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The Interpublic Group of Companies (NYSE:IPG)

Q1 2012 Earnings Call

April 26, 2012 8:30 am ET

Executives

Jerome J. Leshne - Senior Vice President of Investor Relations

Michael I. Roth - Chairman, Chief Executive Officer and Chairman of Executive Committee

Frank Mergenthaler - Chief Financial Officer and Executive Vice President

Analysts

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

David Bank - RBC Capital Markets, LLC, Research Division

John Janedis - UBS Investment Bank, Research Division

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Matthew Chesler - Deutsche Bank AG, Research Division

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Tim Nollen - Macquarie Research

Anthony J. DiClemente - Barclays Capital, Research Division

James Dix - Wedbush Securities Inc., Research Division

Operator

Good morning. And welcome to the Interpublic Group's First Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded. 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. Sir, you may begin.

Jerome J. Leshne

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

During this call, we will refer to forward-looking statements about our company, which are subject to the uncertainties in the cautionary statement included in our earnings release and the slide presentation and further detailed in our 10-Q and other filings with the SEC.

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

Michael I. Roth

Thank you, Jerry, and thank you for joining us this morning as we review our first quarter results.

As usual, I'll start out by carving the key highlights of our performance. Frank will then provide additional detail on our quarter. I'll conclude with an update on our agencies and full year outlook to be followed by a Q&A.

Beginning with revenue. In the first quarter, our organic rate -- growth rate was 2.8%. Our comparison to last year was the most challenging among our peer set because of our industry-leading 9.3% organic revenue growth in Q1 a year ago.

Given this difficult hurdle, our 2.8% organic growth represents a solid result. Regionally, we were led by double-digit growth in Asia-Pac, fueled by a broad cross-section of our agencies, followed in turn by growth in Lat-Am, the U.S. and U.K.

Revenue decreased in Continental Europe where macroeconomic conditions, not surprisingly, continued to pose a challenge.

We saw growth at our IAN sector, which consists of our global advertising networks, our media operations, the U.S. integrated independents and our digital specialty agencies.

CMG's strong performance reflects the continuing growth of our marketing services specialist agencies and public relations that is Weber and Golin, experiential and sports marketing, as well as branding and identity.

Once again, digital services made a very strong contribution to our growth. This was true for the embedded capabilities at all of our global advertising networks within Mediabrands, at the U.S. integrated independent agencies and across the marketing services agencies that are part of CMG. It was also the case at our digital specialist agencies which continued to show strong growth and are making good progress in extending the service offerings and broadening the geographic reach.

Turning to our client sectors. We had double-digit growth in the auto and transportation and retail sectors, as well as growth in financial services and food and beverage.

The tone of our continuing business remains solid, but we did experience the negative revenue impact related to last year's account activity that we identified on our last call. Those headwinds were mainly felt in our consumer goods and tech and telecom sectors, both domestically and internationally.

Turning to operating expenses. Results in the quarter reflect continued careful cost management. This type of discipline is something that we trust you've come to expect from this management team.

Our Q1 seasonal operating loss was $39 million, a 13% improvement compared to a loss of $45 million a year ago.

On a trailing 12-month basis, our operating margin was 9.8%, maintaining our performance for the full year 2011, a level of profitability that Interpublic had not achieved in over a decade. Other Q1 highlights saw continued progress in decreasing outstanding shares and reducing our debt.

During the quarter, we repurchased a further 5 million shares using $53 million along with our quarterly common stock dividend of $26 million.

Given the seasonality of our cash flows, we chose to moderate the pace of our repurchase activity in the year's first quarter.

For the 12 months ending March 31, we have returned over $550 million to our shareholders via common dividends and the repurchase of 46 million shares. This is an accomplishment of which we are proud and one that speaks to our confidence that we can continue to build on the strong performance and positive momentum of recent years, another area in which we've taken significant strides in strengthening our balance sheet and overall financial position. In late March, we took another positive step in this regard by retiring our $400 million 4.25% convertible notes, which eliminates 33 million shares from our diluted share count. Concurrently, we issued $250 million of new 10-year senior notes with a 4% coupon, thereby, lowering our total debt by $150 million as a result of these 2 transactions.

With the first quarter behind us, we remain solidly on track to deliver on our 2012 targets as we continue to drive value for our key stakeholders going forward.

I'll turn things over to Frank now for some additional color and join you after his remarks.

Frank Mergenthaler

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

On Slide 2, you'll see an overview of our results. Organic growth was 2.8% in Q1, which as Michael pointed out, was on top of industry-leading organic growth of 9.3% a year ago. We continue to narrow our Q1 seasonal operating loss, which was $39 million this year. Compared to last year's first quarter, we drove 50 basis point of operating leverage from our ops and general expenses, primarily on occupancy costs.

Trailing 12-month operating margin was 9.8%. The conversion rate on our constant currency revenue growth to operating profit for the trailing 12 months remains in excess of 30%.

Our Q1 earnings per share was a seasonal loss of $0.10, the same level as a year ago. We maintained strong liquidity with $1.59 billion of cash and marketable securities on the balance sheet at quarter end compared with $1.85 billion a year ago.

That comparison includes having used over $700 million to repurchase shares, pay common dividends and pay down long-term debt over the past 12 months. The retirement of our convertible notes in the first quarter dramatically reduces our diluted share count while our deleveraging is the latest step in a series of moves that have seen us lower our debt by $730 million over the past 4 years, significantly strengthening our financial position.

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

Our average basic share count for the quarter was 438 million compared with 476 million a year ago, a decrease of 8%.

During Q1, we repurchased 5 million shares at an average cost of $10.61. We had $298 million remaining on our board authorization as of March 31.

Turning to operations on Slide 4, beginning with revenue. Revenue in the quarter was $1.51 billion, an increase of 2.2%. Compared to Q1 2011, the impact of change in exchange rates was a negative 110 basis point while net acquisitions and dispositions added 50 basis points. The resulting organic revenue increase was 2.8%.

The tone of business was solid across most of our businesses and regions of the world, although, our growth rate also reflects the revenue headwinds that Michael mentioned earlier.

As you can see on the bottom half of this slide, our Integrated Agency Networks segment grew 1.7% on top of 9.7% a year ago.

Organic growth at our CMG segment was 8.6%, with solid performance across the marketing services portfolio led by strong regional growth in Asia-Pac, the U.K. and Latin America.

Moving on to Slide 5, revenue by region. In the U.S., we had 2.7% organic growth. Our independent agencies Lowe & Partners, Worldgroup and our specialty digital agencies all had a strong quarter.

Turning to international markets; again, focusing on organic growth. U.K. increased 2.5% on top of 9.2% growth in Q1 2011. Growth was fairly broad-based across our agencies and disciplines, as well as client sectors.

Continental Europe decreased 5.5% in Q1. Macro conditions continued to weigh on client spending while last year's account losses also weighed on performance.

Asia-Pac organic revenue growth was 16.9% in Q1, which is a terrific result on top of double-digit growth a year ago. We saw strong growth in media, marketing services and at McCann. We had double-digit increases in Australia, China and Japan. Reported growth was 21.7%, which includes revenue of our recent acquisitions in that region.

In Lat-Am, Q1 organic revenue growth was 4.4% on top of double-digit growth in Q1 2011. We were led by strong regional offerings of McCann, Lowe and CMG. R/GA offices in Sao Paulo and Buenos Aires also contributed. Our other markets group decreased 2.8% due to decreases in Middle East and Canada, partially offset by growth in South Africa.

On Slide 6, we chart the longer view of our organic revenue change on a trailing 12-month basis. Most -- the most recent data point is 4.7%, which is updated to include Q1 2012.

Moving on to Slide 7 on our operating expenses. Total operating expenses increased 2.2% organically compared to last year. Our operators continue their effective focus on expense management. For the trailing 12 months, operating expenses increased only 3.1% organically, well below organic revenue growth of 4.7% during the same period.

Total salaries and related expenses were 73.3% of revenue in Q1 compared to 73.2% of revenue last year. On a trailing 12-month basis to March 31, total salaries and related expenses were 62.8%, compared to 63.5% from the same period a year ago. Again, we tend to recognize expenses relatively evenly across the 4 quarters while Q1 reflects the seasonality of our revenue.

Our total headcount at quarter end was 42,500, a year-on-year increase of 1.6%. The increase reflects our investment of growing disciplines such as media and public relations and in digital services throughout our agencies. It also reflects growth in markets such as China, India and Brazil. Offsetting these investments were net reductions in certain markets such as Continental Europe, where our focus has been managing our workforce to the appropriate revenue base.

Severance expense is 1.4% of Q1 revenue compared with 1.6% a year ago. Incentive expense in the quarter was 4.4% of revenue both this year and the year ago. For the full year, we continue to expect incentive expense to remain in the range of 3.5% to 4% of revenue.

Turning to office and general expenses on the lower half of the slide, O&G was $441 million, an increase of less than 1% both organically and reported. O&G expense was 29.3% of revenue compared to 29.8% a year ago. Underneath that 50-basis-point improvement, we drove 40 points of leverage in occupancy expense, which is due to both our revenue growth and lower lease expense.

On Slide 8, we show our operating margin improvement on a trailing 12-month basis with the most recent data point of 9.8% for Q1 2012.

As we said on our Q4 call, our target level for this year to improve at least 50 basis points on the way to our objective of fully competitive profitability over the next few years.

Turning to the current portion of our balance sheet on Slide 9. We ended the quarter with $1.59 billion in cash and short-term marketable securities compared with $1.85 billion a year ago, a decrease of approximately $270 million.

The comparison includes over $550 million returned to shareholders over the last 12 months in the form of share repurchases and common stock dividends, as well as net debt reduction of $150 million in our long-term debt. We also had cash inflow last year of $134 million from the sale of approximately half our interest on Facebook.

On Slide 10, we turn to cash flow for the quarter. Cash used in operations was $498 million compared with the use of $801 million a year ago. As a reminder, cash flow in our business is seasonal. Working capital tends to generate cash in the fourth quarter, which is followed by the use of cash in the first quarter.

In this year's first quarter, cash used in working capital was $445 million compared with the use of $736 million a year ago. We pointed out in our last conference call that we expect to see more moderate cash use in Q1 this year as the follow-on to more moderate cash generation of the proceeding fourth quarter.

In investing activities, we used $21 million in Q1 primarily for CapEx. Our financing activities used $229 million, which includes net debt reduction of $150 million. We also used the $50 million -- $53 million per share repurchases and $26 million on our quarterly common stock dividend. Net decrease in cash and marketable securities in the quarter was $729 million.

On Slide 11, you see our total debt outstanding at quarter end and at year end from 2007 through Q1 2012. This depicts a reduction of total debt, which has seen us take total debt from $2.35 billion at the end of 2007 to $1.62 billion at the end of March 2012, a decrease of $730 million. By retiring the convertible notes in Q1, we eliminated 33 million shares from our diluted share count.

For EPS purposes, since the retirement in the current near the end of the first quarter, you should be aware that we will show a reduction for the full year of approximately 3/4 of that total with the entire $33 million out for next year.

It is also worth noting that at the end of February, S&P upgraded our outlook to positive, and just last week, Fitch reaffirmed our investment grade rating with an outlook stable. Looking ahead, over the next 12 to 18 months, we'll have additional opportunities for debt reduction and to further improve our balance sheet and reduce our effective cost of debt.

In summary on Slide 12. We are pleased with our performance in the quarter. This organic growth that reflects the strength of our offerings and our globally diverse businesses. We continue to effectively manage costs and believe we remain on track to deliver our financial objectives for the year. Now let me turn it back over to Michael.

Michael I. Roth

Thank you, Frank. As you can see our first quarter performance represents a solid beginning for 2012. Organic revenue growth on top of the very strong Q1 last year, demonstrates that our agencies continue to be highly competitive in the marketplace and contributions came from across our portfolio. The companies within CMG continue to win market share and we are leading the industry in areas such as PR, experiential and sports marketing.

Of the growth -- other growth drivers in the quarter included our U.S. integrated independents, Mediabrands and Lowe. Across the group, digital services were strong.

During our recent calendar view meetings with our major operators, one of the recurrent themes has been [Audio Gap] continue to adapt our various offerings to meet the demands of marketing in a digital world. Whether it be at Mullen or Deutsche, Weber Shandwick or UM, at least half, and as many 3 and 4 new hires coming on stream, are individuals who bring digital expertise into our agencies.

We continue to see the benefits of our digital strategy in which the primary pillar is embedding digital talent at all of our agencies. Of course, having best-in-class digital specialists like R/GA, HUGE and MRM, as well as leading-edge offerings such as Cadreon and the audience platform, further enhances our digital capabilities and our overall performance.

Since the beginning of the year, we've begun to build new business momentums and we are net new business positive for the first quarter.

The commonwealth win at McCann will see us add meaningful incremental GM markets and revenue internationally. Worldgroup has also added a number of wins in its healthcare group. Draftfcb made good strides in replacing its SCJ revenue domestically with digital and CRM wins on Cox Communications and Discover Card, and also had significant assignments on the healthcare front.

Our U.S. independents and Mediabrands had strong new business in the quarter. The new business pipeline is solid. At this time, last year, we had a number of major clients in review. That is not currently the case. Instead of defending, we are involved in a number of new business opportunities in which there is significant upside. It also bears mention that our performance in the emerging economies remains strong. Coming off combined organic revenue growth greater than 25% in Brazil, India and China in Q1 of 2011, we saw additional double-digit growth in this group during the first quarter.

This result was led by China where our CMG agencies, McCann and Mediabrands led the way. Draftfcb also won a number of important new clients in the market.

In Brazil, performance was led by Lowe, CMG and R/GA. McCann also performed well in Lat-Am.

In India, we've had a very significant market presence overall, with Draftfcb, Lowe and McCann, all having outstanding agencies.

As you saw last year, we've begun to be more active on the M&A front. We do not see any area of vulnerability in our portfolio, but we are committed to investing in targeted transactions that enhance our agency brands, particularly in high-growth capabilities such as digital and marketing services, as well as high-growth geographic markets.

There's never been a greater need for informed advice as companies in every industry and all regions of the world seek to navigate an increasingly complex digital, media and consumer ecosystem. We are well positioned to capitalize on these opportunities.

In summary, we are pleased with the Q1 results. We know that Q1 is our smallest revenue period seasonally and while the headwinds we are facing will be less pronounced in the second half of the year, we have consistently cautioned against putting too much weight on a single quarter's results.

That said, we remain comfortable with the full year 2012 goals of 3% organic revenue growth and at least 50 basis points of operating margin improvement that we shared with you on our last call.

We are solidly on track to deliver on those targets. The significant deleveraging we've undergone and the strength of our balance sheet provide additional powerful leverage that should allow us to continue to support the needs of our business, return capital to our owners and drive shareholder value. The challenge for our management teams and for our people is to remain focused on the needs of our clients and building their businesses, which in turn will allow us to build on our success and create sustained value going forward.

I would now like to open the floor for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Alexia Quadrani of JPMC.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

If you can give us a bit more detail on the impact of the client losses you were dealing within quarter. Was January the first month of the revenue loss from SC Johnson? And do you think we'll be hit with the same sort of magnitude in the second quarter? And then, when do you circle pass through any other notable client losses that are still impacting the quarter?

Michael I. Roth

Yes. Thank you, Alexia. Well, we had indicated they actually -- and we started seeing the loss of SC Johnson in December of last year. So it didn't wait until January before we saw any impact. What we said in our call that we expected about 2% to 3% of headwinds for the full year and while we indicated it was over-weighted, if you will, in the first half of the year. So we will continue to see those headwinds certainly through the first 6 months, but we will continue to see some headwinds through the balance of the year. If you -- what's interesting about the headwinds is that it's somewhat overweighted in the U.S., Lat-Am and Continental Europe, which explains some of the lower organic growth numbers that we're putting out there with respect to those markets. So if we use the first half of the year, if we use anywhere from 3% to say 3.5% in terms of headwinds, that should give you a good idea and that should start trailing off towards the end of the year.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

And then other -- were there anything else real sizable that's also, I guess, above the normal course of business that also impacted Q1 or is it really the SC Johnson?

Michael I. Roth

Obviously, that was a big factor. Of course, we had the Microsoft media and we did have the Home Depot media flowing through. But again, Alexia, if we look at it from a full-year perspective, when we say we're comfortable with 3% organic, that takes into account the headwinds and basically how we see the flow-through impact of that throughout the year.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

So it sounds like if the headwinds are the same and not getting any worse, maybe even getting a little bit better in Q2 and comps get a little bit easier, we should see, I guess, there's -- I know you don't give quarterly guidance, but there's a reason to believe things get a little bit better in the second quarter in terms of...

Michael I. Roth

It only took you a few minutes before you ask already about the second quarter, Alexia. But look, we again -- we don't give quarterly results forecast. We look at it from a full year. Obviously, there's some new -- there's some opportunities into -- new business wins that will factor into our results. So all we can say is that you see the existing headwinds that we have. We are comfortable with our overall objective. I hope to see some good positive announcements on some of the new business opportunities we are seeing and all of that will impact our second quarter results.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

All right. Well, just one more, but bigger -- big-picture question. On McCann in the U.S., I know you highlighted in some of your prepared remarks about the strength you're seeing outside the U.S. In the U.S. itself, are you seeing -- did you see growth year-over-year at McCann? And I guess, any color on where McCann is versus where you hoped it to be at this point?

Michael I. Roth

McCann, obviously, we've made continuing investments in new talent in McCann. And just recently, I met with the senior management team there. I'm feeling real good about our leadership at McCann and where that's heading. They have terrific plans in terms of opportunities that are out there. Of course, once in a while, you see some losses, and I'll anticipate the question before it comes. We just recently saw movement of some business out of McCann, L.A. Not significant in terms of dollars, but it is with Nestlé. On the other side, you'll see an announcement recently of McCann U.S. winning a new project with Nestlé Waters. So that's the nature of our business. We win some business, we lose some business. When we give you a full year forecast, it factors in all the business opportunities and potential [indiscernible] we see.

Operator

David Bank of RBC Capital.

David Bank - RBC Capital Markets, LLC, Research Division

Two questions. The first here is if you look at the growth that you generated in the first quarter and then, I guess, extrapolate it to your guidance for the full year, could you talk about how much of that organic growth or how much growth is sort of a function of new business wins versus existing clients? And has that -- did that surprise you at all in the first quarter? And the second sort of related question is if you think about the agency business, you kind of win some and you lose some. We obsess about these headwinds and stuff, but the reality is sometimes you win, sometimes you lose. If you look at the 200 to 300 basis point headwinds, how much of the 200 to 300 basis point is really kind of above and beyond in your mind that win some, lose some?

Michael I. Roth

Yes, let me talk about the first. This is the first quarter, so it's hard to pinpoint exactly how much is new business versus not, but the fact is in the first quarter, the growth that we're seeing is from our existing clients, okay? The roll off of our losses we know and how that's going to impact us and that's why we give you the numbers that we've given you, but we won't see new business wins impact until later on in the year. We're starting to see some of it in the second quarter but it should be through the rest of the year. The other thing to keep in mind is that if you look at the organic changes in our first quarter last year, we had some -- a very impressive organic growth in the quarter. For example, in the U.S., we had an 8.8% organic growth in the first quarter. So that's a very difficult hurdle with some headwinds to overcome so we're pleased with the changes that we're seeing in the United States facing that kind of organic growth. The same when you go to Lat-Am. Lat-Am, we had almost 14% organic growth in the fourth -- in the first quarter last year, so to show growth on top of that is fairly impressive. So that's exactly why when we give guidance, if you will, we talk about it from a full-year perspective, because we look and anticipate some loss business, we know what our existing client base, we've already stated that our strength is in our existing client base. We win some, we lose some. And the bulk of our organic growth from our existing clients is what drives our business. And that's how we operate our businesses.

David Bank - RBC Capital Markets, LLC, Research Division

But I guess -- if I could just sort of follow-up, so I think we understand then you guys have been really transparent in pointing out the headwinds. If you look at the year. Is it -- normally, like what is kind of the normal range of headwind? I guess what I'm asking? Where wouldn't you point it out? If it was like 100 basis point in either direction.

Michael I. Roth

Last year, we had about 2% headwinds. So to put one on top of the other, if every year we're going in with 2%, and last year, we had terrific organic performance versus our sector so we were able to, on a full year basis, overcome 2% headwinds. Obviously, we're driving to do the same for this year, it is only the first quarter. We'll be announcing some positive wins. We have a whole year ahead of us and so that is, if you want to keep that in mind, we've been able to overcome those kind of headwinds before. And still show very strong performance.

Operator

John Janedis of UBS.

John Janedis - UBS Investment Bank, Research Division

Frank, can you talk a little bit more on the leverage and the occupancy line? I think you've got a team working on that, but is that a good run rate on an absolute dollar basis going forward or were there some onetime items in there?

Frank Mergenthaler

John, there was no onetime items. We've seen progress on that line for multiple quarters. I think our centralized real estate team does a terrific job. We're constantly trying to co-locate agencies and markets, take advantage of scale, drive competitive pricing in markets on lease terms and we've been seeing that benefit consistently. So there's not a real estate transaction that can get executed anywhere in the globe that doesn't go through that group. And the group's doing a terrific job, and we expect it to continue to do a terrific job.

John Janedis - UBS Investment Bank, Research Division

That wouldn't move very much, I guess, through the next couple of quarters?

Frank Mergenthaler

I don't expect to see. Again, we want to see consistent progress, John, but if you go back and track it, there's a magnitude of the progress over the past 8, 10 quarters, we're starting to hit a ceiling specially as the global real estate markets starts to turn and pick up.

John Janedis - UBS Investment Bank, Research Division

Okay. And then can you guys talk a little bit about how your multinational clients are thinking about their spending in Continental Europe? Meaning, are they reallocating to other faster growing markets outside of Europe? Or are they just taking the money and pulling back on that budget? And also, do you think we're bottoming in Europe yet?

Michael I. Roth

I wish I knew the answer to the question, whether we -- I hope we bottomed in Europe. Look, we had good results in the U.K. That's a positive sign, but, obviously, the rest of Continental Europe is challenging and there are pockets of light and there are still issues. Our multinational clients are focused on emerging markets, period. That's not news and frankly, they go where the money is and where the opportunities are. So that's why it's so important for us to have very strong offerings in those markets whether it would be Lat-Am, whether it be Asia-Pac and the rest of China and India, but also in markets like Indonesia and Africa and Turkey. These are markets that our clients are looking at to invest money and gain market share, and that's where we're going to see significant growth in the years to come. So it's not a question of just taking money and cutting back here and investing there. They are investing in growth, period. And if there's an opportunity to invest in growth, they will spend those dollars.

Operator

Peter Stabler of Wells Fargo Securities.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

I wanted to get a little bit more color on CMG, if we could. First of all, any onetime items in there? I know it tends to be more of a project-based business. And secondly, can you give us a sense of the component there? Is this really being driven by predominantly PR? And then, how does this visibility for you, for CMG, kind of compare to IAN?

Michael I. Roth

Yes, I mean, you're absolutely right. The CMG business tends to be more of a project-based business. We're trying to get that to a model of recurring revenue stream. We're making some success there, but clearly, it's always interesting when we do forecasting for those businesses. Because it's a project-based business, most of their business is to be generated, as we say. But they consistently outperformed, so we're very comfortable with those numbers. We've had a very strong market in particularly in the PR side. Weber Shandwick and GolinHarris continue to be best in class. They win awards that reflect that, but the results -- more importantly, their results reflect that. Our sports marketing group: Octagon is having a very good year; as well as Jack Morton, which is our experiential marketing. So although Weber Shandwick and PR and Golin are the biggest piece of CMG, we are seeing good performance across all the businesses within CMG.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Great. And I'm wondering, you might be reluctant to provide this, but in terms of looking at Europe, if CMG is, call it, 17% of your revenue globally. I mean, are we talking about a distribution in Europe that is radically different? Is CMG 5% of the business over there or?

Frank Mergenthaler

Without getting specific numbers, Peter, it's small. The distribution is smaller in Europe. But they've actually invested in our growing especially in the U.K.

Operator

Matt Chesler of Deutsche Bank.

Matthew Chesler - Deutsche Bank AG, Research Division

So it was a good start to the year. Can you give us a sense as to if you wouldn't mind revealing how this compared to your internal budgets whether it was revenue or profitability or both? Just trying to get a sense whether -- you gave guidance. It's only been a month and a half and this is just the first quarter of the year, but whether you're feeling incrementally positive or in terms of hitting your full year target or whether your confidence is pretty equivalent to what it was when you first offered the guidance a month and a half ago?

Michael I. Roth

Well, I wouldn't say that we're solidly on track to deliver on these targets if I wasn't comfortable with those numbers. I hate to do this because all the accountants are going to look at me funny. But take a look at our incentive comp as an example, okay? We base our incentive comp on a full year basis, okay? And then, we have to amortize it through the year. So that is one line, if you want to look at I don't particularly like looking at it, but I know you're going to ask for example. So I'll use that went. Our incentive comp is in line frankly it's a little higher but it's in line with what we forecast for the full year. In order for us to do that, we have to be comfortable with the full year and we have to show that where our plans are coming out are consistent with that. That's the simplest way I can tell you that we're comfortable with the full year. Look, we want to drive to beat that. That's our objective, all right? We set targets that we think are a bit of a stretch but are attainable and that all our business units put together plans on where they think they can do better. So we're comfortable where we are right now for the first quarter. Certainly, we've got a lot of time left in the year, but the tone of our business all indicates that we should be able to deliver on these results and hopefully we'll do a little better.

Matthew Chesler - Deutsche Bank AG, Research Division

Quick question for Frank. Frank, can you sort of lay out your thoughts as to deleveraging further from this point in time? I mean, the way that you handled the transactions in the quarter are somewhat indicative of a current desire to delever a bit so far this year, but really not clear what's your thoughts are beyond that point?

Frank Mergenthaler

I mean, Matt, you can expect to see further deleveraging for us, I don't want to put a number on it, and we've got material opportunity a year from now when we've got some more converts out there, depending on what share price is. And we also have some expensive securities that mature in 2017 with a coupon of 10% that we can buy in or refinance at a slight premium. So those are things you can expect this management team to be aggressive in looking at options and driving the cost of our funding down plus probably deleveraging along with it.

Matthew Chesler - Deutsche Bank AG, Research Division

And when you talk about deleveraging, Frank, I mean are you talking about sort of the multiple or are you also referring to absolute pay down of gross debt. And just on those 10%s, when is the first opportunity that you're able to go at them?

Frank Mergenthaler

Second quarter of next year, we can go at them with a locked-in premium, which is manageable, because right now they're trading at a very expensive premium. So we probably won't touch them until that strike price is locked in. And you can expect actual gross debt to come down somewhat.

Michael I. Roth

A good example of our approach to the balance sheet is look at our debt offering. We borrowed 250, we were very pleased with our ability and our reaction in the marketplace. It was oversubscribed many times over. And frankly, we could have loaded up on debt there at a very attractive rate and we chose not to. And so we chose to take that $150 million and reduce our debt. So I think that should give you a good indication, one, of our confidence in our ability to perform in the future, and 2, where we look to see where we put our capital. And so we can -- the Board authorized the new share buyback program of $300 million, which we are now starting to eat into, so we finished the $450 million authorization. And from a balance sheet point of view, we're very comfortable, but as Frank said, we're going to be very opportunistic in terms of the marketplace and where do we use our capital and what are the right objectives. Our objectives are to grow our business and enhance shareholder value. And that's the analysis we go through every time we see an opportunity.

Operator

Michael Nathanson of Nomura.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

I have a couple. Let me start with China for a second. If you look at your Asia-Pac number for this quarter, how big is China within Asia-Pac? And in terms of the business you're winning, what's the difference there between your CMG offerings and IAN? So what's driving China, and how big is it?

Michael I. Roth

Well, we don't give out specific numbers by country. We do -- Asia-Pac, we do give out numbers. It's -- obviously, Asia-Pac is becoming a bigger piece of our business. Overall, let's assume Asia-Pac is 11% or so. And clearly, China is an important part of that, although, it's certainly not the largest part of Asia-Pac.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Okay. And then in terms of how do you get bigger in China? How do you go about it's now fourth or maybe the third biggest advertising market in the world. So how do you to get into China more aggressively?

Michael I. Roth

Yes. We are -- the first thing you have to do in China is to make sure you have new talent and good talent. And if you look at, for example, we just beefed-up our talent in McCann in China with the addition of Jesse and some other people. CMG has repositioned its offerings in China and so talent is what drives the business in China. It's kind of a illusory to go out and buy businesses in China that frankly a year from now, they're not even going to be there. So we will be strategic if we see some attractive bolt-ons, if you will, to any transactions in China. We will look at them. We'll try to get comfortable with retention of the people and the book of business. But our primary focus in China is to grow organically through getting great talent and working with our multinationals as well as focusing on local clients. For example, some of our businesses, because of our multinationals, have a good core agency and they're growing locally, which is I think, eventually, as we go out beyond the key cities, we have to be able to have talent to focus on that growth locally. And that's how we're going to grow it.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Okay. Can I just ask one for Frank. I guess, the deleveraging have been a little bit less aggressively than maybe I would've have thought, given how much cash you have on the balance sheet. So just can you walk me through the thinking for both of you guys of, I know the rates were low -- you took advantage of that -- but why even go to debt market when you have so much cash on your books? Is there just a level of cash you want to always have just in case? So walk me through why you didn't tap into that market to this point?

Frank Mergenthaler

As Michael pointed out in his comments earlier. There are a bunch of cash calls around trying to drive shareholder value. So we're trying to manage our way through where we put our money against M&A, where we put our money with respect to share repurchase, where we put our money in dividends. So we're looking at multiple uses for our cash. When we evaluated our options, the 2 things we concluded on was, one, we wanted to deleverage and we will continue to delever and we wanted to do it in a way that was thoughtful and take advantage of very, very attractive markets. So I think the transactions we did, delevering by $150 million and also tapping a very attractive debt market, I think, was a very well balanced, thought-out strategy. And I think going forward, you'll continue to see us in a similar path. We look at all options that I think will be fairly thoughtful around what we're going to do with respect to delevering further and also tapping a very attractive capital markets.

Michael I. Roth

The same kind of conversation we had on whether we do share buybacks versus dividends. And frankly, one of the issues that we have to address is whether the tax law is going to change and what impact that will be. So we want to make sure we are flexible in terms of our cash and basically to meet the objectives of our shareholders. I mean, certainly, there's an argument, aside from not tapping the debt market at all, there's an argument that giving rates, being so low, we should have borrowed as much as we could and be opportunistic and then figure out what to do with the money in terms of whether it be share buyback or whatever. We don't want to be knee-jerk reaction to that, but we want to make sure we're participating. So I think the message you should take away from what we did in the debt offering is we were opportunistic, we saw some good rates and we took advantage of it. We were conscious of our investment grade rating and we still have one more to go. And we want to make sure by the end of the year, we're positioned, so that we finally get them to move on that, and we're hopeful that they will. And so all of our various constituencies are affected by whatever decision we make and by our dividend policy, by our share buyback policy, by deleveraging. All of that rolls up into how we enhance shareholder value and we will continue to make those calls as they come up and as we see opportunities. I think that's what you want us to do in terms of our management team.

Operator

Tim Nollen of Macquarie.

Tim Nollen - Macquarie Research

Tim Nollen from Macquarie. Two questions, actually, please. First just following up on the cost questions. I think it's nice to see staff cost organically rising just about in line just below a fact, I guess, organic revenue growth, and even better to see the O&G line and remaining very, very low. Could you just let us -- do you have specific targets in mind that gets you to what you're considering a peer level performance a few years out in terms of those 2 lines? I think I know what they are, but I just want to make sure you're on track and what those numbers are. And then secondly, could you please talk about what you're seeing in terms of shifting budgets from TV or the broadcast or cable into online video, industry-wide, what you're seeing and more importantly for you, how that impacts you, if at all?

Michael I. Roth

The shifting is the ongoing question. Every year, everyone says TV is dead. Everything is going online and yet you see organic growth in TV. So here I go, I mean, I'm just going to tell you and I said it in my remarks, advice in terms of way you spend your money right now is critical. Analytics, in terms of where you spend your money are critical, which is why we're investing our money in talent and resources and tools to make that decision. Clearly, online spending and video and the web are all significant growth opportunities and we have the resources and talents to work it, but traditional TV hasn't gone away. Now you can look at the forecast and say that the rate that it's going, eventually, Internet is going to overtake it, who knows. But right now, we have to be able to be responsive to all of that, and in some cases, traditional TV works. In some cases, it doesn't. And we do see a considerable amount of our client dollars focusing on digital and web-based video. And certainly, the issue of the over-the-top and all these things are issues that we have to be able to address. And frankly, that confusion is good for us because that's where we earn our stripes in terms of advising our clients.

Frank Mergenthaler

And, Tim, on the cost profile as we close the difference between where we are and competitive margins, we hope to continue to see progress against the O&G performance although we're starting to bottom out. So the real leverage is going to be around staff costs. And when you look at a fully loaded staff cost ratio, that number has got to be less than 60%. And right now, it's -- we've made significant progress but we need -- there's still room to grow. When we look at the various components, it's getting greater operating leverage out of our base salaries and being very aggressive in things like temporary labor. And it's an area that all of our operating groups have been extremely focused on for years, have invested aggressively against technology and tools to allow them better visibility into things like staff utilization. And it's the metric quite frankly every time Michael and I meet with our operating folks we spend the most time on other than revenue. So that's the area that if we are going to close the gap or when we close the gap, that's the area we need to see the greatest leverage.

Tim Nollen - Macquarie Research

So even staff costs currently rising about the same pace as organic revenue growth, you're looking for efficiencies there that can keep that ratio down.

Frank Mergenthaler

Sure. I mean, and again the real estate discussion or the comments we made earlier is a good case in point.

Michael I. Roth

The reference I made to the people we are hiring have digital expertise goes to that issue. What you have is an employee base that some of whom haven't gotten the experience or really bought onto to the new digital environment. And when you bring in talent that is, it makes it much more efficient. And by the way, our staff cost ratios are going up, but organic is going up more, it's not the same. So that's a good sign when that happens, okay. Because that's where you see the leverage drawn on our people, and to the extent we're able to see talent in the marketplace and bring them onboard, that's how we become more efficient going forward.

Operator

Anthony DiClemente of Barclays.

Anthony J. DiClemente - Barclays Capital, Research Division

It's clear to me that your clients, your existing clients need the advice on what to do in the environment. I'm wondering if your clients are looking at digital as way to use earned media as opposed to paid media with respect to new projects. So that's okay for you guys, you're still providing the consulting, but I'm just wondering, are they looking to do more with less? And people talk about that in the context of social media understating -- dollars estimated on social media understating the true activity. So I'm wondering -- your thoughts on that and I have a follow-up for Frank.

Michael I. Roth

No, absolutely. I mean, that's the holy grail. I mean, if they can start shifting that and we can provide the tools and resources and content, right, because you need content to be able to do that, then that is certainly a key objective. And frankly, if we're a part of making that happen, that's what our tools and resources are supposed to be able to do.

Anthony J. DiClemente - Barclays Capital, Research Division

Making what happen exactly? Making it -- allowing them to do more with less paid media dollars? Making that possible? Is that what you mean?

Michael I. Roth

Yes. I mean and look, that's the game on the social media and -- but you still need content. You still need things that measure it. You still need access to the consumer and that relationship and what else are they looking for, and how do you build that platform. And that's what we do.

Anthony J. DiClemente - Barclays Capital, Research Division

Thanks, Michael. Frank, what I'd love to get is a better feel for incremental margin in the model. Not sure if there's a clean way for you to help us with this, but like for example, if after all is said and done for 2012, if you were to print 4% organic revenue growth, how would that flex your 50 basis point improvement in operating margins, for example?

Frank Mergenthaler

Well, we had said going into '11, incremental margin on growth of 30% was a reasonable assumption. We reiterated that on our last call. When you look at trailing 12 months, incremental margin as of 3/31, it's north of 30%. So if we in fact exceed the 3%, is there an opportunity to expand that 50 basis points margin...

Frank Mergenthaler

Sure. Right? And so 30% assumption is still a good assumption.

Anthony J. DiClemente - Barclays Capital, Research Division

But I think that using your current numbers, it's actually more like -- I could be wrong, but it's more like higher than 50% incremental margin as it stands?

Frank Mergenthaler

Well, again, if I look at what my trailing 12 is after 3/31, it's 38%.

Michael I. Roth

Yes. When we modeled out and we had our Investor Day, when we showed our glide pass, if you will, to achieving competitive margins, if we use a 30% conversion rate, that's how we're going to get there. So if we do better, we'll get there sooner.

Operator

James Dix of Wedbush.

James Dix - Wedbush Securities Inc., Research Division

Just 2 questions for you. First, when you last reported the big account review out there was Chevy where you got a win. I'm just curious at this point what are the big account reviews out there for you both where you can pick up business and any significant ones where you might be defending [ph] ? And have do you look at your position on them and the likely timing of when you'll find out? And then second, your severance for the quarter was really dead in line with what I was expecting. I just want to know if you can give a little color as to where you are expecting severance for the year as a percent of revenue, especially given the geographic trends, growth trends, you're seeing in particular the declines in Europe. Although you've been fairly vocal about things, you have not expected a lot of growth in Europe this year.

Michael I. Roth

The 2 biggest pictures out there frankly are opportunities for us. One is Unilever Media. As you may know, right now, the bulk of our Unilever media is in Latin America and we are very comfortable with where we stand on that and we view our opportunities with respect to inroads on the global media pitch. Hopefully, will be positive and we're actively engaged in that discussion as we speak. So the downside on that one is not significant. The upside we think could be very beneficial to us. The other one is the Bank of America. There, Hill Holliday is leading our pitch there. We have an existing relationship with Hill Holliday and Bank of America, which is outstanding. We certainly are comfortable and we believe our existing business is solid and we view that as an opportunity as well. We don't have any other big pitches. We have the post office with respect to Campbell Ewald and Draftfcb that, as you may know, has been extended. So that will play out towards the end of the year. The other 2 pitches we would hope to see in the first half of the year resolved. But we don't have any other big clients up for review, and frankly, which is why my comment was I think our opportunities on the upside in terms of new business.

Frank Mergenthaler

James on severance. For the first quarter, the majority of the severance was in Europe. For the full year, we historically guided people to 1% . We've trended over that for the last few years, probably 1.5% of revenues is a reasonable number and I think that the variable in that discussion again is Europe.

Michael I. Roth

Well, thank you very much for joining us. We look forward to our call with respect to our second quarter results. And thanks for joining us. Good bye.

Operator

This concludes today's conference call. Thank you for your participation.

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