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The Interpublic Group of Companies Inc. (IPG)

Q2 2007 Earnings Call

August 07, 2007, 8:30 AM ET

Executives

Jerome J. Leshne - Sr. VP of IR

Michael I. Roth - Chairman and CEO

Frank Mergenthaler - EVP and CFO

Analysts

Craig Huber - Lehman Brothers

John Janedis - Wachovia Securities

Alexia Quadrani - Bear Stearns & Company

Carl Choi - Merrill Lynch

Frank Searby - JP Morgan Chase & Company

Paul Ginocchio - Deutsche Bank Securities

Troy Mastin - William Blair & Company

David Leibowitz - Burnham Financial Group

Presentation

Operator

Good morning and welcome to the Interpublic Group Second Quarter 2007 Earnings Conference Call. All parties are in a listen-only mode until the question-and-answer portion. [Operator Instructions]. This conference is being recorded and if you have any objections, you may disconnect at this time.

I would now like to introduce Mr. Jerry Leshne, Senior Vice President of Investor Relations. And sir, you may begin.

Jerome J. Leshne - Senior Vice President of Investor Relations

Good morning. Thank you for joining us. We have posted our earnings release and our slide presentation on our website www.interpublic.com and we'll refer to both in the course of this call.

This morning we're joined by Michael Roth and Frank Mergenthaler. We will begin with prepared remarks to be followed by Q&A and we plan to conclude before market open at 9:30 AM Eastern Time.

During this call, we will refer to forward-looking statements about our company which are subject to uncertainties in 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.

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

Michael I. Roth - Chairman and Chief Executive Officer

Thank you, Jerry, and thank you all for joining us this morning as we review the second quarter and first half of 2007.

I'd like to begin by touching on the highlights of our performance and providing a brief update on each of our major operating units. Frank will then take us through the specifics of our financial results. After his presentation, I'll return with some closing comments to provide a sense of where we stand in relation to the targets we have for the business, something I know you're all anxiously awaiting to hear.

As is generally the case on our calls, the first thing I'd like to address is revenue. For some time now, we've been talking about our focus on attracting and developing talent at many of our companies as well as strategically realigning a number of our capabilities so as to better succeed in the marketplace.

The organic revenue growth of 6.6% this quarter is a terrific indicator of how much of a difference the right people and the right service offerings can make. It's also a testament to the real potential of Interpublic as a competitive force in the marketplace. This was a subject that seemed open to debate a few years ago. As you can see, it should be no longer a topic that's on the table.

This quarter's growth was fueled by a very wide cross section of our agencies, across all the marketing disciplines, and it brings our year-to-date organic increase to 4.3%.

We are seeing revenue growth from existing clients such as Microsoft, US Army, Sony, and Merck. There's also positive impact from wins like Wal-Mart, BF Goodrich, Citigroup, Lionsgate, K-Mart, Bank of America. Through July we remain new business positive year-to-date.

You will also see that we posted a strong increase in profitability. Operating income was up from $77 million in last year's second quarter to $146 million this year. This demonstrates that we can improve our operating margin.

These results reflect our progress in addressing operating expenses, which we are accomplishing by upgrading financial talent, by improving our financial systems and disciplines, and by attacking transitional costs such as professional fees.

To be fair, these are areas in which there is still work to be done. We have always stated that trying to move our company to double-digit margin performance by 2008 was an aggressive target. Our overall results are the sum of talent upgrades we've been making at many units, strategic realignments at others, and multiple turnaround efforts at the operating unit level that are each at different stages of completion.

So I'd like to take a few minutes here to provide color commentary on the relative strength and progress at each of our key operating units.

As we've outlined previously, we've significantly increased our investment in talent and tools at both the World Group and CMG. This was necessary to bolster digital and other emerging capabilities. As a result of the changes we made, these units bring highly competitive global offerings to market in growth areas such as activation, CRM, public relations, sports marketing, and strategic branding.

We are seeing these investments pay off in increased business with existing and new clients. That is why both of these major businesses are making significant contributions to our improved results.

Our domestic independence, which specialize in the integrated offering that clients demand today, also continue to perform very well, of note, Hill Holiday and Deutsche. All of our companies are moving in a positive trajectory as we upgrade their talent and position them for future success. But we are not as far along on the spectrum of investments and commensurate returns with all of our portfolio.

The merger of Draft and FCB has clearly created an offering that can win in the marketplace. We are pleased with the integration efforts to date. This new agency model will require continued investment in training and talent as it reaches its full potential. It does bear mention that the recent consolidation of Verizon business within Interpublic resulted in significant assignments shifting away from Draft FCB in New York, which will slow progress at this important location.

At Lowe, we put in place a new management team last spring and have since invested in new talent in a number of key markets such as China. The resulting improvements in Lowe's product, which is creativity driven by high-value ideas, has led to outstanding results in competitions like at CAAN and at internal client award shows and recognition from multinational clients as evidenced in yesterday's win of the global BAX [ph] business in a highly competitive pitch.

Our focus at Lowe continues to be on refining the network's operating footprint, ensuring that the agency is equipped with the right set of tools and capabilities to meet the needs of the marketplace and improving overall financial performance. Our plans call for the agency to continue to improve and be profitable in 2008.

The talent pool and the overall media offering at both Universal McCann and Initiative Media have made great strides over the past six to 12 months. Operating performance at both units is beginning to reflect this.

Our new approach to media as an increasingly strategic discipline has played a part in recent wins, most recently the successful defense of key J&J assignments in Asia and North America where we also picked up business from a number of major competitors. However, media is one of the most rapidly evolving areas of our business and our agencies must keep changing and improving so as to build on the gains we have made during this past year.

You will also find that we are addressing a number of the new media needs through new models, such as the Sandbox Communications Planning Agency, which we created by combining the strength of RGA and Digital with Universal McCann's media thinking as well as momentum, all on behalf of Johnson & Johnson.

We must also continue to develop new media capabilities in vital areas like search as we did with our acquisition of Reprise Media and mobile marketing, where we recently announced the joint venture with Velti. And we must do what's necessary to embedded digital talent and expertise at every one of our companies.

Emerging economies will also have to be an area in which we focus. We just closed two transactions in India that increase our stake in the leading local agencies with which we have long standing associations. This will solidify our leadership position in this key market. We will continue to invest in other growth markets, notably China and Russia, to build on the progress that we have posted during the first half of 2007.

Now, to take us through the story in detail, I'd like to hand things over to Frank for a review of our results.

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

Thanks, Michael. Good morning, everyone. I will refer to the presentation slides that are available on our Web site and accompany the webcast of this call. On Slide 2, we call out some key points related to the quarter. As Michael indicated, we were pleased with the improved revenue and profitability growth in Q2.

Revenue on a reported basis increased 7.8% and organic revenue growth is 6.6% compared to the second quarter a year ago. We also drove improved leverage on both of our principal operating expense lines. As a result, Q2 operating income was $146 million reflecting an increase of approximately 70% before restructuring. Our Q2 reported operating margin was 8.8% compared to 5% a year ago. Diluted EPS was $0.24 a share compared to $0.10 last year.

Slide 3 is our P&L for the second quarter. I'll cover revenue and operating expense trends in some detail shortly. So here, I'd like to call out, we had a tax benefit of $11 million which includes the reversal of reserves following the completion of tax examinations in the quarter. The largest item was approximately $80 million for certain worthless security deductions. We called this item out in the first quarter 10-Q.

On Slide 4 we provide additional detail on revenue. Reported revenue in the quarter was $1.65 billion, an increase of 7.8%. Compared to 2006, exchange rates had a positive impact of 2.6% and net business dispositions were a negative 1.5%. The result was organic revenue growth of 6.6%, attributable to higher revenue for both existing clients and net client wins, which as you will recall, were quite strong on the back half of last year and the first quarter of this year.

The lower half of the slide shows segment performance. The organic revenue increase was 5.2% at IAN and 14.7% at CMG. At our Integrated Agency Network segment, domestic advertising and media performed very well. Internationally, revenue performance was mixed. CMG's strong results reflect double-digit organic revenue increases in public relations, event and sports marketing.

Slide 5 provides a regional breakdown. In the US, revenue increased 10.7% organically, an outstanding result due to strong performance pretty much across the board. We had solid growth at the World Group, Draft FCB, at both of our major media brands, and in several of our integrated independent agencies including Hill Holiday, Campbell-Ewald, and Deutsche. We had double-digit growth in our PR and sports marketing agencies and particularly strong growth in our events businesses.

In the UK, revenue increased 0.7% organically in the quarter. Consolidated growth was offset by a weakness in our events business which had several assignments a year ago that did not repeat. In continental Europe, revenue declined 3.9% organically. This was principally due to lower spending from existing clients at our media and advertising businesses in a number of key Western European markets such as France, Germany, and Italy.

In Latin America, revenue increased 1.3% on an organic basis. Draft FCB had increases in every major Latin market. In Asia-Pac, revenue increased 13.6% organically with double-digit increases in China, India, and Australia with all disciplines contributing to growth.

On Slide 6 we move into a closer look at operating expenses. Salaries and related expenses were $1.01 billion in the quarter compared with $945 million a year ago and 61.1% to revenues in the quarter compared to 61.7 a year ago. As you will see in the appendix to our presentation, leverage on base salaries and benefits improved to 51% from 52.3%.

We continue to make the necessary investments to drive revenue growth in strategically critical areas, notably digital, marketing services, and media. These investments have been partially offset by headcount reductions in slower growth areas.

Total incentive compensation expense in the quarter increased approximately $8 million from a year ago, mainly due to higher expense for our annual incentive program result in improve performance. The increased cost of our expanded performance-based equity comp programs was largely offset in the quarter due to true-up relating to planned forfeitures. Headcount was approximately 42,200 compared with 42,400 a year ago.

Office and general expenses at the bottom of the slide were $503 million in the second quarter compared with $505 million a year ago. Leverage improved by 250 basis points to 30.4% to revenue from 32.9% a year ago. O&G expenses decreased 0.7 organically as fees for outside professional services, chiefly accounting and financial controls, declined $16 million from Q2 '06. As you will see in our presentation appendix on Page 25, occupancy expense declined to 7.9% of revenue from 8.7% a year ago.

On slide, we show cash flow for the quarter. Cash flow from operations was $44 million in Q2 compared with $17 million a year ago. On the highlighted line, you see that working capital used was $133 million of cash due to normal seasonality.

D&A in Q2 was a total of $62 million, depreciation was $41 million, amortization of restricted stock and other non-cash compensation was $13 million, and amortization and interest expense was $8 million.

In the investing activity section, we used $66 million for acquisitions. As Michael discussed earlier, we have made several investments in high growth, strategically critical areas this year.

In Q2, we closed the acquisitions of Reprise Media and Lintas India. Reprise is a best-in-class asset in the critical area of search engine marketing optimization. The Reprise team has already begun to work with some of our largest clients.

The Lintas acquisition takes us from 49% to 100% ownership with a top-notch diversified agency that has been a long time partner for us. It closed in late June, so it had almost no impact on our Q2 P&L, but we will consolidate the results going forward.

Our step up from 51% to 100% of FCB Ulka, another of India's leading agencies, was a Q3 transaction. The strength of Ulka's offering and management team have led Draft FCB to announce that the Indian operations will serve as headquarters for the network's Asia Pacific and Africa regions, a first in our industry. As you can see, the financing session was fairly quiet in Q2, particularly compared to the effects of the ELF transaction a year ago.

On Slide 8 we present the current portion of our balance sheet as of June 30th '07 and '06 as well as at yearend 2006. We ended Q2 with $1.48 billion of cash and short-term marketable securities. Those are the areas highlighted in yellow.

Under current liabilities, as we called out on our Q1 conference call, short-term debt includes our $400 million 4.5% convertible notes. As we've discussed previously, this reflects the option of the noteholders that put the debt back to us in March of 2008. Debt maturity schedule's presented on Slide 9. Total debt at quarter end was $2.3 billion. This schedule essentially unchanged from our first quarter conference call.

On Slide 10 a summary of key developments. Stronger topline growth in Q2 reflects the improving competitiveness of our businesses, which is the product of strategic decisions we have been taking related to our offering and targeted investment in talent and tools. While we're making progress in generating greater leverage from our staff costs, further improvement is needed.

In the area of financial controls, our new systems and processes are helping us to address margin leakage. It is also a result of upgrading our financial talent which has been enabling us to reduce our reliance on outside advisors.

We are actively identifying best commercial and financial practice throughout the organization and putting them to work across Interpublic. We are also divesting underperforming operations and moving aggressively when developments require cost actions.

In that light, there are three items that took place late in the quarter that I would like to address in my remarks because they will have a significant localized impact at certain of our companies. As Michael said earlier, we recently experienced client reversals at McCann on J&J and Buick, at Lowe on GMC, and in the move of Verizon's business away from Draft FCB in New York.

Each of these agencies has a contribution to make to the turnaround so their progress in replacing the lost business is important. We are also actively engaged with them on the related cost reduction plans.

Draft FCB has already moved to mitigate the effect of Verizon by reassigning staffers to open positions within the agency to work on recently won accounts, shifting 35 people to work on Verizon business at MRM and letting approximately 50 people go from a work force of 1,500.

Lowe has informed its GMC team that it will be winding down the business and it is assessing the impact on New York operations. McCann has also managed their cost base against the reductions in revenue.

Now to provide some context to the numbers that I have shared with you and wrap up the call, I'd like to hand it back to Michael.

Michael I. Roth - Chairman and Chief Executive Officer

Thank you, Frank. As you can see, our second quarter saw Interpublic perform at the highest level in many years. These results are encouraging and should serve to validate our belief that we have the Company on the right track and that the actions we've taken to improve our people and our product are impacting our ability to compete and win.

For some time now, we've been clear in communicating with you a number of other fundamental elements of our turnaround. Above all, we have said that our results and our progress would not be linear from quarter-to-quarter.

Our performance for the first three months of this year, though unplanned, led some to draw unduly negative conclusions about our prospects. Similarly, we would caution you against using the second quarter's very strong results to extrapolate performance for the balance of the year.

You have heard all of our peers comment on the speed of which the digital component of the business is evolving and the rapidly accelerating need to embed these skill sets into every one of our agencies. This requires increased levels of investment in professional development and technology. We all knew these changes were coming, but the pace in which they're taking place has accelerated.

In order to remain competitive in this regard, we may be called upon to make decisions that ensure our long-term growth but affect our ability to achieve the full measure of our aggressive margin targets within the timetable we have set. At this point, we do not see the need to adjust these goals or the turnaround time frame.

We continue to drive the organization towards achieving the 2008 targets. However, in spite of our strong performance this quarter, the client shifts and losses we've discussed today, coupled with the dynamic change in our industry, represent additional challenges that we must overcome.

As we've said repeatedly on past calls, our approaches at turnaround has been based on a willingness to take direct action to address both issues and opportunities. Aggressively attacking weak financial controls carried a very high short-term cost, but has ensured our long-term viability.

Realigning Draft and FCB as well as our media agencies was potentially disruptive, but has significantly upgraded the competitiveness of these offerings. The complex ELF transaction was initially poorly understood and frowned upon by some in the financial community, yet it has proven to be very farsighted since it amply provided for our backup liquidity needs well ahead of the current crash in the credit markets.

We've indicated in the past that our goal is competitive margin performance. We will continue to be direct in taking those actions that we believe will enable us to achieve the 2008 goals and that are also consistent with the long-term interest of value creation. As always, we will be totally transparent, keeping you updated on our decisions, our prospects, and our progress against the turnaround goals.

This quarter confirms that our future is brighter than it has been in some time. There is, of course, still work to be done. We remain committed to doing what's required to build on recent topline momentum, further address costs and better serve clients, all of which will lead to enhanced shareholder value.

With that, I'd like to open up the floor to your questions. Thank you.

Question and Answer

Operator

[Operator Instructions]

The first question is from Mr. Craig Huber. Your line is open.

Craig Huber - Lehman Brothers

Yes. Good morning. Can you do us a favor and just sort of break down this 6.6% organic revenue growth? It was very strong overall but I'm curious, do you break it down between new clients versus growth at existing clients?

Michael I. Roth - Chairman and Chief Executive Officer

The bulk of that… we won't give you the specifics, but the bulk of it is from growth in our existing clients.

Craig Huber - Lehman Brothers

Okay. And then second question. Can you give us a sense how Lowe did in the quarter and also how your media buying operations did from a revenue perspective?

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

With respect to, Craig, it's Frank. With respect to the media buying operations, we saw growth in the quarter year-on-year, which is the first time I think we can actually articulate that since we've put the turnaround plans.

With respect to Lowe, they continue to rationalize their global footprint, they continue to put out terrific creative work, the feedback we've been getting from clients is very positive. The BAX win, I think, is indicative that the transformation is Lowe is underway.

The GMC loss is challenging and they're going to need to address the cost ramifications of the GMC loss in particularly New York, but the leadership there is firmly committed that the work product seems to be very strong and they're very focused.

Michael I. Roth - Chairman and Chief Executive Officer

Our plans for Lowe continues to be improved profitability and as I indicated in my remarks, to turn profitable in 2008.

Craig Huber - Lehman Brothers

Bit in terms of revenues in the quarter, can you give us a sense how Lowe did?

Michael I. Roth - Chairman and Chief Executive Officer

I think the notion of Lowe is that what we've said is our goal was to stabilize Lowe and I think it's fair to say, clearly, Lowe has been stabilized. Our goal now is to grow it and improve profitability.

Craig Huber - Lehman Brothers

And then my final thing on Lowe, should investors expect over the next maybe six, nine months a significant change in the operations at Lowe? Are you pretty content with directions going right now?

Michael I. Roth - Chairman and Chief Executive Officer

We're always looking to refine our footprint. Clearly, the loss of GMC to New York has an impact and we're addressing what needs to be done with respect to that. Certainly all of the people affiliated with the GMC have been notified and we're addressing it.

We continue to look at better ways to be efficient with the global footprint of Lowe but we continue to believe that the growth opportunity is there. I recently met with some of their clients as well as been in Europe and met with them and I think the creative offering that Lowe brings to the table on a global basis is terrific.

And it's based on that talent and that product that we think will bring Lowe to profitability. The quarterly revenue, as I said, have been stabilized and flat.

Craig Huber - Lehman Brothers

Great. Thank you.

Operator

The next question is from John Janedis. Your line is open.

John Janedis - Wachovia Securities

Hi. Thank you for taking my question. Michael, give us some of the recent macro concerns. Are you sensing that some of your advertisers are getting more cautious as you move towards the back end of the year?

And then Frank, just briefly, can you give us an SEC update? Do you think we'll see resolution by yearend?

Michael I. Roth - Chairman and Chief Executive Officer

Well, first of all, we've had our operating review meetings and the sense is that our clients are not pulling back for the rest of the year. And I think you've seen that, frankly, from some of our competitors, as well.

So I think the tone is solid. Everyone is cautious. Everyone's looking to spend the dollars in the right place. So I think the dialogue that we've been having with our clients is more of where to spend your dollars in terms of the fragmented media and the type of offerings that are out there.

But we certainly don't see a major pullback in the spend. And frankly, I think you see the spend in the up front was surprisingly positive. And I think that is also indicative of the fact that our clients are willing to spend the dollars.

The SEC update. As you all know, we received a Wells Notice. We have formally responded to the Wells Notice and we continue to have dialogues with the FCC. It was good to at least see some action in terms of the SEC in bringing it forward and we want to resolve this as quickly as possible, and we were responding to whatever issues the SEC has raised.

John Janedis - Wachovia Securities

Okay. Thanks. One quick last one, guys. Were there any one-time revenue generating events in the quarter?

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

Nothing material, John, to call out.

John Janedis - Wachovia Securities

Great. Thanks a lot.

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

Thank you.

Operator

The next question is from Ms. Alexia Quadrani. Your line is open.

Alexia Quadrani - Bear Stearns & Company

Hi. Thank you. A couple questions. First, Frank, I believe you just recently went through some mid-year review with some of your major divisions. Are there any major takeaways from that meeting?

And secondly, I think, Mike, you commented that the new business year-to-date was positive. Could you comment on what it was like in the quarter? Then I have one follow-up.

Michael I. Roth - Chairman and Chief Executive Officer

On the media side, let me address that. The takeaway, frankly, from our perspective is that our media offering has really made a substantial improvement.

Frankly, if you would have looked at our media offerings 18 months ago, they, frankly, weren't competitive. And I think what you saw in particular in the J&J review that we were able to win against some very stiff competition.

So I'm very pleased with the media offering that we brought to the table and, in fact, our clients have responded the remarkable improvement that we've seen both in initiative as well as Universal McCann. So I think the fact that we're seeing positive results from media and the fact that from a competitive point of view our media offerings are able to compete with the competition out there is a very solid performance and I'm very pleased with what we've been able to do.

You know, we added a lot of talent to media. Nick, Brian, and Richard Bevins, and Alec have all done a tremendous job in terms of adding very strong people and offerings to their competitive sets. So that's been very positively received by our clients.

I'm sorry, your second question, Alexia, was what?

Alexia Quadrani - Bear Stearns & Company

Well, also first on the first question about the mid-year review for the other agency outside media, as well, if you can comment on that. And then the second question was you'd mentioned new business wins were a positive year-to-date. I was wondering if you had any color about the second quarter.

Michael I. Roth - Chairman and Chief Executive Officer

Well, we have a solid pipeline. We obviously can't win them all and, frankly, in some of the pitches that are out there, we have one or two agencies competing. So we're hopeful that certainly we'll prevail.

Media reviews, I'm not sure what you're referring to --

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

Mid-year reviews.

Michael I. Roth - Chairman and Chief Executive Officer

Oh mid-year reviews. Do you want to comment?

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

Alexia, the mid-year reviews, I think, we're, everybody for the most part is on track with their '07 operating plans. I think the only thing I would call out is the late events of Q2 and how those respective agencies are going to deal with certain client losses because there are going to have to be actions taken.

Other than that, I thought that for the first six months, people came in on plan and were relatively positive on where they are for the year.

Michael I. Roth - Chairman and Chief Executive Officer

The tone was solid and, obviously, we just have to keep our head down and it's nice to see that we're competitive in all fronts.

Alexia Quadrani - Bear Stearns & Company

And this last question. It looks like you had a nice tax benefit again in the quarter. Should we assume that going forward you're not going to be a taxpayer?

Michael I. Roth - Chairman and Chief Executive Officer

Not be a taxpayer? The tax benefit that we had was a one-time event and it was as non-cash benefit. So I think you have to assume that as we turn profitable, we will be paying taxes.

Of course, we'd still have an NOL carry forward of a sizable in excess of $1 billion in foreign countries, and there, our opportunity is to turn profitable and utilize those NOLs from a cash point of view in those countries.

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

You know, Alexia, it's jurisdiction specific depending on where income's generated do we have tax coverage. Needless to say we're trying to do everything we can to minimize cash taxes.

Alexia Quadrani - Bear Stearns & Company

We should assume the effective tax rate will remain, obviously, at a pretty low level? It looks like you've been tracking that way for a couple quarters.

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

I think the effective tax rate should somewhere be in the mid 50s for now.

Alexia Quadrani - Bear Stearns & Company

Okay. Thanks.

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

You're welcome.

Operator

The next question from Mr. Carl Choi. Your line is open.

Carl Choi - Merrill Lynch

Hi. Good morning. Can you hear me?

Michael I. Roth - Chairman and Chief Executive Officer

Yes.

Carl Choi - Merrill Lynch

Just wondering if you can be a little more specific about the impact of some of the recent account losses, whether it's from revenue standpoint and also from a severance standpoint? That's my first question.

Michael I. Roth - Chairman and Chief Executive Officer

The revenue impact on the account losses we'll start seeing some of it in the fourth quarter. The full effect, obviously, will be in next year. I think what we've said, we've estimated or we've seen written accounts for in the range of $45 million to $50 million of revenue all-in for the client losses.

Carl Choi - Merrill Lynch

And do you, severance probably will pick up. Do you have any sense about how that may turn up?

Michael I. Roth - Chairman and Chief Executive Officer

Throughout the rest of the year, we're going to be looking very carefully. As we indicated, each, both Draft FCB is already taking some actions with respect to the movement there. Lowe is looking in New York particularly with the impact of GMC as well as McCann. So I think we'll have a better sense of any actions with respect to any of these losses to be taken place in the third quarter.

Carl Choi - Merrill Lynch

But absent these account losses and, Mike, I understood your point about not sort of extrapolating the results from the second quarter into the second half, but is there any reason why the revenue growth performance can continue once you adjust for some of these recent account losses?

Michael I. Roth - Chairman and Chief Executive Officer

Certainly, we believe, and as I indicated, our goal is to be competitive on the revenue side for 2008 and to achieve our margin targets. And where we've got our head down, and there's nothing to indicate if we can overcome some of these losses that we can't be there.

Carl Choi - Merrill Lynch

And last question.

Could you quantify, maybe a question for Frank, the impact from some of the acquisitions that you have made in the first half of the year, what the revenue contribution would be?

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

The acquisitions we made, Carl, Reprise, which was a Q2 event, de minimus in the quarter because of the timing of the acquisition and the size of the asset, and the same thing with Lintas since we closed very late in the quarter.

Carl Choi - Merrill Lynch

I guess I was thinking about more the second half.

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

We don't disclose the individual revenue for those agencies.

Michael I. Roth - Chairman and Chief Executive Officer

I might add that our total offering in India now, I think the numbers indicate that we're like the number two offering in all of India. So it's very, very powerful, very aggressive, and very good work being done in there.

Carl Choi - Merrill Lynch

Great. Thank you.

Michael I. Roth - Chairman and Chief Executive Officer

You're welcome.

Operator

Mr. Frank Searby, your line is open.

Frank Searby - JP Morgan Chase & Company

Yes, thanks. So a couple questions. Good quarter, by the way.

Michael I. Roth - Chairman and Chief Executive Officer

Thank you.

Frank Searby - JP Morgan Chase & Company

One is if you look at the consolidation, you're talking about the rising consolidation and the severance, you're saying that the account losses but the severance should hit in the third quarter? Did some of that actually hit in the second quarter? That would be one question.

Second one is free cash flow looks pretty good in the quarter if you strip out the working capital, assume that's neutral for the year. What are your thoughts on this year free cash flow?

And just one other follow-up question that CapEx was pretty high in the quarter. Just kind of surprising, not to be expected. And then, finally, are we gaining momentum in Europe? You had a little bit of a pick up on a revenue side in Europe and I guess the Latin America, but still just wondering the under performance there, how you see things progressing throughout the year. Should that be a steady sort of progression?

Michael I. Roth - Chairman and Chief Executive Officer

That's a mouthful. We'll split them up.

Frank Searby - JP Morgan Chase & Company

My other 20 questions were already asked.

Michael I. Roth - Chairman and Chief Executive Officer

We're gaining momentum there and we think that we should show improvement in Europe. Obviously we've repositioned some of our talent there and the World Group is showing some positive results there. Cash flow, we do hopefully we'll show positive cash flow.

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

From an operating perspective, we'll be cash flow positive for the year. And with respect to your severance question, the majority of the severance from the client losses should hit in Q3, potentially Q4 because you've got a runoff period of time servicing these clients as they transition out.

And on CapEx, while we're a little bit ahead of last year, we still believe the CapEx number will be somewhere between 150 and 160 for the year.

Michael I. Roth - Chairman and Chief Executive Officer

Yes, we had a bunching up, if you will, of some of the capital expenditures so we should level off.

Frank Searby - JP Morgan Chase & Company

Just to understand things, the Verizon consolidation they consolidated business at McCann, basically, right?

Michael I. Roth - Chairman and Chief Executive Officer

Yes, that's correct. That's why I refer to Interpublic. A good portion of it all ended up at McCann, which was good from an IPG perspective, but it became a little disruptive, obviously, to Draft FCB in New York.

Frank Searby - JP Morgan Chase & Company

Okay. Great. Thanks a lot, guys.

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

You're welcome.

Michael I. Roth - Chairman and Chief Executive Officer

Thank you.

Operator

Mr. Paul Ginocchio, your line is open.

Michael I. Roth - Chairman and Chief Executive Officer

Good morning, Paul.

Paul Ginocchio - Deutsche Bank Securities

Good morning. Could you comment on your second quarter salary growth of 5.5%? Is that something pretty significant acceleration from the first quarter? Is that something we should expect in the back half?

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

Actually, Paul, the SRS is relatively flat Q1 '07 and Q2 '07 with significant incremental revenue. So when you look at the progression, I think that's probably a more meaningful comparative. So that's what we've been trying to focus on getting more leverage from our existing staff.

Paul Ginocchio - Deutsche Bank Securities

Great.

Michael I. Roth - Chairman and Chief Executive Officer

I think one of the points about our salary levels is, obviously, we've seen an improvement in revenue. And when we started on this, if we had taken wholesale staff reductions to bring the numbers down on a very accelerated basis, I think it would have impacted our revenue opportunities and, certainly, we've added a lot of people in specialty areas in particular digital and public relations and so on.

So I think what we've done is rather than take wholesale reductions in salary to improve margins, I think it's proven that the investments we've made in upgrading our talent throughout our organization is positive to the revenue side. So we're feeling positive about that.

Paul Ginocchio - Deutsche Bank Securities

Great. And then just second question on that same basis, sequentially it looks like office and general was up $10 million sequentially and if you take out the decline in professional fees it's up even more. Are we to the bottom of where office and general can go or is there still more cost to come out?

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

One of the main reasons it's up is just client pass through so it's profit neutral but I think that we're never bottomed out, we're always looking for more money, Paul, but I think we'll continue to be aggressive with utilization of professional services by bringing more stuff in-house.

I think we showed some traction on the occupancy side, which we're pleased there and we'll continue to focus on that. So it was relatively flat Q1 to Q2. We continue to focus on that number and we still believe there's some opportunity.

Paul Ginocchio - Deutsche Bank Securities

Great.

Michael I. Roth - Chairman and Chief Executive Officer

Our operating reviews are focusing on the two key areas, which are revenue growth and cost opportunities. And the cost opportunities are not just in the salary side, we're looking at cost reductions across the board.

Paul Ginocchio - Deutsche Bank Securities

Great. Thanks very much.

Michael I. Roth - Chairman and Chief Executive Officer

Sure.

Operator

Troy Mastin, your line is open.

Troy Mastin - William Blair & Company

Thank you. Good morning.

Michael I. Roth - Chairman and Chief Executive Officer

Good morning.

Troy Mastin - William Blair & Company

First on the second quarter new business, were they positive? I just want to clarify.

Michael I. Roth - Chairman and Chief Executive Officer

I said for the year we're net positive.

Troy Mastin - William Blair & Company

Any commentary on Q2?

Michael I. Roth - Chairman and Chief Executive Officer

Q2, I don't know whether we break it out on the Q. I don't know the answer to that, but on a cumulative basis, we're still positive.

Troy Mastin - William Blair & Company

Okay. And then in terms of the trend in wins and maybe the pipeline that you see as potential wins, how has that looked recently on a maybe month-to-month basis and is there anything we should read from any sort of a trend line?

Michael I. Roth - Chairman and Chief Executive Officer

No, I think the pipeline is solid. We have a number of announced pitches and some that aren't announced that we're continuing working. So I think the pipeline is there and hopefully we'll get our fair share.

If you think about the bunching up of the losses we had in the second quarter, it may have been negative, but the point is that year-to-date we're positive.

Troy Mastin - William Blair & Company

Okay. And then you made reference to potentially having to step up your investment in technology and professional development. I wonder if you could give a little bit more color on the nature of what these investments might look like.

Michael I. Roth - Chairman and Chief Executive Officer

Well, clearly, and everyone's chasing the same people out there and your next question, of course, are you paying up? And I think the answer is that people with unique expertise, in particular in the digital side, are commanding a premium.

Recently you saw RGA added a very talented individual to their offering to round out the offering in RGA. We have a couple of other unique hires that are coming on-stream.

So I think we're constantly looking to beef up our talent and, obviously, we're also looking to bring all of our talent base to be competitive in the marketplace. So we're constantly looking to add to that.

Troy Mastin - William Blair & Company

So you were making reference predominantly to talent rather than more maybe technology?

Michael I. Roth - Chairman and Chief Executive Officer

Yes, absolutely. I think our CapEx number that Frank referred to that we said is going to level out for the year includes any investments that we're talking about.

Troy Mastin - William Blair & Company

So looking out into maybe '08 and beyond, we shouldn't expect to see a big ramp in CapEx?

Michael I. Roth - Chairman and Chief Executive Officer

No. And again, what we said about acquisitions is that they will be strategic and tactical. You saw that in India, you saw that with Reprise. The type of acquisitions that we're looking at are very strategic to where we're looking for. We're not looking… we don't see a big acquisition out there. But it's nice to be talking about acquisitions again at all. A couple of years ago, we were not.

Troy Mastin - William Blair & Company

Did you highlight this because you see it as maybe the biggest risk to achieving the '08 targets that the need to reposition more digitally and the --

Michael I. Roth - Chairman and Chief Executive Officer

The reason I highlighted it was because my comment before. When you're looking at our salary levels, rather than just taking reductions in salary, by hiring talent it ultimately converts to revenue.

We want to make sure we maintain a balance of reducing headcount, reducing costs on the salary side, but also investing in revenue opportunities and these type of individuals enhance our competitive position in the marketplace.

Troy Mastin - William Blair & Company

Okay. And you asked us not to draw too much from the strong organic growth in the second quarter, so is maybe a good way to look at your performance on a going forward basis maybe considering the first half of the year where you had, I think, 4.3% organic? Is that a better --

Michael I. Roth - Chairman and Chief Executive Officer

It'll average out throughout the year. I think the point is that we're very pleased with the results for this quarter. I think it shows that we're very competitive in the marketplace.

We are focused on our margins, we are focused on revenue growth, and we are marching towards the goals that we've stated. And I think we're on plan to accomplish what we want to do for 2007.

Troy Mastin - William Blair & Company

Okay. Thanks.

Operator

The final question is from David Leibowitz. Your line is open.

David Leibowitz - Burnham Financial Group

Yes, a few unrelated issues. First, the $400 million worth of the convertible preferreds, how many have actually put back at you?

Michael I. Roth - Chairman and Chief Executive Officer

None.

David Leibowitz - Burnham Financial Group

And what are the terms that would make them want to put it back?

Michael I. Roth - Chairman and Chief Executive Officer

Well, there's a strike price of $12 and change. $12.42. Obviously, there's a break point somewhere less than that where it's better to hold than put back. I think the numbers in the range of $10 and change and so if our stock price is in that range, I think it's unlikely that it'll put it to us.

But obviously, given where we are from a financial point of view that the date, by the way is March of 2008. But given where we are from a financial point of view, if they were to be put to us, we have alternatives to take care of that. So financially, we're well positioned to deal with it either way.

David Leibowitz - Burnham Financial Group

Very good. Second question, you had some very significant wins in the latter part of last year. Are they going to be contributing to the bottomline or pre-tax line as it were in the second half of this year or is that really going to be an '08 contribution?

Michael I. Roth - Chairman and Chief Executive Officer

No, I think, in fact, you're seeing some of the ads. What Martin Agency has started has started to run some of the Wal-Mart ads that you've seen on TV in the new positioning. So we're starting to see pick ups from the new business that we acquired, in particular Wal-Mart, as well as some of the other new business gains.

David Leibowitz - Burnham Financial Group

And the last thing. Do you have to mark your excess real estate to market and if so, what impact does that have?

Frank Mergenthaler - Executive Vice President and Chief Financial Officer

David, we don't.

Michael I. Roth - Chairman and Chief Executive Officer

No, and we don't… we lease. It's all, okay. All right, so. We're not a REIT.

David Leibowitz - Burnham Financial Group

Well in this day and age you have to ask--

Michael I. Roth - Chairman and Chief Executive Officer

The question.

David Leibowitz - Burnham Financial Group

Thank you very much.

Michael I. Roth - Chairman and Chief Executive Officer

Thank you.

Operator

And that was the final question, gentlemen.

Michael I. Roth - Chairman and Chief Executive Officer

Well, I thank you all for participating, obviously, we'll be available to answer some additional questions and we look forward to talking with you at the end of next quarter. Thank you.

Operator

That concludes today's conference call. Thank you for your participation and you may disconnect at this time.

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Source: Interpublic Group Q2 2007 Earnings Call Transcript
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