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Edited Transcript of OMC earnings conference call or presentation 18-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Omnicom Group Inc Earnings Call

NEW YORK May 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Omnicom Group Inc earnings conference call or presentation Tuesday, April 18, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John D. Wren

Omnicom Group Inc. - CEO, President and Director

* Philip J. Angelastro

Omnicom Group Inc. - CFO and EVP

* Shub Mukherjee

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Conference Call Participants

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* Alexia Skouras Quadrani

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Benjamin Daniel Swinburne

Morgan Stanley, Research Division - MD

* John Janedis

Jefferies LLC, Research Division - MD and Equity Analyst

* Julien Roch

Barclays PLC, Research Division - MD and European Media Analyst

* Timothy Wilson Nollen

Macquarie Research - Senior Media Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Omnicom First Quarter 2017 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. At this time, I'd like to introduce your host for today's conference, Vice President of Investor Relations, Shub Mukherjee. Please go ahead.

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Shub Mukherjee, [2]

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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 measure in the presentation material.

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.

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [3]

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Thank you, Shub. Good morning, and thank you for joining our call. I'm 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 top line and reduced revenue growth by 1.2%. Our EBITA 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 remain cautious as numerous geopolitical and macroeconomic events remain unresolved. In the U.S., it is still unclear on how legislation in several major areas, including the budget, tax reform, infrastructure spending and health care, could impact the economy. And the U.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 focused on the things they can control, developing their talent, 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 of a number of field marketing, events and other noncore operations, which did not fit our long-term goals. At the beginning of April, we also disposed of a majority stake in a legacy print media business, which operates in the United States and Canada.

As a result of these dispositions and considering the acquisitions we've 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 EBITA 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 benefited 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 continued to outperform, and Brazil returned to positive growth, although it was in the low single digits.

As compared to the prior year, our EBITA for the quarter increased $19.9 million or 4.7% to $440.3 million. EBITA 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. Results were positively affected by the adoption of the 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 3 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 remain very strong. Overall, we're very pleased with our first quarter results.

It's only been 2 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 base and capabilities, simplifying our service offerings through our new practice area and client matrix structure, making investments in our agencies and through acquisitions and driving efficiencies throughout our organization.

The goal of our individual practice 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 collaboration. Our efforts in this area are driven through both formal and informal practices 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 Campaign's Agency of the Year for the last 2 years and has a superb management team. We're thrilled to have them joined the group, and I'm certain that it'll 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're very satisfied with the progress on our strategic initiatives and our financial performance in the first quarter. While there are 3 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 EBITA margin improvement.

Turning now to our people. Our belief in investment in talent, 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 Report for media. For the first time ever, a single holding company won 2 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 network in the world and adam&eveDDB was the highest ranking creative agency. I want to congratulate everyone who helped win these awards and drive our business every day. Your talent is a great reflection on Omnicom, and your hard work 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 and creative content. That's why we continue to push hard on our diversity initiatives. Last quarter, Omniwomen celebrated International Women's Day by launching 4 new chapters in Canada France, Germany and the UAE, bringing total number of regional chapters to more than 10. In the 3 short years since Omniwomen was launched, I'm delighted by how influential and successful the organization has been in promoting diversity, and we're 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 onboarding 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 at the top, with Omnicom's independent Board of Directors now including 5 women and 3 minority 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're 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.

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [4]

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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've experienced recently. On a reported basis, while we continue to be negatively impacted by the weakening of the British pound, the FX impact of our other major currencies 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 of 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 31, 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 EBITA increased 4.7% to $440 million. The resulting EBITA margin of 12.3% represents a 30 basis point increase over Q1 of last year, and our operational efficiency programs, focus 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. Our 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 rate swaps and higher interest rates have decreased the benefit on the floating leg of our swaps as well as additional interest expense on our future earnout obligations.

Interest income this quarter was higher when compared to Q1 a year ago, resulting from higher cash balances held by our international 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 1, we were required to adopt the ASU 2016-09, which changed the way income tax expense is recognized on share-based compensation under U.S. GAAP. The new standard requires that the difference between the booked tax expense and the cash tax deduction recorded on our tax return from share-based compensation be 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 vests or 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 effective tax rate for Q1 2017 by 3.3%.

The standard requires prospective 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've 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 in 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've been $229.4 million, an increase of 5% versus Q1 of last year.

Now turning to Slide 2. 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've 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 the new accounting standard that we were required to adopt. Though the final income tax benefit is based on Omnicom share price at the future vesting date for restricted stock and at the exercise date for stock options, it is not possible to estimate with any certainty the impact of the new accounting pronouncement on our income tax rate or on 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, excluding 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 3, we shift the discussion to our revenue performance. During the quarter, the negative impact from FX was lower than it has been in quite some time. As said previously, the British pound continued the weakness we've seen since the Brexit vote last June. On its own, the FX impact of the pound's decline reduced our revenue by nearly $50 million in the first quarter. While with our 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 or 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, it's 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. So the Q1 acquisition revenue amount only includes 1 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 disciplines as well as our most recent disposition in early April of Novus, our specialty print media businesses, 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% to 4.5% for the full year. Given several of the businesses that we disposed of were 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 EBITA margin improvement for the year to 50 basis points. We plan to continue to evaluate our portfolio of businesses. However, we expect that our disposition activity for this year is substantially complete, and 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 6 of our regions had positive organic growth this quarter with the U.K., Continental Europe and Asia Pacific all delivering strong organic revenue results. Our full-service advertising agencies performed well again, and our media businesses, including Hearts & Science, continued to perform very well. And our health care businesses had another strong quarter, particularly strong growth from the health care group's international agencies.

On Slide 4, highlighting our regional mix of business. You can see during the first quarter, the 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 and 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 nonprofit consulting.

In Europe, the U.K. once again had a great quarter with organic growth of about 8% with strong performances across most disciplines. The rest of Europe was up just over 8% organically in the quarter. Within the eurozone, we saw solid performances from Germany as well as Ireland, Italy, Portugal and Spain. France was marginally positive again this quarter while The Netherlands continued to lag. Growth in Europe outside the eurozone was strong across most of the markets, including the Czech Republic, Poland, Russia and Switzerland. In the region, the one market of note that was 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 macroeconomic and political conditions in the market continued 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 5 shows our mix of business by discipline. For the quarter, the split was 54% for traditional advertising services and 46% for marketing services. As for 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 of our 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. CRM 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 continued to struggle. PR was up 1.8% this quarter, and specialty communications, primarily Omnicom Health Group, was up 3.3% organically.

Turning to Slide 6, we present our mix of revenue by our clients' industry sector. In comparing the Q1 revenue for 2017 to 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 7, 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 8, 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 noncontrolling 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 earnout payments and net of proceeds received from the sale of investments, totaled $18 million, and stock repurchases, net of the proceeds received from the 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 3 months of the year.

Turning to Slide 9 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 the decrease in the noncash fair value of our debt of about $70 million over the past year, which is directly related to and offset by the 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, and the use of cash in excess of our free cash flow of approximately $67 million. These increases in net debt were partially offset by the effect of exchange rates on cash during Q1 that increased our cash balance by about $70 million. As for our ratios, they remained strong. Our total debt-to-EBITDA ratio was 2.1x, and our net debt-to-EBITDA ratio was 1.1x. And due to the year-over-year increase on our interest expense, our interest coverage ratio, while still quite strong, decreased to 10.9x.

Turning to Slide 10. We continue to manage and build the 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 increased to 52%.

And finally, on Slide 11, we track our cumulative return of cash to shareholders over the past 10-plus years. The line on the top of the chart shows our cumulative net income from the beginning of 2007 through March 31, 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 result in a 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 in the presentation materials for your review. But at this point, we're going to ask the operator to open the call for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Alexia Quadrani from JPMorgan.

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Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [2]

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

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [3]

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Sure. So I think the largest of the acquisitions (sic) [dispositions], which we closed in early April, Novus, the print media business, is focused 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 the U.S. So the mix is primarily North America of the total dispositions that we've completed to date.

And then on the organic growth front, certainly, we think going forward, there's 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 anticipate a significant increase in the profile in the immediate term, but we think that disposing of these businesses was the right thing to do from a long-term strategic perspective because they didn't really fit our strategies regarding sustainable long-term revenue growth and profitable -- and profit growth.

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Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [4]

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And then if you could give us maybe any more color in terms of why you've seen such a 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 to sort of trend below sort of company average. I guess any color in what's pressuring that if it may not -- if these businesses really were not necessarily of size, and maybe they are, that they're kind of weighing on it, but it sounds like they're a healthy mix of U.S. and non-U. S.

And then, John, maybe if you could just give us some color on -- if you're seeing above-average pressure from clients, either in the consumer packaged goods area where some -- one of your peers have mentioned some pricing pressure or maybe even the retail segment, which I know is not that big for you guys, given what's going on in that vertical.

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [5]

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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 have 2 months from start to go, that's been an ongoing issue for us, and it comes down, I think, in large part, to leadership. And one of my network CEOs is taking it 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're 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 1 to 2 retailers which seriously cut back. Those tend to be low-margin businesses, but the volume of the revenue 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 packaged goods, we've been very fortunate. First of all, I guess out of all the 3 -- if you take just the big 3 players, our profile in large packaged goods companies, we were last to the party. So our revenue from those areas are not nearly anywhere near the size of our competitors in the rest of the industry. And those clients are adjusting the services that they've traditionally purchased from those competitors. If you were to look at their portfolios and how they service those clients, you'd see quite a bit in things 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 to the large packaged good clients or partnering with them have been in more contemporary type of services. And we were going -- coming from a smaller base, so the impact isn't nearly what they've projected in whatever public comments they've been. Does that answer your question, Alexia?

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Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [6]

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Perfect. And then anything from retail? Or do you think retail is sort of the same old, same old? Or are you seeing -- we're reading, obviously, about so much pressure in the retail industry. Have you seen any pressure there?

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [7]

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Well, we made the assumption that there is going to be continued pressure, especially the big box type of retailers. I take the view that, that pressure is not going away anytime soon, and the stores that you see out there are principally showrooms where people go and see the products that they want to buy, touch them, feel them, but then go back home and purchase them online. And some of the stats that came out of the credit card companies at 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 and going to move going forward. That's why, in truth, strategically, some of the dispositions that we did were -- not only domestically, but internationally, are in the field marketing business because -- whereas they've contributed to growth at low margin in the past, what we see going forward is still going to be low margin, but the growth that they're going to be 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.

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Operator [8]

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

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Julien Roch, Barclays PLC, Research Division - MD and European Media Analyst [9]

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The first question is on Accuen, if we could get the contribution to organic in the quarter.

The second question is, is it possible to have an idea of the organic of the business you sold in Q1? Was it down 5%, 10%? Or what would have been organic in Q1 if 100% of the disposals have been down? Any color would be great.

And then the last question is you said that the mix of the assets you sold was primarily North America. Can we get an idea that 60%, 70%, 80%? Any color would be great as well.

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [10]

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Most of the sales, with the exception of Novus, happened early in the first quarter. So they didn't -- they themselves didn't have much of an impact in organic growth, (inaudible).

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [11]

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Yes. (inaudible).

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Julien Roch, Barclays PLC, Research Division - MD and European Media Analyst [12]

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But if you assumed they'd been done on the 1st of Jan., what would have been the impact? Or some -- or maybe the kind of -- or either of the organic of the assets you sold, because I assumed they were declining.

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [13]

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I think, overall, the portfolio of businesses that we've disposed of probably would've dragged our growth 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 or meaningful way versus the chances of them continuing to kind of decline strategically, we think the chances of decline prospectively are much more likely, which was the key driver behind the disposition strategy.

As far as a couple other items you had there, Accuen. 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.

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [14]

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

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Julien Roch, Barclays PLC, Research Division - MD and European Media Analyst [15]

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So that means that if the growth of Accuen is flat for the quarter, then it actually had a negative impact on overall growth, right? Or you -- when you say...

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [16]

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A neutral impact on the calculation of organic growth, but it's kind of one of those very odd doesn't happen or hasn't happened very much in the past. The way that we offer those services are on a bundled and on an undisclosed basis and on a -- and on the disclosed basis. A lot of the clients have shifted to wanting those services on a fully disclosed basis, which puts us in a 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.

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [17]

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Yes. So 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. It's still early days in the programmatic space. As John had said, the business continues to grow, and we're happy to offer it to our clients in whichever way they find most useful. But Accuen being flat for the quarter, we don't really look at it as if somehow that's -- that dragged down our growth profile. I mean, it's 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.

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Julien Roch, Barclays PLC, Research Division - MD and European Media Analyst [18]

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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%?

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [19]

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I think it's probably in the 70% to 75% ballpark. So if you said 3/4 of it is 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.

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Operator [20]

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

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [21]

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So I'm just -- you talked a lot about the macro environment at the 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 your advertisers are getting a little more nervous, given what we see on TV and in the news every day. I just wanted to see if we could revisit that for a minute.

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [22]

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Most of the really intelligent people I speak to don't watch TV, but you had this morning. You had the U.K. announcing an election in June. In Turkey, you had a very narrow win just this past Sunday, which linked in or changed the way that their government operates. So I think everybody -- well, 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 slipped is the timing of when you might see those benefits, but they haven't given up hope. But as a result, you have to plan a business, you have to take all that into consideration and plan for what you know, not for what you hope for. And so there hasn't -- so when you see our -- the fact that we haven't changed our guidance for the rest of the year when it comes to the top line, it's really reflective of that caution, what our clients are committing to us versus if some of these things happen or they pass quietly, we're prepared to grow with the marketplace.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [23]

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And then, Phil, just to come back to the dispositions one more time. Just doing some back of the envelope math, I think the -- what you gave us, since the revenue impact offset by margin, better margin expansions, suggests that these dispositions did have some profits associated with them. I just wanted to confirm that there is an earnings impact from the additional, I guess, 300 basis points or so of net dispositions this year. If you had any color there?

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [24]

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

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [25]

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

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [26]

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No, understood. Got you. And maybe just one last one for either of you. I'm just curious, it's been made evident that Amazon has become a much bigger advertising business, particularly on search, than we thought on prior years. I'm 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, 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 I'm just curious if you have any thoughts.

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [27]

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I think Google's dominance continues, especially in search. It's an important alternative, and I would never -- I never underestimate, over the longer run, what Amazon is capable of doing. If you're looking at 2017 or the more immediate future, I'd only list it as an important alternative to Google, not somebody who I anticipate is going to take most of their market share in the short run.

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Operator [28]

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

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [29]

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A couple things. Sorry to come back on the dispositions one, hopefully, last time. Just to be clear, I think, Phil, 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 net dispositions offset by some acquisitions, so it's a net minus 3.5% to minus 4.5%?

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [30]

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

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [31]

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Okay. So that's reported revenue a bit further down than we had previously had given the scope of the dispositions, okay.

Secondly, 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 and McDonald's, some of those. Have they begun to contribute in Q1? And if there's 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 may be 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 may be coming off the boil now and maybe a shift back into branding from the manufacturers and the retailers, which would obviously help your business.

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [32]

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Just repeat that last question, Tim.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [33]

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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 the A versus P. The promotions don't necessarily help you. The advertising, the branding business would help you. The question is, are we beginning maybe to see a shift back into some more branding away from promotions?

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [34]

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Right, 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 were largely medium wins, other than McDonalds. VW just started up January 1.

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [35]

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That's global though.

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [36]

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And it's a global business win for us for PHD, not just North America. AT&T probably started in the fourth quarter of '16, and McDonald's also recently started in early '17 for us as well. So that gives you a sense of the timing.

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [37]

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And mind you, McDonald's we had a lot of that underlying work already. We were able to consolidate North America, the way that we won the business. So it was incremental, only to start off with.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [38]

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

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [39]

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We've got a big portfolio businesses. We've got a lot of wins and a lot of losses, unfortunately, we try not to dwell on the losses. But certainly, these wins weren't exclusive. 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 though, some other offsetting -- some factors are offsetting the contributions of the new wins. But we're happy with the underlying performance of the businesses that generated wins, and we continue to work with all the businesses in our portfolio. Want to take the branding follow-up?

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [40]

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By all means. In terms of promotions versus brand, advertising of the bigger, the Unilevers and the P&Gs of the world, that really hasn't been the primary shift, at least I don't believe. I think what you're 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 says, "Gee, we produced this ad. Do we really need to test it in 6 markets or 12 weeks in an old traditional fashion? Or are there other ways to find out whether we're reaching the audiences or not?" That's technology, the changing consumer. All -- that all has an impact on all of 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, then 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 to try to make their marketing dollars work more efficiently.

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Operator [41]

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

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John Janedis, Jefferies LLC, Research Division - MD and Equity Analyst [42]

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I'll wrap it up with quick 2 questions. First, John, you talked about the volatility in the LATAM 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 was the quarter more of a one-off?

And then I guess bigger picture, you've historically talked about the importance of investing in talent and your people. And understanding the first quarter is always the small one seasonally, if the organic revenue trend continues, can we potentially see more operating leverage? Or would you reinvest that to the business?

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John D. Wren, Omnicom Group Inc. - CEO, President and Director [43]

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In terms of LATAM, we were pleasantly surprised, although it's early days, to see Brazil stabilize. And I think the new government down there of -- 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've gone through a lot of difficulty, but they seem to have been -- they had great strides in fixing many of the problems, so -- or at least addressing many of the problems. In terms of your second question?

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Philip J. Angelastro, Omnicom Group Inc. - CFO and EVP [44]

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Yes. In terms of if the growth continues, I think we're not -- 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're certainly not committing beyond I think what we've said. But in terms of the contribution or the potential contribution, we're always looking at trying the right -- trying to find the right balance between where do we invest, how much do we invest and 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.

Thanks, everybody, for joining us on the call, appreciate it.

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Operator [45]

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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.