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Executives

Randall Weisenburger - EVP and CFO

John Wren - President CEO

Analysts

Alexia Quadrani - Bear Stearns

Craig Huber - Lehman Brothers

Dan Salmon - BMO Capital Markets

Troy Mastin - William Blair & Company

Jason Helfstein - Oppenheimer

Ben Schachter - UBS Securities

Catriona Fallon - Citi

Matt Chesler - Deutsche Bank

Omnicom Group Inc. (OMC) Q2 2008 Earnings Call July 22, 2008 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Omnicom second quarter 2008 earnings release conference call. (Operator Instructions).

At this time, I would like to now introduce you to today's conference call host, Executive Vice President, Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead.

Randall Weisenburger

Thank you and thank you all for taking the time to listen to our second quarter 2008 earnings call. We hope everyone has had a chance to review our earnings release. We've posted to our website both the press release, and a presentation covering the information that we'll present this morning. This call is also being simulcast and will be archived on our website.

Before we start, I have been asked to remind everyone to read the forward-looking statements and other information that's included on page one of our investor presentation, and to point out that certain of the statements made today may constitute forward-looking statements, and that these statements are present expectations, and actual events or results may differ materially.

We are going to begin the call with some brief remarks from John Wren. Following John's remarks, we will review our financial performance for the quarter in more detail, and then both John and I will be happy to take questions at the end.

John Wren

Good morning and thank you for all for joining our call. Let me start by saying that we were pleased with our second quarter performance. The results were in line with our expectations. As Randy has just mentioned, he'll take you through all the details in just a couple of minutes, but there are just a couple of areas I'd like to highlight.

Our revenue growth in the second quarter continued to be strong in the US despite the difficult operating environment for many of our clients. In Europe, growth was on plan except for the UK, Spain and Italy which experienced some slower growth. Revenue growth though in the rest of the world was strong, with very solid performance in the emerging markets of Asia, the Middle East, Eastern Europe and Latin America.

As for our mix of business, revenue grew as we expected. Advertising grew at 9.8%. Organic growth in advertising continued to be strong, despite the economic challenges in the US, we were on plan. We did have some impact in the quarter from last year's third quarter loss of AT&Ts wireline business and Dell, but we'll cycle through those losses a little later in the year.

We were very encouraged by the growth in our marketing services business where growth was very strong. As Randy will explain, clients increased their spending in specialty and measurable marketing areas, such as CRM, which grew 17% for the quarter.

Looking forward, we remain cautious about the economy, but we believe we are well positioned to adjust to these changing market conditions. Despite the economic headwinds, we continue to invest in our people and our business units at record levels.

I'd like to just take a second and turn to acquisitions. As many of you know, we've been very conservative. I'm still hopeful though that we'll start to see price income more in line with our historic expectations. Despite our discipline, I guess our acquisitions have been growing at about 1% or thereabouts a little bit more over the past couple of periods.

One positive side of the economic slowdown is a reduction in the financial buyers interested in our industry. Additionally, some of our competitors who have aggressively paid in our opinion uneconomic prices for some of their acquisitions have weakened their balance sheets, and we will be limited going forward in their ability to do acquisitions. As a result, we're hopeful that pricing will become more sensible, and we expect that we'll do more deals going forward.

With that, I'll turn this back to Randy and then we'll both be available to answer questions.

Randall Weisenburger

Thanks, John. As John noted, we are very pleased with the performance of our agencies this quarter. First from a product perspective, our agencies again distinguished themselves at the Cannes Advertising Festival this year, winning each of the three top spots for Agency of the Year as well as the number one and number two spots for Network of the Year. And from a financial perspective, we feel we had a very strong quarter, as the numbers will show, especially given the overall economic backdrop that we're all observing.

Revenue in the second quarter increased $351 million to almost $3.5 billion. That was an increase of 11.2%. Revenue for the six months increased $705 million to $6.67 billion, which was an increase of 11.8%.

Operating profit for the quarter increased 12% to $517 million with an operating margin of about 14.9%, which was up almost 10 basis points from last year. For the six months, operating profit increased 11.6% to $867.6 million, and that was a margin of 13%.

Net interest expense for the quarter was $18.7 million. That was down $3.5 million from last year, and up about $7.7 million from Q1. First, the year-over-year improvement is primarily the result of not needing to make the supplemental interest payment on our 2032 bonds last July, as well as continued improvements in our cash management efforts and higher interest income on our foreign cash balances.

Those benefits were offset by higher interest expense on our Euro and Yen denominated swaps. The increase from Q1 is primarily the result of increased average debt balances, or I should more likely say lower-cash balances, as many of our larger cash payments such as bonuses and earn out payments are paid in the second quarter, as well as an increase in interest expense on our Euro and Yen swaps.

On the tax front, our reported tax rate for the quarter was about 33.6% bringing the full year rate to 33.7% which is pretty consistent with last year. Net income for the quarter increased 11% to $307 million, bringing net income year-to-date up to $515.6 million. And that was an increase of 12.2%.

Fully diluted earnings per share reflected our performance for the quarter as well as the impact of our share repurchase activity, increasing 14.3% to $0.96 per share. For the six months, EPS increased 16.7% to $1.61.

Analyzing our revenue performance, FX in the quarter and for the six months was positive at 5.2%. Looking ahead if rates stay where they are, FX should continue to be positive in the 4% range for Q3 and the 2.5% to 3% range for Q4.

Growth from acquisitions, net of divestitures, added about $38 million to revenue in the quarter, or 1.2%. And organic growth was very solid especially given the economic backdrop coming at 4.8%, adding approximately $150 million to our revenue.

Year-to-date organic growth was $331 million, or about 5.6%. You should also note our new business performance in the quarter was again very strong with net wins totaling just over $1.1 billion. As for our mix of business, traditional media advertising accounted for about 43% of revenue, and marketing services 57%. As for their respective growth rates, advertising grew 9.8% in the quarter, and marketing services increased 12.4%.

Breaking down our marketing services revenue, CRM continued to be very strong growing 17.2%, public relations was up 3.7% and specialty communications was up 4.1%. This category, specialty communications, consists primarily of recruitment advertising, healthcare and our directory business.

As we mentioned before, the directory business has not been performing well. And recruitment advertising is probably our most economically sensitive business, and it's been feeling the effects of the economy for a couple of quarters now.

This quarter, two things that affected organic growth stand out. First, we felt the year-over-year impact of the AT&T wireline and Dell losses, which occurred in the second half of last year, and we haven't yet felt the offsetting effect of some of the larger wins we had in Q4 and Q1.

And second, we are beginning to clearly see a shift in the mix of client spending from traditional media advertising to CRM. As a result, organic growth in traditional media advertising slowed in the quarter and organic growth in marketing and services, and more specifically the CRM category accelerated quite significantly.

Our geographic mix of business in the quarter was 50.4% US, 49.6% international. Within the US revenue increased $92 million, or 5.5%. Acquisitions added about $20 million, or 1.2%, and organic growth was 4.3%, adding about $72 million to our revenue.

International revenue increased $259 million, or 17.7%. FX accounted for $163 million of that growth, or about 11.1%. Acquisitions added $18 million and organic growth came in at 5.3%, adding about $78 million to our growth.

Internationally we had strong performances in the emerging markets of Asia, the Middle East, Asia and Eastern Europe, as well as in the established markets of Asia; like Australia, New Zealand and Hong Kong also we had strong growth in Latin America. We did experience slower growth in the quarter in the UK, Spain and Italy, as well as Canada.

Cash flow for the first six months was strong and consistent with historical trends. Our primary source of cash, as always, was net income adjusted for basic non-cash charges; primarily stock-based compensation and the related tax benefits, and then depreciation and amortization. Those items together totaled $669 million. Our primary uses of cash were dividends which totaled 97.3 million, capital expenditures, about 92.7 million, and acquisitions, including earn-out payments from prior acquisitions, totaled approximately $210 million.

Share repurchases for the first six months totaled 408 million, and we also received about $64 million of proceeds from option exercises and stocks sold under our employee stock purchase plans. That resulted in net repurchase activity for the six months of $344 million. As a result of our repurchase activity over the last 12 months, our average diluted share count was reduced from last year by about 3%, down to 321 million shares.

Current credit picture; we finished the quarter in a strong capital markets position. Year-over-year, our net debt balance decreased about $124 million, and our operating leverage ratios, specifically EBIT to net interest and net debt to EBIT, continued to improve. From a liquidity perspective, we also finished the quarter in a very strong position with cash and un-drawn committed credit facilities totaling almost $3.5 billion, and we had an additional uncommitted credit facilities available, totaling $600 million.

So again we believe Q2 was a strong quarter overall, and we are cautiously optimistic about how we are positioned going into the second half of the year.

Now both John and I will be happy to take questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question, then this morning, comes from there line of Alexia Quadrani with Bear Stearns. Please go ahead.

Alexia Quadrani - Bear Stearns

Thank you, a couple of questions. First, did you see any significant trends as the quarter progressed, like a meaningful deceleration of growth or anything that may suggest you would see a bigger fall off in Q3, or the back half of the year?

Randall Weisenburger

No.

Alexia Quadrani - Bear Stearns

Okay. Randy, how would you characterize the operating environment in terms of expense control? Are you being a bit more cautious or taking more drastic steps in light of a potential slow down?

Randall Weisenburger

No. We started taking steps probably at the end of last year, and certainly in the first quarter. We asked all of our operating companies to manage their costs and staffing levels on a very tight basis. So hopefully, we've been ahead of it. We'll obviously continue to adjust businesses and cost structures as the environment, or if the environment, changes.

Alexia Quadrani - Bear Stearns

And the directory business has been a bit of a drag for awhile. Any reason to keep it? Any thoughts of divesting it?

Randall Weisenburger

Yes, we are in the process of trying to divest it. I was hoping to get that deal done in the second quarter. It didn't happen. I'm hopeful that it's going to happen in the third quarter.

John Wren

But at this point, it's a little very small business, Alexia.

Alexia Quadrani - Bear Stearns

Okay .John, just one last thing to clarify: You had mentioned that AT&T and Dell, do you think you are probably going to cycle through that loss in about the fourth quarter of this year. Is that right?

John Wren

Yeah. We lost it in the end of the third quarter last year. There's about an equal impact in the third quarter, as to what we faced in the second, and then it really channels down in the fourth quarter, and then it's gone.

Randall Weisenburger

This quarter was also a little bit of an anomaly, in that some of the larger wins we had in the fourth quarter and Q1, we didn't really start seeing it in the revenues. There is a lag time with some of the losses and some of the wins.

Alexia Quadrani - Bear Stearns

Okay. I'll let someone else jump on. Thank you.

Randall Weisenburger

Thank you.

Operator

Thanks. And our next question then comes from the line of Craig Huber with Lehman Brothers. Please go ahead.

Craig Huber - Lehman Brothers

Yes. Hi, good morning. Just as you guys look out to the second half, is there any large areas or large customers or sectors that you see a meaningful pull back on in committed spending?

John Wren

A meaningful cut back that they've communicated to us? No. Obviously the automotive sector is something that has been very challenged in the United States and the environment changes every day, I think. So we remain cautious.

Randall Weisenburger

Financial Services is a sector that's probably mixed by client.

John Wren

Right. So there are challenges out there, for sure but we've been facing these all year in those two sectors. So I haven't seen any significant cut backs, with respect to us. We are not a proxy for broadcast media. So there could be a shift, as we've seen in the quarter, between very measurable marketing services which are the largest part of our company versus what is spent in the broadcast or some of the other media areas. So we have seen shifts. We haven't seen reductions to our revenue base. I don't know if I'm being clear.

Randall Weisenburger

Well, what we've pointed out a couple times is we see a shift or if there is a shift in spending from traditional to say CRM, generally we capture a bit more of the clients overall spend. Obviously there's work, labor to go with it. So we can capture a bit higher percentage of their overall spend, which certainly mitigates the changes. We also it's worth pointing out we have a much higher market share relative to our competitors in the marketing services field, so those shifts from a market share standpoint kind of moves to one of our strengths as well.

Craig Huber - Lehman Brothers

Okay. Then just a nitpick question on share buybacks. What was the average price you spent on stock repurchases in the second quarter and how many shares did you buy, please?

Randall Weisenburger

That's going to take us a minute to look up. Why don't we go to another question, and as we look it up and I get the number I'll just say it.

Craig Huber - Lehman Brothers

If I could just ask one other thing; you mentioned Canada, Spain, Italy and UK, was it all you think just economic driven, the slower growth or negative growth in those four countries?

John Wren

Spain and Italy have been more or less in an economic recession for the last couple of quarters. The UK, we saw a flat performance in the second quarter which was a slight reduction in performance. Canada, we are torn. We think there's an impact of the Dell loss in Canada.

Randall Weisenburger

I think you also had some with the currency; I think there have been historically some near-shoring to Canada with currency and I think that is basically going away at this point.

John Wren

That was specifically in digital, and primarily in digital, and some other areas. So that's equalized.

Randall Weisenburger

So basically we don't really think it's the economy. At least with the data we have, it doesn't appear to be economy driven in Canada.

Craig Huber - Lehman Brothers

Thank you.

Randall Weisenburger

Thank you.

Operator

Thanks and our next question then comes from the line of Dan Salmon with BMO Capital Markets. Please go ahead.

Dan Salmon - BMO Capital Markets

Good morning, guys. Two quick questions; Just maybe digging a little bit beyond some of your segments reporting and into your marketing services and CRM segment, are there any particular marketing techniques that you are seeing your customers and your clients rather pick up a little bit more than others, particularly in that CRM segment?

And then, secondly on the acquisition activity, it sounds like you are still mostly staying on the sidelines right now beyond sort of traditional buys in digital and emerging markets. Are there any specific areas that you're looking at? I know in the past, you've talked about analytics and targeting technology. Any updates on what type of candidates you're looking for there would be great. Thank you.

John Wren

Last question first; I think you have primarily our targets outlined pretty well for us. We think that we've been very disciplined about pricing for a long time. The financial buyers are really gone away and our competitors have really exhausted their balance sheets when you look past the fiction of net debt and you look at what the gross debt on balance sheets is.

We are in a great position going forward as opportunities come more in line to actually complete some transactions. We don't have anything teed up, as you'll see in the third quarter per se, but we do have a we have number of targets which we'll be able to pursue I think more aggressively than we have had in the past.

In terms of CRM, it's a broad array of techniques and products. It depends on the client base. It is different from financial services than it is for automotive, or than it is for consumer goods. We are very, very deep in the area and we've been enjoying it wherever there's a clear measurement that a dollar spent brings back $2 and clients are very, very willing to continue to increase their spending in those areas.

Randall Weisenburger

And basically anything that is driving I'll say next day sales or near-term sales, is probably a more accurate term, driving traffic to stores, et cetera. Going back to the question about stock repurchase in the second quarter, we bought 1.53 or just over that 1 million shares with an average price of about $48 a share.

Second quarter repurchase activity is generally our lowest quarter. That's where our highest cash outflows from, and I mentioned in my comments, bonus payments and earn-out payments. So, we tend to use our free cash to buying shares given those other payments, the second quarter is generally a lower quarter. I would suspect we will return to more normal buyback activity in Q3 and Q4. Dan, did you have other questions?

Dan Salmon - BMO Capital Markets

No, that's great. Thank you.

Randall Weisenburger

Thank you.

Operator

Thank you. And we do have a question then from the line of Troy Mastin with William Blair & Company. Please go ahead.

Troy Mastin - William Blair & Company

Hi, my first question is about margins. I believe that the ongoing growth driven by currencies has a negative mix shift effect on your margins. If I'm correct, any idea, any approximation on how much of a drag that is on margins, so we can get a context on kind of an apples-to-apples basis what your margin improvement looks like?

John Wren

It does have a negative drag. I haven't calculated it. My guess is it's in the 10 to 30 basis points range with FX at these levels.

Troy Mastin - William Blair & Company

Okay, great. Second is your net tranche converts come up at the end of this month. If they end up getting put how should we think about the impact that you could face on your interest expense or your share repurchase activity for the remainder of the year?

Randall Weisenburger

I don't think it would impact our share repurchase activity. It would impact our interest expense or reported interest expense.

John Wren

But you are really a week away, Troy, from knowing that, to put it in your model rather than us speculating about it today. I'm not trying to short list your answer.

Randall Weisenburger

And we have been reasonably good in our objective will be to keep the bonds outstanding.

John Wren

Right.

Randall Weisenburger

So I suspect, based upon past practice, I think we've had a pretty good track record at making the appropriate supplemental interest payments if they necessary to keep the bonds outstanding. I would suspect we'll do that again this time.

Troy Mastin - William Blair & Company

Okay, good. And then looking at your environment and client losses, and just trying to understand a little bit more how you view your organic growth in the quarter, has the environment changed that substantially, or should we consider the organic growth this quarter, which is a deceleration from last quarter as being primarily driven by some of the client losses that you have and the lag in tick up of new activity that you've won earlier this year and late last year?

John Wren

There was an impact to those things for sure, which muted it a bit, but there is an economic headwind out there and we are not immune from it. I think what we are seeing in the new business areas, we are winning which is great. We've seen this in past recessions where it takes a little longer to ramp up into start to spending associated with those new business wins. This happened four times that I can remember pretty clearly in my career.

It seems to be true this time around as well. When that changes, how that changes, nobody gets a memo. It's just a lagging effect, and at some point it will resume normal activity. It's just we are seeing that delay. So a win that you get today, which you would expect to start to see revenue in more normal times three months from now, you might not see that revenue coming in for five or six months, and that's pretty classic.

Randall Weisenburger

Four things to sort of highlight in organic growth. First of all, we pointed this out for a few years now. There is a Q1, Q3, versus Q2, Q4 organic difference. We've tended to have slower organic growth in Q2 and Q4, which I think is driven largely by changes in revenue recognition policy. I shouldn't say policy, revenue recognition and client contracting as clients shift. Second, is the timing of the Dell, AT&T losses and not seeing some of the offsetting larger wins coming through?

Finally, I think we saw a positive benefit in the quarter of a mix shift towards CRM. So I think those four things really drove the organic growth this quarter, some positive, and some negative. But basically I think at 4.8%, organic growth overall was inline with what we would have expected going into the quarter.

John Wren

The difference between us being pleased versus great is in absolute terms $30 million, so we can't get to that granular when we are talking about such a small number.

Troy Mastin - William Blair & Company

In terms of those that are adversely affecting organic growth, which is the most substantial?

Randall Weisenburger

I think they are probably about equal. I think the Q1, Q2 phenomena is about a point and I would think the Dell, AT&T is probably about a point.

Troy Mastin - William Blair & Company

Okay, great. And then new business wins in the quarter? $1.1 billion?

John Wren

Yeah, just over 1.1 billion.

Troy Mastin - William Blair & Company

Okay, great. I'll let someone else speak. Thanks a lot.

Operator

Thank you. And we do have a question from the line of Jason Helfstein with Oppenheimer. Please go ahead.

Jason Helfstein - Oppenheimer

Hi. Thanks. Three questions; the first, is there any kind of lag between when money is pulled out of advertising, and then moved into marketing services? Is there a lag where they are strategizing where the money is going to go? The second question, does slower advertising have an impact on your working capital? So if working capital was down year-over-year is that because of slower advertising or because of timing of the quarter close? And last question, the leverage ratio is down year-over-year. Would you guys expect to essentially raise leverage to buyback some more stock, or should we assume that you guys will be somewhat cautious with the increasing leverage, as a result of the economic backdrop? Thanks.

John Wren

Third thing, first; we'll continue to be cautious. View it as sensible, as opposed to cautious. But as Randy has said I think many, many times, for the activities of dividends, capital, most acquisitions and then dividend repurchases, they are the result of the free cash flow that we generate. So we are not stepping away from that at this point. That will all be done within our own ability to manage that.

Your first question, there is nothing scientific or measurable that I can tell you. That really depends client by client. It aggregates into where I can't give you any generalizations as to somebody walking away, say from a broadcast type of commitment and then reinvesting its money in CRM. That has more to do with bottom up plans rather than industry type of trends. And your second question...

Randall Weisenburger

It was a working capital question. Working capital came in inline. I don't have enough insight or details to say whether or not that was because of any, if there was any change because of our mix of business. I think working capital, for us cash flow in the quarter, was pretty consistent based on the past. So I didn't see anything there.

Jason Helfstein - Oppenheimer

Okay. Thank you.

Operator

Thanks. And our next question then comes from the line of Ben Schachter with UBS Securities. Please go ahead.

Ben Schachter - UBS Securities

I was wondering if we could drill down a little bit deeper into the UK and understand (sort of 38:52) what are the key verticals or what are the key things going on affecting growth there. And also to clarify one of the earlier questions in terms of what you've seen throughout the quarter, my understanding of how you answered was basically that June was the same as the earlier months and you didn't see any particular weakness in June? Just want to do clarify that. Thanks.

John Wren

That's true. The performance that we saw throughout the quarter was very consistent with plan and there wasn't any noticeable deceleration in June at all in terms of the UK.

Randall Weisenburger

I don't think there was anything that really stood out?

Randall Weisenburger

Why don't we go on to another question and we'll take a look at some numbers to come back to that one, but I don't think there was anything that stood out.

Ben Schachter - UBS Securities

All right. Just on the US organic, when you start to think about when that can recover, not getting a head of yourselves. But what do you think are going to be the leading indicators to show how that can actually begin to re-accelerate again?

Randall Weisenburger

When you go through some of the things that I said affected organic growth, you have to look at those with respect to domestic and international as well. So while I mentioned Dell, AT&T is about a point, those are predominantly domestic losses. So that kind of doubles up because you've effectively got half of our revenue in the United States, as those two items that are predominantly US were one point in total. It's really two points to the US. So I'm not sure the US really slowed quite as dramatically from an economic perspective as the numbers really appear. So, I think that will offset with CRM is also probably a little bit stronger here in the US.

Ben Schachter - UBS Securities

Okay. Go ahead.

John Wren

Ordering enough in the UK, it's probably in the aggregate of about 10% of our business. The only consistent companies that had a deceleration were our recruitment advertising business, which we fully expect and anticipate and has been going on. It muted growth. We went from being slightly positive in the first quarter to flat in the second quarter.

And just from a cursory look, there's nothing that speaks to any trend that I can tell you. They've suffered from Financial Services declines as well there plus a little nervous numbers in their overall economic situation. So I'm sorry, I don't have any more specific to tell you.

Ben Schachter - UBS Securities

And the last question, in terms of digital and the acquisitions you might be interested in there, what types of digital companies are you most interested in, platform, specific verticals, what are you thinking there?

Randall Weisenburger

We are always looking at a variety of things. One, we are looking to fill all I'll say, holes or vacancies in our current capabilities both from a geography standpoint. Each of our existing brands is looking to fill out their capabilities to better serve their client needs. We are always looking for great quality, additional platforms. Right now we have a very extensive digital capability, both from a standalone basis, as well as, we focused, or our agencies have focused on building the digital capabilities within their traditional businesses.

As we've always said, we think digital is really more of a medium than a discipline. Although, the capabilities need to be built to make sure we are able to serve our clients in that medium.

Ben Schachter - UBS Securities

Okay. Thanks.

Randall Weisenburger

Sure.

Operator

Thank you. Our next question then comes from the line of Catriona Fallon with Citi. Please go ahead.

Catriona Fallon - Citi

Yes, good morning.

Randall Weisenburger

Good morning, Catriona.

Catriona Fallon - Citi

Good morning. So, when we hear discussions about say Procter & Gamble keeping a key, an eye on spending, Nissan perhaps trimming $100 million from their add spend, maybe even Anheuser-Busch having to reign in spend after being acquired, how is this pullback going to manifest itself over the year or so? So for instance, if a $100 million campaign becomes $90 billion, where would we see that pullback? And is this primarily in media buying, or one other medium might be seeing some weakness?

John Wren

Well, if you see it for instance in media buying, you won't see it through our numbers because most of that money is going out to third-parties.

Catriona Fallon - Citi

Okay.

John Wren

It's not revenue that we capture. We are the agent so we do the campaigns. The amount of money that gets spent in media, if there is a move from traditional type of advertising media platforms to other techniques and ways to reach consumers, the shift in one off times are very positive to us, not a negative even though it may affect the media sector say in the U.S.. It doesn't have the same impact to our numbers. In many cases we can generate more revenue through the marketing services that some of that money is diverted to.

Catriona Fallon - Citi

Great. And then one other question. You'd said that you do receive a larger share of the pie for digital campaign. Can you give us some color on the contribution in a campaign like that for creative, whether it's website development, display buying, advert buying? And within that, then what are the areas of strength and how do the margins compare to this type of work versus traditional advertising?

Randall Weisenburger

Margins are pretty comparable. As far as the work goes, there's significantly more work that we do. If we are doing say, we are building websites or web presence, web marketing ideas; all of those waive is really ours. So if a client were to spend $10 million in traditional media, much of that money is going to the media. Another hunk of money is going to third parties that are actually, I'll say, producing the commercial.

Then we're getting paid for the design, architecture, creative work. When you throw that on the Web, we are getting paid for the design, architecture, creative work, plus the execution work. And very little money is really going to third parties.

If we're doing online, say, media buying and planning, key word search, banner ads, rich media whatever, again the commission percentage or the fee percentage to our agencies is generally much higher than TV. It's obviously a lot more work to spend $20 million on online than it is to spend $20 million in a TV campaign. So the commissions are generally multiples of each other. Behind it within the margin, the margins are about the same.

Catriona Fallon - Citi

Are you seeing a transition? Are clients talking about mean certainly there's the move to the web but then between TV and magazines and radio, are you seeing some specific areas of strength and weakness?

Randall Weisenburger

I haven't really heard of anything standing out in a dramatic way. Different clients have different plans and different things they are trying to execute.

John Wren

If you take a look at the automotive sector, which I think clearly is cutback in terms of its media spending, I think that has had a real impact on all those categories, certainly broadcast TV, certainly print because people are trying to, and in the same area, same spending reduction there's been an increase in terms of online type of investments and ways to reach the consumers and showroom. So certain industry sectors I think traditionally have been heavier in one media or another. And so where you have difficulties in a sector, you'll see a greater impact.

Catriona Fallon - Citi

Great. Thank you.

Randall Weisenburger

Thank you. I think we have time for one more question.

Operator

Okay, great. Thanks. That question will come from the line of Matt Chesler with Deutsche Bank. Please go ahead.

Matt Chesler - Deutsche Bank

Good morning. A follow-up on the accelerating growth that you're seeing in CRM. Beyond the mix shift between traditional and marketing services that you spoke about, was there anything unusual that took place in CRM in the quarter? Is there -- are your acquisitions concentrated all in this area? What was organic growth in the second quarter in CRM? It looks like relative to organic growth in the first quarter in CRM?

John Wren

It accelerated quite a bit in the second quarter. And I don't think the acquisitions are concentrated in the CRM space, and frankly FX is probably a little bit lower in CRM than it is in traditional media advertising as well.

Matt Chesler - Deutsche Bank

The organic growth accelerated 1Q to 2Q in CRM?

Randall Weisenburger

Yes.

Matt Chesler - Deutsche Bank

In your prepared remarks, you highlighted Asia as being strong, but did it specifically call China?

Randall Weisenburger

China was very strong.

Matt Chesler - Deutsche Bank

China was very strong?

Randall Weisenburger

Yes.

Matt Chesler - Deutsche Bank

Can you provide some commentary on the progress of Beijing related on the fixed planning relative to your expectations?

Randall Weisenburger

I can't. Maybe John can.

John Wren

I can't with any accuracy. No, I didn't bother to try to dissect it. I apologize.

Matt Chesler - Deutsche Bank

Okay. And finally, the pace of new business pitches, earlier in the year seemed to be running a little bit slower. Have you noticed any changes industry wide, or with regards to the pitches that you have involved in and the pace are they still running slower than usual this year, and if so are you still expecting or waiting for a pick up?

Randall Weisenburger

Yes, I'm still waiting for a pick up. It has been a bit slower than in the recent past. Again, this follows a pattern of just when you get economic slowdown, there tend to be fewer pitches when you are in the middle of that. At least that's historically what I've experienced and we are in that same area right now I think. There's activity, but not blockbuster activity.

Matt Chesler - Deutsche Bank

Finally, can you make any commentary regarding the level of new pitches and your involvement in that relative to your future investment and your last year margins?

Randall Weisenburger

I'm not quite sure that I understood the question.

Matt Chesler - Deutsche Bank

Is there any near-term relationship between the amount of new pitch activity that you're involved in and the margins that you're able to deliver quarter-by-quarter?

Randall Weisenburger

This pitch cost, there's definitely a cost associated with it. So there may be something, there's nothing that I can really pull out of the numbers and say that it had this affect or that effect. As a percentage of our overall cost base, I don't think those numbers probably really standout one way or the other.

Keep in mind, when we're talking about pitch activity, I think we are largely addressing kind of the bigger pitches. Sort of the three yards and a cloud of dust-type work happens everyday around the world with all our agencies.

That activity certainly continues and that base of new business, which is very important to the consistency of Omnicom is out there and I think remained in the quarter just as robust as it has been. It's the sort of the larger one-off pitches that are harder to time, they are not -- they're probably only maybe in a big year 15 or 20 of those and they don't happen on necessarily a steady quarter-to-quarter basis.

Matt Chesler - Deutsche Bank

Thank you.

Randall Weisenburger

Thank you, and I'll thank everyone again for taking the time to listen to our call. We'll talk to you soon.

Operator

Okay. Thank you very much. And ladies and gentlemen, that does conclude our conference for today. Thanks for your participation and for using AT&T's Executive TeleConference. You may now disconnect.

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Source: Omnicom Group Inc. Q2 2008 Earnings Call Transcript
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