquisitions as well as capital return program that drive further value creation for our shareholders.

In terms of the tone of the business, we're hearing from our operators and marketers are committed to investing behind their brands. While there are certain areas of macro uncertainty such as China, Russia and perhaps India pending results of its election, the overall environment is one that should create sufficient opportunities for us to achieve or exceed our stated growth objectives for the full year.

Our new business pipeline is solid with activity across the full range of our portfolio. As you would expect, media, digital and marketing services are dynamic areas but we are also seeing a number of RFPs in the area of integrated services both at the agency network and at the holding company level.

We had a very strong performance in these types of competitions last year and are working to replicate that result in 2014. As you know our positive 2013 net revenue business means that we entered this year with some tailwinds. These will be more favorable in the first half of the year than the full year. As previously indicated the second half will also reflect some client losses in the U.S. during the lateral part of last year.

Turning to an update on our companies, McCann had a strong quarter as it make further moves to enhance its position as a global powerhouse that delivers integrated marketing solutions to multinational and local clients. The group is winning business and has a very active new business pipeline. McCann has also continued to add senior new talent that will help take the agencies creative product which took dramatic steps forward in 2013 to an even higher level.

We continue to see strong performance of CMG, where our PR agencies are expanding geographically and in terms of capabilities. Weber and GolinHarris recently collaborated to win a significant consolidation with a top 10 multi-national client. GolinHarris and DeVries are building out the global presence and Weber Shandwick industry leading social media practice within media co is leading the way and taping a broad range of daily streams to effectively engage with consumers and these new channels.

Octagon posted solid performance to start the year and Jack Morton is moving to significantly enhance its digital offerings. Mediabrands also build on its positive momentum. UM and initiative a winning new assignment in key international markets and the groups developed market cluster is posting strong performance.

The Mediabrands digital companies including Cadreon, Reprise and Ansible continue to be growth drivers. The recently announced partnership with AOL to beta test the industry first cross screen programmatic advertising platform is another step along this journey. And our recent investment in ADstruc will allow Orion to incorporate the benefits of digital buying into our outdoor media offerings.

During the quarter, Foote, Cone & Belding announced that it was rebranding to reclaim the equity in one of our industry’s most storied names as well as clearly signal it's intend to take the high ground in terms of creativity and brand stewardship. These moves compliment the agency’s proven ability to deliver highly accountable marketing solutions and its single P&L model.

Domestic new business performance with win from Levis, Tulia and Jia deli chocolate is an early positive sign that the leadership and cultural shift to the agency is taking hold.

At Lowe, the focus is fully on the integration of Profero that new partnership has already won a number of projects in the U.S. and Asia. The network’s leadership also continues to refine, combine (indiscernible) offerings which has recently been introduced to agency search consultants. The team lunched the new campaign for the national Milk board out of New York and recently recruited senior and creative and strategic talent into the Detroit office. And the agency is making progress in operationalizing it’s significant (indiscernible) which will be run at the new office in Barcelona.

R/GA, Huge and MRM all had very strong performances in the quarter. We continue to support these agencies as they build out new capabilities from consulting to analytics and digital retail operations. MRM's global footprint places it among the industry’s leading digital networks and R/GA is now active in over 15 markets including San Paulo, London, Sydney and Singapore with China and India currently in the planning stage.

The expansion of Huge started to reach eight U.S. cities last year. We're also seeing increased collaboration on major clients and new business initiatives from digital specialist agencies.

An additional element of our portfolio that sets us apart for many of our peers is the group of fully integrated U.S. independents such as Mullen, Hill Holiday, Martin, Deutsch and Carmichael Lynch. These agencies have fully modern offerings including strong digital analytics and channel planning capabilities and as a whole they performed well in the quarter. Significant highlights with the promotion of Karen Kaplan, Chairman of Hill Holiday and Kristen Cavallo, the President of Mullen's flagship Boston office.

Key wins during the quarter included HTC at Deutsch LA and GNC at Carmichael Lynch. Mullen's worlds become a break out viral hit (ph) also there special mention. Overall, we are pleased with progress thus far in 2014. Our portfolio with agency is strong. Our strategy embedding digital expertise across the group while also investing organically behind our digital specialist is yielding positive results.

In our ability to deliver open architecture, best the IPG Solutions is increasingly becoming a differentiator for us in the marketplace. We will always offer combinations of siloed agencies will create single client entities that disregard the value of their agency brands; our approach is wholly client specific and post together the right talent for each breeds in a highly collaborative team approach.

During the quarter, we saw a good performance from our top 20 clients, an important source of organic growth for us. We're also seeing meaningful opportunities in terms of new business. The U.S. market which is our largest remains solid. Latin America, Asia and the BRIC market posted double-digit growth. Our focus on margin expansion with evidence in the Q1 results and this will remain a top priority for us going forward.

Our financial strength has been and will continue to be a source of significant value creation. We've very effecting in deleveraging while returning about 1.7 billion to shareholders over the past three years. We believe that we remain well positioned to meet or exceed our organic growth target of 3% to 4% and achieve an operating margin level of 10.3% or better. Plus or less, 2014 is about execution, continuing to drive competitive growth while focusing on cost discipline, so as to significantly improve margins. This intern will allow us to deliver our ultimate commitment, which is the further enhance shareholder value.

With that, I'd like to thank you for your time and continue to support and open the call for questions.

Question-and-Answer Session

Operator

Okay. Our first question Alexia Quadrani with JP Morgan. Your line is open.

Alexia Quadrani – JP Morgan

Thanks for the color you gave on the impressive improvement in organic revenue growth. Is there any more detail you can give us in terms of how much of that came from the tailwind of new business you won historically versus how much might be overall improvement in the marketplace?

Michael Isor Roth

Thank you and thanks for joining us this morning Alexia. Well, we said we were going to have tailwinds in the first half, and I would say in the first half they were 1.5% to 2%. And going into the second half, we're not likely to see that kind of lift from those tailwinds because of the losses that we experienced at the end of the year that you know but overall our tone is very solid Alexia which is why we're being as supportive as we are to the commitments we've made to achieve our target or exceed.

Alexia Quadrani – JP Morgan

And just to follow-up but you still see probably net positive in terms of a challenge versus headwinds when you look at the first half versus the second half?

Michael Isor Roth

Yes. Right now we're net new business positive. Yes.

Alexia Quadrani – JP Morgan

And then just on the improvement in euro market, I guess, I don't know if you can answer this question but how much sort of you really on a firmer ground now and things are bit better or how much of it is things look better but we should still expect some volatility quarter-to-quarter because it's early days?

Michael Isor Roth

One quarter, we're painfully aware of our performance in the last quarter in terms of Continental Europe. What we saw in the first quarter is our new business wins particularly Lowe CR and Zurich starting to come on board and that accounts was at the 3.8% organic growth in the first quarter. We still have a ways to go to raise any flags in Continental Europe.

As we said, for the budget, for the full year, we're budgeting slightly 1% to 2% growth in Continental Europe, it's nice to see us ahead of that in the first quarter but we still have three more quarters to go.

Alexia Quadrani – JP Morgan

Alright. Thank you very much.

Michael Isor Roth

Thank you, Alexia.

Operator

Our next question is Tim Nollen, Macquarie. Your line is open.

Tim Nollen – Macquarie Research

Hi, thanks. Couple of things, one is just ask about the growth and emerging markets versus U.S. and Europe, it seem some of your competitors have lower emerging market growth figures and kind of indicated that some multinationals are shifting budgets from emerging markets back to the U.S. and Europe which are a bit more stable at least in Europe case that it has been in the past few years. One of you could just comment on general budgets and clients spending in emerging market versus the U.S. and Europe?

Michael Isor Roth

Well, I think our results indicate that it's both. We see strong growth in our emerging market, obviously China and Latin America double-digit growth, Australia we saw a double-digit growth, India was slightly off. We had some shifting of some client business add up India and that accounted for the lack of -- the kind of growth that we were seeing in India. And as I indicated, in India a lot of dependent upon the outcome of the election that are coming up. We still believe India will be a strong growth opportunity for us and I might add we did bring our Board of Directors to India at our last Board meeting which is a positive statement to our support of our agencies in India.

And the growth in the United States continues to be solid. I think when you look through the pass-through’s that we add a negative impact on in the U.S., we'll organically up 6.5%, which indicates that obviously the tone of our business in the U.S. continues to be solid. But I don't see any dramatic pullbacks if you will. But you can't continue to have double-digit growth on top of double-digit growth forever.

So I do believe, we'll see that settle down, but it will still settle down into a higher growth pattern, which we're very comfortable with. But for example in Latin America, the huge growth we saw in Latin America was on top of 16% last year. So that's very encouraging but at some point it has the level off. But client is still looking at those as markets where they can either gain market share or enhance their brand.

Tim Nollen – Macquarie Research

Okay, thanks. Can I ask another question, you call out some of your independence during particularly well right now and it strikes me that this is somewhat different between you and some of your peers that you have the separate independence, is there anything you can say about profitability or future path, you've done something in the past with putting independence in the larger groups Campbell Ewald all being a recent example, does that makes sense longer term to maintain in those independence?

Michael Isor Roth

Yes, in fact our independence continue to be among our higher margin contributing agency. I think the trend that -- in the case of putting Campbell Ewald with Lowe that was on the heels of frankly a pitch than involved Campbell Ewald and Lowe and Hill Holiday I might add in terms of the Cadillac business and we were looking to both Lowe guidance for the U.S. So we thought this was a great opportunity to do that. But the way we look at our U.S. independence they're fully integrated. They have media, they have planning, they have PR businesses, they have events, they have consulting. So if they (indiscernible) don't fix it and what we do is when our independence have global opportunities don't happen to a Lowe, McCann or FCB, the partner as well as partnering with Mediabrands offerings on a global basis. So we're quite pleased with our current structure. We don't see any immediate need to merge any of our independence because we do have this collaboration D&A at IPG. And we've been very successful in taping into these types of arrangement. So there is no need to merge them but in Lowe and Campbell Ewald it was specific and it really met a need of both the organization. So we're pleased with our Independence, they do a great job and particularly you saw Mullen and you saw the wins the Deutsch and Carmichael Lynch and Hill Holiday continues to be an outstanding performer for us.

Tim Nollen – Macquarie Research

Okay. So If I can just threw you a last softball on that topic still.

Michael Isor Roth

Okay.

Tim Nollen – Macquarie Research

The relative low margins versus your peers over the years is perhaps more due to struggles that you've had with the various large networks but you had good things to say about them McCann and now FCB, is it safe to assume that famous words but these are on the right track now and the whole group margin can rise, it's not a matter of splitting out between the traditional Agency Network and the independence but everyone is doing better now.

Michael Isor Roth

Yes and I think both Frank and my comments, we indicated that our performance improvement was of course with the Board of our global network. So that's encouraging, it's always been our position that-- our drive is to be competitive margins or better and that's what we're focused on and we do believe there is still opportunity obviously for us to expand margin. But the repositioning of Lowe in the past few years, the addition of Profero to Lowe is obviously a big help and their recent client wins particularly with CR is an indication of that competitiveness. FCB back on the right track. They have a great new management team and they perform well in the first quarter and obviously the McCann is doing well this first quarter and we expect great things from that organization. So we're very pleased and yes we're on track to achieve our goal of competitive margins and that's what we're focused on.

Tim Nollen – Macquarie Research

Alright that makes perfect sense. Thanks very much.

Michael Isor Roth

Thank you, Tim.

Operator

Our next question is Peter Stabler, Wells Fargo. Your line is open.

Peter Stabler – Wells Fargo

Thank you. Good morning.

Michael Isor Roth

Good morning.

Peter Stabler – Wells Fargo

I have a couple of question on the media side. So once again, you guys called out strength and contribution from Mediabrands there seems to be a trend across the peer group. So couple of questions here, one: as you look out over the year do you think that this is kind of secular trend that can continue for multiple years and if so why and then secondly would love your updated thoughts on the idea of scale, this is a topic that we debate frequently with investors with regard to the media business, how important the scale but love your update thoughts on that. Thanks very much.

Michael Isor Roth

Sure. Let me start with scale, because obviously that question is relevant and continues to be relevant in light of some potential transactions that are out there. I've said this before peer; we compete against WPP before the announcement of Publicis and Omnicom. And if you look at the presence of WPP versus Omincom which is, they're relatively had the same side depending on markets they are in and we've been able to compete very effectively against those organizations giving our scale. So the important of scale is yes, it's important.

However, we have the relative scale, we've been able to deliver and we frankly view our size is being the right size because we have the scale to buy efficiently and have presence in the marketplace and people have to pay attention to us. We place $35 billion - $37 billion of media in total, that's not insignificant. So it gives us to see that the table but we're also more flexible, we're able to create personalize, specific and customized offerings in the planning and buying area that clients like to see and we've been very successful at it.

So I think media will continue to be a growth vehicle going forward for us. But what I like about the media and which is what I think is what's happening in our industry is the integrated offering is really coming to life here and that is the whole notion of what this model is going to look like in the future and that's from the cradle to grave. And we have this going on with a number of our clients where we look at the total pot of what the client is using to spend and take all of their dollars whether it's allocated to media buying, whether it's allocated to creative, whether it's allocated to digital, we have to look at this as a total picture and certainly media and planning is a critical component of it but so as digital, so as PR and so as experience and marketing. And that's what clients are looking for. And that's why when we get these RFP into the holding company, what we do as we approach it and a total integrated way focused on what client needs are and we don't pay attention for the sialos that are associated with it. And last year, we were very successful in that offering and so far we have a number of those going on this year which I hope to be successful in.

So I think there is a trend which is where I think it belongs and that is looking at media and our agencies that are creative, digital and PR all together and bring to the table truly the integrated offering focused on the customized need of our clients and I think that's what you're seeing.

Peter Stabler – Wells Fargo

One quick follow-up for Frank, thank you Michael.

Michael Isor Roth

Sure.

Peter Stabler – Wells Fargo

With regard to growth, however in the U.S., it was a negative offset. So could you just try to size those two things us? Was this a wash?

Frank Mergenthaler

For the U.S., it had an impact of about 170 basis points. So our actual growth was 6.5% and in the U.K. it was adversely effected growth they're sort of organically goes from 10 to 3.7. So on net and net it's a bit of a headwind on our overall because the U.S. is such a large marker for us and overall adverse impact of our organic growth by about 70 BPs.

Peter Stabler – Wells Fargo

Thank you.

Frank Mergenthaler

You're welcome.

Operator

Next question is Brian Wieser, Pivotal Research. Your line is open.

Brian Wieser – Pivotal Research

Hi, thanks for taking the question. I was wondering you know then given the the lingering delays in the Publicis Omnicom merger, do you think that's helping with the account activity at the present time?

Michael Isor Roth

Brian, I get that question a lot. I can't point to any specific clients that are in play if you will as a result as the potential merger. But there is always that kind of uncertainty that's out there. But I can't say specifically and anything we hearing anecdotally it is just that it’s anecdotal. Our view is we're competing against the same players we completely against before. And frankly until that transaction is closed both Omnicom and Publicis are going in the market on as separate companies anyhow. So it's kind of businesses usual in the RFP world. But I think there is a lingering issue over that, certainly the conflict issue is there and but we haven't seen huge transformation if you will because of the conflict frankly one of the issue is -- when is these things going to happen and if it’s going to happen at all and I think the point-- the key questions is client awaiting to see the same things that everybody else is waiting to see.

Brian Wieser – Pivotal Research

Obviously no status quo for now.

Michael Isor Roth

I think that's the reality of it. We have always seen recruiting opportunity, yes. Have we been able to add some very talented people to our company as a result of this I'd say somewhat yes. But really the true impact of this is yet to be see and we're all -- the client as well as all of are in the business are waiting to see what happens.

Brian Wieser – Pivotal Research

Okay. And the second I just wondering we know that Huge and RGA are obviously doing very well but is the profit profile of those agencies and may be its not them specifically but digital and agencies of that nature generally better than, comparably well run conventional agencies?

Michael Isor Roth

Well, one of the things about digital, they are more pitching in activity than some of the others because some of their businesses is project based. So therefore the new business pitches expenses. We saw that frankly at our RGA last year and we call that out in our yearend results and frankly we saw the results of that in the first quarter that RGA had a particularly good first quarter on the new business front. So I think what you see is more new business pitch activity and expenses but overall there margins have been very solid and they've been among our better performing agency. So we'll take that type of pitch expense anytime given the conversion rates that we're seeing in our digital agencies.

Brian Wieser – Pivotal Research

Got it. Thank you very much.

Michael Isor Roth

Thank you, Brian. Next question please?

Operator

James Dix, Wedbush. Your line is open.

James Dix – Wedbush Securities Inc.

Hey, good morning guys. Just a two things, in terms of the new business activity Michael, you indicated it was fairly active. Is there any key accounts where you defending at least in part maybe in some of these integrated pitches, I'm just curious what the puts and takes might be there on some of those, some of that bigger activity. And then I guess just secondly I know you have historically said you're quite comfortable being a little overweight and your U.S. business mix and it look like you had another strong quarter if you exclude the pass-through in the first quarter. But is it possible given your strength in the international growth that international might actually outpace your overall growth this year, I am just curious about how you seeing the geography shape up. Thanks.

Michael Isor Roth

Well, what's interesting is Asia-Pac became our second largest market. So there 12% the next big is the Europe I guess, it’s 10%. Now we got there both by the growth in the Asia-Pac and the decline we had in Continental Europe, so that's part of it. But yes, there is no question that we're seeing an increase in Latin America as well and eventually we'll like to see that. Right now we're 57% in the U.S., 60% North America. We would like to see that a little bit less than 60% and more in the markets but it's going to take it some time to get there and the rest of the world increased. And the next question was on pitches. The most notable pitch page that public, and I had this page with public is of course the Microsoft page which we are in the final stages and we're retaining the international media part of the business of Microsoft that's we're pitching as well as hopefully increasing our business opportunity both in the media and creative and collaboration and deployment part of the business. It’s a pitch, it's probably the biggest pitch out there right now and we've got a great offering there and we're quite pleased with what we put forth and frankly how some of the other holding companies as well, so we're continuing to push that. But we do have a couple of government mandatory reviews out there but other than those of the only big pitches that are out there.

James Dix – Wedbush Securities Inc.

Just one follow-up on that. So the international media is already been carved out or set aside that you're going to keep out or is that just part of the overall pitch? Got it, got it.

Michael Isor Roth

Yeah, so this the way pitches structure that I don't like to go to details, but everything on the table other than a couple of parts of the visit they're step out. But for long intends and purposes the media is up for review, we do the international part of the media and we're (inaudible) the international part and hopefully adding to that.

James Dix – Wedbush Securities Inc.

Got it. Thanks very much.

Operator

Next question Tracy Young Evercore. Your line is open.

Tracy Young – Evercore

Yes, hi. Thanks so much for the color on the U.K. and the pass-throughs. Can you give us any guidance towards second quarter, how we should be thinking about the same issue. And then also could you give us some sense of the (indiscernible) in business for first quarter how that built throughout the quarter? Thanks.

Michael Isor Roth

Monthly basis?

Tracy Young – Evercore

Yeah, just generally.

Michael Isor Roth

We don't give monthly numbers if you will. The trend if you will is continues to be positive and so that's was just of your question is the answer is yes.

Tracy Young – Evercore

Yeah, thanks.

Michael Isor Roth

Okay.

Frank Mergenthaler

And on the past those Tracy.

Michael Isor Roth

Yeah, our visibility is (indiscernible) is a project based if the material up in any quarter we'll call out, so you folks out line of side.

Tracy Young – Evercore

Okay. Thank you.

Michael Isor Roth

You're welcome.

Operator

Final question is Richard Tullo, Albert Fried Company. Your line is open.

Richard Tullo – Albert Fried Company

Hey guys, thank you for taking my questions just two quick one. Well, first of all congratulations on great execution on the cost side the equation.

Michael Isor Roth

Thank you.

Richard Tullo – Albert Fried Company

Healthcare.

Michael Isor Roth

That on the revenue side either.

Richard Tullo – Albert Fried Company

No. Would you guys I think the, I never loosely over the revenue side the equation is just the cost side of the equation is seems to be the focused. Healthcare, how much of the growth was due to new drugs or the rollout of Obama Care, because that seems to be moved a little bit there?

Michael Isor Roth

Yeah, that's healthcare was a double-digit growth that before us. There is no question, we do have some big engagements on healthcare particularly in California on the side of the business and that helped in terms of our growth in healthcare, we want break out how much, but it was clearly effective for us in that growth. But healthcare, I don't have the breakdown in terms of new drug versus old, but if you recall one of the reasons last year that healthcare didn't perform as well as we would like was a lot of drugs will coming (inaudible) and I do think as part of the a activity in healthcare right now, we are a number of new drugs that are out there, that are contributing to the growth in that segment.

Richard Tullo – Albert Fried Company

Okay. And a little bit treat about this AOL deal. Can you please provide a little color on what the (inaudible) from other thing is that go on and (inaudible) or?

Michael Isor Roth

It’s all part of it in. here basically what we're trying to do in terms of the program part of our business is to get as much course platform inventory in one place. And the partnership with AOL is continues, because we have a number of partnerships with AOL, they're like wind in terms of seen the growth of a digital platforms all coordinating in one place and therefore since we are committed to having at least 50% of our media placed in the digital program although space over the next couple of years. The partnership with AOL. Frankly we have partnerships also with clear channel if you will (inaudible) this is all part of our course platform mobile as well as TV buying if you would and the AOL is kick start to that, it's a data test and we'll pretty excited about what we're seeing there.

Richard Tullo – Albert Fried Company

As we get into mobile, what point you think in terms of focus does that over shadow TV. And is there -- and you going to 1% and you think that will reflect on CPM rates and any of the (inaudible) in the equation?

Michael Isor Roth

Well, I don't think there is any question at the growth and mobile will continue to be additional. But it's not the only platform out there. It certainly the one is getting most retention certainly in roller areas where they are any other bandwidth if you will and mobile continues to be strong growth vehicle. We're still learning how to deal with mobile in terms of the impact of mobile and what type of content was unable and mobile versus traditional media. But it will continue to be a strong component of our growth and all of our offerings right now contain a portion of mobile planning and execution and that will continue to grow. I don't think it will replace all other outlets if you will, but certain this growth is indicative with being continued to important factor and what we do.

Richard Tullo – Albert Fried Company

Thank you very much. And congratulations on a terrific quarter.

Michael Isor Roth

Thank you very much. Yes, we're very pleased with our quarter. When I saw that (inaudible) we have ended a call earlier and if any call would end earlier would be this one, so that's not to be (inaudible). So I thank you all, we're very pleased with the quarter, we look forward to next call with you and hopefully we'll have similar type results. Thank you very much.

Operator

This does conclude the conference for today. All participants may disconnect at this time. Thank you.

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