Omnicom Group Inc. (OMC) Q3 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Omnicom Third Quarter 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I'd now like to now introduce you to today's conference call host, Executive Vice President and Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead.

Good morning. Thank you for taking the time to listen to our third quarter 2012 earnings call. We hope everyone had a chance to review our earnings release. We posted to our website both the press release and the presentation covering the information that we'll be presenting this morning. This call is also being simulcast and will be archived on our website. Before we start, I've been asked to remind everyone to read the forward-looking statements and other information that's included on the last page of our investor presentation. And to point out that certain of the statements made today may constitute forward-looking statements and that these statements are our present expectations, and actual events or results may differ materially. I'd also like to remind you that during the course of the call, we will discuss some non-GAAP measures in talking about Omnicom's performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in the presentation materials. We're going to begin the call with some brief remarks from John Wren. Then following John's remarks, we'll review our financial performance for the quarter, and then both John and I will be happy to take questions.

Good morning. Thank you for joining us on the call. We are now 3 quarters through 2012, and I'm pleased to say that our performance over the quarter and for the year-to-date remains strong. Let me start by talking through some of the key points driving our business results and strategies, and then I will provide some perspective on the larger business environment. The third quarter was another solid quarter for Omnicom and our companies. Our broad geographic footprint, diversified expertise and emphasis on creative excellence has benefited both our clients and our shareholders. For the quarter, we continue to generate solid organic growth, particularly in light of the macroeconomic environment. And our margin performance remained strong, keeping us on track to achieve our margin objective for the year. Before getting into the specifics of our third quarter performance, I'd like to spend a few minutes discussing the strategies that have allowed us to continue to achieve consistent results: First, our investment in the best talent; next, expanding our footprint geographically and in new service areas; also expanding our digital, analytical and consumer insight capabilities; and finally, an increasing coordination of our service offering on our top 50 clients. A few weeks ago, we returned from the Spikes Advertising Festival, Asia's most prestigious creative awards show where 30 different Omnicom agencies won a record 117 awards, including first and second prize for Network of the Year by BBDO and DDB. This performance significantly outpaced our competition. I think this recognition is important in illustrating how the different components of our strategies come together to benefit our clients. It also shows our progress in growing our portfolio geographically to include what we believe are the most effective and creative agencies in the Asia Pacific region. Expanding in developing markets will continue to be a core strategic focus of Omnicom. In the third quarter, our revenue outside the U.S., U.K. and Eurozone accounted for almost 24% of our top line. We also know that our success is increasingly being supported by what goes on behind the scenes in our networks and agencies. Across many of our clients, but especially for our top 50 clients which are served by multiple agencies in our group, our people are collaborating more closely to share insights and ideas and increasingly working together to achieve common objectives. These collaborations are successful because they bring together our top talent from different agencies to provide integrated solutions across brands, disciplines and geographies. Collaboration and coordination across our agencies is even more important today in servicing our major clients as many of them are seeking to consolidate their advertising and marketing spend across a smaller group of agencies. Overall, we have been successful in gaining a greater share of business in these consolidations while providing clients more integrated services and operational efficiencies. We're also benefiting from stronger digital capabilities within our agencies and from our increased focus on using data and analytics to generate valuable insights and drive results. As I have said before, the industry is only at the beginning of learning how to use these new technologies to effectively communicate with consumers. And these new technologies are changing quite rapidly, requiring us to continually change and adapt. While each of our agencies is developing digital and analytical skill sets, we are also increasingly leveraging our investment in Annalect. Annalect, which includes our search business, resolution media, our mobile and display businesses, now has over 600 employees servicing clients in more than 30 markets around the world. Overall, we are firmly committed to bringing the best talent, creative, digital and analytical tools to our clients. And clients, existing and new, are responding by expanding our mandates and awarding us new pieces of business. Of course, we must always be conscious that we're operating in what remains a fragile economic environment. As we invest in areas with significant growth potential, we do so carefully and we remain vigilant in managing our expenses. Our goal is to take advantage of growth opportunities while remaining flexible and agile enough to respond to the changing economic conditions. As we've noted in the past few quarters we continue to keep a close eye on the macroeconomic picture. While we remain cautiously optimistic about our business, we recognize that political and economic uncertainty, as was most recently highlighted by the IMF, could negatively impact global growth this year and next. With this in mind, in every market we are working with our companies to assess the impact of economic shifts while continuing to focus on the things we can control: investing in talent, expanding our capabilities and adapting quickly to a more complex, technologically driven environment. Now I'd like to turn my attention to the third quarter. Organic growth for the quarter was a solid 3.5%. This performance was driven in large part by the U.S. and developing international markets. Our advertising business also continued to perform extremely well followed by our CRM business. Looking more closely at revenue by geography. We saw continued strength in the U.S. with organic growth of 3.1%. Although this was somewhat slower than what we had experienced in the first half, U.S. growth was driven by strong results in advertising, media and sports and event marketing. The U.K. was essentially flat for the quarter, weighed down by a slowdown in our field marketing operations. Outside of this one operation, the overall market performance was quite positive, supported in part by the Olympics-related spend. Euro region growth was a negative 1.8% for the quarter, although the performance by market again varied. Germany and France and the Netherlands were negative while Italy, Portugal and Spain were all positive due to the strength of our individual businesses in those markets. However, given the state of these economies, we remain very cautious. I should note our European management teams have clearly been facing the most challenging conditions across our global footprint, but they continue to do a very good job of servicing their clients and at the same time managing their cost structures. Outside the Eurozone, the Czech Republic, Russia and Turkey had strong performances. And notwithstanding the less robust growth expectations in developing markets, Latin America and Asia each experienced double-digit growth for us during the quarter. Latin America was driven by Brazil and Chile, and Argentina was also positive. In Asia, we had above average performances in China, Japan, India and Singapore. Looking at revenue growth by industry. Auto and consumer products, retail and technology were among the better-performing sectors. And net new business was over $1 billion for the quarter. Let me now turn to our capital structure and use of cash. We are operating in an environment with historically low interest rates and continue to look for ways to use this as an opportunity to optimize our balance sheet, provide for continued growth and to ensure that shareholders are the major beneficiaries of Omnicom's strong cash flows. In the second quarter, we raised $750 million in new debt, and during the third quarter we raised an additional $500 million at a yield of just under 3%. We also continued to repurchase shares during the quarter, bringing our year-to-date repurchases to over $700 million. Even with these new financings and repurchases, our balance sheet and credit ratings remain extremely strong. The new capital provides us with greater flexibility to invest in our existing businesses and to add new ones where appropriate. On the acquisition front, we believe valuations have become inflated in many areas, particularly in digital. We are committed to maintaining a disciplined approach to acquisitions and will only pursue transactions that allow us to further our strategic goals and that meet the tests of fit and price. Before I finish, I want to note that we have continued to manage our businesses carefully by removing unnecessary costs and making smart investments in growth. This diligence has paid off and we fully expect to deliver on our 2012 margin targets. I'll now turn the call back to Randy who'll take you through our numbers in more detail.

Thank you, John. As John pointed out, this was a very solid quarter for our agencies. We continue to track very well against our objectives for the year despite a difficult economic backdrop that has not improved as we'd expected coming into the year. Our agencies have done very well this year on the new business front with both account consolidations and continuing to develop innovative new services for their clients. At the same time, they've made excellent progress managing their costs and realigning their cost structures where necessary. And as this quarter highlights, our agencies continue to make excellent progress building the brands, mostly organically, in the developing markets. Now for the quarter. Revenue came in at a little over $3.4 billion, which was driven by solid organic growth of 3.5% and in spite of a continuing stiff FX headwind, which this quarter was a negative 3.4%. But I'll address our revenue growth in more detail in a few minutes. EBITA increased 4.4% to $414.6 million and margins this quarter were 12.2%, up about 50 basis points from last year. For the 9 months, we're now a little ahead of schedule but that's mostly timing. We expect to achieve our previously stated margin target of 13.4% for the full year. Similarly, operating income, or EBIT, for the quarter increased 3.7% to $387 million. And our resulting operating margin of 11.4% was a year-over-year improvement of about 40 basis points. Amortization of intangibles was up about $3.6 million this quarter, about $2 million of which resulted from a nonrecurring impairment charge. And the balance was due to an increase in amortizable intangibles related to acquisitions. Slide 2 addresses the items below operating income. Net interest expense for the quarter was $40.3 million, up $8.4 million from Q3 of last year and up $5.4 million from the second quarter. In the second quarter, we issued $750 million of 10-year 3 5/8% notes. And this quarter, we opportunistically added $500 million to that same issue at an effective rate of about 3%. Both the year-over-year and quarter-over-quarter increase in interest expense is predominantly due to the interest paid on these new notes, offset by interest income earned on the increased cash balances. However, the rates earned on cash balances is quite well in the current environment. On the tax front, our reported rate for the quarter was 34.2%, basically flat with our Q3 rate last year and remains in line with our expected operating tax rate for the year. Earnings from our equity interest in affiliates increased just under $1 million to $5.3 million this quarter. And additionally, the allocation of earnings to the minority owners in our less-than-fully owned subsidiaries increased $4.5 million to $29.7 million. This increase was due primarily to the strong performance of many of our international subsidiaries outside of the Eurozone where some of our ownership structures include minority ownership by our senior management teams as well as additional minority interests in several of our recent acquisitions. And the aggregate result was net income increasing to $203.9 million for the quarter. On Slide 3, we show the allocation of net income to common shareholders and participating securities as well as our diluted share count, which is down year-over-year by 4.6%, and the computation of our diluted earnings per share, which for the quarter increased 2.8% to $0.74 per share. On Slide 4, we take a closer look at our revenue performance. First, with regard to FX. On a year-over-year basis, the U.S. dollar continued to strengthen against almost all of our major currencies except for the Chinese renminbi. The net result was, as I mentioned earlier, a very stiff headwind that reduced revenue for the quarter by 3.4% or about $115 million. Fortunately, as we've discussed in the past, the majority of our costs are incurred in the same currency as our revenues. So while there's a pro rata effect on earnings, there is a minimal effect on our operating margin. FX rates over the past month or so have stabilized somewhat. Looking ahead, if rates stay where they are currently, we expect FX to be negative by only about 75 basis points in Q4 and negative about 2.5% for the full year. Revenue from acquisitions, net of dispositions, increased revenue by $23.5 million in the quarter or 0.7%. In addition to the 4 new acquisitions completed during Q3, we continued to benefit from the acquisitions completed over the past 12 months, including Mudra in India, MCI in Japan and Marina Maher. We also continue to feel the effect of the dispositions that we completed mostly during the second half of 2011. While we've started to cycle on several of these dispositions, we'll not fully cycle through until 2013. So at this point, if we don't complete another acquisition or disposition for the balance of the year, the net acquisition revenue will be positive about 40 basis points in Q4. And with regard to organic growth. While increasingly mixed by market and industry sector, overall we had another very solid quarter, up 3.5% or about $118 million. This quarter, we continued to perform well in North America and we had double-digit growth in South America, Asia, Africa and Russia. However, this was offset by the ongoing sluggish performance across Europe. Our new business performance continued to be strong in the quarter with net wins of just over $1 billion as we continue to benefit from some of the larger account consolidation movements that are occurring in the marketplace. And our agencies have continued to successfully develop innovative services utilizing the many new technologies and communication platforms that are available today. Turning to our mix of business on Slide 5. Brand advertising accounted for 47% of our revenue; and marketing and services, 53%. As for their respective growth rates, brand advertising's organic growth was 5.7%, driven by continued strong growth in our media businesses, emerging markets and new technology services. And marketing services was up 1.6%. Within marketing services, CRM had an organic growth of 2.4%, public relations was slightly down at 0.3%, as was specialty communications. While still negative, this quarter was a significant improvement from the first half. While we continue to see spending cuts in the pharma and health care sector, we have benefited from some of the account consolidation initiatives. As a result, we expect to cycle through the difficult comps next year and see this sector turn into a positive. Turning to Slides 6 and 7. Our geographic mix of business in the quarter was split 52% in the U.S., 15% in the euro markets, 9% the U.K. and 24% rest of world. In the United States, revenue increased $55 million or 3.2%. Organic growth continued to be solid generally across disciplines and industries at 3.1% or $53.4 million. And acquisitions, net of dispositions, was marginally positive, adding $1.5 million. International revenue decreased $29 million or about 1.7%. As I mentioned, FX continued to create a strong headwind causing a revenue decline of about 6.9% or $115 million. Acquisitions, net of dispositions, increased revenue by $22 million. And organic growth, although extremely mixed by region, continued to be solid overall at a positive 3.8% or $64 million. Looking at the organic growth by market. In Europe, of the larger countries, Russia continued to perform very well, the U.K. was essentially flat and Germany, France and the Netherlands were down. In aggregate, the Eurozone markets were down 1.8% organically. In Asia, we continue to have strong performances across the region with double-digit growth overall. This quarter, China, India, Japan, Hong Kong and Indonesia led the way. In other parts of the world, we had strong performances in Canada, Brazil, Chile and Africa. Turning to Slide 8, which shows our mix of business by industry. There were no significant changes, either year-over-year or versus the second quarter of 2012. As for growth rates, while still quite mixed by sector, this quarter we had solid performances in auto, retail, technology and consumer products. Turning to Slide 9. Our cash performance for the first 9 months was very good with free cash flow, excluding changes in working capital, increasing just over $100 million to $966 million. On Slide 10, the breakdown of our primary uses of cash for the 9 months included dividends to common shareholders of $235 million. The year-over-year increase reflects both the 20% increase in our quarterly dividend and the reduction of our share count; dividends paid to minority interest shareholders of $79 million; capital expenditures of $159 million. As we've mentioned on earlier calls, CapEx is planned to be up this year primarily due to a couple of sizable office makeovers related to long-term lease renewals, as well as increased IT spending related to our IT consolidation initiative. Acquisitions, including contingent purchase price payments, net of the proceeds received from the sale of investments, totaled just under $159 million. And share repurchases, net of the proceeds received from stock issuances under our employee share plans, totaled $714 million. In total, and again excluding working capital, year-to-date we've outspent our free cash by about $380 million. Slide 11 shows our current capital structure. As we mentioned earlier, in August, we added an additional $500 million in 10-year senior notes to the $750 million issue we completed in Q2. As a result, year-over-year, our total debt increased by $1.25 billion to $4.46 billion. However, our net debt position at the end of the quarter was $2.5 billion, an increase of $200 million from the same time last year. As a result of the increased debt, our total debt-to-EBITDA ratio increased to 2.2x although our net debt-to-EBITDA ratio remained flat at 1.2x. Also, our interest coverage ratio remains very strong at 11.9x. And finally, on Slide 12, as we've continued to successfully build the company through a combination of prudently priced acquisitions and well-focused internal development initiatives, both the return on invested capital and return on equity have remained very strong. For the last 12 months, our return on invested capital was 15.7% and our return on equity improved to 28.3%. This concludes our prepared remarks. There are several other supplemental slides included in the presentation materials for your review. But at this point, I'm going to ask the operator to open the call for questions. Thank you again.

[Operator Instructions] Your first question comes from the line of Alexia Quadrani from JPMorgan. Alexia S. Quadrani - JP Morgan Chase & Co, Research Division: Just a question on the sort of overall advertising outlook that you're seeing right now. Has there been a change in sort of client mentality on spending? I noticed just a little bit of a slowdown versus the strong organic growth you saw on the first half. Is it more that budgets were set and they kind of overspent in the beginning and now they're compensating, but the mentality hasn't really changed or are you seeing more of a bit of a pull in?

I don't think there's any one answer to that question, Alexi. It's all of the above. With the uncertainty that is reported every day in the newspapers about China being off a little bit, that Europe's not solved yet and the uncertainty with the fiscal cliff as people await the election. There's conservatism and we're not certain yet what the outcome is going to be in the fourth quarter or as we get into the first quarter of next year. We do know that we're performing very well and we're engaged in very positive conversations with our clients. But there's no single answer or generalization I can put -- I can come up with to answer you. Alexia S. Quadrani - JP Morgan Chase & Co, Research Division: But it generally sounds -- generally feels though like a pretty healthy environment. I don't want to read too much into a slight slowdown in growth. Is that fair?

Yes, we came into the year thinking 4% for the full year was a good number. I still think 4%, that range is probably still a good full year number. The timing of the spend year-over-year can obviously move around quite a bit. We had a very strong first half, but again I don't think -- we're not ready to change our full year numbers yet. Alexia S. Quadrani - JP Morgan Chase & Co, Research Division: And just a follow-up on the margin. You beat expectations now for most of the year. I think you mentioned in your opening remarks you're still on target for your goal. I guess, can we assume a little upside given the strength going into the fourth quarter to your goal for EBITA for the year?

No.

No. I mean, we're willing to commit to what we committed to a year ago.

Your next question comes from the line of Craig Huber from Huber Research Partners.

A question for you is margin targets for this year of 13.4%. Is there anything, Randy, that you're doing on the cost front that you've already put in place for this year or planning to do in the fourth quarter that may potentially have a tough cost comparison for 2013?

Well, I think these – well, I've said it for a number of years. I think the margins -- our margin target for this year is a very good overall margin given Omnicom's mix of business and our commitment to constantly invest in our businesses, our training programs, et cetera. Yes, so I think this year is going to be a very tough comp for next year. I think our agencies are up to that challenge. But I think these are good numbers.

And then also, could you speak a little bit further about what you're seeing over in Europe. Is your sense over there that things are getting worse, about the same or getting better on the confidence levels, the economic backdrop in your major markets over there?

There's still a great deal of uncertainty in Europe. Southern Europe, the problems aren't resolved and you have political change which is recent in France. Ultimately, the Germans are going to have to probably pay the bill, but they're going to have to decide when they're going to do that. So I don't see any improvement to the European market in the near term. I think they're at a very fragile point and they seem to be working their way through it, but I'm not prepared or ready to declare it solved in any way, manner, make, shape or form. So we continue to manage our businesses market-by-market, office-by-office in response to what the changing environment is.

And then lastly, if I could, just a quick housekeeping question. Randy, would you -- could you just break apart your salary line versus O&G and also for your interest expense line, break that apart, please?

Let's see. Salaries -- salary and service cost is $215 million -- $216 million. And office and general is $503 million. And interest, let me see, interest expense is $47.8 million. Interest income is $7.5 million.

Your next question comes from the line of Tim Nollen from Macquarie.

A couple of things, please. Could you please elaborate a little bit more on your discussion on digital/analytical/consumer insight? Is this just continuing the work you've been doing in digital or are we detecting -- am I detecting a new tone here in things that you're doing? Are you ramping up some of your efforts there? Likewise, you talked about collaboration across your agencies. Are there further central cost savings that you might seek to achieve once you've gotten to this margin target level for this year? And likewise, is that kind of a new program or an extended effort? And then lastly, on share buybacks, you've given, it looks like kind of a net figure on share buybacks. Is there a like a gross number you could give us what the actual dollar spent on just share buybacks in Q3, please?

Sure. The first part of your question, if you'd repeat it, I'm sorry?

Yes. It was about your discussion on analytical and consumer insights. Should we detect that you're doing more work in this area? And I don't think -- you really haven't talked a whole lot about that in the past.

Yes, and probably the fault is having not spoken about it more directly in the past. What we've elected to do, we've been doing it now for at least 2 years, is investing very heavily through the P&L rather than through doing large acquisitions in developing and expanding our digital capabilities across-the-board. But I highlighted in the call Annalect and a number of companies that are engaged in almost purely digital items. And those investments continue to be made. We're making a lot of progress and getting to our first line of products, which we're deploying to our clients and that's only going to speed up and continue. What we do see during the quarter was significant growth. Not big dollar amounts yet, but significant growth in the use of mobile for the first time. And I think that's ultimately where the future is and that will ultimately unleash the floodgates. But the whole industry is moving in that direction. So we've just started to discuss it a bit more then, but our commitment to it has been more across-the-board for quite a while. The second part of your question?

Your second question, I think, has sort of 2 parts to it. The comments, I think, John was making about collaboration is our efforts to provide more innovative, comprehensive service to our clients and by increasing the coordination amongst our agencies around those clients. We've described them in the past as client-centric networks. You took it on the cost savings side. There are a number of -- unrelated to that really, there are a number of initiatives that have been going on with Omnicom for the last couple of years. We announced them pretty strong last year about centralizing various functions in efforts to drive our costs down. Obviously, those efforts are continuous. They're going to be ongoing for a long time. And then once we're done with those initiatives, hopefully we're developing more initiatives as we go because we're certainly charged from our clients with the task of constantly improving the efficiency of overall operations. And your final question was stock purchases in the quarter. I think we spent about $195.7 million and it was roughly 3,708,000 shares.

Your next question comes from the line of John Janedis from UBS.

A couple of toughies here for you guys. One is, I know it's early but you have a sense of discretionary or project spend for later in the quarter? And then secondly, John, can you maybe give us a little bit more color on how your clients are approaching the fiscal cliff?

Well, first of all, we wind up going through this every year. There is a certain amount of money that most years in the past 2 decades has gotten spent in the fourth quarter. There has been 1 year, 2008, I think where it didn't. And there's a certain amount of unknown and that won't become clarified until -- as we go through the quarter. It's way too early in the fourth quarter to know exactly what that's going to be. Our clients are, especially our multinational clients, go where the sales are. I mean, so -- and go where there's more certainty. That's why you see Europe slowing down. U.S. has held together pretty well considering all the uncertainty associated with the election and the decisions that the country has to make in terms of how we're going to go forward in the near term. And Asia, Asia's going -- especially China is going through a change in leadership. There's been a modest reduction in growth there. But we think it's only temporary and as the transition gets fully affected, you'll see that market return to growth as well. So it's a -- it's like the headlines at the moment. People are, to the extent that they can, shifting their tactics to meet the current economic situation.

And fortunately, due to the diversified nature of our business, frankly, our revenues have held up in many markets much, much better than overall media spend. We've seen, especially some of the Southern European countries, dramatic reductions in media spend and we've had – they're pretty significant reductions, if you're the agency with the reduction. But on a relative basis, our agencies have done very well.

Your next question comes from the line of Peter Stabler from Wells Fargo.

With regard to your European managers, is it more difficult for them to forecast given the macro uncertainties out there? When you guys compare your forecast and actual results, do you tend to see a wider variance, either to the upside or downside, in Europe? And then I got one quick follow-up.

There's constant reforecasting, recalibration. I wouldn't characterize their job as more or less difficult than anybody else's around the world. But again, when economies are weak when you're seeking what in the press is called the new normal and it hasn't arrived yet, you're very vigilant. You're watching all the time and you're adjusting constantly.

I think it also depends upon which forecast you're talking about. So a 3 months out forecast, I don't think there's any significant difference I'll say in the volatility of their forecast -- European forecast versus other markets. If you went out a year, I'm sure it's a bit more uncertainty in their forecast. It's not a matter of a difference of accuracy, but it's certainly the uncertainty that they're facing.

Great. And then, Randy, could you offer a little color on severance, how that's been tracking through the quarter and maybe expectations for the year?

It's basically been tracking as we had expected. It's I think down a little bit from this quarter last year, but largely in line. This year, severance is down quite a bit from last year in the aggregate. If you remember, we had the fairly large restructuring initiative that we took in the first quarter of last year. Absent that, it's pretty much tracked quarter-to-quarter.

Can you just say -- I mean, are we elevated over normal run rates still at this point?

Yes.

Yes, and if I can just add one comment. It's more expensive to make adjustments to your staff in Europe than it is in almost any other market in the world, only because of the social policies that are in place. That's improving somewhat, but still when there's lower growth, we need to go in and adjust that from time-to-time.

Yes, we would -- I'm not quite sure when a normal year is anymore, but we used to think that a normal year of severance was probably in the $60-or-so million range and through 9 months we're well above $70 million. So it's definitely up versus a so-called normal year.

And it sounds like Europe is still a work in progress?

Yes.

Your next question comes from the line of Michael Nathanson from Nomura.

I have 2 to you guys. One is could you talk about a bit about auto growth. It's been a great category. If there's any growth differences by region for us, how much of that's U.S.? And then I don't want to read too much in one data point, but if you talk a bit also about public relations, it was down this quarter. I know you had a tough comp, but if you go back to like back to '08, it was a pretty good canary in the coal mine for some slowing. So what's happening, do you think, in PR? And then talk about oil for a second.

Auto growth, I don't have it broken down market-by-market. I don't know if Randy has got them. I would imagine our Japanese clients are going to have a little bit of difficulty in the fourth quarter because of the conflict with Japan, but hopefully that'll pass quickly. But auto growth has been strong. In the U.S., it's been strong. In China, it's been strong. In Brazil, throughout the entire year. And your second…

And your second...

Was PR. I know it's only one quarter and it's a tough comp, but what's happened there and is that potential canary in the coal mine for others slowing?

I don't see it as a canary in the coal mine.

No, I don't either. And frankly, I think our PR businesses in general are doing pretty well. I certainly haven't heard anything serious negatives or slowdowns or things from our firms. I think the -- it's a pretty modest decline, 0.3 point. I think it's probably activities.

Yes. I mean we haven't studied it client-by-client. I think as you're looking forward at PR, and I don't know when this starts to show up in the numbers. Increasingly, clients especially in a social media environment, are talking about doing more PR as part of overall campaign planning. Again, not – I'm trying to tie it to the product rather than tie it to the actual reported results. But not terribly aware of any significant issues.

Your next question comes from the line of David Bank from RBC Capital Markets.

Two questions. The first is when you look at the swing factors that you have every fourth quarter in terms of the project work and the kind of incentive payments that may -- that hopefully come in and some of the true-ups, how do you -- what's your confidence level in those dollars coming in this year versus last year? Is it about the same or – when you think about that? And the second question is you kind of highlighted, I think in your prepared remarks, that the private valuations remain somewhat lofty. And I was wondering if that -- how much longer does that have to sustain itself before it maybe translates into a more direct change in capital allocation decisions like a change in stock buyback levels or things like that?

With respect to the second part of your question, increasingly clients are looking to go to a smaller group of agencies to reduce the roster number of vendors that they have to interface with. So a lot of -- in my view, a lot of the valuations for one-off small digital companies have been good on the owners because they've gotten decent prices through selling it but they're not really justified when you compare it to the growth in the general market and some of the trends, which are going on. And again, we're in the service business. The average age of our employees is early 30s. The digital capability of those people becomes more ingrained in everyday and the distinction between what was called traditional in digital diminishes every day. I think what does improve is the information and our ability to analyze the information and direct the messaging to individuals and to measure those results. And that's the trend that's well in place and going to only continue. With respect to the first part of your question…

Every year, in the fourth quarter, there's a couple hundred million dollars of sort of that, I'm going to call it project spend, call it whatever we want to call it. Every year it's about that same number. I got to say every year we have about the same insight to it, which is pretty minimal. Given the economic backdrop of what's out in the marketplace and frankly the fact that it's an Olympic year and I think people may, because it's an Olympic year, move their spend around more. It's certainly more difficult to predict especially on a year-over-year basis all those factors. Probably make me feel even a little less comfortable than I did last year, which wasn't very comfortable because we don't have a lot of insight into that number.

And with respect to the other parts of your question, we're running the business on a -- we're a service business on a long-term basis and reporting it every 90 days. So the swings in any 90-day period may not be impactful to our conclusions about what the long-term correct thing to do in terms of running our business are. So we go into fourth quarter with a certain amount of uncertainty about the next 90 days, less uncertainty about whether we're making the correct decisions about our business.

Your next question comes from the line of Ben Swinburne from Morgan Stanley.

Randy, I'm curious in the Eurozone, I think you mentioned down around 2%, maybe a little less in the quarter. I don't know what the year-to-date number is, but do you think that's a reflection of share gains for your agencies? That seems, given everything we see in Europe, actually a pretty good result. Then I have a follow-up.

Well, I don't know if it's -- I mean, I think there's a variety of factors. One, we've got a very diversified set of businesses. I mentioned that on an earlier question. I certainly think that helps us. I think our revenues at our agencies have held up pretty well given the economic backdrop and what I see is just overall media spend. I think a lot of that has to do with frankly the hard work of the people at our agencies, and frankly, the innovative ideas that they're coming up with for their clients to serve them better and more efficiently in the marketplace. Again, great ideas are valuable to clients. I think our agencies have done pretty well on that front. It's hard to say whether or not we have a share gain or not, but I do think our agencies are doing pretty well.

Great. And then just touching on, John, you mentioned in your prepared remarks a couple of times account consolidation. And it seems like this sort of goes in and out of favor. What's driving it now? Is it sector specific or more broad? And do you think it continues to drive the kind of M&A we've seen in the market? We've seen small deals for a while, but it seems like the large M&A consolidation in the sectors seems to be picking up? I don't know if they're related to that account consolidation trend or independent or have any impact on, be curious on your thoughts on that.

Well, I think the account consolidation is a trend that is in place and quite a number of our clients are going through the process and quite a number of our clients and other people's clients are discussing the process. And I think that's driven by a desire, in a low growth environment, to gain efficiencies. I also think the shift in media mix and how you reach consumers also has an impact on wanting to depend and deal on fewer people and not have an unlimited number of vendors that's serving you up specialties, which you may respond to and haven't fully thought through in terms of what is the most effective way to get to a consumer. So I think this trend is in place for now and I think it will only continue because companies -- our clients, most of the major companies around the world are under some degree of pressure to become more efficient. And so that's where we are today and I think as we go into 2013 and...

Do you think it drives the sort of holdco-level M&A we're starting to see a little bit of? Does it -- is there a relationship to those?

I mean I think if you're talking about the advertising marketing business, the numbers on some things versus the revenue are big, but on some things that have gotten done -- but the industry, itself, is fairly narrow. So I mean we've seen Dentsu active and we've seen some people clean up some so-called digital companies, which have been in the marketplace for quite some time. But I don't see a huge M&A activity in our space and I can't predict what'll happen to some of the smaller remaining players over the course of the next year. Money is very cheap, so it makes some of those decisions easy in the short run for people to spend money on deals.

I think the 2 thoughts are a bit unrelated. I don't believe account consolidations are what's driving any of the thinking around M&A activity in the industry. I think the account consolidations idea, this has been kind of an ongoing trend in parts for quite some time. It was done on a regional basis. It was done on various brands. Now you're seeing a few more global changes. I think from our industry's perspective, I think when you have a difficult economic backdrop, when companies are under more economic pressure, I think it forces change. Or it forces -- it certainly encourages them to attempt change to try and get more efficient. But I think that initiative is going on in the marketplace and we'll see how it all plays through.

Your next question comes from the line of Matt Chesler from Deutsche Bank.

I think just about all my questions have been answered and asked. But I think I'll just riff off of a couple other ones I've heard.

Because I never heard you not to be with a question.

I won't disappoint you. The notion that valuations are still inflated, does that have any implications on how you invest internally, organically in tools to stay ahead of the curve with regard to new disciplines, or are those separate?

My reference was to digital acquisitions, so it's not all acquisitions, number one. And number two, we made a commitment several years ago to make certain that every one of our employees was trained, developed and up to the standards of understanding digital in the way it affects what our products are. So we've heavily invested every year. We continue to make those internal investments at a very sizable pace, specifically in the areas of mobile, analytics, data and what the future will be, all of that ultimately aiding our ability to measure what we do and to be able to provide increasing ROI for our activities. I don't know if Randy wants to add to this.

Yes, I think it's right. I mean, I think with fully [ph] all of our acquisitions, especially through with some of the smaller ones, it's really a make-or-buy at a good price for our shareholders. Acquisitions are fantastic. They can accelerate change, they can get you to where you want to be faster versus starting from scratch and trying to build it. But we found for the better returns for our shareholders, a constant focus on building our business internally has proven to work pretty well in most cases. Doesn't mean that we're not going to do acquisitions. They just have to be right price for our shareholders as well. We're getting pretty close to 9:30, so, Matt, if you've got other question or one more question from the field? But either way, we'll call it after one more question. Is there another question on the line, operator?

Your next question comes from the line of Dan Salmon from BMO Capital Markets.

I just wanted to go back to your discussion around analytics and Annalect, in particular, Accuen The Trading Desk. And some market participants have claimed maybe that The Trading Desk has become an unfortunate sort of layer in the media buying processes, programmatic becomes a small but growing part of the mix of media buying. Do you agree with that assessment? And whether or not you do, how do you see those analytics and particularly trading desk functions evolving over time? Is it to be a sort of specialized group, a SWAT team, so to speak, within OMD and PHD? Or is it more and more being aligned with some of your client teams directly?

Well, it's clearly being aligned for the benefit of our client teams as a utility, in effect, for both our media-buying activities as well as some our other activities and campaigns. The pace at which the digital marketplace occurs and then the manner in which it's done instead of using physical bodies, but almost through algorithms where in nanoseconds things are purchased, and then if not producing the kind of ROI, resold off back into the market, I think looking way into the future, that kind of an auction will occur for almost all media. But just because the technology existed though, it doesn't mean that it will happen overnight. And it's slow. TV still gets done in the same -- similar fashion to how it was once done, as is outdoor, as is other major components, which are a key part of the mix. So it's a process of evolution. I think at the core of it is going to be -- and the determinant to where these analytics go is going to be what privacy laws become and whether you wind up with public information, which you can access to target or do you have to build your own ability to measure consumers than to target consumers. And the question hasn't been resolved yet. And I think it's going to take quite a while before some of these privacy issues do get resolved and I think that will dictate a good deal of the future. The problem isn't lack of data. There's always been too much data. The problem is how do you make the data you have actionable and useful and where you can analyze it in a fashion that you can get insights and then act upon them in an appropriate amount of time.

Yes, I think a couple of things to add. One is to keep in mind that these trading platforms have only been around for a couple of years at this point. So the development of them and how they're going to work out, we have to realize that they're only a couple of years old. Frankly, being involved in them – with them, there's a huge value in learning how they can work, et cetera. On a long-term basis, it's not really about the technology. It's about the insights in utilizing the technology or as John points out, there's a lot of data, but there's limited number of people that have the ability to get real insight out of that data. That's what our ultimate business is. Now in the early stages, we have to be somewhat the technology player, the data player because those things are all new. But on a long-term basis, it's going to be that insight that we can bring to our clients that's going to make the difference.

And just final point on it. I think we're just at the beginning of the -- of where mobile will go. And as more money gets spent and we become more efficient in reaching consumers using mobile devices, because that remote control's with you 24 hours a day and generally always in your pocket, whatever shifts we've seen up until now, we're going to see yet another seismic shift.

And let me thank everyone for taking the time to listen to our call. And I guess the fourth quarter's going to be on us...

Well, the fourth quarter is on us.

Is on us. The fourth quarter earnings will be here in no time. Thank you, again.

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