Omnicom Group Inc. (OMC) Q2 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Omnicom Second Quarter 2011 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I'd like to now introduce you to today's conference call host, Executive Vice President, Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead.

Thank you for taking the time to listen to our second quarter 2011 earnings call. We hope everyone's had a chance to review our earnings release. We posted to our website both the press release and a presentation covering the information that we'll present this morning. This call is also being simulcast and will be archived on our website. Before we start, I've been asked to remind everyone to read the forward-looking statements and other information that is included on Page 1 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 this earnings call, we'll 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 accompanying this call. We're going to begin the call with some brief remarks from John Wren. Following John's remarks, we'll review our financial performance for the quarter in more detail, and then both John and I will be happy to take questions.

Good morning. Thanks for joining us. We're pleased to announce strong operating results for the second quarter. It was an excellent quarter all the way around. Despite the challenging worldwide economic backdrop, our results reflect our continued focus on disciplined growth by enhancing the capabilities in the performance of our portfolio of agencies around the world. While every market is different, we remain consistent in our focus of driving profitable and sustainable growth. The result is we believe we are executing against our 2011 business performance objectives, and we're improving our market position for tomorrow. I want to highlight several areas this morning. In the second quarter, organic growth was up 7.2% over the same period in 2010. Growth was particularly strong in our advertising and CRM businesses. Geographically, the strongest performing areas were the U.S., Asia and South America. Second, we're continuing to execute against our strategic objective of building a deeper presence in rapidly growing markets. In the second quarter, we announced the creation of a new business unit, Omnicom Greater China. This unit will enhance our ability to maximize global marketing and brand building opportunities for our Chinese and multinational clients. The group already operates in more than 40 agencies in over 30 locations, covering 130 cities in Greater China, and the new operating structure will allow for greater coordination and integration. Looking to the second half, we expect to increase our acquisition activities in other high-growth developing markets. Third, we continue to make progress towards our goal of returning margins to 2007 levels by 2012, which began in earnest late last year. Randy will take you through more details of our margin for the second quarter a bit later. However, we began to see the effects of our strategic and repositioning activities on our margins during the quarter, and expect the margin improvement to continue during the second half of the year and into 2012. Although we're not finished yet with our review of all the companies in our portfolio, and we still have a little bit more work to do, we do not expect to incur any significant charges for the remainder of the year. Finally, our agencies continue to create groundbreaking, award-winning work that delivers value for our clients. At the International Festival of Creativity in Cannes held in June, our networks and agencies once again demonstrated their leadership by garnering top honors with BBDO and DDB ranking among the top 3 networks worldwide. BBDO is the #1 ranked network for the fifth year in a row and took home 3 Grand Prix awards, the most awarded to any agency network at the festival. And for the first time, they received the network Global Creative Effectiveness award. BBDO Almap in Brazil was also named Agency of the Year for the second time in a row, and DDB's top wins included a Titanium line. Now let me touch on a few more specifics. Across the globe, our businesses remain resilient despite some significant challenges facing individual markets in Europe and the continued challenges facing Japan. In the U.S., we saw very strong organic growth, which was 8.1% versus the second quarter of last year. Though the job picture and the pace of economic improvement is more negative than it was last quarter, and we remain concerned about the failure to complete a debt ceiling deal, we believe that this situation will improve over the coming weeks and months. And as a result, we expect to see a moderate growth in the U.S. throughout the rest of 2011. In Europe, the picture is largely positive. Growth remains strong in the U.K. and in most European countries inside and outside the Eurozone. Overall, organic growth in the Eurozone was positive despite a year-over-year difficult comparison in France and the loss of an important client in the Netherlands. Meanwhile, in the rest of Europe outside of the Eurozone, we saw a very solid positive growth. In Asia, we continue to see double-digit growth even as Japan continues to recover from the tragic events of the first quarter, which resulted in negative growth in that country. And in the Middle East and South America, we also experienced very strong double-digit organic growth. Thanks in part to the strong growth in developing markets, together with new investments in these markets, we continue to diversify our businesses globally. Non-U.S. revenues for the quarter increased to 49% from 46% in the year-ago period, even as the U.S. continues to grow very, very significantly. And revenues from markets other than the U.S., the U.K. and the Eurozone represent almost 22% of our revenue in the quarter compared to 18% in the prior year. By industry, our growth is coming from across the spectrum of industries we serve. Revenues are up in every significant industry category with auto, financial services, technology and travel and entertainment having performed very, very well. Turning to our cash flow. We remain committed to maximizing returns by utilizing free cash flow and cash on hand for dividends, acquisitions and share repurchases. While acquisition activity was slower during the quarter than in the past several quarters, we continue to see a broad range of well-priced opportunities, and we would expect activity to pick up again in the second half of the year with a continued focus on expanding our presence in rapidly growing markets. During the quarter, we repurchased 6.6 million shares for a total of 13.4 million shares year-to-date. In closing, we're pleased with the performance of our business and the progress on our strategic priorities. We understand that our clients are looking for strategic partners who can not only create great work but can help them address critical business challenges, both globally and locally. With this in mind, we continue to develop our management teams and seek leaders and innovators around the world to help us optimize our portfolio and drive profitable and sustainable growth. Together, our strategies will allow us to continue to serve our clients across geographies and disciplines in the face of the changes in the geographic landscape and rapidly evolving technologies. I'll now turn the call back to Randy who'll take us through the numbers and then we'll be available to answer your questions. Thank you.

Thank you, John. It was an excellent quarter all the way around. Our agencies performed very well, being recognized by their clients with more than $1 billion in new business wins again this quarter, as well as being recognized by their peers in the numerous creative shows that have taken place this year around the world. And not to be left out, our treasury group was awarded the Adam Smith Award for best practice and innovation for 2011. In the second quarter, we continue to make solid progress towards the goals we set for ourselves for 2011 and 2012. In spite of continued uncertainties in the domestic and global economies, Omnicom recorded strong organic revenue growth in most of our major markets and all of our targeted growth markets, as well as across the full breadth of industries that we serve. Our agencies also made excellent progress in leveraging our people and resources more effectively and managing our costs more efficiently. We achieved meaningful margin improvements this quarter and continue to track well towards the margin target we set for ourselves for 2012. Now turning to the details of our financial performance. With very strong organic growth and a fairly significant positive FX impact, our year-over-year revenue grew 14.7%, bringing revenue for the quarter up to $3.49 billion. Our reported EBITDA increased 18.4% to $511 million. Our resulting EBITDA margin was up substantially to 14.7%, which was about a 50 basis point improvement from last year. it's also worth noting that this margin improvement was net of what was a negative impact from FX of almost 20 basis points. And our reported operating income or EBIT increased 17.5% to $488 million. Net interest expense for the quarter was $27.6 million, up $3.9 million from Q2 of last year and down about $4.5 million from Q1 this year. The year-over-year increase primarily reflected the interest on the $1 billion 10-year senior note we issued last August, partially offset by the positive effect of the interest rate swaps we entered into on our 2016 senior notes and the benefits of our strong operating cash performance. On the tax front, our reported tax rate for the quarter was 34.3%. Basically in line with our expected operating rate for 2011, which is between 34.2% and 34.4%. As a result, net income for the quarter increased a very strong 13.1% to $275 million. And when combined with the year-over-year share reduction of 7.6%, diluted earnings per share on the quarter increased substantially to $0.96 per share or a 21.5% increase. Turning to Page 3. We take a closer look at our revenue performance. First, with regard to FX on a year-over-year basis, the dollar continued to weaken versus most of our major currencies. The net result was a positive FX impact on revenue for the quarter of $168 million or about 5.5%. As I mentioned before, the FX impact had a negative impact on our EBITDA margin of about 20 basis points. Looking ahead, if FX rates stay where they are currently, we expect FX to be positive around 4% in Q3 and then about 2% in Q4. Revenue growth from acquisitions, net of dispositions, increased revenue by $60 million in the quarter or about 2%. The second quarter represented the first full quarter impact of the acquisitions of the Clemenger Group in Australia and New Zealand and Communispace in the U.S., as well as several dispositions, primarily in the U.S. There continue to be several additional dispositions that we are working on that we expect to complete before year end. And as always, there are a number of acquisitions that are being reviewed and considered. With regard to organic growth, we had another very strong quarter. Our agencies are doing very well in the new business front and on expanding the scope of services they are providing clients, especially with respect to the use of new technologies. As I mentioned, we continue to see year-over-year growth across every industry sector that we serve, and we finally cycled on the loss of Chrysler this quarter. As a result, organic revenue growth was a very strong 7.2% or $218 million. Turning to our mix of business. Brand advertising accounted for 46% of our revenue and Marketing Services, 54%. As for their respective growth rates, brand advertising continue to take the lead with 10% organic growth while Marketing Services was up 4.9%. Within the Marketing Services category, CRM had 7.5% organic growth. And within this sector, direct and field marketing, branding and research all had outstanding performances. Public Relations had organic growth of 1.3% and Specialty Communications decreased by about 1.2%. On Slide 5, our geographic mix of business in the quarter was 51% U.S. and 49% international. In the United States, revenue increased $127 million or 7.8%. Acquisitions, net of dispositions, reduced revenue by about $5 million or 0.3%, and organic growth continue to be very strong at 8.1% or about $132 million. International revenue increased $319 million or 22.7%. A little more than half that growth or $168 million was a result of FX changes. Acquisitions, net of dispositions, increased revenue by $65 million or 4.7%, and organic growth, although very mixed by country, was overall quite strong and up 6.1% or about $86 million. Internationally in Asia, we had stronger performances in China, Australia, South Korea Singapore and India. Japan was modestly negative, with several of our agencies feeling the effect of the earthquake and tsunami. In Europe, results continue to be very mixed. The U.K. and Russia performed very well. France was flat, and Germany was up modestly. Elsewhere in Europe, we had good performances in the Czech Republic and Belgium. In the so-called peak markets, organic growth in the aggregate are far better than last year, was only marginally positive with Spain, Portugal and Italy performing okay and Ireland and Greece continuing to be negative. Additionally, Latin America and the Middle East continue to have strong double-digit organic growth. Slide 6 shows our mix of business by industry. There were no significant changes in our mix of business in the quarter, and again, this quarter, we experienced positive growth across all of the industry segments that we serve. The strongest sectors for us were financial services, technology, travel and entertainment, retail and now that we've cycled through the loss of Chrysler, our auto business was up year-over-year in the quarter almost 20%. Turning to Slide 7, cash flow. Our cash performance in the first half of the year was in line with our expectations. We generated approximately $470 million of free cash flow after CapEx and excluding changes in working capital. Our primary uses of cash, year-to-date, were dividends to our common shareholders which totaled about $129 million; dividends paid to our noncontrolling interest shareholders of about $50 million; acquisitions, net of the proceeds from the sale of investments was $277 million; and share repurchases, net of the proceeds received from stock issuances under our share plans and their related tax benefits totaled $557 million. Combined, this resulted in a net use of cash year-to-date of approximately $543 million. Slide 8 shows our current capital structure. Our net debt position at the end of the quarter was approximately $2.2 billion, which was an increase of about $550 million over the last 12 months. That increase was driven predominantly by a return of capital to shareholders through both dividends and share repurchases, which for the last 12 months, totaled about $1.5 billion and that's net of the stock issuance proceeds. And our total debt was $3.2 billion, which was effectively unchanged from the end of the first quarter and up about $1 billion year-over-year through the issuance of the 2020 bonds last August. Our leverage ratio, or total debt-to-EBITDA ratio, stands at 1.8x, and our net debt-to-EBITDA ratio is approximately 1.2x. Our interest coverage ratio remained very strong at 11.9x. And finally on Slide 9, where all the numbers come together, our return on invested capital and return on equity for the last 12 months increased to 15.5% and 24.5%, respectively. Both improved from last quarter, and both remain consistent with our 10-year historic averages. And with that, I'm going to now ask the operator to open the call for questions.

[Operator Instructions] And our first question in queue will come from John Janedis with UBS.

Can you give us a little more color on what you're seeing in the U.K.? You're now on, I think, the fifth consecutive quarter of mid- to high-single digit organic growth in the marketplace and I'm wondering how much of that is share gains? And what are your people on the ground telling you about clients spend, given that continued soft economy in the market?

I would say share gains contribute quite a bit to our overall performance in the U.K. We have excellent agencies there, and we've been batting very well in terms of new business opportunities. In terms of many of our clients there are regionally and globally based clients, so there's an increase in spending in terms of what their plans are and their objectives are.

Okay. And then on -- Randy, for you, you talked about consolidations and divestitures as part of your margin goals for next year. Can you give us an update on how far along you are relative to plan there?

Yes. As we mentioned, or as John mentioned, we think we're pretty far along with anything that could have a charge. We think we've taken most of those charges in the first quarter. We certainly have a few more transactions we'd like to get completed. The timing of that is hard to determine. It's not fully in our control. People are progressing, but whether they're going to close behind the third quarter, the fourth quarter, is hard to say. I have to say there were a couple that I was hoping we're going to close in the second quarter that didn't happen.

Your next question comes from the line of Alexia Quadrani from JPMorgan. Alexia Quadrani - JP Morgan Chase & Co: Just looking at the impressive top line results in the quarter, can you give us a general sense of how they may progress through the quarter? I'm trying to get an idea if you have any sense of the good growth continuing into Q3? And also, sort of on that same topic, could you just elaborate on what clients are saying about spending in the second half? Do you find that they're generally on track for their annual budgets?

At the moment, I would say people are on track for the spending that they're planned to do. There is, as we all know, there's a fair amount of uncertainty here in the U.S., given Congress' inaction and people not knowing quite how to plan in the near term. So we remain a victim as everyone is of those actions, But short of that, everybody has been very consistent so far in terms of what their planning is for the balance of the year.

I think our revenues over the quarter were pretty balanced month-to-month. Alexia Quadrani - JP Morgan Chase & Co: So really no reason to assume that we should see sort of a change in the trend in sort of July, August given your comps are roughly the same?

No, I mean, July and August, the third quarter is not as large or significant as the second quarter is. But on a year-over-year basis, I think we can expect the same type of growth. Alexia Quadrani - JP Morgan Chase & Co: And just that you bought back an impressive number of shares sort of year-to-date it sounds from your earlier comments that the focus may be more towards acquisitions in the second half. Are those -- how much -- I guess any comments you could give us on your outlook for the share repurchase given that in the second half, and also how much visibility do you have on that acquisition pipeline over the next couple of months? And should we assume that acquisition growth therefore should offset the divestitures that you highlighted?

We have a great visibility in our pipeline. We don't necessarily have such great visibility on when they're going to close. So that one's a little trickier. Two sides to every transaction. Alexia Quadrani - JP Morgan Chase & Co: I mean I guess are there some deals that sort of you -- I mean when you say the acquisition activity's going to pick up, how much confidence do you have behind that? Are there some deals that you're about to close, some deals that you closed? And if not, should we assume the buyback activity will be similar to the first half?

Well, there's a number of deals which we're in the process of completing. We expect some of them will close in the next -- in the third quarter or beginning of the fourth quarter. Again, as Randy suggested, we're not always 100% in control of the timing because there's another side to the equation. And so we've targeted a number of companies in a number of developing markets, and we're proceeding at a pace to close them. I suspect that they'll be closed this year. I just don't know the month in which they will be done. At least I'm hopeful that they'll be done. Having said that, I think we exceeded what our original target was in terms of repurchasing shares slightly than what we told you in the first half. We will make those judgments along with the board as we get through the rest of the year, but right now our focus is on acquisitions.

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

I have some interrelated questions on operating margin. First off, did you have any -- or can you give us any numbers behind any type of onetime items that might have been incurred in Q2? I didn't see any in the press release or the slides. Secondly, related to this, it looks like your SG&A margin went up just a bit, but you're OMG margin went down quite a lot in Q2. If you could talk a bit about what went behind those. And then lastly, again, interrelated to this, you had been saying that your progress towards your margin target might be a bit more 2H weighted as opposed to 1H although your Q2 margin expansion was 50 basis points. Does this mean you, I guess this is related to a previous question, are you maybe a little ahead of track here? Or what should we think about second half margins?

Almost forget the first points. So the first points were on...

Onetime items, if there were any onetime charges you could talk about in Q2?

Certainly wasn't anything significant, I mean I guess for the company of our size there's always -- you can call anything you want one time. But there's certainly nothing of major significance. As far as the breakout of where our operating leverage came from, we had operating leverage everywhere. What came through in the quarter was on I'll say some of our fixed cost. We're certainly making fairly good progress on rent, depreciation and those types of items that are in control of the cost, making reasonable progress on the salary side as well. That gets offset a little bit by incentive accruals as well. Incentive accruals have been up for the first half. So it creates a bit of a balance. I think we're largely, and you said kind of how we're tracking, I think we're largely on track to where we wanted to be from a margin perspective coming through the year. I was a little bit surprised with the impact that FX had on margins. Obviously, our domestic margins are a little bit higher than our international margins, overall, and with the normal sort of 2% or 3% plus or minus FX you don't really notice it. This quarter with the 5.5% impact from FX, we actually saw it in the margins a little bit. It was almost 20 basis points. So I think, overall, we're tracking pretty well. I think we're pretty happy with our progress. Certainly have an awful lot of people in the organization, if not everybody, focused on it.

Your next question comes from the line of William Bird from Lazard.

John, I was wondering if you could just talk about how much impact social media is having on your business? And as you look at results this quarter, was there any particular part of your business that really surprised you?

I guess the second question first. There wasn't anything that surprised me very much. We just saw a very steady performance in all the markets that weren't under some unusual stress like Japan and Greece. So I was happy across the board as Randy mentioned and I mentioned I think in our comments. In terms of social media, it's affecting everything, Bill. I would imagine almost every campaign, advertising campaign we do, every marketing services store promotion campaign that we do, at this point has some social marketing component to it. And it's becoming just part of the normal process that we go through in terms of wanting to include and extend the messaging into a network. So it's pretty much the norm. It's no longer just demographic targeting and media selection. It's how do you engage the consumer and try to encourage that kind of conversation.

I think even broader is just the rapid deployment of new and emerging technologies. It seems that every one of our disciplines, every one of our campaigns, people are experimenting with or utilizing new technologies to extend the region, extend the breadth of the campaigns.

Great. And just a follow-up, just wondering if you're seeing any kind of change in behavior in just some of your more discretionary like project-type areas of your business?

So much of it I can categorize as a project. Now, I wouldn't say, I mean, it's constantly evolving, it's constantly changing. But I wouldn't say there's any major trends that are developing that stand out.

Your next question comes from the line of James Dix with Wedbush.

Just maybe 3 questions. John, I guess you were indicating in the back half of the year you were looking in the U.S. for more moderate -- for moderate growth, I don't want to misstate it. I'm assuming you consider the 8% growth in the second quarter above moderate. So I just want to see if you can give any more color as to what you're looking for in the U.S. kind of in the back half of the year, especially since the comparisons get pretty tough in the fourth quarter. And then secondly, in terms of margins, was there any easily quantifiable impact of your dispositions on margins in the second quarter? And then finally, just any general thoughts on what type of salary pressure or turnover pressure you're seeing in terms of your margins going forward? Or are salary increases and turnover kind of in line with historical norms at this stage of the cycle?

First, U.S. growth. I mean U.S. growth has trended a little higher in the first half, when you exclude Chrysler from our first quarter, than we have been anticipating. And it's hard sitting here, given the backdrop of unemployment and all the challenges that the U.S. has to think that it's not going to moderate closer to what our original forecast, which was a couple of points slower as we get into the second half. We're not hoping for that. We're not planning for it -- we are planning for it. So we're being a bit conservative in that. Until we see it, we're not going to believe it's going to happen. In terms of margins I didn't...

The question was the impact of dispositions on margins. It wasn't meaningful. Certainly, the companies that we've tried to dispose of were not high-margin, high-growth businesses. Otherwise, we wouldn't have been looking to dispose of them. So I'm sure there was a positive impact. But at most, it would have been a couple basis points.

Okay. So certainly under 10%?

Yes. First of all, it wasn't very much revenue. So it couldn't have a lot of impact. And the last one was salary pressure and turnover. I don't believe turnover has changed in any kind of a meaningful way. Salary pressure, there is some salary pressure. We're 2 or 3 years into a recessionary period that we've been trying to control costs. There's certainly a number of people that haven't had salary increases in a couple of years at this point. So with that, there's certainly some pressure, but it's an unfortunate state of the U.S. economy and a lot of the global economies that we're going to have to keep those costs under control.

So kind of a low single-digit, at this point, expectation in terms of just base salary growth?

Certainly. And it's not easy, but we certainly try to manage to that. As Randy said, increasing base salaries as to reflect the growth of the marketplace that you're in. And we try to reward people where we can't increase salaries through increased incentives if the performance exceeds what our expectations were.

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

I have a couple, I'll do one at a time. Randy, you were mentioning the impact the foreign exchange is having on margins. I just wonder if you can give us the hierarchy of the 4 regions report U.S., U.K., other and Euro, you said U.S. is the highest, which of the 3 other regions, what's the hierarchy of margin base rate?

I don't know to be honest. I've got the U.S. a little bit higher. Europe is probably, at least right now, on the lower end. So what were the other -- I mean what were the regions you mentioned? U.S.?

Yes, I was looking at your Slide 5, U.S., U.K., other and Euro because I'm just trying to get a sense as we look at currency the rest of the way, how should we think about the impact of currency by region on potential margin degradation for the currency?

From a volume standpoint, U.S. and the Euro region, including the U.K., is the bulk of the revenue. So the U.S. margins are a bit higher than Europe. The rest of the world isn't going to move the needle dramatically in that kind of a timeframe.

Okay. And you mentioned acquisitions, the international acquisitions, is the majority of that in the other markets because I know commerce was there which should be Australia. But is that focused mostly on others, is there any acquisitions being done in Euro or U.K.?

Yes we're always looking at acquisitions to extend our current capabilities around Europe. We have a number of brand platforms operating in the Europe looking to extend their capabilities and reach, so those are always possibilities. And obviously, it's a large geographic area, so from a numbers standpoint, it's inevitable that we'll complete a number of acquisitions in those markets. As a strategic focus, the rest of the world is obviously a greater, yes, I'll say a strategic focus, Asia, emerging Asia, Latin America, Middle East, probably India, obviously are very important, and we've got a lot of resources focused on expanding there.

Okay. But do you think year-to-date that is still mostly other is the main -- or the amount of flow you're seeing for acquisition base revenue, is that mainly coming through the other geography line or is it more mixed?

Yes, I mean, just to maybe restate what Randy said. Our focus in terms of us working and searching and looking and developing acquisitions from a corporate perspective, is really in the other developing markets around the world. I would say once you get into the more developed markets, they become opportunities, and there are opportunities that come up from time to time and we act on them. So our efforts are on both, but we're actively searching in developing markets.

Okay. One last one, if you look at your revenue by industry mix, you guys had a very big step up in financial services this quarter versus the last quarter, last year's quarter. I wonder was there anything unusual, is it acquisitions related? Is it new business wins? So you went from maybe it's a rounding from 8% to 10% financial service impact in terms of the revenue by industry? Was there anything unusual about that? Or is that -- or any industry that's actually financial services that's driving that underneath these numbers?

I think we had strong new business performance in the space, as well as the sector doing well.

Your next question comes from the line of Craig Huber from Access 342.

My first question please, normally you give us the net new business wins in the quarter, what was it this time please?

One more time, I'm sorry.

What was the net new business wins in the quarter?

It was just over $1 billion.

Okay. And then also you've talked about these divestitures. Can you quantify the revenues what's potentially left here to divest, is it less than $100 million of revenues at this stage?

On an annual basis?

Yes.

On an annualized basis, it would be -- if we had everything completed on the potentials list, it would be about $200 million.

Right. The likelihood of that is unfortunately small, but -- so it will be less than $200 million but the max will be about that.

Okay. And was severance in the quarter more like a normal $15 million to $20 million?

Yes.

Yes.

And then lastly, can you just talk a little bit further on the Europe, the Euro part x U.K. of 0.4% in the quarter. I mean given the worsening economic trends out there, I mean does it seem inconceivable that could certainly go negative here in the third quarter, I wanted to, just curious what your clients are telling you, a little bit further clarity, please?

It was actually fairly mixed results by market and somewhat business related. We had a -- we had one client, I think John mentioned, that was reasonably sizable that was lost.

But Europe is -- at the moment Germany continues to be strong followed by the U.K. The rest of Northern Europe is steady. We saw some improvements in the non-Euro markets and then Southern Europe is a disaster. The good news is that in Southern Europe, our numbers, which have been decreasing for the last several quarters are getting smaller so the decreases are less impactful.

Is the general sense though for Euro, for the back half of the year that it would be -- trend similar to what you saw in the second quarter or worse or just too hard to tell right now?

It's hard to tell. So I mean being conservative, we'd say we're expecting about the same as what we've seen.

Okay, very good.

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

Within your disciplines, there is one that stood out, especially Cannes down 1% maybe can you just give us some color as to what's driving that. Is there any geographic exposure to that as well? And then Randy, just in terms of your leverage, it looks like you guys have restored your leverage to what it was before the downturn. Wondering if you thought that you're finally at an optimal point in terms of leverage that you're comfortable with? Or if that might change to one degree or another going forward?

First on specialty. That category is largely our ethical pharmaceutical area. And it was healthcare overall was up but that area of healthcare was down. As far as leverage goes, as we said as we go through the year, we kind of restored that -- put that $1 billion of leverage back. We front-end loaded this year a little bit. Certainly, the share repurchase activity in the first half, we said was going to be about 10 million shares. I think we ended up right at 10 million shares, net. I think it was about 13-point-something million shares, gross. Yes, so I think we're largely on track to where we thought we were going to be. I don't think we're quite back to the full leverage level on a net basis that we said we're going to probably get to by the end of this year and the beginning of next year.

Okay. And to follow up on the dispositions comment, is there -- could you just generally characterize the characteristics of the businesses that you don't think are no longer attractive to be in the portfolio. Apart from whether or not you think they will grow or whether they're profitable. But is there any particular geographic exposure or discipline exposure that they have in common, or maybe if you could just generalize it? Just generalize what no longer fits.

They are mostly U.S.-based. 50% of our business is the U.S., so that make sense. They're businesses that are maybe generally good businesses, but not strategically aligned with the overall portfolio of Omnicom. So it's either a different client base or they were attempts at greater alignment or greater benefits of being part of the overall portfolio that haven't quite worked out.

That's fair. Non-core.

And generally, the businesses have good management teams. It's not a matter of a poorly run businesses. They are generally fairly good businesses, smart management teams, they're just not a core alignment with, I'll say the rest of the Omnicom group. We can't bring a lot to them, and they're not bringing a lot to the rest of the Omnicom family.

Is it safe to say that those are businesses that should have a -- or expected to have a lower gross profile and lower margin profile than the group? And if so, I would imagine it's not a very large contributor to your 2012 goal, but if you were to fully execute on your $200 million disposition plan, what do you think the impact to growth in the margin would be?

I wouldn't say -- at this point, I wouldn't say that there's any impact. At this point, it's more tidiness and just getting all of our strategic initiatives completed. I don't see even the disposition of these businesses impacting our margins, overall, whether they're with us or they're not with us.

So if you had 120 basis points to make up of margin for 2012, the impact of dispositions is negligible?

Yes, just work through the math a little bit. If they were -- even if it was a 5% margin difference on say the full $200 million in revenue, that's $10 million. That's a pretty small shift in total. You said we're striving let's say for 100, 120 basis points of margin on $13 billion of revenue. $10 million doesn't change the answer very much.

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

Couple of questions. John and Randy, where do you guys think we are on the U.S. ad recovery? And the reason I'm asking is when you look at your -- this is the first quarter were you had a difficult comp and you showed acceleration in revenue growth from last quarter even if you strip out Chrysler. And I look at the drivers of it, and branded advertising was up, 10%, I think you said. I know that's not a U.S. number but still, that's an impressive leading growth category. And financial services and auto were the 2 categories that were the strongest I believe looking at your slides, which I would sort of describe is kind of cyclical sectors. So you could look at the quarter and sort of say maybe we're seeing continued acceleration off of the prior year's pullback in major corporate spending, or maybe you could look at it the other way and say your business tend to be a little later cycle, given just the timing of how contracts work and so this is reflective of what we've seen in the last 12 months. And maybe that's why John you gave the comments that more moderate in the back half, just trying understand how you guys are looking at the results and sort of parse through that question.

Sure, I mean, well, there are a few cyclical things, which certainly have impacted the business. But at this point, I think, we've cycled through most of that. Most of our clients are focused on growing their top line and that has been a conversation that's been going on for a good long while. And certainly is the focus today when we sit down and we speak to our clients. The media is changing, the shift in media is changing where we spend our money and how we provide those services shifts as we go throughout the year. And we always held the belief, and it's a long-term belief and it's served us pretty well, that over the long term, marketing spend will correlate in some fashion to GDP. And so we're happy when we exceed our objectives, but we're governed by our history and by our beliefs. And so we expect things to moderate a bit.

And I think, especially in the United States, we've had a good new business run and what impacts the revenue right now isn't so much what happened this quarter but what's happened over the last several quarters. Our agencies, I think, have done a fairly good job on the new business front for a number of quarters now. As well as expanding the service offering to our clients. Someone asked the question about social media, I extended and talked about new technologies. Those new technologies are ways for our agencies to provide more value-enhanced services to existing clients. So I think all of that is helping to lead those growth rates. It's very difficult for us to know how much of our growth is a rebound off of a maybe what was potentially a lower than normal number in prior periods, and how much of it is economic recovery. And how much of it, frankly, is growth of services with our clients as opposed to new business. So all of those things are certainly helping us right now. As John pointed out, we expect over sometime for our revenues to sort of reconnect with GDP plus 100 or 200 basis points. But that will happen over some period of time.

And Randy, if you look at things like social and new technologies, should that -- if those are driving a bigger piece of your business over time does that show up as marketing services versus branded advertising? I don't want to read too much into those categories, but just trying to think about the buckets here.

No. So that's what we've been trying to say for people for a long time. Those aren't disciplines. They are mediums or tools that all of our agencies are utilizing to provide the types of services that they provide to their clients. So if it's a shopper marketing firm, they're going to be utilizing all of those tools and technologies to execute to their client. If it's a PR firm, they're going to be dealing with social media, new technologies, new analytics in order to provide better service to their clients. So it's really embedded in those disciplines for us, and it's positively impacting all of our agencies across all of our lines of business.

Okay, understood. So the fact that advertising grew twice as fast as Marketing Services in the quarter, we really shouldn't read anything or conclude anything from that?

Certainly not from a new technologies perspective.

Okay, fair enough. And then last question if I could squeeze it in here, this is about a year since the Google announcement last year when you guys broadened your partnership significantly, and I'm just wondering if you had kind of looking back in the last 12 months, if that agreement has accelerated your growth or it changed how you've done business or glad you didn't win more business, any sort of first year anniversary commentary on that agreement?

No, we've entered into similar agreements with I guess all the other major competitors to Google in the area of search and display advertising. And so I would say in the aggregate, all of those partnerships are helping us adjust and adapt and improve the effectiveness of our advertising campaigns that we provide to our clients. But I wouldn't single out any one particular group.

That question comes from the line of Adrien de Saint Hilaire from BNP Paribas.

Just wondering what was the performance of -- you more or less touched on that, but of digital advertising in the U.S. in Q2? And how do you see things in the future knowing that some of your competitors are investing heavily in terms of acquisitions there. So how do you see the growth of digital in the U.S.? And if you could remind us what's the share of digital in your revenues in the U.S.?

Sure. I continue to hold the view that everything has a digital component associated with it. And if you look at any of the campaigns which have been worked on for our major clients, you'll find that there's a significant digital, as well as traditional, component to both. Our attitude all along has been to offer separate specialty services in digital to the extent that clients want to buy it that way. But our belief is that all of our services are digital and will become digital. And it's my personal belief 2 years from now, you won't even use that word to make a distinction. But so we don't, unless Randy, correct me, we don't break the numbers out quite that way because everything is moving in that direction.

We don't even -- I mean if you heard my comment just a second ago, we talk about new technologies not digital or non-digital because frankly everything, as John pointed out, is digital in some respects or another. We see, all of our agencies see significant opportunities to utilize new technologies to extend the services that they're providing to clients fundamentally around their same disciplines. If it's brand advertising or PR or shopper marketing or Field Marketing, all of those disciplines are utilizing new technologies to provide better and greater services to their clients. And it's taking more work, more labor hours, but they're providing a, I don't want to say better, but a broader, hopefully a more effective job to their clients. And thank you all for taking the time to listen to our call.

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.