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Filed by The Interpublic Group of Companies, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
deemed filed pursuant to Rule 14a-12 of the Securities
Exchange Act of 1934
Subject Company: True North Communications Inc.
Commission File No. 1-5029
CAUTIONARY STATEMENT
This document contains forward-looking statements. Statements that are not
historical fact, including statements about Interpublic's beliefs and
expectations constitute forward-looking statements. These statements are based
on current plans, estimates and projections, and therefore undue reliance should
not be placed on them. Forward-looking statements speak only as of the date they
are made, and Interpublic undertakes no obligation to update publicly any of
them in light of new information or future events.
Forward-looking statements involve inherent risks and uncertainties. Interpublic
cautions that a number of important factors could cause actual results to differ
materially from those contained in any forward-looking statement. Such factors
include, but are not limited to, those associated with the effect of national
and regional economic conditions, the ability of Interpublic to attract new
clients and retain existing clients, the financial success of the clients of
Interpublic, and developments from changes in the regulatory and legal
environment for advertising companies around the world, and the successful
completion and integration of acquisitions which complement and expand
Interpublic's business capabilities.
Another important factor is Interpublic's acquisition strategy. One of
Interpublic's business strategies is to acquire businesses that complement and
expand its current business capabilities. Accordingly, Interpublic is usually
engaged in evaluating potential acquisition candidates. Interpublic is currently
engaged in a number of preliminary discussions that may result in one or more
substantial acquisitions. These acquisition opportunities require
confidentiality and from time to time give rise to bidding scenarios that
require quick responses by Interpublic. Although there is uncertainty that any
of these discussions will result in definitive agreements or the completion of
any transactions, the announcement of any such transaction may lead to increased
volatility in the trading price of the shares of Interpublic.
Moreover, the success of recent or contemplated future acquisitions will depend
on the effective integration of newly-acquired businesses into Interpublic's
current activities. Important factors for integration include realization of
anticipated synergies and the ability to retain new personnel and clients.
Investors should evaluate any statements in light of these important factors.
The Interpublic Group of Companies, Inc. and True North Communications Inc. will
be filing a proxy statement/prospectus and other relevant documents concerning
the proposed transaction with the Securities and Exchange Commission. INVESTORS
AND SECURITY HOLDERS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS WHEN IT
BECOMES AVAILABLE AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC BECAUSE
THEY WILL CONTAIN IMPORTANT INFORMATION ON THE PROPOSED TRANSACTION. Investors
and security holders will be able to obtain the document free of charge at the
SEC's website (www.sec.gov/EDGAR), or at the SEC's public reference room located
at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for further information about the public reference room. In
addition, documents filed with the SEC by Interpublic and True North may be
obtained free of charge by contacting The Interpublic Group of Companies, Inc.,
1271 Avenue of the Americas, New York, NY, 10020, Attn: Investor Relations (tel:
212-399-8057), or True North Communications Inc. at 101 East Erie Street,
Chicago, IL, 60611, Attn: Corporate Communications (tel: 312-425-6500).
INVESTORS SHOULD READ THE PROXY STATEMENT/PROSPECTUS CAREFULLY WHEN IT BECOMES
AVAILABLE BEFORE MAKING ANY VOTING OR INVESTMENT DECISION. True North and
certain other persons referred to below may be deemed to be participants in the
solicitation of proxies of True North's stockholders to approve and adopt the
merger agreement with Interpublic. The participants in this solicitation may
include the directors and executive officers of True North, who may have an
interest in the transaction as a result of holding shares or options of True
North. A detailed list of the names and interests of True North's directors and
executive officers, and of their ownership interests in True North, is contained
in True North's proxy statement for its 2000 Annual Meeting, which may be
obtained without charge at the SEC's website (www.sec.gov).
THE FOLLOWING IS THE TRANSCRIPT OF A TELECONFERENCE CALL HELD ON APRIL 26, 2001
AND PLACED ON THE INTERPUBLIC GROUP OF COMPANIES, INC.'S WEBSITE ON MAY 1, 2001
Teleconference transcript 1 May 2001 The Interpublic Group of Companies, Inc.
[Logo]
Interpublic Group April 26, 2001
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Operator: Thank you all for holding. Welcome to the IPG earnings conference
call. I would like to remind everyone from this point on the conference is
recorded and I will turn the conference over to your first speaker, Ms. Susan
Watson. Go ahead, ma'am.
Susan Watson: Thank you operator. Good afternoon everyone and welcome to
Interpublic's first quarter earnings conference call. We released our earnings
at 4:00 p.m. today and partly guided by Regulation FD, we expect to make a
practice of releasing after the market close in the future, followed by a late
afternoon conference call. The release is available on First Call, Bloomberg and
at our web site. For purposes of this call, we will assume you have all read the
release. On today's program are John Dooner, Chairman and Chief Executive
Officer and Sean Orr, our Chief Financial Officer. Nick Camera*, our General
Counsel is also here to help with questions. Before I introduce John, I would
like to mention that this call will be archived at our web site, WWWInterpublic
Dot Com for 45 days and for the next 24 hours you may also access the replay by
telephone at 800-252-6030. The access code for the telephone call is 8658567.
Finally, I would like to incorporate by reference the safe harbor statement at
the end of our press release and now it is my pleasure to introduce John Dooner.
John Dooner: Thank you, Susan. Good afternoon everyone. As usual, what we like
to do is to have Sean take us through the details of the quarter and then all of
us will be available for questions. So let me pass it on to Sean and then we
will back towards the back end.
Sean Orr: Thank you, John. Good afternoon everybody and thank you for joining
our call. What I will be attempting to do here is to take a very, very
complicated story and tell it as simply as I possibly can. As you can see from
the release, revenues and operating profits grew at double-digit rates when
measured in constant currencies in the first quarter. Organic revenue growth was
six percent, nine percent excluding Lowe Lintas. Marketing services grew 14%.
Advertising and media grew two percent, but six percent without Lowe Lintas.
Lowe Lintas' initiative did hold down revenue and operating profit growth in the
quarter as expected. I will come back and talk about Lowe Lintas and Partners
some more in a little bit as we believe they are on a path to become a positive
contributor in the second half of the year. As you can see, EPS was flat before
our FAS115* non KS write down as increases in interest, goodwill amortization
and our shares outstanding offset the improved operating performance. We alerted
you of the drag effect of these and other non-operating items would have on 2001
EPS when we reported our Q4 2000 results and this factor is an important part of
the discussion today. Let me walk you through with simple costs of change
analysis of our Q1 EPS versus Q1 2000 again before the FAS115 accounting charts.
In 2000, our Q1 EPS was $.21. The increase in operating profit in the first
quarter of 2001 would have grown EPS by four cents, however, the increase in
interest expense took EPS down three cents, the increase in goodwill
amortization another two, the remaining items of the P&L netted out to one penny
bringing us back to $.21 on a year to year basis. As we discuss Q2 and the
balance of the year, I will provide some guidance and indication of how these
non-operating factors will continue to impact our EPS because it is an important
part of understanding our P&L model this year and in particular in the first
half of the year. Before we do that, let us first review some of the trends and
issues that became evident during the quarter and particularly in the March,
April timeframe. First of all, the economic environment has softened as we all
know, particularly in the United States. The velocity of accounts being put up
for review appears to be slowing, although I do want to point out, we had an
exceptional new business performance in the first quarter and the verize and
consolidation with Lowe Lintas was announced in the first week of April. At
least speaking for ourselves, the pace of acquisition activity has become more
deliberant. All of the above would appear to be temporary phenomenon, however,
they do have implications relative to our short term financial performance. So
what are we doing? Well first of all, I would say in a word that we are
battening down the hatches. First we continue to aggressively manage our costs
and I would think you would note that from our marching performance in the first
quarter. This is continuing into the second quarter and beyond where the costs
to achieve permanent cost reductions in our business flowing through operations
as they are incurred. Secondly, we have a more aggressive focus on KS
management, KS collections managing payables, ruthlessly eliminating capital
expenditures. In short, in times like this, one goes back to the basics and I
think that if you walk the halls of all of our businesses, that is what we are
doing. Now before I go on to the balance of the year guidance, I do want to
touch on a few other points. First, let me address Lowe Lintas very briefly. As
expected in the quarter, Lowe Lintas was a drag on our revenue performance and
in our release we provide some disclosures to quantify the effect of Lowe Lintas
on our growth rates, I will not repeat those disclosures here. During the second
quarter, Lowe Lintas is expected to be a less negative effect on our revenue
growth. Looking to the second half of the year, Lowe's projection shows solid
single-digit revenue growth on a worldwide basis and double-digit operating
profit growth. For the full year, the Lowe Lintas Group projects to be an agency
group with revenues in the mid $900 million dollar range and margins in the very
respectable high teens. We look forward to the second half when Lowe Lintas will
be a positive contributor to our overall performance and therefore, far less of
a discussion point on conference calls like this and in our individual
discussions going forward. One last point before moving to Q2 and balance of the
year guidance, let me spend a moment explaining the non-cash accounting charge
of $160 million dollars pretax that was taken in the first quarter. As most of
you are aware, Interpublic for many years has played a role in funding start up
businesses in the interactive and new media technology spaces. The most notable
examples would be one, the investment in CKS which eventually will be a series
of mergers became MarchFirst and two, Icon Media Lab, an interactive marketing
concern based in Europe. The company has been able to generate a significant
flow of financial gains over several years from this portfolio. We have recently
been giving more visibility to this activity. First by taking these gains out of
revenues and reporting them as part of other income below the operating profit
line and secondly by disclosing more specifics on these gains when we reported
Q4 of last year. The write-downs taken in Q1 are non-cash adjustments to mark
the recorded values of these investments to their estimated recoverable values,
thus eliminating any future financial exposure in this area. With these
write-downs, Interpublic can get out of the venture capital business.
Accordingly, this activity will not be an important part of our financial
algorithm going forward. So let us look forward and review our ongoing outlook.
When we reported Q4 of last year, we disclosed that equity gains of the sort I
just described were $40 million dollars pretax in the 2000 year. We also
reported that our tax rate included Deutsch, Inc. as an S Corp in 2000 which
artificially reduced our tax rate by about one point and one-half. Therefore,
our $1.51 reported EPS in 2000 included two items which contributed
approximately $.11 that does not repeat in 2001. Given the weakening and
environmental trends I eluded to earlier, we believe that it is prudent to
moderate our revenue and operating profit growth targets for the year and to
deliver reasonable growth off of the $1.40 EPS space. So with this in mind, let
us walk through the Q2 second half and full year algorithms. First, Q2. We
expect single-digit revenue growth performance to persist in our second quarter
due primarily to the Lowe Lintas overhang which is for one last time, thank you,
and the phasing of our new business activities. More importantly, the adverse
impact of the aforementioned non-operating items is most orneriest in the second
quarter between the equity gain impact of four cents, goodwill at three cents,
interest at three cents, tax rate of a penny and shares outstanding effective a
penny, for $.11, a EPS effect flows through in the second quarter comparisons
from these items. We therefore think it is prudent to warn you that second
quarter EPS could be in the low to mid forty cent range and a single-digit
growth scenario. Let us turn to the full year. Remember that we are managing off
the $1.40 base. The goodwill and interest effect has approximately a $.20 drag
effect on the year to year comparison. Double-digit growth and operating
performance, however, will cover that difference. What we are doing here is
returning to a time honored concept that the stronger our operating performance
is for the year, above the operating profit line, the higher our EPS performance
will be and the higher our EPS growth performance will be for the year. Now as
such, a lot depends on the second half. So let us turn to the second half where
we expect second half revenue and operating profit growth to be solid dollar
double-digit growth numbers. When the 2000 base is adjusted for the nonrecurring
equity gains and tax rate, EPS growth will be more in line with operating
performance which is a relationship that we would expect to see going forward.
The relationship between net income and EPS growth will more normally track
increases in operating profit performance. Now why do we feel that that second
half performance is realistic? Well let me talk to some of the things that we
have working in our favor in the second half of the year. First, Lowe Lintas
comparisons normalize. Remember I set a forecast of positive single-digit
revenue growth and double-digit profit growth. The Dot Com and technology
revenue overlaps normalized at initiative and elsewhere. The full effect of our
cost savings activities will be flowing through and showing up in our second
half numbers. The goodwill and interest comparisons become less extreme in the
second half of the year. Our recent success in new business is back loaded to
the second half, that is true about Coke, Verizon, Best Foods, Mass Mutual,
Virgin Mobile, Marriott, DeLoitte & Touche and others. So again, I repeat and
emphasize the strong first quarter new business performance that we reported and
I also repeat the big win of Verizon reported in the first week of April, but
much of that revenue impact will be seen in the second half of the year. Lastly,
just comparisons in general are more normal and easier in the second half of
this year. So I am sure you will have questions on all of the above, but before
I open for questions, I do want to turn to True North and the True North
integration for a moment. Things are progressing quite well. The relationship
between the two companies is quite cordial and we are all very pleased with the
chemistry that is developing. Of course, I am not in a position to talk about
True North or Motto Media performance, however, we are placed into cape that the
SEC has indicated they will not review the S4 registration and it frees us to
move ahead with an anticipated late June True North shareholders meeting. As we
indicated when we announced the transaction, we believe corporate redundancies
will save us about $25 million dollars annually, we still feel very good about
that number. We have also indicated that the one time costs of achieving these
and other savings and the other costs associated with optimizing and combining
our two business portfolios, and the costs of the transaction itself will be
accounted for as a group of merger related costs on or around the time of the
transaction. We have also indicated that we will be in a better position to
provide further quantification of these costs at that time and so I will not be
commenting on the quantification of any of these costs on this conference call.
So let me just summarize some of the key points in our release and in my
comments and then I will open it up for questions. Number one, although the
second quarter will not be pretty, Interpublic represents a strong set of
business now and will be going forward. You see in the first quarter
double-digit growth with solid organic growth performance in a tough market with
very strong Q1 and early April new business performance, especially when
compared to the competitive set. We see Lowe Lintas on a pay up to be a positive
contributor to our overall performance in the second half of the year. You see
our interactive exposures and our venture capital activity behind us. You see
continued emphasis on cost management and continued demonstration of our ability
to manage costs aggressively in tough environments. You have a second half
outlook that looks positive, particularly as our comparisons normalize and our
new business rolls in. I think in the long run a very, very important point is
you see a return to a more normal financial algorithm where operating profit
growth is driving EPS growth. So I think those cover the highlights of the
conference call. They hopefully represent an attempt at making a complicated
story as simple as possible, but I am sure there are questions and so at this
point in time we will open up the meeting to questions.
Unidentified Speaker: I think it is appropriate that we go right to questions.
Operator: Okay, if anyone has a question at this time, please press star
followed by one on your touch-tone phone and your name will be placed into cue
until you are announced. If someone has already asked your question, you may
remove yourself from the cue by pressing the pound key. Just a moment please.
Unidentified Speaker: Hello.
Operator: Okay, go ahead Mr. Russell.
Mike Russell: Okay, can you hear me now?
Unidentified Speaker: Hello Mike.
Mike Russell: Hi. John and Sean, I was wondering if you could give us an idea of
how you see the second half of Lowe Lintas having easier comparisons and give us
maybe a little more flavor on the organic revenue growth for the rest of the
year, given the assumptions that you are able to make at this time?
John Dooner: I will give bit of that and I will let Sean give a little of the
organic road. You know that we are cycling Lowe Lintas was cycling losses that
came primarily out of the merger over the last year or the year 2000. That
revenue was a significant amount even more than I think that we expected which
we talked about in the Q4. Obviously, those comparisons go away in terms in the
second half of this year. They truly finish cycling as we did mention in the
fourth quarter at the end of the second quarter. That and some of the gains they
have had in new business clearly point out a plan that has very significant
positive numbers. I would go as far as to say high single-digit growth, as well
as double-digit profit growth and I think that is solidly founded. I also want
to near what Sean has said, it will be a great pleasure that we will only be
able to talk to them in some positive light going forward. In terms of organic
growth, how about if you share some of our?
Sean Orr: Sure. Mike, as we mentioned, organic growth in the first quarter was
six percent without Lowe Lintas' portfolio, it was nine percent. The back half
of the year, with Lowe Lintas enjoying the absence of all of the negative
comparisons because of the cleaning out and our overlaps of sold businesses,
closed businesses and lost business from the merger, they will be showing
positive organic revenue growth in the second half of the year. Without Lowe
Lintas in the first quarter we are at nine percent and the back half of the
year, our overall organic growth performance should improve off of the six
percent if the economy stays reasonably stable with the status quo. I would
expect north of six, somewhere in the six to eight percent range, economy
willing. I hope by now people understand the arithmetic as to why the bad
overlaps go away in the second half of the year for Lowe Lintas. The merger was
announced in November of 1999 and the consolidation activities took place
between then primarily the middle of last year when the client conflicts were
identified, the businesses that were going to stay and go were identified. So
all of the revenue downside that was the natural consequence of a merger of this
side was to happen. As a result, by the end of the second quarter we complete
the anniversary and much of that activity and as a result you then start having
normal comparisons in the year to year results of the second half of the year.
Mike Russell: Okay and just on the cost side, could you tell us D&A and give us
an idea on the cost savings you are able to generate, were they more on the
salary side, on the office side or how you got it on the salary side?
Sean Orr: Relating to the portfolio as a whole, Mike?
Mike Russell: Yes.
Sean Orr: Well since the fourth quarter, the beginning of the fourth quarter,
all of our businesses have been on red alert in terms of cost management and the
largest part of our cost structure, Mike, is people. People costs represent
about 56 or 57% of revenue. Okay, so it is the largest part of our cost
structure. We have been having hiring freezes, we have been laying people off,
we have been freezing salaries and we have been curtailing a lot of the
discretionary spending that people are free to do for the last two quarters. We
continue to do so and will do so I suspect throughout the remainder of the year.
That has been an important driver of why we have been able to deliver the
margins just so on the first quarter.
John Dooner: It is an ongoing process. It is not unique to this moment and we
have some clever if you will words that we use like red light, yellow light,
green light in terms of holding costs or reducing costs depending on the market
situation, depending on the sector situation, depending on an individual account
situation. It has to do with how you control those costs given an environment.
So not only does it talk about costs, but also it recognizes the flow of revenue
to ensure that you are not spending part of the visibility, the clear visibility
of that revenue. So these practices which have been part of Interpublic over a
period of time obviously are heightened during any kind of indicated negative
economic environment and so therefore, going forward we are very confident that
if it does continue and/or accelerate that we will use these same principles.
They are not new, they are just fundamental as Sean said earlier and one that we
are very steeped in the practice of using.
Mike Russell: Great, thanks very much.
Operator: The next question or comment is from Eve Glott's* line. Go ahead
please, you have the floor.
Eve Glott: Thank you. I was just trying to get a sense of what exactly changed
since mid-February when you released results. The things that you mentioned in
the press release and then also, Sean in your comments, the economic client, the
non-operating, the higher interest, those things you all discussed on the last
conference call. So I am trying to get a sense of what more on what is going on
and then I have a couple of follow up questions.
Sean Orr: I think simply stated, the environment is clearly softer and there are
clearer evidences of softness in certain markets, the US in particular. I think
you, Loren and others have been very articulate about that yourself and so
therefore, the revenue, we are being much more realistic I would say about the
revenue outlook, particularly in the first half.
John Dooner: I also think that we have had more information as you know come
from February, March, if you will and now into April. There is no question about
that giving us more insight, but I think also a very stronger commitment towards
getting a very balanced if you will economic model going forward. In just
reviewing the issues that were at hand and taking very defined actions to ensure
that it does get balanced in the short order.
Eve Glott: Alright thanks and then can you give us a sense of what effect
foreign exchange had in the quarter and then also total debt at the end of the
quarter.
Sean Orr: We do not have balance sheet information yet, Eve, and so we will have
to get back to you on that. The currency, you saw the effects of currency on the
revenue and the currency in the quarter was largely a revenue issue. The
earnings impact from currency was less than half of a cent. If currency stayed
this way for the rest of the year, it would have a little bit more of an
earnings impact, probably a couple of pennies.
John Dooner: Yes, it definitely had an impact on revenue coming out of Europe as
I am sure you have seen with our sales and the other releases and I guess our
hope that the Euro would change its direction is not coming true and so that has
to be monitored very carefully as is I know you surely will recognize that some
of the other world economies or currencies also need to be closely watched.
Eve Glott: Okay and then can you quantify by chance what kind of EPF impact NFO
and also Deutsche had in the quarter?
Sean Orr: You start to, well first of all I do not think we would be inclined to
disclose that. Well let me just talk about NFO, I think rather than answer that
as the question the way you asked, Eve, and that is NFO on an organic basis in
the first quarter had mid single-digit revenue growth worldwide even though that
performance was skewed towards the overseas markets. Europe was particularly
strong. Their business is behaving strangely enough and maybe it is just a
coincidence, a lot like our advertising businesses and so their performance is a
little bit more skewed towards overseas. Profit improvement as we expected. For
the year, they are looking at a growth rate at this point in the high
single-digits and they are looking for a very substantial improvement in
margins. So we are happy with the outlook for NFO and those numbers would make
it accretive. I am not going to give you a net quantification of that, but it
would make it accretive. As for storage, storage was accretive from the get go.
Deutsch had a very solid first quarter, very solid double-digit revenue growth
and it is just a great business that continues to perform well.
Eve Glott: Thanks and then finally, the guidance that you gave for the year,
does that include True North.
Sean Orr: No.
Eve Glott: Okay, thank you.
Operator: The next question is from David McMurray's line. Go ahead, please, you
have the floor.
David McMurray: Hi, thanks. Actually, both of my questions are sort of follow
ups on Eve's questions. First, with respect to the guidance, it is actually
knocking going from 10, 11% growth to a low single-digit decline, roughly a 15%
swing there. Just without having looked at the model, it looks like revenue
estimates will probably come down in the mid single-digits and so there is more
to it there. I am just wondering if any of these non-operating items have
changed over the past few months, if any of these represent surprises relative
to your thinking in February?
Sean Orr: There has not been a surprise below the line. I think we need to spend
some time off line, David, because I think we need to walk you through our
revenue picture because we are seeing a better revenue picture than you just
suggested for the full year.
John Dooner: For the full year, David, we anticipate having double-digit revenue
and profit growth and that double-digit is moderated relative to what our
original thoughts were if you will back in February. So while it is still very,
very positive, it is not quite as positive as before. I think the thing that
Sean mentioned to you earlier, in looking at the below the line and looking at
the economic model, we are really going to aggressively attack that to get a
better balance between the below the line if you will cost and the relationship
that it would have to EPS and to operating profit and that is causing if you
will the imbalance that you are talking about.
David McMurray: Right. Now actually my point was I think the consensus revenue
growth estimates prior this call were in perhaps the 15, 16, 17% range, those
may be coming down five or six percentage points, earnings are coming down 15%.
Is all of that just margin pressure, the difference?
Unidentified Speaker: What it is is how badly deleveraged we are because of the
bottom half of the P&L, David, and that is something maybe I can walk you
through off line. Your estimate is right and maybe I just misunderstood what you
were saying before. We are talking about a lower consolidated revenue estimate
for the full year and because of these below the line fixed costs. The interest,
the goodwill amortization, the tax effect, the shares are all givens and the
absence of the one time income, that what you are seeing here is that you had a
fragile P&L model. That with the loss of revenue, we can manage the operating
profit effect of that, but we are badly deleveraged on the lines between
operating profit and EPS because of all of these fixed items and they are large
and that is what you are dealing with here.
David McMurray: Okay and just my second question following up on NFO, can you
tell us what is the difference between your reporting constant currency growth
rate of one percent in the quarter for the marketing intelligence segment?
Unidentified Speaker: We closed down a business early last year and so that is
out of their numbers. So you have some revenue in the first quarter last year
that does not exist this year that you have to remove from the comparison when
you look at organic performance here.
David McMurray: Okay, thanks very much.
Operator: The next question or comment is from Laban Bonredden's* line. Go
ahead, please, you have the floor.
Laban Bonredden: How are you doing guys? In terms of as I start to look out and
look at what is going on, once you close the True North deal, obviously some of
the issues that you had with Lowe Lintas had to deal with all of these client
conflicts. When should I start to see those types of issues raised with True
North and how will that cycle? Are we going to be looking at another cycle of a
year of (inaudible) problems?
Sean Orr: No, I think you have a very different scenario with the True North
than you have with Lowe Lintas in that we are not in a position where we have to
take their biggest agency properties and put them together operationally with
our agency brands which is where you trigger the kinds of conflicts you had at
True North. So you do have some conflict issue, but it is a sensitivity, a
holding company conflict sensitivity rather than an operating agency
sensitivity. Perhaps John would.
John Dooner: Yes, I think that Sean said this before, but at this point in time,
the integration and the planning of integration is way ahead of schedule and
that is really terrific. It is going extremely well which we had hoped and
believed, but maybe even better than we thought. The people that need to be
committed are committed which is fantastic. The clients again, and I understand
what Sean is saying, holding company if you will, not necessarily merging two
advertising agencies together which we do not intend to do, the clients are
comfortable. The brand indication, the brands if you will, their brands, that
will be either integrated and consolidated, that review is well in process and
we would obviously do that minimizing any kind of fall out. So the net of it is
it is positive, it is ahead of schedule, clients are comfortable, people are
committed, those are the key things you look for and obviously we would
intelligently try to decrate that integration with minimal fallout. At this
point in time, there is no indication of fallout from the merger. You know, we
are not naive, but the reality is at this point in time there is none. As a
matter of fact, there is some indication that (inaudible) has gotten that
indicates some positive relationships will prevail.
Laban Bonredden: Sean, you had also run through some numbers, I think you said
one cent in the second quarter for tax rate, one cent for shares out, there were
a couple numbers there. Could you just run through that again please?
Sean Orr: How about if we do that off line, but I would be happy to do that for
you?
Laban Bonredden: Okay and I just wanted to clarify as well you saying that after
this charge that you are taking in terms of the VC business and other
investments, we should not be looking for anything going forward?
Sean Orr: In terms of investment activity and marketable securities for public
companies and the like that is right.
Laban Bonredden: Alright, thanks.
Operator: The next question or comment is from Alexia Quadrani's* line. Go
ahead, please you have the floor.
Alexia Quadrani: Hi, John, I just have a follow up question on your comments on
Lowe Lintas. How confident are you that the problems at Lowe Lintas really have
gone away and things are improving? I know we saw some nice winds for Lowe early
in the quarter, but more recently we did see a couple of big losses with Dell
going on the common and UPS now moving over to Martin. Are those just normal
course of business? I mean is business really much stronger there?
John Dooner: Well the thing that you are seeing with Dell I think was properly
stated that it is part of that whole industry sector of what is going on with
the huge amount of movement that has gone on in the last two months. The UPS
thing, they stay with their involvement in the UPS, as in McCann. So UPS is kind
of like an Interpublic partnership where there is going to be some fluctuation,
so I do not look at that as a big ding if you will against the Lowe Lintas. The
fact that Verizon was comfortable to consolidate the five agency businesses into
one was quite an extraordinary positive statement and they won that. They had to
show the capabilities and gain the confidence of the company to achieve that.
Now that said, you read today that there is some changes in Lowe Lintas to
further build their management group and I think it is appropriate what they are
doing and I think it will help them going forward. The way I evaluate them now
is very strict. They are an agency that the notion of looking back with the
excuses that one guy was good, one guy was bad and all of the other stuff that
we have read and have sometimes talked about is of ancient history to me. They
will be evaluated based on their performance consistent with our other strong
performing agencies and at this point in time, it looks like they are on track
to that. Frankly, I am a believer. I believe that they will perform at that
level and so I am very comfortable. With that said, I think like any of our
companies, it is incumbent upon myself and management to keep a close eye to
make sure that all of our operating companies are performing at a very high
level and they are indeed.
Alexia Quadrani: Okay, just a couple of follow up questions. I noticed you cited
Burger King as a win on your new business win list. Is that just the incremental
business you pulled in from On the Com, it is not the business from Lowe Lintas,
is it at McCann?
John Dooner: Well it is probably a couple of things. I am not sure exactly and
we can get somebody to clarify it, but yes, Burger King of course was won by
McCann and so therefore, it may have reflected that. Also, Burger King as won by
Campbell Mathoon* in the kids business and of course that is a huge win for them
and Burger King was also won from Alcon* which is a Yamacom* Company at
InterDraft. So you really had Interpublic having three big wins as it relates to
the Burger King business in the first quarter.
Sean Orr: But the impact it had on the net new business number reported on XEF*.
It only has incremental spending as opposed to double counting the revenue
coming out of Lowe Lintas.
Alexia Quadrini: Okay, that is what I was looking for.
John Dooner: Yes, sure.
Alexia Quadrini: Then on the other income, I think when you were on the fourth
quarter earnings call you had mentioned if I remember correctly that the other
income line will fall in half, Sean, from about $100 million to close to about
$40 or $50 million in 2001. Sean, from your comments earlier, are you suggesting
that will be zero this year or still more like $40 or $50 million?
Sean Orr: Well I think we will continue to look at opportunities. I think one of
the things we will do as we consolidate with True North is look at our business
portfolio and make sure that all of the pieces make sense and if not, I think
that we probably will take some non-strategic assets and consider selling them.
I just do not want to predict that and put a number on it at this point in time.
So just think of a safer more prudent course to take would be that as we do that
we will tell you, but to be committed to a number at this point in time is just
not something we think is smart.
Susan Watson: Alexia, also remember that the gains on securities is about half
of that $98 million or whatever it was. The other part was interest income and
we will continue to have interest income on the cash balances particularly
because of the media billing.
Alexia Quadrini: Okay, so we should see something on that line. Then just one
other quick question, the guidance for 2002 on the EPS line, should we just see
double-digit growth in 2002 as preliminary guidance?
John Dooner: I think it is too early to give guidance on 2002, but I have to
tell you that I am extraordinarily bullish about what we are going to have as an
Interpublic company in terms of finally having all of the engines working at
four cylinders. Again, with things like Deutsche and True North being part of
our portfolio, I think we are going to be, with the hope of a decent economy,
extraordinarily bullish going forward, but I think it is a little too early to
actually give guidance in 2002. I will tell you one thing for sure, Alexia, we
work very diligently to get this if you will in the balance sheet or if you will
in the economic model to really reflect the performance goes down to EPS.
Alexia Quadrini: Okay, thank you.
Operator: The next question or comment is from Vivian Kwan's* line. Go ahead
please, you have the floor.
Vivian Kwan: Yes, hi. Sean, can you just tell us what you are assuming as far as
operating margin improvement in your renewed guidance? Are you still using 50
basis points? Then I have a couple of other questions.
Sean Orr: It depends upon what line. If it is before goodwill amortization that
is what you would be looking at roughly, Vivian.
Vivian Kwan: Okay and after goodwill amortization?
Sean Orr: Well, the problem we have is goodwill amortization for the year does
eat into that margin.
Vivian Kwan: Okay.
Sean Orr: Okay, but you would have roughly one-half of a point margin
improvement before the impact of goodwill amortization and the goodwill
amortization as you know is math, we cannot manage that, so the numbers that you
can have some management impact on will continue to show roughly that kind of
improvement.
Vivian Kwan: Okay, fine. Secondly, your international organic revenue growth was
pretty good in the first quarter, but we have been hearing from some companies
about slowness in Europe. Can you just comment on recent trends in the European
markets?
John Dooner: Yes, I think it is appropriate, Vivian, that we know the cliche of
the cold being the United States and the sniffles going around the world over
time and I think that there is some evidence of that. That evidence is weeks
old, it is not reported in detailed numbers, but rather inandotal and soft, but
I think it is fair to say that you are going to be seeing some softness in
Europe, the degree of which is not clear yet.
Vivian Kwan: Okay and then just finally, if you are working off of 140 BS* for
2000 in giving guidance, do you have numbers by quarter to help us with our
quarterly models?
Sean Orr: Well the only thing we have not done is given you a split between the
third and the fourth quarter at this point. We really have focused on the second
quarter and the second half as time buckets at this point, Vivian, and we have
not been splitting hairs between third and fourth quarter at this point.
Susan Watson: Vivian, the two factors to be aware of is if you normalize our tax
rate at 41% across the year you are going to get halfway there and the other two
elements are there was about one penny of stock security gains, or security
sales in the third quarter and about two pennies in the fourth quarter and that
is going to get you most of the way there.
Vivian Kwan: Okay, great, thanks.
Operator: The next question or comment is from Bill Berg's line. Go ahead
please, you have the floor.
Bill Berg: Yes, thanks a lot. Just a couple of quick questions, thank you. Let
us see, it looks like about $.19 of your full year downward guidance is coming
out of the second quarter, is there anything there beyond other income comps
that is driving the number down? Second, I just wonder if you could talk a
little bit about sort of net new business at Lowe Lintas if you measured it at
all in the quarter and could share that with us? Third, just revenue declines at
Lowe Lintas in the quarter based on some of the numbers you gave out, it looks
like they may have been down about nine percent and I am just wondering if that
is off base.
Sean Orr: It is just a tad higher than that. It is analogous to what it was in
the fourth quarter, very analogous to what it was in the fourth quarter. Do me a
favor, Bill, go back to your first question again and repeat it.
Bill Berg: Sure, I am just curious, it looks like most of your downward earnings
guidance is coming right out of the second quarter and I am just wondering if
there is anything you have seen more recently beyond Lowe Lintas that is
resulting in numbers coming down and if so, dramatically on a near term basis?
John Dooner: The one thing for sure is the second quarter is the most
exaggerated effect of the below the line costs which Sean can talk about, but
again, I think that Sean mentioned, we are seeing a similar kind of softness as
we have had in the first quarter if you will because of the cycling of Lowe
Lintas and initiative generally where we are seeing about six percent. So I do
not think in terms of the performance we are seeing a significant decline, but
we are going to see the continuation of what we had in the first quarter and
then the exaggerated impact of some of the below the line costs.
Sean Orr: What you are seeing in the second quarter, Bill, is the comment or the
answer to David's question earlier about how the deleverage below the operating
profit line is impacted when you have a revenue shortfall. The adjustments we
are making to our revenue expectations throughout the year probably hit the
second quarter more than any other period and with the disproportionate impact
of these non-operating charges in the second quarter, you have a double whammy.
Susan Watson: And to Sean's earlier point, the new business wins really do not
flow in until the second half and the cost cut benefits also flow in in the
second half, Bill.
Bill Berg: Okay. Do you have a net new business number for Lowe Lintas?
Susan Watson: We have not broken those out by agency, but I will remind you that
we had about $200 million of wins at Lowe Lintas in the first quarter and then
the $400 from Verizon and so that is $600 million so far this year compared to
$400 in all of last year.
Bill Berg: How about in the loss column?
Susan Watson: I do not have those in front of me.
Sean Orr: We will get that for you, Bill.
Bill Berg: Okay, just one final question. Do you expect organic growth to slow
further in the second quarter for IPG and Lowe Lintas as a whole and I mean
organic revenue growth?
John Dooner: The indications we have are similar to the first quarter.
Bill Berg: Okay, great, thank you.
Operator: The next question or comment is from Ron Thomas' line. Go ahead
please, you have the floor.
Ron Thomas: Yes, I am curious. We, at least on the buy side, we are looking at
sort of a path of declines in advertising expectations for this year and for
next and I am curious to the extent you can tell us what kind of advertising
growth in the US and/or overseas are you looking at in making your expectations
for the rest of the year, talking about your profit and new business
expectation?
John Dooner: In terms of the environment, Ron?
Ron Thomas: Right, I mean I have seen advertising growth in the United States,
estimates as low as zero for 2001 and I think they probably, seat of the pants,
I think they probably go from about zero to plus three to three and one-half
percent right now. So there is a pretty wide range there and the European, at
least the international ones, the expectations seem to be coming down quite
quickly as well although from a higher base.
Sean Orr: Yes, the thing is we read the same stuff you do, Ron. It is a hard
market to read right now and a lot of the information you get is dated. What
ends up becoming more important than anything else is what your individual
clients are doing.
John Dooner: Yes, what goes on now obviously, not really 2002, but certainly
2001, you are dealing with hard numbers in terms of budgeting and so forth and
so you are dealing more with that than you are with media trends as an indicator
or what the revenue stream would be. You are exactly right, we are seeing the
same numbers that you are. I will say that the first quarter, some of the public
trend numbers were a lot lower than what we saw and as I understand from our
preceding competitors, the numbers are tracking a little bit more like Bob
Collins' numbers than some of the more negative numbers. I am not suggesting
that there is not some issue out there, but that is what has happened so far.
Sean Orr: We did try to get a peek under the tent with Cohen about one week and
one-half ago, but he is pretty religious about not previewing any of his
conclusions and so he is going to be reporting in another six weeks or so and we
are going to have to wait for that.
Ron Thomas: Do you have any, I am probably fishing too deeply here, but are you
getting any impression that the rate of decline is slowing?
Sean Orr: It is really a mixed bag. I mean if you really are honest, it is more
sector driven than it is absolutely across the board. There is no question that
there is at least an anxiousness going on. In some sectors like in consumer
products there is a sense of aggressiveness and some sectors like telephone and
telecommunication and technology, there is no question that there is a direct
decline. So it is not, I think absolutes here are hard to support right now. The
other thing we know that we have is we have consumer confidence, while down,
still relatively high. So there is many people talking about hey that this thing
is of the moment, we improved the consumer confidence and they come out in the
sunshine that things are going to get better and then of course you have the
people doing doom and gloom. So you really have an extraordinarily mixed bag in
kind of guestimating the economy right now. So what we have in our hands
obviously are those plans that are coming from our clients that are being
monitored by our companies. The most important thing you could do right now is
incredible diligence of repeatedly looking at those things to validate whether
you are staying on track or if indeed there is some issue with them. Of course
if there is, what course of action do you take relative to cost?
Ron Thomas: Okay.
Operator: The next question or comment is from Oscar Woos* line. Go ahead
please, you have the floor.
Oscar Woos: Yes, hi. Given that the proxy for True North has been cleared, when
do you expect to be able to give combined guidance for the rest of the year for
the two companies?
John Dooner: Right now we continue to hold to the expectation of the transaction
being accrete from the get go, but we really cannot get combined guidance until
we are one company. So that will happen as soon as we close. Right now we are
told by the True North folks that they are working towards getting a shareholder
meeting scheduled for the later part of June and we will close as soon as
practical thereafter if they meet that timetable.
Oscar Woos: Okay and then in answer to another caller you mentioned something
about positive developments in some relationships at Hutcone*. I did not catch
exactly what was the point that you were making there.
Sean Orr: What I was talking about was that in talking about conflicts and the
relationships, I think we saw recently that Hutcone got a piece of business from
a client that many of you speculated would provide some difficulty in going
forward. So I was really responding to somebody asking whether or not we would
see a similar kind of fallout with True North coming in and I was trying to
demonstrate that we will not.
Oscar Woos: Okay, so I guess at this, I remember when you first announced the
transaction there was some speculation that some client conflicts might cause I
guess either company to lose some important accounts, but at this point you are
not seeing any moves by any major clients?
John Dooner: That is exactly correct.
Oscar Woos: Okay, great, thank you.
Operator: The next question or comment is from Troy Mastoon's* line. Go ahead
please, you have the floor.
Troy Mastoon: Hi, thank you. A few questions, the first one is I am curious if
you could quantify or at least give some directional idea of how much of the new
business wins come from the Coke relationship, the expansion of that
relationship?
John Dooner: I think that is quantified and if I remember correctly, I have some
people in here that maybe can help me, I think we put it in as $100 million.
Susan Watson: In that range roughly.
John Dooner: Yes and my lips as yours, I could be conservative.
Troy Mastoon: Okay, thank you.
Susan Watson: That was in the first quarter, Troy.
Troy Mastoon: Okay and the next question, I am curious if in this environment
everyone talks about marketing services being more I guess recession resistant,
does that skew the new business win numbers at all? I mean are those more
marketing services related today that might suggest higher revenue numbers two
or three quarters down as a result of presane reported new business wins?
John Dooner: Well not exactly. The new business wins we were talking about are
pretty much advertising driven to be honest with you, but the notion of what you
are talking about, the broader implication, again, I have to tell you that
growth is almost more like sector than it is by general area. There is no
question it is a lifecycle of the marketing services businesses, it is still on
a better swing if you will than is the advertising. With that said, within the
marketing services business, as well as, advertising, you will see a disparity
in terms of growth or moderation of growth by sector almost regardless of the
sector if you will. I know it is regardless of what its marketing services are
advertising.
Troy Mastoon: Okay and then one final question. Here is this smaller agencies
now, some of the independents, do they seem more interested in this environment
to seek out an allegiance with a larger partner if they are seeing more softness
in their business and that is resulting in that kind of movement, thanks?
John Dooner: I suspect for, actually if you have a softer market, who wants to
buy anything and so let me put that over on the side. I think that you are going
to see in our world that the small agile creative companies there is always
going to be a big place for them. The ones that I think that are going to be a
little bit more marginalized are those in the middle to be honest with you.
There is no real correlation to economic softness and some of the large holding
companies acquiring. I think that that process is really one of strategic needs,
quality and other things that come into play more than the economy if you will.
Then obviously if you have an economically depressed small agency, its value is
less and so it may not be the time that they would want to sell as well.
Susan Watson: Operator, we will take one more question.
Operator: The last question or comment is from Michael Russell. Go ahead please,
you have the floor.
Michael Russell: Just one housekeeping thing, I was wondering if you could give
us an idea of how the convertibles, the add backs will go for the year and how
the share count will go for the year.
Susan Watson: The share count for the year, Mike, is about $335 million dollars.
Typically you will have one convertible, diluted when the earnings per share
gets to $.30 and they will both be diluted in any quarter when they are $.40. So
at this point we would look for one to be diluted probably in the second and one
or both in the fourth quarter.
Michael Russell: Great, thank you.
Susan Watson: And one for the full year.
Michael Russell: Okay, thank you.
Susan Watson: Thanks everybody for joining us. We will talk to you again in
about six weeks.
*Proper names/organizations unverified
C:8658567/1837
Job #833086
DT: 04/29/01