Omnicom Group Inc. (OMC) Q1 2017 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to the Omnicom First Quarter 2017 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. At this time, I’d like to introduce to your host for today’s conference, Vice President of Investor Relations, Shub Mukherjee. Please go ahead.

Good morning. Thank you for taking the time to listen to our first quarter 2017 earnings call. On the call with me today is John Wren, President and Chief Executive Officer, and Phil Angelastro, Chief Financial Officer. We hope everyone has had a chance to review our earnings release we have posted on our website, www.omnicomgroup.com, this morning’s press release along with the presentation covering the information that we will review 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 we have included at the end 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 expectation and that actual events or results may differ materially. I would 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 will find the reconciliation of those measures to the nearest comparable GAAP measures in the presentation materials. We are going to begin this morning’s call with an overview of our business from John Wren, then Phil Angelastro will provide our financial results for the quarter, and then we will open up the line for your questions.

Thank you, Shub. Good morning and thank you for joining our call. I am pleased to speak to you this morning about our first quarter results. We’re off to a very good start. Revenue increased by 2.5% to almost $3.6 billion. Organic revenue growth for the first quarter was 4.4%. Currency headwinds continued to be a drag on our topline and reduced revenue growth by 1.2%. Our EBITDA margins met our expectations and increased by 30 basis points compared to the first quarter of 2016. While our revenue growth exceeded our internal targets for the quarter, we remained cautious as numerous geopolitical and macroeconomic events remain unresolved. In the U.S. it is still isn’t clear on how legislation in several major areas including the budget, tax reform, infrastructure spending and healthcare could impact the economy, and the U.S.’s relationship with several key international trading partners is also being tested by the new administration. In Europe, the combination of Brexit and the upcoming general elections in France and Germany may lead to policy shifts in those countries. In Asia and the Middle East, the situation in North Korea is increasingly unsettling and the crisis in Syria continues to destabilize both the Middle East and Europe. In the face of these macro events, Omnicom’s agencies remain focussed on the things they can control, developing their talents, delivering results for their clients and driving improvement in their financial results. Our performance in the quarter once again demonstrates the consistency and diversity of our operations, the strong competitive position that our agencies have across the spectrum of advertising and marketing disciplines in key geographic markets and our digital data and analytical expertise and the success of our strategy in this area. Before I cover our performance by region, I’d like to address our ongoing evaluation of our portfolio of companies which we addressed on our year end call in February. We continue to evaluate our portfolio of businesses to ensure they strategically align with our goals. As a result of this process, during the last several months, we disposed over a number of field marketing events and other non-core operations which did not fit our long term goals. At the beginning of April, we also disposed the majority stake in the legacy print media business which operates in the Unites States and Canada. As a result of these dispositions and considering the acquisitions we have completed to date, we expect disposition revenue to exceed acquisition revenue for the full year 2017. More specifically, we expect negative net disposition revenue to be between 3.5% to 4.5% for the year. The elimination of these businesses from our portfolio should result in an EBITDA margin increase of an additional 20 basis points for the remainder of 2017. At this point, although we continue to evaluate our portfolio of businesses we expect that our disposition activity for 2017 is substantially complete and we do not expect any additional significant dispositions this year. We will continue to focus on our strategy of making internal investments and finding accretive acquisitions that further strengthen our core capabilities. Turning now to our organic revenue growth by region. North America was up just over 1%. We benefitted from positive performances at our traditional advertising and media agencies as well as our digital CRM businesses. However, this was offset by declines at our events, field marketing and branding businesses. The U.K. grew at a very healthy 8% with solid performances across all of our disciplines. In Europe we experienced strong growth of 8.2% with almost all of the countries across the continent performing well. Looking at Asia Pacific, first quarter organic growth was 9% similar to Europe the results in Asia were strong in most countries with Australia, Hong Kong, India, Japan, Korea and New Zealand all contributing significantly to the growth in the region. Latin America was up 5.4%, our operations in Mexico continue to outperform and Brazil returned to positive growth although it was in the low single digits. As compared to the prior year, our EBITDA for the quarter increased $19.9 million or 4.7% to $440.3 million. EBITDA margins increased to 12.3% versus 12% in the first quarter of 2016. Net income available for common shares for the first quarter increased $24.4 million or 11.2% to $241.3 million. The results were positively affected by the adoption of a new accounting pronouncement related to accounting for tax benefits on stock based compensation. Phil can better explain this to you later. The combined result was an increase in EPS of 13.3% to $1.02 a share for the quarter versus $0.90 per share for the same quarter a year ago. For the first three months of 2017 we generated $355 million in free cash flow and returned approximately $360 million to shareholders through dividends and share repurchases. Our cash flow balance sheet and liquidity remained very strong. Overall, we are very pleased with our first quarter results. It’s only been two months since our last conference call and our focus has been to continue to execute against the goals we laid out in February, expanding our talent facing capabilities, simplifying our service offerings through our new practise area and client matrix structure, making investments in our agencies and through acquisitions and driving efficiencies throughout our organization. The goal of our individual practise areas together with our global client group is to deliver to clients the industry’s best talent and continuous innovation by better targeting our internal investments and fostering collaborations. Our efforts in this area are driven through both formal and informal practises that preserve the individuality and culture of our agency brands while delivering customized connected solutions. You can expect further developments on these initiatives throughout 2017. On the acquisition front in the first quarter, TBWA acquired a majority stake in Lucky Generals; one of the leading independent creative agencies in the U.K. Lucky Generals has been shortlisted for campaigns, agency of the year for the last two years and has a superb management team. We are thrilled to have them join the group and I’m certain that it will make a significant contribution to TBWA. Our operational efficiency programs in areas such as real estate, information technology, back office accounting services and procurement continue to take effect. Through these programs we are enhancing our platform systems and controls and driving cost improvements across the group. Overall, we are very satisfied with the progress on our strategic initiatives and our financial performance in the first quarter. While there are three quarters to go, right now we feel good about our ability to deliver on our 2017 full year organic growth target of 3% to 3.5% and a 50 basis point EBITDA margin improvement. Turning now to our people, our belief and investment in town [ph] data and analytics creativity and collaboration are paying off in terms of industry recognition. Let me just highlight a few. For the 11th straight year, OMD topped the Gunn [ph] report for media. For the first time ever, a single holding company won two Adweek Media Agency of the year titles. As PHD won the Global category and Hearts & Science won breakthrough agency. BBDO topped the WARC 100 ranking as the most strategic networks in the world and Adam & Eve/DDB was the highest ranking creative agency. I want to congratulate everyone that have helped win these awards and drive our business everyday. Your talent is a great reflection on Omnicom and your hardwork is appreciated. Omnicom’s ability to win awards relies on talent and for us that means a diverse workforce. We recognize that a diverse group of people will create a stronger culture, perform at a higher level and will be better at developing meaningful insights in creative content. That’s why we continue to push hard on our diversity initiatives. Last quarter, Omni women celebrated International Women’s Day by launching four new chapters, in Canada, France, Germany and the UAE bringing the total number of regional chapters to more than ten. In the three short years since Omni women was launched, I am delighted by how influential and successful the organization has been in promoting diversity and we are seeing the benefits across all aspects of our business. Finally, as many of you may recall in 2016 Omnicom took meaningful steps on our board refreshment process with the on boarding of exceptional candidates who bring a wealth of experience and fresh perspectives. I’m happy to report that our commitment to creating a diverse and inclusive workforce starts to comp with Omnicom’s independent board of directors now including five women and three men already members. Sadly, long serving board member Mike A. Henning will be stepping down from the board in May. We would like to recognize Mike and extend our thanks to him for his outstanding leadership, dedication and loyalty to Omnicom over the years. The board expects to continue to add new additional members over the next several years. In closing, we are pleased that our performance continues to reflect the excellence of our people and agencies. We are off to a strong start to the year and well positioned to deliver on our internal targets. I will now turn the call over to Phil for a closer look at the first quarter results.

Thank you, John and good morning. As John said Q1 was a good quarter. Our agencies performed well in meeting the objectives of their clients and the financial and strategic goals we set for them. Total revenue for the quarter was just under $3.6 billion, an increase of 2.5% versus Q1 of 2016. Our organic revenue growth for the quarter was 4.4%. Regarding FX, the negative impact of currency rates was lower in Q1 than we have experienced recently. On a reported basis, while we continue to be negatively impacted by the weakening of the British Pound, the FX impact our other major currency was mixed. For the first quarter, the FX impact reduced revenue by 1.2% or about $41 million. As we have discussed previously, we continue to evaluate our portfolio of businesses to ensure they align with our strategies, and over the past several months, we have disposed off several entities that do not fit our strategic long term goals. This is reflected in the negative impact on revenue from our disposition activity through March 31st, which exceeded our acquisition revenue in the quarter reducing revenue by $24 million or 7 basis points. I’ll go into further detail regarding our revenue growth and our acquisition and disposition activity later in the presentation. Looking at the rest of the income statement, operating income or EBIT for the quarter increased 4.5% to $410 million. With operating margin improving to 11.4%, a 20 basis point margin improvement versus Q1 of last year. Q1 EBITDA increased 4.7% to $440 million, and the resulting EBITDA margin of 12.3% represents a 30 basis point increase over Q1 of last year. And our operational efficiency programs focussed on the areas of real estate, back office services and procurement continue to be primary drivers of our margin improvement. Now turning to the items below operating income. Net interest for the quarter was $39.6 million down $0.5 million versus Q1 of last year and down $600,000 versus the fourth quarter of 2016. Gross interest expense was $53.5 million an increase of $3.2 million versus Q1 of last year and an increase of $1.3 million versus Q4 of 2016. The increases were due to the reduced benefit from our fixed to floating interest rates swaps and higher interest rates have decreased the benefit on the floating like of our swaps as well as additional interest expense on our future earn out obligations. Interest income this quarter was higher when compared to Q1 a year ago, resulting from higher cash balances held by anti national treasury centers when compared to last year, as well as an increase in interest rates on those deposits versus the rates we earned during Q1 of 2016. Additionally, interest income from our international treasury centers was higher in the first quarter of 2017 when compared to Q4 of 2016. Although as expected, we saw our cash balances decrease in Q1 compared to year end, an increase in interest rates helped offset any reductions. As you may be aware on January 1st, we were required to adopt ASU 2016-09 which changed the way income tax expenses recognized on share based compensation under U.S. GAAP. The new standard requires that the difference between the book tax expense and the cash tax deduction recorded on our tax return from share based compensation we recorded to income tax expense. This difference is generated as a result of our stock price on the date of the award, compared to the stock price on the date that restricted stock vest, on the date that stock options were exercised. For the first quarter, we recorded an additional tax benefit on share based compensation of 12.4 million which reduced our effected tax rate for Q1 2017 by 3.3%. The standard requires prospect of recognition and does not allow restatement of prior periods. Previously, under GAAP this difference for us was recorded directly to equity and not to the P&L. As a result, our effective tax rate for Q1 was 29.2%. Excluding the benefit from the adoption of the new accounting standard, our effective tax rate would have been 32.5%, which is slightly lower than last year’s rate of 32.8% and in line with our expectations regarding our full year 2017 tax rate. Earnings from our affiliates were marginally positive during the first quarter, and the allocation of earnings to the minority shareholders and our less than fully owned subsidiaries increased $2.7 million, $20.6 million from $17.9 million mainly the result of improved performance at our less than fully owned subsidiaries versus the first quarter of last year. Including the benefit to income tax expense from adopting the new accounting standard, our reported net income for the quarter was $241.8 million an increase of 10.7% compared to last year. Excluding the benefit to income tax expense, our net income would have been $229.4 million, an increase of 5% versus Q1 of last year. Now turning to slide two, the reported net income available for common shareholders for the quarter was $241.3 million, and our diluted shares for the quarter were $236.5 million down 1.9% versus last year resulting from net share repurchases. As a result, our reported diluted EPS for the quarter was $1.02, up $0.12 or 13.3% versus diluted EPS of $0.90 from Q1 of last year. The impact of the new accounting standard increased our diluted EPS by $0.05. Excluding the impact of the additional tax benefit under the new accounting standard, diluted EPS would have been $0.97, which when compared to Q1 of last year is an increase of $0.07 a share or 7.8%. An additional point regarding our new accounting standard that we were required to adopt is the final income tax benefit is based on Omnicom’s share price at the future vesting date for restricted stock and at the exercise date for stock options is not possible to estimate with any certainty the impact of the new accounting pronouncement for our income tax rate or our net income or our diluted EPS for the full year. However, in 2017 the bulk of our share based awards for restricted stock vested in the first quarter therefore including the impact of any stock option exercises our stock price remains in the range it was during the first quarter. We expect any additional tax benefits for the remainder of the year to be approximately half of the benefit that was included in our Q1 results. Turning to slide three, we shift the discussion to our revenue performance. During the quarter, the negative impact from FX was lower than it has in quite some time. As said previously, the British pound continued weakness we've seen since the Brexit vote last June. On its own the FX impact of the pounds decline reduced our revenue by nearly $50 million in the first quarter. While with our other major currencies we've seen some volatility in rates since the November elections. For the quarter they netted to a slightly positive impact on our revenue in total. For the quarter on a reported basis the dollar weakened against the Brazilian Real, Canadian dollar, the Australian dollar and the Russian ruble, and in addition to the pound the dollar strengthened against the Chinese yuan and the euro. As a result, the net impact of FX changes decreased our quarterly revenue by $41 million, a 1.2%. If currencies stay where they currently are based on our most recent projections FX may negatively impact our revenues by approximately 2.2% for the second quarter of 2017 and 1.2% for the full year. However, considering all the variables impacting the foreign currency markets quite difficult to estimate what will happen to FX rates for the rest of the year. Revenue from acquisitions, net of dispositions resulted in a decrease to revenue of $24.3 million in the quarter or 0.7%. On the acquisition side TBWA closed on the acquisition of London-based Lucky Generals beginning of February. And we cycled through our largest recent acquisition Grupo ABC in January. For the Q1 acquisition revenue amount only includes one month's revenue from that acquisition. On the disposition side, in the past several months we completed several dispositions including agencies in our field marketing and events discipline, as well as our most recent disposition in early April of Novus, our specialty print media business which operates in the U.S. and Canada. Consistent with our prior discussions and considering both the dispositions and acquisitions completed to-date, disposition revenue will exceed acquisition revenue for the full year 2017. Our current expectations are that net disposition revenue will be between 3.5%, 4.5% for the full year. Given several of the businesses that we disposed off, we’re not our peak performers. We expect that this will result in a benefit to our overall margin profile of 20 basis points, together with our previously discussed expectations to achieve margin improvement of 30 basis points. This would bring our total expected EBITDA margin improvement for the year to 50 basis points. We plan to continue to evaluate our portfolio of business. However, we expect that our disposition activity for this year is substantially complete. We do not expect any significant additional dispositions in 2017. Organic growth was positive $153 million or 4.4% this quarter. Some highlights of our growth this quarter include geographically all six of our regions had positive organic growth this quarter with the U.K., Continental Europe and Asia Pacific all delivering strong organic revenue results. Full-service advertising agencies perform well again and our media businesses including Hearts & Science continue to perform very well. And our healthcare businesses had another strong quarter particularly strong growth from the healthcare group’s international agencies. On slide four highlighting our regional mix of business. You can see during the first quarter split was 60% for North America, 9% for the U.K., 16% for the rest of Europe, 10.5% for Asia-Pacific, 3% for Latin America and only 2% for Africa and the Middle East. By region organic revenue growth in North America was up 1.1%. We saw positive performances from our traditional advertising media agencies as well as our digital direct marketing businesses. This was offset by declines in some of our other CRM businesses in the region including events and field marketing, as well as branding, shopper marketing and non-profit consultant. In Europe, the U.K. once again had a great quarter with organic growth of about 8%, strong performances across most disciplines. The rest of Europe was up just over 8% organically in the quarter. Within the euro zone we saw solid performances from Germany, as well as Ireland, Italy, Portugal and Spain. France was marginally positive again this quarter but Netherlands continue to lag. Both in Europe outside the euro zone strong across most of the markets including the Czech Republic, Poland, Russia and Switzerland, in the region the one market of note [ph] that is negative was Turkey. The Asia-Pacific region was up just over 9%, and we continue to see organic growth across most of our major markets and disciplines in the region including in Australia as well as India, Japan, South Korea and New Zealand. The Greater China agencies had a solid quarter of organic growth as well. Latin America returned to positive organic growth during the first quarter. Brazil was slightly positive organically. However the macro economic and political conditions in the market continue to make it difficult for our agencies to grow their businesses on a consistent basis. Elsewhere in the region outside of Brazil our agencies in Mexico continued their strong performance. And finally Africa and the Middle East which is our smallest region was up double digits organically driven primarily by our project-based businesses in the region. Slide five shows our mix of business by discipline. For the quarter the split was 54% for traditional advertising services and 46% for marketing services. As of their organic growth performance our advertising discipline was up 6.4%, another solid performance. Our growth in this discipline continues to be led by the performance over media businesses with good performance across all of our regions and most of our offerings, as well as good performances by many of our full-service advertising agencies. DRM was up 2.1% for the quarter. We continue to see mixed results across our businesses and geographies. This quarter we saw strength in some of our international businesses which was particularly offset by weakness in the U.S. Within CRM our direct marketing and digital direct agencies performed well in the quarter, while our branding businesses continue to struggle. PR was up 1.8% this quarter, and specialty communications primarily Omnicom Health Group was up 3.3% organically. Turning to slide six, we present our mix of revenue to our client’s industry sector. In comparing the Q1 revenue for 2017 -- 2016 you can see there were no major shifts in the percentages each industry contributed towards our total. Turning to our cash flow performance, on slide seven you can see that in the first quarter we generated $355 million of free cash flow excluding changes in working capital. As for our primary uses of cash on slide eight, dividends paid to our common shareholders were $131 million which reflects the effects of the 10% increase in the quarterly dividend that was approved last spring, which was partially offset by the reduction in shares outstanding due to repurchase activity. Dividends paid to our non-controlling interest shareholders totaled $10 million and capital expenditures were $32 million for the quarter. While we've seen a decrease in CapEx, we have also seen a planned uptick in activity in our equipment leasing programs. Acquisitions including earn out payments and net of the proceeds received from the sale of investments totaled $18 million. In stock repurchases, net of the proceeds received from stock issuances under our employee share plans totaled $232 million. All in, we outspent our free cash flow by about $67 million during the first three months of the year. Turning to slide nine, regarding our capital structure at the end of the quarter, our total debt at March 31, 2017 of $4.94 billion, is up about $290 million from this time last year. This increase resulted from the incremental $400 million of borrowings related to the debt issuance back in April of 2016 along with a decrease in the non-cash fair value of our debt of about $70 million over the past year which is directly related to an offset by change in the fair value of the respective interest rate swaps on our debt. The increase in net debt relative to year-end was a result of the typical uses of working capital that historically occur in the first quarter which were approximately $550 million. The use of cash in excess of our free cash flow approximately $67 million. These increases in net debt were partially offset by the effective exchange rates on cash during Q1 and increased our cash balance by about $70 million. As far our ratios they remain strong. Our total debt to EBITDA ratio was 2.1 times and our net debt to EBITDA ratio was 1.1 times. And due to the year-over-year increase in our interest expense, our interest coverage ratio was still quite strong decreased to 10.9 times. Turning to slide 10, we continue to manage and build a company through a combination of development initiatives and judicially priced acquisitions. For the last 12 months our return on invested capital ratio improved to 21.8% while our return on equity increase to 52%. And finally on slide 11, we track our cumulative return of cash to shareholders over the past 10 plus years. Aligned on the top of the chart there’s our cumulative net income in the beginning of 2007 to March 31 of 2017 which totaled $10.1 billion, while the bar shows the cumulative return of cash to shareholders including both net share repurchases and dividend which during the same period totaled $10.8 billion, all resulting in cumulative payout ratio of 107% since the beginning of 2007. And that concludes our prepared remarks. Please note that we have included a number of other supplemental slides and presentation materials for your review. But at this point we're going to ask operator to open the call for questions. Thank you.

[Operator Instructions] Your first question comes from the line of Alexia Quadrani from JP Morgan. Please go ahead.

Thank you. Just a couple questions. First, on your commentary on the dispositions. Thank you for that color and the impact on profitability, your margins for the year. I was wondering if you could also tell us what impact if any that these dispositions might have on organic revenue growth? And any more color because they’re largely in the U.S. I know you mentioned one of the bigger ones was in North America, but anything else that might skewed more toward the U.S. versus International?

Sure. I think the largest of the acquisitions which we closed in early April, it was the print media business is focus in the U.S. primarily and they have an operation in Canada. The rest of our dispositions occurred both in the U.S. and outside the U.S., so it isn't just U.S. exclusively. Some of the field marketing operations are in the U.S. and some are outside of the U.S. So the mix is a primarily North American of the total dispositions that we completed to-date. And then on the organic growth front, certainly we think going forward is going to be a benefit from the dispositions to our overall organic growth profile. But in terms of the size of the numbers, it takes an awful lot to kind of move the needle. So, we don't want to anticipate a significant increase in the profile in the immediate term, but we think as closing of these businesses was the right thing from a long term strategic perspective, they didn’t really fit our strategies regarding sustainable long-term revenue growth and profit growth.

And then if you could give us maybe any more color in terms of why you’ve seen such disparity in organic growth in general in the quarter and the last couple of quarters you have such impressive organic revenue growth internationally, but the U.S. continues just sort of trend below sort of company average. I guess any color and what’s pressuring that if it may not if these businesses really were not necessarily upsize and if they are, that’s a kind of weighing on it, but it sound like they’re healthy mix in U.S. and non-U.S. And then, John maybe if you just give us some color on if you’re seeing above average pressure from clients, either on consumer packaged goods area where one of your peers mentioned some pressuring or maybe even the retail segment which I know is not that big for you guys given that what’s going on it in that vertical? Thank you.

Sure. Well, some of the pressure in the U.S. has come from things that we discussed in the fourth quarter, our year end call. Branding for instance, which generally are projects which you don't have a large backlog on and normally probably you have two months from start to go. That's been a ongoing issue for us and it comes down, I think in large part to leadership and one of my network CEOs is taking me very seriously and hasn't yet found the proper replacements for certain people who are no longer with us. I'm very confident about the business because they are very smart people and when you do have the right people that growth will come back pretty quickly. Also field marketing, what’s left of it in the United States was disappointing only because of one or two retailers which have seriously cut back. Those tend to be low margin businesses, but the volume of the revenue is associated with them can be impactful in any quarter. Again nothing terribly troublesome and certainly not to the core businesses which we live on, but it is something that we’re working on and should see improvement as we get through the rest of the year. In terms of package goods, we've been very fortunate. First of all, I guess out of all the three, as we take just the big three players, our profile in large packages companies, we were last to the party, though our revenue from those areas are not nearly anywhere near the size of our competitors and the rest of the industry. And those clients are adjusting their services that they have traditionally purchased from those competitors. If you have to look at their portfolios and how they serve those clients you’d see quite a bit thing like market research and some other areas where they gain a lot of revenue, those whole areas are changing. The things that we've been able to sell the large packaged goods clients, we’re partnering with them have been in more contemporary type of services and we're coming from a smaller base, so the impact is nearly what they projected in whatever public comments they’ve made. Is that answers your question, Alexia?

Perfect. And then anything from retail or do you think retailers is sort of same old or you’re seeing, but reading obviously about how much pressure that retail industry. Have you seen any pressure there?

No. We make the assumption that there’s going to continued pressure especially big box type of retailer. I take the view that pressure is not going away any time soon and the storage that you see out there principally showrooms where people go and see the products that they want to buy, touch them, feel them, but then they go back home and purchase them online. And some of the stats that came out of the credit card companies in year end show a real increase for the very first time. It’s always been increasing. But I think it exceeded almost 30% of year-end sales which is to me a tipping point of how things are moving, going to move going forward.

Okay.

That is why intrude strategically with some of the dispositions that we did were not only domestically but internationally are in the field marketing businesses because whereas they’ve contributed to growth at a low margin in the past what we see going forward is still going to low margin, but the growth that they’re going to able to contribute is going to be really stifled. So it was good to sell them to people who want them and have different objectives than we do.

Okay. Thank you very much. Appreciate it.

Your next question comes from the line of Julien Roch from Barclays. Please go ahead.

Yes. Good morning and thank you very much for taking the question. The first the question is on Accuen, if we could get the contribution to organic in the quarter. The second question is it [Indiscernible] an idea of the organic of the business you sold in Q1. Was it down 5.10 [ph] or what would have been organic in Q1 if 100% of disposals have been down, any color would be great? And then the last question is as you said that the mix of the assets you sold that was probably North America. Can we get an idea is it 60%, 70%, 80% any color would be great as well? Thank you very much.

Most of the sale with the exception of Novus happened early in the first quarter, so they themselves didn’t have much of an impact in organic growth.

Yes. But if you assume that been done on the 1st of Jan what would have been impact of some or maybe the kind of an idea of the organic of the assets you sold, because I assume they were declining?

I think, overall the portfolio of businesses that we’ve disposed off probably would have dragged or broke down a bit, but not to a great degree if you look at it on an annualized basis. I think the driver -- the key driver of why we’ve taken this direction is the future growth profile of these businesses. So while in any one quarter in the past 12 months or so, they might have marginally impacted our growth profile to a small degree, probably negatively. We think going forward, the chances of them growing in any consistent meaningful way versus the chances of them continuing to kind of define strategically. We think the chances of decline prospectively, much more likely which was the key driver behind the disposition strategy. As far as couple of other items you have there, Accuen is basically flat for the quarter, so no real growth in Accuen this quarter. It was actually down slightly in North America. And from our perspective it's not unexpected.

And you should be careful of how you read that. The underlying business actually grew except for clients instead of buying it on a bundled basis that moved to buying it as an agent, they using us as an agent to procure those services. So the business itself is very healthy, but the method in which our services approaches changed and that's why we get the mathematical solution that you got.

So that means that it’s because of Accuen is flat for the quarter than it actually had a negative impact on overall cost, right. Or when you say…

A neutral impact on the calculation of organic growth, but it's kind of one of those very odd doesn't happened or hasn’t happened very much in the past. The way that we offer those services are on a bundled and in undisclosed basis and on a disclosed basis lot of the clients have shifted to wanting those services on a fully disclosed basis which puts us in the position of treating it as if we were their agent and not selling them a product. So the underlying business is healthy. It just doesn't reflect in the math of how you would go about calculating organic growth.

Yes. The more and more brand-based advertisers look for ways to effectively target the consumer that they're trying to reach through programmatic. They’re more likely to choose the more traditional approach and we’re fine with that. Its still early days in the programmatic space, as John had said business continues to grow and we’re happy to offer to our clients in whichever way they find most useful. But Accuen being flat for the quarter, we don't really look at it is as if somehow that drag down our growth profile, mean it essentially flat for the quarter. We don't expect that it's going to go back to growth profile we had on prior years. We think this shift may continue and as long as the underlying business continues to grow that's fine with us.

Okay. And the last one was the mix of the assets you sold, you said primarily North America, but can we have an idea, is it 60%, 70%, 80%?

I think it’s probably in the 70% to 75% ballpark. So if you said three quarters of it as North America, that’s probably about right. I don't have a schedule in front of me that does the math. But I think that’s about right.

Okay. Thank you very much.

Sure.

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

Thank you. John, just you talk a lot of the macro environment beginning of the call and I’m just – but at the same time you reiterated your full year outlook. I’m just wondering if you are just sort of giving us some color or if you're advertisers are getting a little more nervous given what you see on TV and in the news every day? I just wanted to see if we could revisit that for a minute?

Most of really intelligent people I speak to don’t watch TV.

Okay.

But you had this morning. You had the U.K. announcing an election in June. In Turkey you had a very narrow win this past Sunday, which linked into a change the way that their government efforts. Though I think everybody I speak to is cautious. They’re not – there are still animal spirits out there and everybody is hoping that just a number of these initiatives around the world especially those in the United States get pushed through what seems to have slept is the timing of when you might see those benefits, but they haven't given up hope. But as a result we have to plan a business. You have to take all that into consideration and plan for what you know and not for what you hope for. And so there hasn’t -- when you see, in fact that we haven't changed our guidance for the rest of the year when it comes to the top line and it's really reflective of that caution and what clients are committing to us versus if some of these things happen or they pass quietly we’re prepared to grow with the marketplace.

And then, Phil, just to come back to the dispositions one more time, just doing some back in the envelope math, I think what you gave us, it’s a revenue impact offset by margin, better margin expansion suggested that these decisions did have some profits associate with them, I just wanted to confirm that there is an earnings impacts from the additional I guess, 30 [ph] basis points net dispositions this year?

Yes. I think the businesses themselves certainly have lower margins in the overall on the account profile. And if you wanted to assume somewhere in mid-single digits that's probably roughly a good rough assumption.

But if I heard the question correctly, the 30 basis points is really predicated off of last year's performance and we don’t see this dispositions and any income or that they contributed will make that up in making our numbers.

Yes, I understand got it. And maybe just one last one for either of you, I’m just curious that it’s been made evident that Amazon has become a much bigger advertising business particularly on search than we thought in prior years. Just curious when you look at how you advise your clients particularly with all the controversy that’s been going on with Google and YouTube, you know is Amazon becoming an increasingly attractive option for advertisers on the search side or are they still sort of more just around the margin, I know Google is obviously pretty dominant in that space, so just curious if you have any thoughts there?

I think Google’s dominance continues especially in search. It’s an important alternative and I would never underestimate over the longer run, but at what Amazon is capable of doing. But if you are looking at 2017 or the more immediate future I’d only list it as an important alternative to Google and that’s somebody who I anticipate is going to take most you know their market share in the short run.

Yep. Thank you both.

Sure.

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

Hi, thanks. Sorry to come back on the dispositions one, hopefully last time. Just to be clear, I think so you said net dispositions, meaning the acquisition line for you guys would be down 3.5% to 4.5% just want to make sure that its net dispositions offset by some acquisitions with a net minus 3.5% to minus 4.5%.

Yes, that’s right. That’s net of acquisitions we completed to date.

Okay, so that’s – that’s reported revenue a bit further down than we had previously had given the scope of the dispositions. Okay, secondly if you come back on North America again please, could you remind us what is the timing of these major account wins that you have had Volkswagen, AT&T, McDonald's some of those, have they begun to contribute in Q1 and if there is any sense you can give us of the scope that they will contribute. I’m just wondering kind of what is the underlying, underlying North America growth rate that maybe somewhat offset by those revenues coming in as they do. And lastly, back on the CPG spending question, and tying it to the branding comments that you’ve had about branding having been a weak business particularly in the U.S. lately, I know there’s been a big emphasis on promotions within the CPG and retail sectors for the last few years just wondering if you sense that that maybe coming off the boil now and maybe a shift back into branding from the manufacturers and the retailers which would obviously help your business?

Just repeat that last question Tim.

So on the branding business, which you said is hurting in the U.S. I know a lot of CPG manufacturers and retailers have been absorbing a lot of promotions as opposed to branding. So you know the A versus the P you know the promotions don’t necessarily help to the advertising the branding business would help, the question is are we beginning maybe to see a shift back in the some more branding away from promotions.

Okay, I’ll take the first one. So, the answer is yes, all those wins have been contributing at this point. P&G and AT&T go back to 16 P&G probably started with Hearts & Science in the second quarter and most of the wins you referenced the large and medium wins other than MacDonald’s. VW [ph] just started up January 1st and it’s a global business win for us for PHD not just North America. AT&T probably started in the fourth quarter of 2016 and MacDonald’s also recently started in early 2017 for us as well, so that gives you the sense of the timing.

And mind you MacDonald’s we had a lot of that underlying work already, we were able to consolidate North America, the way that we won the business. I thought it was incremental and just start off....

And have you given us any sense of the relative revenue contribution from these?

You know we’ve got a big portfolio of businesses. We had a lot of wins and a lot of losses unfortunately. We’re trying to dwell on the losses but certainly these wins were an exclusive that there are some ups and downs in the broader portfolio and that’s part of the strategy to have a broad diverse portfolio that can provide some consistency and less volatility, so certainly there is some other offsetting, some factors offsetting the contributions of the new wins, but we are happy with the underlying performance of the businesses that generated the wins and we continue to work with all the businesses in our portfolio. You want to take the branding....

By all means. In terms of promotions versus brand, advertising of the bigger, the of the P&G's of the world, that really hasn't been the primary shift atleast I don’t believe, I think what you are seeing is almost an evaluation as to the number of vendors that those big advertisers use, a reduction or a consolidation of the number of vendors that they use and then zero based budgeting type of activity which has – we produced this ad, do we really need to test it in six markets for 12-weeks in an old traditional fashion or is there other ways to find out whether we are reaching the audiences or not. That’s technology, the changing consumer, all that all has an impact on all those individual decisions and I think that’s what you see going on as those companies like our own and others look to make certain that if you can reduce an expense than get at it, and so that’s what I really think is going on and I think it’s a permanent trend for some of those big companies who try to make their marketing dollars work more efficiently.

Okay, thank you.

Do you think Operator given that the time of the market opened I think we have time for one more call?

Okay, that question comes from the line of John Janedis from Jefferies. Please go ahead.

Hi, thank you. I’ll wrap it up with two quick questions. First, John you talk about the volatility in the Latin American region over the past few quarters, but are you at a point now where you think you can see sustained growth in the region or is the quarter more of a one-off and then I guess bigger picture you have historically talked about the importance of investing in talent and your people and understanding the first quarter is always this moment seasonally if the organic revenue trend continues can we potentially see more operating leverage or would you reinvest that into the business?

In terms of Latin, we were pleasantly surprised although it’s early days to see Brazil stabilize and I think the new government down there or most of that’s behind them, so we should continue to see incremental improvement. We also expanded at the end of the year in Colombia and we’re just first bedding those companies down into our portfolio. So I’m bullish in the long run on Latin America, there’s a lot of population. They have gone through a lot of difficulty but they seem to have been, had great strides in fixing many of the problems or atleast addressing many of the problems. In terms of your second question...

Yes, in terms of you know if the growth continues I think we are – John’s comments earlier on in terms of our expectations for the rest of the year and given the uncertainty that’s out there we are certainly not committing beyond I think what we said, but you know in terms of the contribution or the potential contribution we are always looking to try to find the right balance between where do we invest, how much do we invest and you know wanting to grow, so I think you’ll continue to see us look to leverage the business but you’ll also continue to see us look to reinvest in the business so that we can build more sustainable future growth as opposed to keeping a short term focus.

All right, thank you.

Thank you. Thanks everybody for joining us on the call. Appreciate it.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.