The Interpublic Group of Companies' (IPG) CEO Michael Roth on Q1 2016 Results - Earnings Call Transcript

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Interpublic Group of Companies Inc. (NYSE:IPG)

Q1 2016 Earnings Conference Call

April 22, 2016 08:30 AM ET

Executives

Jerome Leshne - Senior Vice President of Investor Relations

Michael Roth - Chairman and Chief Executive Officer

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

Analysts

Alexia Quadrani - JPMorgan Securities LLC

Benjamin Swinburne - Morgan Stanley

Peter Stabler - Wells Fargo Securities LLC

Dan Salmon - BMO Capital Markets

Tim Nollen - Macquarie Capital

Tom Eagan - Telsey Advisory Group

James Dix - Wedbush Securities

Brian Wieser - Pivotal Research Group LLC

Operator

Good morning and welcome the Interpublic Group First Quarter 2016 Earnings Conference Call. All parties are in a listen-only mode until the question-and-answer portion. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this point.

I would now like to introduce Mr. 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. 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 AM Eastern.

During this call, we will refer to forward-looking statements about our company. These are subject to the uncertainties in the cautionary statements that are 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 certain 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 Roth

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

We’re pleased to report another quarter with very strong performance. Organic revenue growth was 6.7% notably that comes on top of 5.7% a year ago. Our growth was driven by increases in all major disciplines, geographic regions and across most client sectors. This strong growth is consistent with our performance in recent years and a sign of the strength of our offerings across the portfolio. It’s encouraging to see a start to year at a top of the competitive table in terms of growth.

Acquisitions headed another 30 basis points to growth in the quarter, while currency translation was a 3.1% drag on revenue. Reported revenue growth was therefore 3.9%.

Q1 operating profit was $21 million compared with $8 million last year. As you all know, our first quarter is seasonably small in terms of revenue, while total costs are distributed fairly evenly throughout the year. That said positive and sustain Q1 profit increases are yet another market with continued strength and progress.

During the quarter, we continue to combine our growth will effective expense discipline. We achieved leverage on our expenses for base payroll, benefits and tax and our office and general expenses. The result was Q1 operating margin expansion of 70 basis points.

Our growth this quarter continues to reflect contributions from nearly all of our major agencies led my McCann, R/GA, Huge, FCB, Mediabrands and Weber Shandwick. Our digital offerings continued their strong growth. This includes the range of embedded digital capabilities within our integrated agency networks as well as our standalone digital specialists.

Once again, this result underscores that our partnerships with clients are evolving as they look to transform their businesses in response to increasingly complex marketing landscape. Another contributor to our performance is our open architecture model which we use to deliver solutions that are customize to client needs using the best of IPG solutions notwithstanding silos. This reflects the growing importance of integrated communication services something we’ve been focusing on for some time now.

The quarter reflects strong growth with existing clients as well as new business wins. In terms of client sectors, we will led by increases in the tech and telecom, healthcare, food and beverage and retail sectors.

Regionally, performance was notably strong in the U.S. where we had organic growth of 8.3% on top of 6.1% in Q1 of ‘15 and where we continue to see outstanding contributions across a very broad range of our agencies, disciplines and client sectors.

International organic growth was also strong at 4.3%, with all regions contributing. LatAm was especially notable at 11.6% organic growth.

Turing to expenses in margin, total operating expenses increased 3.2% compared with our reported revenue growth of 3.9%. As a result, Q1 operating margin improved by 70 basis points. Cost discipline and margin enhancement remain a top priority and we continue to execute against that objective during the year. Our capital structure continues to be source of value creation.

As we announced in February, for the fourth consecutive year, our board increased our quarterly dividend by at least 25%. On our full year 2015 call, we also announced that our board had authorized another 300 million towards share repurchases.

During the quarter, we purchased 2.5 million shares at a cost of $54 million. More recently, we replaced on review for upgrade by Moody’s and our outlook was upgraded to positive by S&P.

Of course we are pleased that our performance continues to reflect the excellence of our people and agencies. As mentioned earlier, our ability to put together integrated solutions that are customized as needs of our clients has increasingly become a differentiator for us. As is our focus on delivering outstanding insights and creativity and our commitment to maintaining and developing the top tier digital capabilities we have across our portfolios. We also remained focus on driving further margin expansion and capital returns.

The strength of our offerings coupled with operating discipline is a winning combination that we will ensure that we continue to deliver for clients and shareholders alike.

While Q1 is seasonably small for us and there is still macro uncertainty particularly in certain international markets. Performance to date has us well positioned to deliver on high end of the 3% to 4% organic growth target we set for the full year and to expand operating margin by 50 basis points or better. As the year unfolds we will of course keep you price of our outlook as was the case in 2015.

At this stage, I’d like to turn things over to Frank for some additional detail on results. And after his remarks, I’ll be back to provide an update on our agencies and the tone of our business to be followed by our Q&A.

Frank Mergenthaler

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

On Slide 2, you’ll see an overview of our results. Organic revenue growth was 6.7% in the first quarter, 8.3% in the U.S. and 4.3% in our international markets. Q1 operating profit was 40 million and are seasonally small first quarter, an increase of 30 million compared to last year.

Adjusted diluted EPS is breakeven, adjusted for items below our operating income and other income in our tax line. Reported diluted EPS is $0.01 per share.

Turning to Slide 3, you’ll see our P&L for the quarter. I’ll cover revenue and operating expenses as well global line items in detail on the slides that follows.

Turning to revenue on Slide 4, revenue was 1.74 billion in the quarter, an increase of 3.9%. Compared to Q1 ‘15, the impact of the change in exchange rates was a negative 3.1%, while net acquisitions headed 30 basis points. The resulting organic revenue increase was 6.7%. As you can see on the bottom half of this slide, organic growth was 7.6% and our integrated agency network segment very strong performance with contributions from all disciplines led by McCann, R/GA, Huge, FCB and Mediabrands.

CMG grew 3.2% organically led by Weber Shandwick, Octagon and Golin. CMG growth was approximately 4% excluding the decrease in pass-through revenues.

Moving on to Slide 5 revenue by regions, U.S. organic growth of 8.3% was broad based across our agencies led by R/GA, FCB, McCann and Huge. Leading clients sectors were tech and telecom, healthcare, food and beverage and retail. Turning to international markets, the UK grew 3.5% organically on top of 6.4% a year ago. There are notably strong growth McCann, Mediabrands and R/GA. Continental Europe increased 1.7% organically. By country, we’re led by strong results in Germany and modest growth in France and Spain.

In Asia-Pac, Q1 organic growth was 2.7%. We’re led by very strong in China as well as by increases in Australia and India, while Japan decreased. In that region, we saw notable contributions by Mediabrands and R/GA.

LatAm grew 11.6% organically with strong performance driven by our agencies in Argentina, Colombia and Mexico. Brazil however remains soft due to macro headwinds. Our markets group increased 7.4% organically which includes strong growth in Canada.

On Slide 6, we chart the longer view of our organic revenue change in a trailing 12-month basis. Most recent data point is 6.3%.

Moving on to Slide 7, our operating expenses, underneath our reported revenue growth of 3.9%, total operating expenses increases 3.2% in the first quarter. Our ratio salaries and related expenses revenue in Q1 was 73% this year compared with 72.5% a year ago. This comparison includes very strong Q1 operating leverage and expense for base payroll benefits and tax. It also reflects increase long-term incentive expense due to our consistently strong financial performance as well as greater expense for severance this year and increase expense for acquisition due to the strong performance acquired businesses.

Lower pass-through revenue also shifted some operating leverage some SRS to O&G, our lower pass-through are offset by lower O&G expense.

Total headcount at quarter end was approximately 49,700 which is increase of 1% from Q4 ‘15 reflecting investment higher growth areas of the portfolio and to support our business wins.

Turning to office and general expense in the lower half of the slide, O&G expense was 25.8% of Q1 revenue, an improvement of 120 basis points from year ago. With leverage across most major expense components, notably our category of other O&G expense which includes the benefits of lower pass-through expense.

On Slide 8, we show our operating margin history on a trailing 12-month basis with a most recent data point of 1.5%.

Slide 9 is provided for clarity and our year-on-year comparison with detail on below the line items. Our reported pretax results includes the below the line of 16 million mostly noncash related to the sale of small non-strategic agencies mainly in Continental Europe. As a consequence of the classification of certain of these assets is held for sale, we had a net tax benefit of 12 million due to reversal valuation allowances for differed tax assets.

Our tax provision also included 8 million benefits from the adoption of new guidance on share based compensation. The net effect on reported results of the discrete items and a loss on sale of business was a benefit of $0.01 per diluted share in the quarter.

Turning to the current portion of our balance sheet on Slide 10, we ended the first quarter with $680 million in cash and short term marketable securities. It’s worth noting that our cash level is seasonal and it tends to peak at year end and decrease during the first quarter.

On Slide 11, we turn to cash flow. Cash use in operations in Q1 was 649 million compared with 781 million a year ago. As you know our operating cash flow was highly seasonal. Our business generates significant cash on working capital in the fourth quarter and uses cash in the first quarter. During this year’s first quarter, cash used in working capital is 690 million compared with 785 million a year ago. Investing activities used 59 million in the quarter including 27 million of CapEx and 27 million for acquisitions.

Financial activities used 158 million mainly for common stock dividend of 60 million and 54 million for share repurchases. Our net decrease in cash and marketable securities for the quarter is 829 million compared with 926 million a year ago.

On Slide 12, we showed debt deleveraging from a peak of 2.3 billion in 2007 to 1.74 billion at the most recent quarter end.

In summary on Slide 13, we are pleased with our revenue growth and profit performance in the quarter which represents a good start in terms of achieving our financial objectives for the year.

With that let me turn it back to Michael.

Michael Roth

Thanks Frank. Understandably we’re very pleased with the results that we’re announcing this morning. The effectiveness of our offerings was evident in our continued strong organic revenue growth across the group whether in advertising, marketing services or media, our strategic creative and digital capabilities are higher competitive.

It’s particularly important in most of our agencies are contributing to our strong results. And that we’re seeing growth in all geographic regions. We continue to demonstrate discipline cost management and we’ll remain focused on conversion, so as to deliver or exceed on our margin improvement target for year. As you saw often heard me saying, we’re proud that IPG is becoming known as a destination of choice the so much of the industry’s top challenge. Our senior corporate team has been together for some time. All of our talented people have brought the company through significant challenges to its current very strong and competitive position. And we’ve done so with the high degree of integrity and humanity.

Along with our focus on getting the best people with the right skills required to succeed in the digital world, we also have shown a long term commitment to improvement as it relates to diversity and inclusion. We were the first company in our sector to name Chief Diversity Officer to establish diversity leaders across our major agencies within the group and interagency D&I business resource group and to directly tie annual incentive compensation for our major agency CEOs and senior executives to progress on diversity and inclusion. Driven by these programs, we’ve seen significant improvements overtime for all minorities with close to 55% of our management positions currently held by women and approximately 20% by people who cover which we believe our industry leading results.

Nonetheless, we know there is still a great deal of work to do in this area. And uniquely we stand by our record of taking swift and the size of action and enforcing accountability around D&I. Particularly in those cases of behavior, my senior executives that run counter the kinds of values for which we should all stand.

For some time now, our investment and talent has been a key driver of IPGs success. On these supplement that which strategic acquisitions this shouldn’t sure that we maintain the very high level of expertise and service delivery that we are seeing from so many of our agencies. We also remain committed to robust capital return programs and we can continue to drive value creation for our shareholders.

Moving on to the tone of our business, we continue to hear from major clients a willingness to invest behind their brands. Our operators will also tell us that the environment for marketers remain sound overall, despite uncertainty in certain important markets such as Brazil and Russia. So there should clearly be sufficient opportunity for us to achieve toward the high end of restated full year growth objectives. But it’s still early, they do need a smallest quarter in the books, so we believe it’s appropriate to stay focused on our goals and measured in terms of expectations. The business pipeline that sound that continues to be a significant number of media pictures and consolidations; they are not quite at the same historically high level of last year.

Elsewhere in the group, our major integrated agencies are seeing solid activity as our marketing service agencies. We are active in all of the major opportunities that are out there other than those on which we are conflicted.

New business has been an area of strength for us in the past two years and in area in which the collaboration has played a key role. We want to build on that performance.

Highlights at the agency level include a strong quarter at McCann, which is winning business and recognition across a range of its companies and around the world. The focus on the part of the management team on creativity, cross utilization of services to major clients and enhancing the specialist digital experiential and healthcare marketing offerings is contributing to strong growth at the Worldgroup.

CMG agencies continued to its strong performance led by public relations. Weber Shandwick and Golin consistently take market share and we added to their capabilities with acquisitions during Q1, provide health, we build on Weber’s outstanding healthcare practice and Brooklyn Brothers will take go individual content production to a new level creativity. Late last week, we announced the acquisition of Spec [ph] to head a leading product design and innovation consultancy to the front head of future brands offerings. At Mediabrands, we have been active on on-boarding much of the new business won during last year is very competitive consolidation and pitch activity.

The New Year began with positive news for UM in the Sony review. As you’ve heard before, the organic investments we’ve made in digital, programmatic and data are playing a key role on Mediabrands success and growth.

During the quarter, we added to their capabilities with a mobile acquisition in the UK and will continue to focus on mobile, social performance marketing and analytics going forward. At FCB, progress continued to be evident in the agency’s results. In Chicago, the agency further built on its [indiscernible], while FCB Inferno won additional BMW business in Europe. And earlier this week prevailed in a highly competitive UK pitch for empower.

FCB Health is a consistently strong contributor and a new management team has been put in place in New York, well a dynamic new leader joined as North American President of the HackerAgency an outstanding CRM agency that’s part of the FCB Group.

MullenLowe Group is increasingly active in new businesses with wins from hired hotels, airways and a number of other opportunities they are public but in which they are among of the finalist in significant reviews. The agency accounted a new leader for its Boston office, who joins us after a long and successful stead at CMO at Congress. MullenLowe is also named the world’s best creative agency at the WARC 100 Awards and top to report for 2015 as campaigns with social responsibility. R/GA, Huge and MRM posted very strong start to the year. In terms of the highly innovative work they are doing for clients, their financial performance and the recognition they are garnering in the market place is significant.

R/GA has been pioneering what it means to be a digital marketer since the beginning of the connected age. The company continues to honored as one of the industry’s top agencies. Growth at Huge has been significant and the agency recently names its first Chief Creative Officer.

MRM remains one of the industry’s top global networks powering the digital business for many of the world’s largest brand.

As you know, we’ve been clear for many years that the changing dynamics of media usage and behavior for an integrated strategy when it comes to digital, not to the highly silo approach taken by some of our peers. The benefits of investing and talent and embedding digital expertise throughout our portfolio as we’ve been doing for some time continues to be evident in IPG’s strong organic revenue performance. Of course being able to combine these embedded digital offerings with our specialty agencies is every more powerful. And just another example, how we mix and match the right capabilities and talent on all of our client engagements.

We’re pleased with the strong performance in Q1 with a very high caliber of our people and with the effectiveness of our capabilities. To continue to see some geographic markets where macro concerns will require monitoring. It’s also worth repeating that Q1 is always our lightest quarter. We will of course remain vigilant on cost in an appropriate level of margin convergent.

Looking forward, we believe that we are well positioned to deliver on a high end of our full year target of organic growth of 3% to 4% and to expand operating margin by 50 basis points of better.

Combined with our company’s financial strength and commitment to capital return, which has been and will continue to be a source of significant value creation will allow us to further enhance shareholder value.

And as always I thank you for your time and support and I look forward to keeping you posted on our progress during the course of the year.

With that I will now open it up to Q&A.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session [Operator Instructions] Our first question is from Alexia Quadrani from JPMorgan.

Alexia Quadrani

I am impressed of organic revenue growth we saw on the quarter specifically North America. Is there any way you can sort of give us a bit more color in terms of how much of that growth came from sort of the underlying health of the market versus your real strong position in new business wins at the end of last year?

Michael Roth

Thank you, Alexia. Well as you know, you are right in saying last year, we ended net positive with respect to the many of reviews. I think a significant part of our results is an indication that of our top 20 clients, our organic growth was close to 12%. Now that’s a significant number and it’s something that reflects what we’ve been saying now for many years. If we continue to focus on treating our existing clients was a pitch, this opportunity that meet in the market place given the talent and resources that we have and that will be continued focus on all of our organizations to treat our existing clients with that type of opportunity and commitment to meeting their needs.

And if you add on top of that net new business wins from pitches obviously that gives right for our results. Now coming into the year, obviously we had some tailwinds as a result of the net new business. We see that rolling out more on the first half of the year, so let’s assume this about a 150 basis points of tailwinds coming into the first half of the year and in the back of the year that will slow down. So a combination of focusing on our existing clients and keeping the backdoor close, winning when we are involved in pitches and focusing on our work open architecture is what makes us comfortable with our forecast going in through the year.

Alexia Quadrani

And just based on your earlier commentary, it sounds like more of you agencies are contributing to growth and maybe just several years ago, can you find that there are - there is still some with our agencies or regions that are still kind of a work in progress that can still you know be a tailwind are positive contributor down the road or do you see that your - finally you know at a price now we’re really you are kind of operating and also in there?

Michael Roth

Well, you know I’ll let our results speak for the question of how all our agencies are performing. And obviously with these kinds of results we’re not relying on one particular agency. And as you know well we’re there with - from the beginning, this has been a journey in terms ore repositioning our people and our organizations. And I said this publically and privately, I’d never been more comfortable with a leadership of our organizations throughout all of our agencies and I am right now.

Our most recent repositioning involve putting Mullen and low together to form the MullenLowe Group and I am very pleased with how that’s come out of the box in terms of new business wins and servicing at our existing clients. So when you combine three global networks of MullenLowe, McCann and FCB, on top of all the independent agencies we have in the U.S. you know some of them are not performing where we would like them to be and of course MullenLowe has a ways to go before they are achieving levels of McCann or SCV and frankly that’s the opportunity we have at IPG are media offerings to best in class, they are recognize obviously UM in terms of its agencies, the year awards and its positive results of new business.

Weber Shandwick and Golin being the top of the charts in terms of winning and gaining market share and certainly Weber winning all the recognition awards, our sports marketing and our experiential, so I am very pleased with all of our offerings that doesn’t need to say we can’t refine that in terms of adding additional talent and go to market strategies and acquisitions. And given our financial position, we are in a position to do that.

So I am feeling - where we told the team is - you know we are fighting any football, you know this is still a journey, we still have margin improvement that’s available to us and that’s what we’re focusing on, but in the meantime, I have no doubt that if there is an opportunity for us to pitch business, we will put together a world-class opportunity in team in place and we will continue to focus on our existing client base, which is among the best in the world. So other than that I am pretty - I am feeling pretty comfortable about where we stand.

Alexia Quadrani

Thank you very much.

Michael Roth

Thank you, Alexia.

Operator

Thank you. Our next question is from Ben Swinburne from Morgan Stanley.

Benjamin Swinburne

Thank you. Good morning. I have a - I wanted to ask actually about tax, the tax outlook and also something on headcount, anyway Michael you like to talk about taxes as much as possible. You know if you look at companies with your revenue mix, you know lot of international, you tend to see tax rates sort of in the low 30s, I know you guys are driving margins and trying to drive profitability particularly in your European agencies. I guess if you could just think about the long term, do you an opportunity for IPG to get its blended tax rate down because that would be a pretty meaningful EPS driver if that opportunity was there for you in sort of the investable future?

I’ll just ask my second one, your incentive comp as a percent of revenue, I think was the highest it’s been in a number of years, and I am guessing that reflects your confidents in the year. I don’t maybe you can spend just a minute on how you guys accrue during the year Q1 as you said it’s small but it seems to be an indication of where you see the year coming in versus what your internal budgets might have been? So those are my two questions.

Michael Roth

Yeah, I know both are fair questions. On the incentive comp, it’s a little over 4% in the first quarter and really what that is, is a long term incentive plan. Given the performance that we had in the last couple of years, and since our long term performance is based on performance operations, it’s encouraging to see that that number is higher because it’s reflective over positive results. Over the year, we still using a 3.5% number in terms of total incentive comp. So it does hit us a little stronger in the first quarter.

And then of course when you compared it to light revenue in the first quarter, it magnifies the percentage of its impact. So this is a little part of a plan, this was in the surplice. We know well that we are performing well in our incentive plans. Frankly our incentive plans are working exactly as they should be. We have short term plan that focus on both agencies as well as overall performance and long term incentives that look to what we need to drive continue consistent performance across the organization.

So I think just look at that as a sort of one off in the first quarter, which is actually positive result given the performance that we’ve had.

Tax is a whole complicated situation. As you know we have a billion dollar greater NOL and that’s principally in Europe. In order for us to use that NOL, we have to generate income in those geographic areas. And we focus very - we have a great international tax department that focuses on optimizing utilization of the NOL which gets into of course agreements between countries in terms of allocations and so on and we try to optimize it. But when we do write-offs in foreign jurisdictions, unless there is income then we use those write-offs as against we don’t the benefit that we were looking for, we do release some results which we saw the reversals in the first quarter. So we have a 28% to 30% cash tax rate which were using which frankly is attractive versus our financial tax rate which is 37% to 39% or 40%.

So we still have a difference between cash versus book. We’re very focused on utilization in the cash NOL. In the U.S, we used up our cash NOL, so what we rely on in the U.S. in U.S. tax planning. We have a great tax department that focuses on that.

So I do think that that NOL is not accounted for asset on our balance sheet but we can’t benefit until we generate profitability and since Continental Europe as you know we did have positive results in Continental Europe this quarter which is as the second - at least second or third quarter in a row that we’ve positive not by a lot but at losses we’ve been having. So that’s encouraging, but I do think there are opportunities but we’re not prepared to commit through a significantly lower cash tax as a result of it.

Benjamin Swinburne

Thank you.

Michael Roth

Thank you.

Operator

Thank you. Next we have Peter Stabler of Wells Fargo Securities.

Peter Stabler

Frank, I wanted to turn back to Slide 22 in the salaries and related. And Frank, I am wondering if you could give us a little bit more color on the base benefits and tax, we’re bit surprised at the amount of leverage you got there, any color you can offer on the drivers and outlook going forward?

And then on the severance expense line, also bit richer than we thought, we are assuming you can see some flow through that towards the back half of the year?

And then couple of other quick ones. Could you remind us where - I think you covered this but could you remind us what’s remaining on the buyback also? Thanks very much.

Frank Mergenthaler

On the buyback, it’s roughly 400. And couple of comments on expenses here, it’s clear as we continued it to reduce our principal relationship in our project related businesses and we see our pass-through revenues go down. You’ve seen a shifting of leverage at BB&T and LNG. But I think that the transparence discloser it’s pretty clear what’s happening. But I would say about our SRS is that the base benefit tax which is our - roughly our fixed component of our salary which we service clients with that’s our biggest areas as focus and we’re thrilled to see the amount of leverage we get out of it. And it’s narrow that we’ve been focused on for years and we’ll continue to focus on. How do you talk that fixed component of our employee based plus quite frankly our temporary labor with surface clients and get more leverage out of it, we are seeing it.

With respect to the other components of SRS, Michael just commented on the incentive component. And to your other question, we didn’t adjust our annual incentive accrual at all in the first quarter. So we booked at a budge, so all of that increase is related to the long term.

And on the severance, we had some incremental severance in Europe and we had some severance at a specific agency and you are right, we should get some flow through in the back half of the year.

Peter Stabler

And then I quick follow-on if I could, so on the BB&T -

Frank Mergenthaler

See one moment; we did had some acquisition charges that ended up being reflected in the SRS as well. You know when we had this in the fourth quarter, on certain acquisition if they are performing well, we have to true up the payments and flow through SRS. So that also was a discrete item in the first quarter.

Michael Roth

And again similar to the long term accrual that’s a good think, that means that the acquisitions we’ve done are performing better than what we modeled out when we acquired them. But the great accounting works that flows through operations.

Peter Stabler

Great, one quick follow-up, so on the BB&T because that’s a relatively fixed piece of the equation frank, is there a target you have for full year, either this year or next year and where that line could go?

Michael Roth

We have a target of 50 basis points or better of margin improvement.

Peter Stabler

Thank you.

Michael Roth

Welcome.

Peter Stabler

Happy weekend.

Michael Roth

Yeah, too you.

Operator

Thank you. Next we have Dan Salmon from BMO Capital Markets.

Dan Salmon

Hi, good morning, everyone. One for Michael and one for Frank. Michael, could you turn back, you had some good comments there about the integration of MullenLowe and I just want to follow-up on that a little bit and maybe if there are some sort of forward milestone that you are looking forward from the agency or maybe is the based terminology and maybe what and then we may be and then sort of the plan you have for it?

And then second for Frank, your review on Moody’s upgrades at S&P, could you just give us an update on the conversations with the rating agencies right now and where your expectations for those maybe?

Michael Roth

Yeah, well look, we’ve at the moment at MullenLowe, but we’ve been repositioning Mullen now. And look Mullen just again this morning won number of awards in the international markets for its creativity and its effectiveness with its clients and it’s always been an issue for us to give in a deeper presence in the United States, so that’s where we think the opportunity lies in terms of utilizing the long network and putting it together with Mullen and in a true merger, this wasn’t a partnership, this is merger and we have Alex heading up the global offering. So we see a tremendous opportunity in utilizing the MullenLowe go to market strategy on a global basis with particular emphasis in the United States and we’re very encouraged in way it’s being received by the consultancy in terms of pitch activity as well as its performance both with existing Mullen clients as well as the formal Lowe clients. And the team is really matched together, they understand it’s a unified organization now and it’s not siloed into Mullen or Lowe and I am very pleased with Alex and his entire team, he headed new people.

So we’re pretty excited about the opportunity. And MullenLowe both have this reputation of creativity and being disrupters if you will in terms of their approach to client servicing and it’s a tremendous combination plus give the digital media capabilities and Lowe has a prefer which is an outstanding digital arm of Lowe that’s performing exceptionally well. So we’re excited about MullenLowe. And as we are with all of our networks, the leadership we have whether Harris at McCann or Carter at FCB and Henry at Mediabrands, I mean that you know - I am not working on my Gulf team yet but I am very pleased with the leadership team that we have in place.

And on rating agency front, both Moody’s and S&P have a positive outlook. We’re in constant dialog, we would hope to get an upgrade from both those institutions at some point, we’re not in position to pinpoint a time but we continue to deliver results like that, we would hope to see those upgrades in the near future.

Dan Salmon

Okay, great. Thank you, guys.

Michael Roth

You’re welcome.

Operator

Thank you. Next we have Tim Nollen from Macquarie.

Tim Nollen

Hi, thanks. Few things, Michael, could you please elaborate a bit more in your comment on the state of the markets, it seemed just you know last quarter it was kind of nervous times and financial markets were volatile and there were a lot of macro issues. And you express some caution at the time and now your comment seem to be that clients are spending steadily and financial markets have picked up and early stage it picked up. And I just wonder what your - if you give bit more color on the state of clients spending, client thinking in terms of investing and marketing, we’ve also seen some pretty good results, their comments this reporting season from the likes of retailers and credit card issuers and so on. So it seems like it feels even better now.

And then just a quick housekeeping I guess, is there anything we need to know in terms of one off below the line that I mean that’s small items but they brought your peers down by a penny in Q1, so anything you know ongoing you know the pass the rate and how should we now about in the coming quarters? Thanks.

Michael Roth

You know I - the one offs items, I think that’s a fair point, inclusively looking - if you are looking at the quality of our earnings in the first quarter, if you take off the one off - take out the one off items, obviously the quality of our earnings is very solid and EPS number is not really reflected of the type of performance we had in the first quarter.

You know you always have risk in the quarter basis going forward, but I don’t believe we have any significant items that we already know about that will hit in that way. The good news is we had the acquisition adjustment in terms of the performance. But the way if we have it going through the rest of the year, that means our acquisitions are even performing better than we thought, so that won’t be a bad thing.

So I think hopefully we won’t have the noise if you will on below the line going forward for the rest of the year.

You know my tone and my language is still its cautionary because there is still a lot of stuff going out there. And - but I did say at the end of the year when we talked about the caution that we didn’t see any specific areas of caution but there were a lot of noise. If you look at Latin America, it’s a great example, obviously Brazil is an issue. And frankly if you look at our organic growth in Latin America was over a 11% that’s not withstanding the factor Brazil was breakeven and there in Latin America we had very strong results from our digital whether it be R/GA, whether it’s be Huge, whether it be our media offerings and McCann in Latin America. So we had very positive results not withstanding in a fact that Brazil which is a large market for us has significant risk in terms of what’s going on there, obviously the government transitions there are an issue. So that causes us to be some concerns in terms of what’s happening there.

In terms of the good news on the U.S. side is we are now 63% of our business being in the U.S. versus the end of the year we’re at 60%. That should be an indication of the strength of our offerings in the United States across the board, PR, media, advertising, digital, experiential and sports marketing, all of them in the United States are performing well which is one of the reason you see a 63% number and we don’t need if you look at the forecast through for U.S. media and media overall, we’re still in the 3% to 4% ad spend in the U.S. and globally which is another reason why we’re somewhat cautious in terms of what the organic number we’re putting out there.

Asia-Pac continues, China, India, Australia are overall perform. China, we had double digit growth. So we have very solid offerings, India was single digital growth but last year we had very strong comps there, we had to go against. Australia continues to perform. Japan was slightly week. So that causes us, you know it’s a lot of noise going on about China but our results don’t yet reflect there. So we have to be cautious about that. And then you go to Europe and the UK results were slightly offered where we’re before and that is attributable to one some of our onetime items were not as strong as they were particularly in the UK. Continental Europe again is not significant to us, it’s about 8% and so one or two items can affect that and we’re still cautious about Continental Europe. And what’s going to happen with that and we don’t know, so it has to be some levels of caution, but you have to look at our results, say well, wait a minute, obviously our clients are spending and we continue to see that. So that’s the reason we still have some caution out there. And like I said we are not spiking any football but we are just managing our existing clients. That’s why it’s so important to manage our existing client basis. And that’s our strategy as we go forward.

Tim Nollen

Thanks and Frank, could you please elaborate a little bit more on the cost side, I am interested more on the O&G expense, I now you’ve done a lot of work over the years with shares services in ERP programs and IT consolidation et cetera. And those numbers took another step down in a good way this time. How much more is there to squeeze out or is more of a cost saving still on the salary side?

Frank Mergenthaler

You know Tim, it’s a good question because we have made investments. We have seen progress. We continue to find floor but you are starting to see some pressure in things like real estate. Certain markets around the world are starting to get fairly expensive. We’ve had growth in those markets, so we’ve got some pressure there in markets like New York and London and Shanghai, but we continue try and leverage the investments we’ve made to drive more efficiency. And share services are good example. You know we won’t more and more processing into our shared services center, we are looking at various end market consolidations in countries. So there is more to do, we never touched, Michael covered about spiking football, we’re going to continue to press but I am not sure if there is that much more runway, but we are going to continue try. So I think at salaries and leveraging salaries is critical to us. That’s why we are pleased to see the progress in the BB&T leverage.

Michael Roth

You know and otherwise to look at it, if you look at our marketing services, we’re not at 50-50 and some of you may remember years ago that was one of our objectives to get at a 50-50. And why I was throwing out in our leadership, I have to throughout Andy Polansky at Weber, Coca-Cola, these are tremendous professionals that are just gaining market share in a space that is highly competitive, so I didn’t want to make slides of factors besides Frank is sitting next to me of our CMG business who are performing well.

Tim Nollen

Thanks very much.

Michael Roth

Okay.

Operator

Thank you. Next we have Tom Eagan with Telsey Advisory Group.

Tom Eagan

Great, thank you. Last year you made investment in Samba TV, with all the changes we are seeing in analytics and measurement, could you remind us what the strategic rationale behind that investment was? And what role Samba TV could play in the larger ecosystem? And then I have a follow-up. Thanks.

Frank Mergenthaler

You know one of the great challenges in our industry is measurement and using data resource in terms of allocating our client’s money in this complex and varied opportunities to gain insights in the market place. One of the questions is whether a TV even can be included in a real time basis in our programmatic offering and insights in linear TV. And what we like to do is make investments in smaller companies that has some unique capabilities and Samba TV is one of those and our relationship with them in terms of adding that type of insight to our overall data stack is a very important aspect. We have many others as well and we have 100 of different data resources that we use in our analytics and Samba TV was just a unique proposition particularly on the TV side that we felt added some additional credibility and insights for us. And we continue to look at these types of tech and data insight companies to help us provide value to our clients.

Tom Eagan

Great, and then Michael, last quarter call you mentioned that the project business was particularly strong in 2015, but that was unclear that was going to be repeated this year, now that we’re on April, what are you seeing?

Michael Roth

Well first of all, our project business is very solid. The comment actually related to our digital business in addition to our PR business which is obviously doing well and that has a tendency to be more project base as it experiential on sports. What’s happening on the digital side of the business, our goal is obviously have agency record in. What’s encouraging is we do have longer standing relationships with our special digital agencies that’s somewhat different than it used to be in the business which is very encouraging, but still a significant portion of our digital practice is more or less on a project basis. And now I think the definition of product basis is chancing a little bit on the digital side.

We have relationship with clients and there spend is vary based on projects within it. We still have the clients. And so for example, we are seeing return of some clients that we had relationships with that may have that spent is much money last year but we are starting to see the spend come back this year. So I characterize that is sort of project business. And I think we have to deal with that more in the environment today, because digital is such a significant part of both our growth and the offerings we have with our clients. So as long as we deliver the best in class offerings and we have the talents and the people, look we’ve been with a PR business that is more than 50% somewhat on a project basis and we continue to perform. So doesn’t scare us, I think it’s an opportunity but it is a characterization of that business that you have to be sensitive to.

Tom Eagan

Great, thank you.

Operator

Thank you. Next we have James Dix from Wedbush Securities.

James Dix

Good morning, gentlemen. I had two questions, first Michael I thought your point you made about the organic growth of 12% for your top 20 clients was quite interesting because I am going to guess that there are ad spending growth organically was not up that much and they are probably their own revenues were not up that much. I don’t have the numbers, I am not sure whether you do, but if that is right, I mean what do you think would be driving their increasing spending with you as a service provider relative to the sizes of their business because I think it might reflect somewhat on the place of the agency in the value chain over the longer term as well as obviously some great near term strength?

And then my follow-up was just, any major pitches that you would call out in the market right now either opportunities or any potential defenses which you would just have us focus on? Thanks.

Michael Roth

Yeah, well, look obviously our clients based are large multinational clients that have significant advertising dollars and marketing dollars. And our goal is always be to give them the best offerings we have and not just one discipline. The health of a client relationship is that we’re bringing multiple services to the table and that’s truly what the integrated offering is all about. And what’s encouraging is that when you look at our top 20 clients, we have multiple disciplines servicing those clients and that’s what gives rise to that type of organic growth.

So you can take a bigger share of wallet from a particular client even though there spend may not be going up. If you are bringing in PR, if you are brining experiential, if you are bringing in media, so that represents the strength of opportunities with our existing client. So - and that’s why I am so pleased with those type of results. And it is so important therefore to keep the backdoor close in terms of servicing clients and that’s what this business is about. We have to add value to our clients and it’s not just one off in terms of that.

We have relationship with our clients that have lasted 50 years and of course those relationships go up and down like everything else. And we have to make sure that we are bringing the best ideas and talent to the table and that’s what our management teams have been doing so well and that’s why we’re seeing the results that we’re seeing. And that goes well for frankly not just us but our industry. You know everyone things that we’re being disintermediated with all those ad techs and other services that are out there, but if with properly servicing our clients and bringing in all the talent and insights that we can bring, we are not going to get disintermediated, in fact we see is an opportunity. So I think so far our results have reflective event.

On the pitch side, there are pretty consistent to what we said before, the army which is McCann, they have a statutory of review that we’ve actually extended. The last time we defended army was in I believe 2011 and it’s been extended through 2017. So great work both on the media side as well as the PR side and the advertising side and obviously we continue to group to great work over that client and since this is a normal review, we are not taking it lightly, but we believe we have a good change of they are continuing.

On the media side, BMW is I think the one pitch that sill remaining that commenced last year and it’s running into 2016 on the media side. And UM has serviced the account. We won actually someone walks in the meantime in some foreign locations, so we are encouraged to see that. So again that one is still out there. CR from MullenLowe is a review that is driven by procurement, so there too it’s a mandatory procurement review, it’s not that we are having trouble with the client, it is putting us a risk, it’s a review, but every time there is a review there is risk. So those are the only big three that I believe are out there you know of note. There are number of media reviews out there that are review was upside, that’s means we are not defending but we are participating in that and it’s public so I can mention it, that’s the 21st Century Fox and Volkswagen, those - we have they are participating in those reviews and we hope to see some positive outcome from that. But again it’s all upside. And I think those are the major ones that I’ll call out right now.

James Dix

Great, thanks very much.

Operator

Thank you. We have Brian Wieser from Pivotal Research.

Brian Wieser

Thanks for taking the question. Hi, good morning. I am sure you all read the article in Champaign a few weeks about regulations and how that might impact the industry. I was wondering if you could talk a bit about that if it plays out, how you would manage the cost that might be incurred associated with it. And more broadly I am curious to hear your thoughts about the potential for more off showing of not just in middle office, but - or the back office but front office operations as well, as we see the industry evolving and business process outsourcing taking a bigger role in what agencies do. I am just curious to hear your kind of long term thoughts on that topic?

Michael Roth

Yeah, first of all as far as the overtime, obviously we looked at it. We don’t see it, first of all, it won’t in fact impact, if it does until next year, we have some impact in ‘15. We did do an analysis of it. We don’t see a material impact to our business as a result of it given obviously some of the temporary labor and some of our employment practices are effected by, but it’s not a material number given where we are right now.

Outsourcing is you have to define outsourcing. We have a number of our agencies that use foreign sites in the low cost environment to do 24/7 production facilities. And frankly they are doing a tremendous job, we have lower cost excellent talent, very strong results 24/7 and it would be wrong for us not to take advantage of locating those type of facilities in those type of countries. It’s not outsourcing in that, it’s our people that are doing it. So it’s not that we are using third parties to do but we are locating our people in those geographic regions particularly in Latin America, we are seeing very good results with it. As far as outsourcing the non-production type people, we like New York.

Brian Wieser

Yeah, let me - I just to clarify I mean marketers looking at marketing something that they outsource more and the idea that agencies that role, so that’s -

Michael Roth

What we do is, we - our markets because we are using integrated approach, we use resources from all over the world. So whether FCB calls it a creative rumble or McCann has a creative counsel or any of our agencies, the way we approach a creative responsibilities now, you need to have diverse input and we use all of our locations all over the world to do that and that’s the value of having global footprints, but we don’t see us in particular outsourcing big pools other than the production stuff and gain I don’t view that as outsourcing.

Brian Wieser

Okay, thank you very much.

Michael Roth

Thank you, Brain. Operator?

Operator

Thank you. This concludes today’s conference. You may disconnect at this time.

Michael Roth

Okay, well thank you all for participating. I look forward to our next quarter and the first half year result. Thank you.

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