Operator: Good morning, and welcome to the Interpublic Group Second Quarter 2013 Earnings Conference Call. All parties are in a listen-only mode until the question-and-answer portion. This conference is being recorded. If you have any objections, you may disconnect at this time.
I would now like to introduce Jerry Leshne, Senior Vice President of Investor Relations. Sir, you may begin.
Jerome J. Leshne - SVP, IR: Good morning. Thank you for joining us. We have posted our earnings release and our slide presentation on our 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 am Eastern.
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-Q 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 CEO: Thank you, Jerry, and thank you all for joining us this morning as we review our second quarter and first half results. As usual, I'll start out by covering the key highlights of our performance, Frank will then provide additional details on the quarter, and I'll conclude with an update on our agencies, the tone of the business, to be followed by the Q&A.
We’re pleased to report a quarter that saw a solid growth in many key world markets. In the U.S., which is our largest market, growth accelerated during Q2 from recent levels. In LatAm, we again had an outstanding performance. And in Asia-Pac, we posted solid growth on the top of challenging year ago comparisons. Overall, our second quarter organic growth was 2.2%. Underneath that number, U.S. growth improved to 3.3%, with contributions from a wide range of our agencies. And let's not forget, we were cycling through the last of our headwinds in the market of approximately 2%. We were led by our marketing service specialist at CMG; Mediabrands, McCann, Huge, Deutsch and several of our integrated agencies.
Leading domestic client sectors were auto and transportation, consumer goods, food and beverage, and healthcare. In the Latin American region, organic growth was 16.1%, which was on top of 27% the year ago; very strong performance. In Asia-Pac, our growth was 4.5%, which also was on top of double-digit growth in Q2 2012.
Our results also reflect the continued challenging business conditions across Continental Europe, where our Q2 organic revenue change was a decrease of 8%, due largely to decreased spend across the region by multinational and local clients, particularly in June, which had weaker than expected performance.
Revenue from acquisitions added over 1% to our consolidated organic growth. This is the result of further investments in high-growth marketing disciplines, such as digital, shopper marketing and certain areas of healthcare, as well as acquisitions in high-growth and strategic international markets.
Another highlight of our second quarter was the continued momentum we saw on the new business front. To our already strong record of account wins for the year, which in Q1 included Chevrolet in the U.S., Acura and SABIC, we added headline wins with Cadillac, Amazon media and Zurich Financial. These developments speak to the high quality of our offerings. Increasingly, they also reflect our ability to deliver open architecture solutions that pull together the best customized teams to meet client need and solve for specific marketing or business problems.
Our first half has been very strong in terms of new business. However, only a limited portion of the revenue from these new wins was a factor in our second quarter. This reflects the unusual lag in our industry between the announcement of a new assignment and the point at which revenue kicks in.
Turning to operating expenses and profitability in the quarter; operating margin was 10% and operating profit $175 million compared to 10.3% and $176 million in Q2 last year. The comparisons reflect the investment required this year to secure, as well as to service our strong new business pipeline. This means we incurred some expenses in Q2 ahead of related revenue on some of our recent wins. But these are significant new assignments, accretive to our results and that investment will pay-off going forward.
The other key factor that weighed on profitability in the quarter was the impact of challenging business conditions in Continental Europe.
We will be very focused on converting revenue growth to profit at high rates in the second half of 2013, as we have done in recent years. We'll also be diligent in managing the impact of declining revenue in Europe. These will be the critical factors in delivering on our margin objective for the full year.
Earnings per share for the second quarter was $0.18, compared to $0.22 a year ago, which benefit from a lower effective tax rate.
Other items of note in Q2 involve additional progress in our program to return capital to shareholders and further strengthen the balance sheet. During the quarter, we bought another 7.5 million shares using $105 million. Since initiating our return of capital program in 2011, we returned a total of $1.2 billion to our owners through a combination of dividends and the repurchase of 88 million shares, and we retired an additional 33 million dilutive share equivalents through the redemption of convertible debt.
In addition, earlier this week, we completed the redemption of our $600 million 10% notes, which we had refinanced at some of the lowest rates in our Company's history. We will begin to see significant interest savings from this transaction beginning in this year's third quarter.
Year-to-date our performance in the new business arena has been noteworthy, and our results at major industry award competitions have been very strong this year. This is a reflection of our strong talent base across all our marketing disciplines, particularly in terms of creativity and our digital expertise. We also continue to see the benefits of our successful deleveraging and the financial strength of our Company. A combination of competitive top line growth and expense discipline will allow us to deliver on our full year objective of 2% to 3% organic revenue growth, and 50 basis point improvement in operating margin.
I’ll now turn things over to Frank for some additional details, and we’ll rejoin you after his remarks.
Frank Mergenthaler - EVP and CFO: Thank you, Michael. Good morning. As a reminder, I hope you're referring to the slide presentation that accompanies our webcast.
On Slide 2, you’ll see an overview of results. Organic growth was 2.2%, which includes 3.3% in the U.S. and 0.8% internationally. Growth in LatAm and Asia-Pac was strong. Our decrease in Continental Europe was steeper in the quarter than recent trend as was our U.K. result. Q2 operating profit was $175 million and margin was 10%. Margin pressure was attributable to two primary factors. First, the high rate of new business additions. Second, the revenue decrease in Europe. We had $1.62 billion of cash and marketable securities in the balance sheet at quarter-end.
As Michael mentioned earlier, we had just completed the very accretive call at 105% of our 10% notes. Pro forma for that transaction or cash balance will be reduced by $630 million. Diluted EPS was $0.18 compared with $0.22 last year, while our tax rate was significantly lower.
Turning to Slide 3, you’ll see our P&L for the quarter. I’ll cover revenue and operating expenses in detail in the slides that follow. It's worth noting here that our Q2 tax rate was 41.9% which is high for us due to greater losses in certain foreign jurisdictions, particularly in Europe where we received no related tax benefit. In contrast, last year's Q2 included a low tax rate of 32.3% having benefit from discrete items in the period. We still believe our normalized rate for the full year will be in the 37% to 39% range as we said on our Q4 call. Also, near the bottom of this slide, average diluted shares were 448 million, which is a decrease of 6.2% from last year, as a result of our share repurchase program. At quarter end, there was $420 million remaining under our current repurchase authorization.
Turning to operations on Slide 4; revenue in the quarter was $1.76 billion, an increase of 2.4%. Compared to Q2 2012, the impact of a change in exchange rates was a negative 100 basis points, while net acquisitions and dispositions added 120 basis points. The results in organic revenue increase was 2.2%. Worldwide, by client sector, we were led by strong growth in auto and transportation, followed by healthcare, financial services and consumer goods. We had decreases in retail and in tech and telecom sector.
As you can see on the bottom half of the slide, the organic increase in our Integrated Agency Network segment was 0.8%. The IAN segment grew both in the U.S. and internationally. However, this is the part of the portfolio in which we saw most of the decrease in Continental Europe.
At our CMG segment, we again saw strong performance with 9.3% organic growth in the quarter and 11.5% in the first half. We had very strong growth across public relations, sports, marketing and events.
Moving on to Slide 5, revenue by region. In the U.S., organic growth was 3.3%. This is well above the level we had been tracking for several quarters, and reflects strong growth across many of our agencies and client sectors. It's also important to note that our total growth in the U.S. was 4.8%, which includes 150 basis points from net acquisitions over the trailing 12 months.
Turning to international markets, the U.K. decreased 1.3% organically in Q2, though it remains up 4.4% year-to-date. The performance in Q2 was primarily due to lower spend by existing clients.
Continental Europe decreased 8% organically. It's clear that macro conditions continue to weight on client willingness to invest in the region. Revenue in the month of June was under notably more pressure than we had seen earlier the quarter. Germany, which is our largest market in the Continent and which had been stable last year, decreased in Q2. France, Italy and Spain, reached negative as well. The Continent was 11% of our Q2 revenue. We have done extensive work to lower expense base in Europe and will continue to manage expenses to the revenue reality we face.
In Asia-Pac, our largest market outside the U.S., organic revenue growth was 4.45% in Q2, on top of 14.3% a year ago. Our growth was led by the Australian market followed by India. We continue to expect solid regional growth for the full year.
In LatAm, Q2 organic revenue growth was 16.1%, an outstanding performance. We had contribution from McCann, Lowe, Media, and CMG across all of the largest markets. Our other markets group decreased 1.8% organically.
Moving on to Slide 6, we chart the longer view of our organic revenue change on a trailing 12-month basis. The most recent data point is 0.9%, which is updated to include Q2 '13 and the roll-off of Q2 '12.
Moving on to Slide 7, operating expenses. Total salaries and related expenses were 63.8% of revenue in Q2 compared to 63.5% last year. For the six months, our SRS ratio was 68.3 compared with 68.1 last year. Severance expense in the first half was higher this year by 20 basis points. As a reminder, first half will be seasonally lighter revenue for us which impacts our salaries ratios. Our total headcount at quarter-end was 44,800 which is an increase of 2.7% over the course of the quarter. Over 40% of our additions were due to acquisitions closed in Q2, mainly in India. We also had a talent to support our growth in LatAm, Asia-Pac and new business wins in the U.S. as well as our high-growth digital, marketing services and media disciplines. Offsetting these recent investments were reductions in areas of the portfolio where our revenue decreased.
Incentive expense in the quarter was 2.8% of revenue compared with 3.3% in Q2 2012. Through six months, expenses for our long-term incentive programs decreased from last year due to shortfall in our 2012 performance comparable target. Through six months, our expense for annual incentives in 2013 is at the same level as it was a year ago. Our expense for temporary labor was 3.6%, compared with 3.7% a year ago.
Turning to office and general expenses on the lower half of the slide; O&G was 26.3% of revenue in Q2, the same level as a year ago. It was $461 million compared to $450 million a year ago. Most of the increase was due to higher pass-through expenses, which are offsetting revenue and our profit neutral. As you can see on the slide, occupancy increased $3 million which is a result of higher lease costs under renewal in New York, and the double carry rent expense during agency relocations.
On Slide 8, we show our operating margin history on a trailing 12-month basis. The most recent data point is 9.6%.
Turning to current portion of our balance sheet on Slide 9, we ended the quarter with $1.62 billion of cash and short-term marketable securities, which compares to $1.5 million a year ago, an increase of approximately $110 million. The comparison reflects that we returned over $528 million to shareholders over the last 12 months in share repurchase, and common stock dividends. As we've already mentioned, our June 30 cash balance includes $630 million, which was subsequently used to redeem debt.
On Slide 10, we turn to cash flow for the quarter. Cash provided by operations was $184 million compared with $157 million a year ago. Working capital was a source of $17 million compared with a use of $16 million in Q2 2012. Our investing activities used $43 million, chiefly for CapEx and acquisitions. Our financing activities used the $122 million, which includes $105 million for the repurchase of 7.5 million common shares at an average price of $14.09 per share. Our common stock dividend used $32 million.
Slide 11 charts our debt reduction over the past few years. We had a short period of double carry following our debt raise last November, which is reflected here on 12/31/2012 and 6/30/13. Pro forma for the redemption completed on Monday, total debt of $2.3 billion on June 30 would be reduced by $600 million to $1.7 billion. You'll recall that in November, we prefunded the redemption at a blended rate of 3.2%, which means the annualized reduction to our interest expense will be approximately $40 million. We will record a charge in Q3 for the $30 million cash premium paid to redeem the 10% notes, plus the write-off of unamortized cost. The total charge of approximately $45 million will be below the line and will not impact Q3 operating profit.
In summary, on Slide 12, we are pleased with our growth in certain key markets in Q2. As we move to the second half of the year, we are focused on profit conversion under our revenue growth as well as managing through the challenges in Europe.
At this point, I'll turn it back over to Michael.
Michael I. Roth - Chairman and CEO: Well, at the midpoint of the year there are significant accomplishments that demonstrate the underlying strength of our agency brands and our longstanding commitment to organically developing digital talent and embedding it throughout our organization. These are the factors that are driving solid organic revenue growth and a strong record of new business wins, which continued in the third quarter.
We remain new business positive for the year-to-date and trailing 12 months, and we continue to see a solid pipeline of opportunities across our organization. The quality of our product is also highly competitive and trending positively.
At Cannes, the industry top award competition which recognizes the most outstanding work from the full range of marketing disciplines and across all media channels, IPG Agencies took top honors. We won 30% of the Grand Prix awarded, more than any other holding company, including in the cyber, direct, film, integrated, and PR categories. Draftfcb and McCann both enjoyed their best performance in many years and McCann Australia's Dumb Ways to Die was the most awarded campaign in the 60-year history of the festival.
Whether in PR and healthcare communications, or sports and entertainment, and interactive marketing, our agencies consistently distinguished themselves in terms of industry recognition. This clearly shows that we have the people and the expertise to help our clients generate the kind of big ideas they need to win in the marketplace. At CMG, we continue to see our agencies win market share, invest in digital talent and capabilities, as well as partner effectively to deliver an integrated offering. Weber Shandwick and GolinHarris are best in class in the PR sector; just as Octagon and Jack Morton lead the way in this respective areas of expertise.
Mediabrands once again delivered strong results with a progressive and client-centric operating structure that combines traditional media cloud and leading-edge offerings across all digital platforms, as well as the industry's most developed pay-for-performance model. McCann continues to show progress. New business has been positive. Senior talent is being added and the organization is building momentum. It also benefits from a global network that is second to none and ideally suited to helping multinational clients succeed in the world's high-growth markets.
Draftfcb has faced revenue challenges this year to its 2012 client losses. But its holistic and highly accountable marketing approach remains right for today's client's needs. The agency has made progress in raising the bar on its creative product and we believe it will attract talent and new business once the new leadership is in place.
Performance at our U.S. integrated agencies was solid in the quarter and for the first half. This group is particularly strong in key areas such as digital, strategic planning, and creative. We've also been pleased to see successful management transactions at a number of these agencies that will ensure continuity and continued success.
Late last year, the Martin Agency named Matt Williams as its new CEO. And during the second quarter at Hill Holliday, Karen Kaplan became only the third CEO in the agency's 45-year history. More recently, we announced the management succession at Campbell-Ewald, where Jim Palmer assumes the CEO role. After an intensive three-month collaboration that was instrumental in our Cadillac win, we also announced that Campbell-Ewald would become part of Lowe, representing the network in the U.S. and providing it with a base from which to grow in this key market. Both the Lowe and Campbell-Ewald leadership teams are very enthusiastic about this new partnership, as are we.
In conclusion, our second quarter results showed good revenue growth as we built on new business momentum that's been apparent since the beginning of the year. With growth, we have a proven track record of controlling costs and managing to the margin. This will be a primary focus for us and our operating teams during the balance of this year. The significant deleveraging we've undergone and the strength of our balance sheet provide additional powerful leverage that allow us to support the strategic needs of our business and also return capital to our owners.
We have outstanding agency brands that are well positioned to help clients succeed in an increasingly complex media and consumer landscape. Our long-standing strategy of embedding digital at the core of all of our offerings and agencies continues to prove itself; and our capabilities in high-growth BRIC and other emerging markets are strong across our major networks.
This combination of factors, plus the strong financial foundation and a focus on cost management, will allow us to deliver on our full year targets of organic revenue between 2% and 3% and a 50 basis point improvement in operating margin. This in turn will drive continued shareholder value this year and in the years to come.
With that, I thank you for your support. And at that, we open it up for questions.
Operator: Alexia Quadrani, JPMC.
Alexia Quadrani - JPMC: Just a couple of questions. First, you mentioned that the headwinds of, I guess, 2% still hitting the second quarter from losses last year. Was there any incremental benefit, I guess, in the second quarter that was a bit of an offset from your sort of bigger headline wins like Chevy, or is that really going to impact starting in Q3?
Michael I. Roth - Chairman and CEO: Well, first of all, obviously, we do have revenue in the second quarter from the new wins. But as we indicated, we're ramping up on the employee base and costs associated with that win. So, we don't see a lot of incremental margin in the second quarter. Frankly, that's one of the reasons we have a drag on margin in the second quarter, because we've added to our employee base. Just to give you a perspective, our employee base and headcount exceeded by – we added in this quarter a couple of hundred employees, so we won't see that impact until the third and fourth quarters. So there was some revenue, but not big margin improvement.
Alexia Quadrani - JPMC: But if you're going to take a look at the third quarter – and Michael, I have to ask about the third quarter.
Michael I. Roth - Chairman and CEO: What took you so long, Alexia?
Alexia Quadrani - JPMC: Taking a look at that, I mean, would you expect, with the headwinds coming off, maybe more of a benefit to the top line with some of the bigger account wins maybe coming on board, would you expect a pick-up? And then I guess more specifically, on the weakness you saw in Europe in the month of June, I guess, any color you can give us on that, any one-time-ish in nature do you think it will continue to be a bigger drag for the full quarter in Q3?
Michael I. Roth - Chairman and CEO: Well, if you do the math, obviously, with our first half year results, we're expecting improvement in our margin in the second half as well as an increase in revenue because of our new business win. And frankly some new business wins we hope to announce in the third quarter. So that’s how – and the reason we were able to affirm what we said in terms of our objective of 2% to 3% organic and an increase of 50 margin points, if you will. So, yes, we think the second half – and traditionally, our second half is stronger on the revenue side and we convert in the second half of the year. So, that is the reason we're affirming, if you will. As far as Europe, as we indicated, June came in as a surprise to us in terms of its impact, particularly in Germany. Germany was positive last year, so there was a harder comp in June, if you will, for Germany. But that still is an area that we have some concern about in terms of watching, and, obviously, whenever we see a decline in revenue, we look at expense rightsizing, if you will. We don't have a lot of – we never counted on a big recovery in Europe, as we’ve said in the prior calls, but this one particular impact in June was a little bit more dramatic than we were expecting. Hopefully, we'll see better recovery, but at this point we can’t comment on that.
Operator: John Janedis, UBS.
John Janedis - UBS: Sticking with Europe, Michael, your results were a little bit weaker than some of your peers. Can you attribute that at all to maybe your market or category exposure? And do you need to see any kind of improvement to deliver the margin target?
Michael I. Roth - Chairman and CEO: Well, clearly, if you look at auto and transportation, which obviously was a very strong sector for us, most of the growth was in the United States. So that could account for some of it. If our competitors are stronger in Europe on the auto sector, then the answer to that would be yes, okay? The other thing is, this business, we all have different clients in different sectors. In some quarters, we outperform our competitors. In other quarters, it's the reverse. A lot of it has to do with where our clients come out. We have the large multinational clients all over the globe, if you will, and in some cases, our clients spend differently. Unfortunately, our clients don't focus on our quarterly earnings. So therefore, how they spend is a different function. But I think you raise an interesting point on the auto sector because we are overweighted, if you will, on U.S. auto; and that actually bodes well for us for the rest of the year.
John Janedis - UBS: Then can you just give us an update on McCann? And at this point, is Paris's full leadership team still in place?
Michael I. Roth - Chairman and CEO: Yeah, McCann is – first of all, we were very pleased with its performance in Cannes. Historically, everyone looked at McCann as this strong global agency, and everyone looked to these smaller shops on the creative side. I think the performance of McCann and Draftfcb in Cannes was an indication that you could be a global network, and really succeed on the creative side. So we're very pleased with the changes and the impact that both Harris and Gustavo and Luca are having in the marketplace, particularly with our multinational clients. One of the issues I've always said is we want to make sure that we keep the back door closed. I think the entire team, they've been out there, Harris, I know, and Gustavo and Luca are all traveling and they're meeting with our clients; and I think they've done a tremendous job in settling down our multinational clients as well as focusing on new business. And I think that bodes well for us in terms of achieving our objectives. And certainly, McCann is in a stronger position now that it's been in and we expect it to continue. We're always looking to add talent. We just announced Chris Macdonald coming into the United States. That's a great addition to the McCann team. But we're always looking at it, but we're very pleased with our ability to recruit and the people we have right now.
John Janedis - UBS: So one final question for McCann then, Michael. Is it fair to say then any kind of incremental severance is now behind it?
Michael I. Roth - Chairman and CEO: It's an interesting question, because we always say our severance number is around 1% and we're always exceeding it. I think what that does is it shows that we are very strong in terms of matching our expense profile with our revenue. So, if we're at 1% to 2 % – 1.2% or 1.3% going forward, I think that seems to be more consistent as we go forward. And then again in Europe; the impact on Europe, it takes us a little more on severance because of the social rules out there. And if actions have to take place in Europe, those severance numbers are a little bit higher. But that's something we're going to look into as we go forward. But I think we view it – whenever we take severance actions, we look for the payback on those actions. And obviously, we take them with a view towards improving our margin on a longer-term basis.
Operator: David Bank, RBC Capital Markets.
David Bank - RBC Capital Markets: So somebody had to ask about 3Q. I guess I'll push a little bit further than that. No good deed goes unpunished, right?
Michael I. Roth - Chairman and CEO: Right.
David Bank - RBC Capital Markets: So, when you guys entered the year and you kind of set the guidance hurdles, obviously, you knew there were some business coming in, but it sounds like there has been some additional momentum gains that have probably, pleasantly surprised you. You're not going to benefit from the full efficiencies and revenues of all that business especially as you kind of onboard people and cost associated with rolling it out. So my question is, clearly you head into 2014 with the cost baked in and the momentum like really formed. So if we think about you being able to do 50 basis points on two to three in '13. Can you give us some context for why it shouldn't be better in 2014?
Michael I. Roth - Chairman and CEO: Well, I'd like to get through to 2013 before I give you guidance on 2014. But if we keep the back door shut, and we continue to improve on the revenue side and the macroeconomics continue to be – growth, if you will, as opposed to entering into a recession, I think 2014 should be fine. But at this point, we are focused on getting through 2013. But we're very focused on keeping the back door shut, and looking at our cost because what you don't want to do is get ahead of it and anticipate a lot of things that until they happen, you don’t want to have a cost profile. It’s not kind of build it and they will come. I think that's one of the fundamental differences in our business these days; and that is, even when we pitch new business, we have to ramp up – and clients are understanding that you don't have a 100 people waiting in a room to jump on new business as soon as it comes in the door. So whenever we have a pitch, and it's a big one – take for example, the Acura win at Mullen, we’ve added a significant size of headcount to support that business, and it was well understood in the beginning that we have to ramp up to do that; and that's the way our business model operates. So that said, if we keep our back door closed, we continue to focus on our existing clients, and when new business pitches come up, hopefully we'll win more of our fair share or our fair share of new business wins. Then 2014 should be okay, subject to the macroeconomics. That's not on the forecast for 2014, but that's a mechanical calculation.
David Bank - RBC Capital Markets: Can I just ask one quick follow-up? I think in your commentary, you had mentioned something about June being a bit of a surprise, kind of turned down in different places. I was wondering if there's any more color on what drove it. Did you see a continuation of the trend, like what happened?
Michael I. Roth - Chairman and CEO: Well, in June, what I said was in Europe, we saw a spike down, if you will, particularly in Germany and France actually. But that's – I didn't say that was true for the rest of the Company. I was focusing on why our European numbers were down. And July isn't over yet, so it's hard for me to comment on what impact it has on the rest of the year. But again, it's 11% of our total revenue. Not that that's insignificant, but we didn't build in big recoveries for Europe. So that's why we're comfortable stating where we are in terms of our ability to achieve our goals.
Frank Mergenthaler - EVP and CFO: We saw, David, softness in both global accounts and local accounts, in both of those markets.
Operator: James Dix, Wedbush.
James Dix - Wedbush Equity Research: Just a couple of questions. I guess, just looking at the first half, how did margins come in versus your internal expectations, obviously, as you had to adjust them for new business wins? And also, just within that, are incentives through the first half of the year kind of running kind of in line with or above or below kind of your original plan for the year? And then I just – two follow-ups from that, but I'll just stop here.
Michael I. Roth - Chairman and CEO: Well, first of all, I think Frank answered the question on incentives. Because of our long-term incentives and we have to true it up and last year we were a little bit off, that accounted for some of the diminution in our incentive expense. And we manage this business on a full year basis. And whether we were on target or not, clearly whenever you have new business and you have to ramp up, the ramp-up isn't built into your objectives for the year. So, if you want to look at it that way, you don't build in. Unless you know the business wins are there, you don't build it into your plan. So that's why we look at this business on a full year basis, and there'll be spikes up and down on a quarterly basis. That said, what we're saying is that our incentives are in the range of 3.5% for the full year. That's a reasonable number to use based on us achieving our goal of the 50 basis point improvement. And it's clearly one of our levers, so that if we fall short, then you can expect to see our incentives reflect that we fall short. We have a pay-for-performance model in terms of our networks as well as in corporate, but we don't really see that until frankly the fourth quarter.
Frank Mergenthaler - EVP and CFO: James, on the margin expectation, it's probably tracking below where we thought for a very good reason because we've been very heavy on the new business. And for the softness in Europe, if you just take the second quarter, there's probably a 50 basis point impact on the second quarter margins for those two events. Just the onboarding of people behind the new business wins, which is, again, we'll see the return on that in the back half of the year. Then, the softness in Europe where you see June we can – you can’t adjust your cost base that quick, so it has a negative impact.
James Dix - Wedbush Equity Research: Of those 50 basis points, would you say still a majority of that was due to just the ramping for the new business?
Michael I. Roth - Chairman and CEO: Between the two events I called out, it was 50 basis points. I don’t want to be more granular than that.
James Dix - Wedbush Equity Research: Okay. No more granular than that.
Michael I. Roth - Chairman and CEO: Yeah.
James Dix - Wedbush Equity Research: Okay, fair enough. And then I guess, just intangibly then, are you feeling more or less confident in your full year outlook than three months ago or kind of about the same given all the moving parts with the new business in Europe?
Michael I. Roth - Chairman and CEO: What we always do is we have our agencies, and our networks come in and talk about pipeline. I like our pipeline where it is now. We know we have some potential wins in the third quarter, hopefully it will be announced. A lot of our forecasting is based on what we call to be generated which is business that we expect to win and so on. So right now, we’re sticking to our – what we said our objectives were. Obviously, the new business wins will help us in achieving our goals. Like I said, we’re going to focus on revenue generation, cost-containment in terms of getting our margins in-line, and keeping the backdoor closed. This business is just about that. Make sure you have the right talent. Make sure you have the right offerings, and service offerings that are competitive in the marketplace. Don't let your expenses get out of line and win new business as it comes up. Right now, we are on track to do that.
James Dix - Wedbush Equity Research: Then my last one is – just given the huge growth you've been seeing in some quarters, specifically in Latin America. I was wondering if you could just comment a little bit on the growth of the overall market there, and whether you're seeing any changes in competitive structure which are helping you on a more recurring basis. Are certain competitors just falling by the wayside or...? I was just kind of curious as to your color on what's going on in that market there.
Michael I. Roth - Chairman and CEO: Well, in Latin America, we've always – all of our networks, our global networks and our media offerings always – and our marketing services business are very strong in Latin America. We've done transactions in Latin America to bolster it. For example, with McCann, the (W) acquisition, CUBOCC on the Mediabrands side. So, we're very comfortable with our positioning in Latin America, and I think our performance reflects the fact that we're competitive across-the-board; and that kind of improvement just basically proves that fact. We have a lot of exciting things going on in Latin America, particularly in Brazil with the World Cup, and with the Olympics coming down. So there's nothing to indicate that Latin America is going to have a dramatic reversal. Obviously, some of the social issues that have happened in Brazil raises some concern. But frankly, right now, we're very excited about what's happening down there, and we continue to invest in our people down there. Frankly, our clients are investing there, which is why we're seeing the improvement that we're seeing. So we're very comfortable with that market. India is another area where we've invested very strongly. In fact the last quarter, we had three transactions pretty much close in India, whether it be in the PR side of it, on the media side of it, and on the advertising side. So, India – and it performed high single digits in the quarter, and we see India as being a strong market for us going forward. So, I think on the emerging markets, I believe we're very well positioned in terms of our global offerings, and we continue to invest behind our brands in those locations.
Operator: Brian Wieser, Pivotal Research.
Brian Wieser - Pivotal Research: I was wondering, can you talk about the costs that you tend to incur when you're actually launching a pitch or when you're choosing to participate in a pitch? Generally speaking, how do you think about benchmarking? So I think that most investors are unaware, just how expensive some of these participating in pitches are, let alone winning them, so that was my first question, and then I have a follow-up.
Michael I. Roth - Chairman and CEO: Yeah, I mean, you're absolutely right. You've been on the other side, so you know. It's not unusual to incur $1 million of expenses on a pitch. You want to put your best foot forward, and these days it's very competitive. What's interesting is that we're chasing businesses that historically some of our global networks would have been too small for them. But right now, given the competitive nature of the landscape, we're all chasing businesses. And fortunately, the benefit of the holding company model is we have a number of offerings competing for the same business. So, one of those – take, for example, if we have two or three agencies competing on a particular client and one of them wins, the other two has incurred expenses, that they're not going to recover. So we have to be very careful in terms of picking our battles. But yes, it's not cheap to chase these expenses – these new businesses, and they run into millions of dollars. And that's why we say if you're going to do it, you got to win it. And so we take it very seriously. And you're right. And that certainly accounts for part of the expense profile that we build into our forecast.
Frank Mergenthaler - EVP and CFO: And Brian, we see it in the temp labor line, the agencies that are more active pitching their temp labor spikes.
Brian Wieser - Pivotal Research: And then purely – so you really incur the cost at the time of the pitching and it’s not being deferred?
Frank Mergenthaler - EVP and CFO: Never. Nothing is deferred.
Michael I. Roth - Chairman and CEO: Yeah, clients are great. They say, put your best foot forward. We go out and we incur production cost. I mean, if you look at some of the major pitches, we're actually running commercials to show our capabilities and our strategic thinking. And the economics of this is such that if you win and the strategic thinking and the creative that went into the pitch is the one that’s adopted, then obviously your recoup it faster, you don't have to reshoot a lot of it. But there is a lot of mechanics here, and you're absolutely right, it costs money to win business. And I think you're seeing that in our results in the first half. But the good news is we won.
Brian Wieser - Pivotal Research: That’s true. And just one – let's think to that clarification first. One other question then on Draft. Can you update us on the timing around the arrival of the new management team, and is it safe to say that any strategic changes or any other changes are going to be waiting until then or is it like status quo for the agency until then?
Michael I. Roth - Chairman and CEO: We were thinking of – certainly, we’ve been looking at strategic changes. Carter will join us sometime in September and we're excited about that. In the meantime, we're managing our business. Neil Miller and the team at Draftfcb are doing a tremendous job. In fact, we just had some positive news on some clients. And so, it’s not that we're sitting around waiting, and we are doing some recruiting along the way. Whether the timing of the recruiting will take place at the exact time, Carter comes or not, we're running out of time, so it probably looks that way. But we're excited about what's on the horizon and some of the people we've been talking to are really excited about potentially joining Draftfcb or, frankly have already signed on to join. So I'm real excited about the team that when Carter finally arrives, he'll be joining in terms of what the future of Draftfcb will hold. In the meantime, we're taking a – over here in corporate, we're taking a close role, if you will, in the future of Draftfcb and managing it through this interim period.
Operator: Craig Huber, Huber Research Partners.
Craig Huber - Huber Research Partners: I have a housekeeping question first, please, on currency. Frank, if the currency rates held flat, like they are, say, now, for the rest of the year, what would be the currency impact do you think be for the third quarter and fourth quarter on your overall revenues, please?
Frank Mergenthaler - EVP and CFO: Probably, for the third and fourth quarter, somewhere between 1.5% and 2%; and for the full year, about 1.5% negative.
Craig Huber - Huber Research Partners: Then my other question is, is there any client reviews of significance here in the U.S. or overseas that investors should be aware of?
Michael I. Roth - Chairman and CEO: There are no significant reviews. We do have Pizza Hut up for review. It's a high-profile client. We've had it for a number of years, and a number of IPG Agencies are pitching that business. But absent that, we don't have any big clients in review. Every time I say that, I worry when I get back to the office, I'll get a phone call saying we have a big one in review. But right now, I'm knocking on wood here, we don't have any big clients in review.
Craig Huber - Huber Research Partners: Then my final question, Mike. On your 2015 operating margin goal of 13%, at the peer level of goals, margins out there, what is your thought on what sort of average organic revenue growth you would need here for the next two and a half years in order to get to that full year of 13% margin goal for 2015?
Michael I. Roth - Chairman and CEO: Well, right now, obviously, we've used – historically, our business has been 3% to 5%. We're not quite there yet. Our forecast– from Magna is certainly for this year is 2% to 3%, maybe a little higher there. I think between 3% and 5% in terms of organic growth is something that you could use in terms of overall macro impact.
Operator: Peter Stabler, Wells Fargo Securities.
Peter Stabler - Wells Fargo Securities: Just a couple of quick ones for me. Could you please remind us of the geographic distribution of your first half headwinds this year? And then secondly, you alluded to a fairly sizable contribution in the U.S. from acquisitions. Could you just help us remember what those assets were?
Michael I. Roth - Chairman and CEO: The bulk of the headwinds were in the U.S.
Frank Mergenthaler - EVP and CFO: And on the U.S. acquisition front, we had a shopper marketing company that we bought. We had a healthcare company that we purchased. And those two are the largest.
Michael I. Roth - Chairman and CEO: Right. The ChaseDesign and...
Frank Mergenthaler - EVP and CFO: Hudson.
Michael I. Roth - Chairman and CEO: Hudson Global.
Operator: Matt Chesler, Deutsche Bank.
Matthew Chesler - Deutsche Bank: A couple of questions to help think about how the year plays out from here. One is focused on the U.S. So, there were 200 basis points of remaining headwinds in the second quarter that you just finished. Do you have any of it that are worth calling out in the third quarter, or should we be thinking that those are pretty much behind you? And then just related to the Olympics, clearly you benefited in the third quarter of last year in the U.K. I presume a lot of that was events-related.
Michael I. Roth - Chairman and CEO: Yeah.
Matthew Chesler - Deutsche Bank: What was the distribution of the work that you can call out as globally? And to what extent did you have some of that in the third quarter in the U.S. last year or anywhere else?
Michael I. Roth - Chairman and CEO: No, I think the bulk of it was in Europe, and it was Olympics-related. So that is a headwind, if you will, in terms of comparisons. We don't have another Olympic in the third quarter.
Frank Mergenthaler - EVP and CFO: And I think last year we disclosed it was $20 million to $25 million.
Michael I. Roth - Chairman and CEO: $25 million, exactly. But on other side of it, there wasn't a lot of margin associated with that business.
Frank Mergenthaler - EVP and CFO: No.
Michael I. Roth - Chairman and CEO: Want to do something about that at CMG.
Matthew Chesler - Deutsche Bank: Right. But did you have any significant Olympics-related work that was serviced out of the U.S. as well?
Michael I. Roth - Chairman and CEO: Yeah. No. No, we don't have any, particularly in the U.S.
Matthew Chesler - Deutsche Bank: Then I'm just interested in a little more color about some of the potential new business that you hope to announce in the third quarter that you referenced a couple of times on this call. So, are these situations where you pretty much won the thing, but you're waiting for approval from the clients, or you're just really close and you're feeling good about that? And then just can you scale some of those? Are they on the level of the few that you announced for the second quarter?
Michael I. Roth - Chairman and CEO: Well, no, you don't get a – there aren't big pitches like Cadillac lying around out there. There are a couple of media clients that are of size, and I'm fairly superstitious. So, until it's signed and we can announce it, I don't like to count it as a win. But we're feeling positive about some of these on the media side and some traditional pitches as well. So, again, there aren't any really big pitches out there right now; and as I said, you never know. But right now, we have some big, say, some media pitches out there. I'm reluctant to tell – to name them because frankly some of them may not have been announced, and I don't want to jump to –. But I think our pipeline is solid. Let me put it to you that way.
Matthew Chesler - Deutsche Bank: Then in Europe, it sounds like the weakness that you saw in Germany, France in IAN that – maybe it wasn't in auto and transports, can you talk to the categories that drove some of that, CPG…?
Michael I. Roth - Chairman and CEO: What's interesting – it was across-the-board. We were looking to see if it was one particular area so that we can call it out, and say it was an anomaly. But frankly – again, remember the size of our business there is not significant. So therefore, small impacts add up, and that's what you're seeing. So you're not seeing a $10 million reduction falling to the bottom line. It's a lot of small stuff across these different markets that have affected us. Again, that's a – hopefully, that will be a rub of the green in terms of our clients in terms of how they look at their spend, but we can't comment on that yet.
Operator: Ben Swinburne, Morgan Stanley.
Benjamin Swinburne - Morgan Stanley: A couple of questions. Frank, you gave some really good color on the quarterly impact from some of the moving pieces. But one was pass-through you mentioned up front in your prepared remarks. Can you just remind us sort of regionally where that shows up? And on the expense side, I believe that's other O&G, but just any little color on...
Frank Mergenthaler - EVP and CFO: Yeah, it's in the O&G line. It makes up almost all of the year – the quarter-on-quarter, year-on-year increase.
Benjamin Swinburne - Morgan Stanley: Got it.
Frank Mergenthaler - EVP and CFO: So its profit neutral, and I look at my actual cost base within O&G, they're effectively flat.
Benjamin Swinburne - Morgan Stanley: And is that mostly U.S. or just basically in line with your broader regional mix?
Frank Mergenthaler - EVP and CFO: It's somewhat consistent with our regional mix.
Benjamin Swinburne - Morgan Stanley: Then, I wanted to ask on the balance sheet side and working capital as it relates sort of to the new IPG with your current ratings and balance sheet strength, but also then in terms of the ask from some big clients about turning the agencies into financing partners. Maybe you could put those two variables into your answer. But I think you ended the quarter if you pro forma for the redemption, at like $1 billion – one of your lower cash balances in a long time. How should we think about your kind of net debt and gross debt plans going forward? And do you have any comment on how these payment term requests may or may not impact working capital, particularly as we move into the back half of the year?
Michael I. Roth - Chairman and CEO: On the balance sheet, if you recall, we had intentionally built up our cash on our balance sheet to get through the rating agencies and through the 'turnaround'. And we always said we had excess cash on our balance sheet. And the fact that we returned $1.2 billion to our shareholders is a pretty good indication that we felt that and it was time for us not to – there was no need for us to carry that excess cash on our balance sheet. So, right now, we have – after we pay off – you take out the $600 million, assume we have $1 billion or so of cash on our balance sheet. We also have $1 billion credit facility available to us and other resources. So, we're very comfortable with our liquidity position. And frankly, you don't want to carry all that cash on your balance sheet. It costs you money to do that. And frankly, we'd rather give it to our shareholders. So, I think what you're seeing now is a good indication of what our balance sheet should look like. And the fact that we had one-time items, for example, the sale of Facebook and we just took all of that cash and returned it to our shareholders. So we're very comfortable with our liquidity, our cash available to us to meet our needs with our balance sheet, and hopefully the final rating agency will realize the strength of our business and our balance sheet to give us their final upgrade so that we have investment-grade across the board. On the issue of terms, procurement has been around forever. They are always arguing about fees. That’s the nature of the business. On one side, clients are correct in asking us to be more efficient in terms of how we do the work and we do that. We work very closely with our clients in terms of the FTE model that's developed and we have to be more efficient. In this environment, given the pressures of margins both for our clients as well as us, it's incumbent upon us to be able to do that. In terms of terms, particularly on the media side, which is the one that you're probably referring to, everyone says we're not a bank and we are not a bank. I think we've taken the position as well as some of our competitors that those type of terms – historically in our industry, this is the way we pay our vendors when we get paid, and that's the way it should be, and frankly they shouldn’t be looking to us to do their financing. Frankly – and that's the way the model should work. We have not seen a major impact on our business model, if you will, that would affect our business going forward right now. Frankly – hopefully a number of the multinational clients have come out and said, we are a partnership and this is the way we should operate and frankly, I agree with that. Most of our clients look at us and say, you're entitled to make a return on your business and we're prepared. And we're prepared to say, you know what, particularly on the media side, our pay-for-performance model reflects the fact that it's a partnership, and if we do it well, we should get paid for it; and that's how we get nice margins on the media side of business. So a lot's been talked about it, but I think on that particular aspect, I think we've all been fairly consistent that this is the way – the historical way of doing it is the way it should be.
Benjamin Swinburne - Morgan Stanley: Thank you very much.
Michael I. Roth - Chairman and CEO: Well, I thank you all for participating. I hope you have a good rest of the summer, and stay cool. We'll talk to you next quarter. Thank you.
Operator: This does conclude today's conference call. You may disconnect your phones at this time.