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Edited Transcript of OMC earnings conference call or presentation 15-Oct-19 12:30pm GMT

Q3 2019 Omnicom Group Inc Earnings Call

NEW YORK Oct 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Omnicom Group Inc earnings conference call or presentation Tuesday, October 15, 2019 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. - Chairman & CEO

* Philip J. Angelastro

Omnicom Group Inc. - Executive VP & CFO

* Shub Mukherjee

Omnicom Group Inc. - VP of IR

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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

* Craig Anthony Huber

Huber Research Partners, LLC - CEO, MD, and Research Analyst

* Julien Roch

Barclays Bank PLC, Research Division - MD & European Media Analyst

* Michael Brian Nathanson

MoffettNathanson LLC - Founding Partner & Senior Research 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 Third Quarter 2019 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. At this time, I'd like to introduce you to your host for today's conference, Senior Vice President of Investor Relations, Shub Mukherjee. Please go ahead.

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Shub Mukherjee, Omnicom Group Inc. - VP of IR [2]

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Good morning. Thank you for taking the time to listen to our Third Quarter 2019 Earnings Call. On the call with me today is John Wren, Chairman 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 to 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 statement and other information that we have included at the end of our 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 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 can find the reconciliation of those measures to the nearest comparable GAAP measures in the presentation materials.

We are going to begin this morning's call with an overview of our business from John Wren. Then Phil Angelastro will review our financial results for the quarter. And then we will open the line for your questions.

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [3]

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Thank you, Shub. Good morning. I'm pleased to speak to you this morning about our third quarter results. Organic growth for the quarter was 2.2%. Growth in the United States and several practice areas core to our business performed better than our overall results reflect. I'll provide more color on this in just a few moments.

As a reminder, in the third quarter of 2018, we recorded a net gain from the sale of Sellbytel offset by charges related to several dispositions and repositioning actions as well as certain 2017 Tax Act provisions. Phil will provide more details during his remarks. My remarks will exclude the impact of these items in comparing Q3 2019 results to Q3 2018.

Third quarter EBIT margin was 13.1%, an increase of 40 basis points versus the prior year, which is a bit better than our expectations. And EPS for the quarter was up 6.5% to $1.32 per share. Overall, our results continued to demonstrate the consistency and diversity of Omnicom's operations, our ability to deliver consumer-centric strategic business solutions to our clients and our best-in-industry creative talent combined with market-leading digital, data and analytical expertise.

Turning to our organic growth by discipline. Advertising and media was up 3.4%. Our advertising and media agencies continue to rapidly evolve their offerings in a manner that has allowed them to remain highly relevant for their clients. Healthcare had another very strong quarter with growth of 9.5%. Omnicom Health Group has some of the top agencies in the world covering the healthcare and pharmaceutical industries, and the group is very well positioned for continued growth.

CRM Consumer Experience, which includes digital and precision marketing, events, branding and shopper marketing, was up 1.8% in the quarter. Our precision marketing and digital agencies had high single-digit growth in the quarter. This growth was offset by a reduction in project revenues in our events and shopper agencies.

As expected, CRM Execution & Support was down 1.5%. Within this group, field marketing performed well in the quarter while the not-for-profit specialty production and merchandising and point-of-sale businesses had negative growth.

Finally, PR was down 3.8% in the quarter. While some areas of PR faced difficult comps, our PR business underperformed. We are committing significant resources to improving the operations in our PR group.

Looking at our performance by geography. The U.S. was up 2.7% in the quarter. Our Advertising, Media, Healthcare and CRM Experience business performed very well and as a whole had mid-single-digit growth. This growth was offset by weak results in CRM Execution & Support, which we had expected and have discussed in past calls, and our PR business declined more than we expected.

Beyond the United States, the North American region, primarily consisting of Canada, was up 2.7% for the quarter.

The U.K. was up 3%. Our agencies in the U.K. had very strong results across Advertising and Media and Healthcare, partially offset by declines in CRM Consumer Experience and CRM Execution & Support. Overall growth in the Euro and non-Euro region was 1.6%.

In the Euro Markets, Italy, the Netherlands and Spain performed well. France had negative growth as it continued to be impacted by the loss of a specialty print production client, and our events business also had negative performance due to difficult comps. The non-Euro markets overall performed quite well, led by the Czech Republic, Poland and Russia.

Asia Pacific organic growth was 0.4%. India, Japan and New Zealand had double-digit growth. Australia and China were negative in the quarter.

Latin America was up 6.6%. With the exception of Colombia, all of the countries in Latin America performed well in the quarter. Our smallest region, the Middle East and Africa, was down 4.5% primarily due to weak performance in South Africa.

Looking at our cash flow in the 9 months of 2019. We generated just over $1.2 billion in free cash flow and returned approximately $960 million to shareholders through dividends and share repurchases. Our use of cash remains unchanged, paying our dividend, pursuing accretive acquisitions and repurchasing shares with the balance of our free cash flow. Our balance sheet and liquidity remain very strong.

Overall, we're pleased with our financial performance in this quarter and remain on track to achieve our full year targets of 2019.

Turning now to our strategy and operations. I'm pleased to report that we're in a very strong competitive position. We remain focused on our key strategic objectives that have served us well. These strategies are centered around hiring and retaining the best talent, driving organic growth by evolving our service offerings, improving operational efficiencies and investing in areas of growth. As part of this process, we are continually making internal investments in our agencies across all of our practice areas as well as pursuing acquisitions, particularly in the areas of data, analytics, digital transformation, precision marketing and healthcare. Over the past few quarters, we've made good progress on enhancing our capabilities in digital transformation, machine learning and audience-centric services.

In the third quarter, Omnicom Precision Marketing Group, which manages our CRM and digital agencies, acquired a majority stake in Smart Digital. Smart Digital services and technology platforms are used to deliver large-scale, real-time personalization solutions that enable individual brand experiences and increase loyalty across all consumer touchpoints. It significantly strengthens OPMG's offerings in decision sciences, automation and machine learning. Smart Digital follows on the heels of the group's acquisition of Credera. Credera overlays management consulting and digital transformation on top of OPMG's existing CRM and digital offerings. In a little more than a year, Credera has helped us forge stronger relationships and partnerships with many of our multinational clients. We have continued to invest in its growth and are currently launching new offices in New York and Chicago.

The acquisitions of Smart Digital and Credera have built upon OPMG's already strong ability to work with clients from the very beginning of developing a marketing transformation strategy all the way through to campaign execution. These investments in OPMG are fully aligned with our investments in Omni. In order to execute CRM campaigns, OPMG agencies leverage their clients' first party data and combined it with the third party data available through Omni to create powerful end-to-end individualized customer experience solutions.

As you are aware, Omni is our world-class people-based data and analytical service platform. OPMG is one example of where our agencies are using Omni to enhance their offerings using data-driven solutions. Omni's tools and applications are used by agencies across the group to deliver growth, efficiency and scale to our clients. In fact, we're very pleased that our ability to integrate data into the creative process was cited in a recent analysis from leading research and advisory firm, Forrester.

When comparing data and technology platforms across the various holding companies, the report states that the Omni platform offers the most creative integration of agency platforms. This advantage was achieved because our investment in Omni were made for the purpose of servicing the specific needs of our agencies and clients. It cannot be achieved simply by buying legacy data platforms that weren't built with the flexibility required to meet the rapidly changing demands of today's marketers.

At Omnicom, creativity is at our core. We were founded by creatives and it's part of our DNA. Omni is used by our creative agencies to employ data-driven insights for developing the most effective marketing and advertising content for clients.

But while we continue to stress the importance of data, analytics and technology, we also realize that they can only take us so far. As I've said before, these are tools and service of creativity and content, which is also why it's critical that all of our agencies from CRM to creative to media to PR, healthcare, experiential and shopper leverage Omni.

To date, we have scaled Omni by training over 4,000 employees worldwide. This training is critical to our strategy because we know a platform is only as good as the people in our agencies who use it. As has been our long-held view, which Forrester eloquently stated in its report, it's a combination of humans and machines that will give CMOs the data-driven execution they desire and agencies the new capabilities they need to remain relevant.

I now want to highlight a few new business wins that have come organically from existing clients as well as adding new marketers to our roster of clients. In the third quarter, we deepened and expanded our existing engagements with some of the largest clients including AstraZeneca, Novartis, Wells Fargo and Unilever, who awarded us 2 of their product lines, Rexona to BBDO, and Sunsilk to adam&eveDDB.

We also won several new client engagements from world-class marketers during the quarter. Kroger, the largest grocery in the United States and the second largest retailer behind Walmart, named DDB New York as its first-ever creative agency of record. OMD won the global Boehringer Ingelheim Animal Health account. And Allianz named a number of Omnicom agencies for an integrated offering, which will include Creative, Media, Branding and PR. These results can only be obtained by having the best talent in the industry who continue to be recognized by winning more of their fair share of industry awards.

After winning big at the Cannes Lions Festival, seeing our agencies continue their winning streak at the 2019 Spikes Asia Festival of Creativity was especially gratifying. Here are a few highlights from Spikes, which is often referred to as the Cannes of Asia.

We had 2 networks within the top 3 with BBDO being named Network of the Year for the sixth year in a row and TBWA placing third. BBDO also had a strong performance in the APAC Agency of the Year category with Colenso BBDO coming in first and BBDO Pakistan coming in third. Due to the outstanding work of our agencies, we walked away from the festival with over 120 Spike awards, 12 of which were Grand Prix, which translates as the highest honors in over half of the Spike categories.

In summary, we made significant strides in evolving our services, capabilities and organization to better service our clients and their growing data needs while remaining grounded in our core business of creativity.

We're pleased with our financial performance in the third quarter, which continued to reflect the benefits of our strategies. As we move forward in the fourth quarter, I'm confident that we are well positioned to deliver our internal targets for the full year 2019.

I'll now turn the call over to Phil for a closer look at the third quarter results. Phil?

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [4]

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Thank you, John, and good morning. John said we had a solid quarter as our agencies continue to find a good balance between meeting the needs of their clients and managing their cost structures.

Before I start, and as a reminder, for comparison purposes, there are a number of items that impacted our prior year third quarter 2018 results. They included pretax gain of $178 million on the disposition of Sellbytel, our European-based sales support business, along with a number of other small transactions; pretax charge of $149 million related to repositioning actions primarily resulting from incremental severance and lease terminations; and additional tax expense of approximately $29 million resulting from adjustments for the provisional amounts originally recorded in connection with the 2017 Tax Act.

As we reported last year, the net impact of these items increased our reported Q3 2018 operating profit by $29 million, net income by $18.2 million and diluted earnings per share by $0.08. Therefore, we will present our 2019 results in comparison to 2018, both with and without these items.

The non-GAAP adjusted amounts on Slides 5 through 8 present last year's results excluding these items and show how our underlying business performed year-on-year on a comparable basis, which we believe is a meaningful presentation for investors and it is consistent with how management analyzes our 2019 operating performance.

For the third quarter, organic revenue growth totaled 2.2% or $83 million. The continued strength of the U.S. dollar over the past 12 months created an FX headwind, which reduced our reported revenue by $57 million or 1.5%. The reduction in revenue from dispositions made during the last 12 months, primarily in our CRM Execution & Support discipline, exceeded revenue from acquisitions in the quarter. As a result, our third quarter revenue was reduced by $117 million or about 3.1%. In total, our reported revenue decreased 2.4% to $3.6 billion in the quarter. We will discuss the drivers of the changes in revenue in more detail in a few minutes.

Moving to Slide 5. Our operating profit or EBIT for the quarter was $473 million with an operating margin of 13.1%. In comparison to last year's non-GAAP adjusted results, operating income in total was effectively flat while operating margin was up 40 basis points.

Q3 EBITDA was $495 million with the corresponding EBITDA margin of 13.6%, up 20 basis points versus the adjusted 2018 Q3 results. The improvement in margins when compared to last year continued to stem from our ongoing efforts to improve efficiency throughout the organization, particularly in the areas of real estate portfolio management, back-office services, procurement and IT services as well as the change in business mix resulting from the strategic disposition, several noncore or underperforming agencies over the past year.

Net interest expense for the quarter was $49.3 million, down $7.4 million compared to the third quarter of 2018 and down $900,000 versus Q2 of this year. Most of the decrease is a result of our refinancing activity this quarter. However, the full effect of the resulting decrease to interest expense will not occur until Q4.

I'll summarize the activity for you. In early July, we issued EUR 1 billion of senior notes in 2 parts. We issued EUR 500 million of 8-year senior notes due in 2027 at an effective rate of 0.92%; an additional EUR 500 million of 12-year senior notes due in 2031 at an effective rate of 1.53%. Together, the Euro note issuance after deducting the underwriting discount and offering expenses resulted in net proceeds of $1.1 billion at an average rate of 1.23%. Part of the proceeds were used to retire the EUR 500 million of 6.25% 2019 senior notes came due in mid-July. In addition, we called EUR 400 million of the 4.45% 2020 senior notes for redemption on August 1.

As a result of the refinancing activities this past quarter, our expected ongoing long-term debt portfolio will be comprised of $4 billion in U.S.-dollar denominated debt and EUR 1 billion in euro-denominated debt. In addition, with the drop in long-term interest rates, we opportunistically settled our fixed floating rate interest rate swaps at a small gain. As a result, our debt portfolio is now 100% fixed rate debt at very attractive rates.

Total third-party interest expense for the quarter decreased by $4.7 million when compared to Q3 of 2018. Interest income increased slightly but less than $1 million period-over-period. Interest expense and our debt decreased $3.9 million versus Q2 of 2019 and was also driven by the refinancing activity in the quarter, while interest income decreased $2.9 million.

Q4, we expect interest expense savings of approximately $9 million from the refinancing activity. However, total interest expense for Q4 and going forward will be subject to the translation of our newly issued Euro note interest expense into dollars.

Regarding income taxes. Our reported effective tax rate for the third quarter was 26.5% and our year-to-date rate for 2019 now stands at 26%. We anticipate that our effective tax rate for the fourth quarter will be a little bit higher or approximately 27% excluding the impact of share-based compensation items which we cannot predict because they are subject to changes in our share price and the impact of future stock option exercises.

Earnings from our affiliates totaled $500,000 for the quarter, down slightly versus Q3 of last year including the effect of FX rates and the allocation of earnings for the minority shareholders in our less than fully owned subsidiaries, $22 million during the quarter, down $3.5 million versus the adjusted Q3 2018 amount. But the gain on the Sellbytel disposition included about $7 million allocated to minority shareholders in Q3 2018.

So for the quarter, after adjusting to exclude the net impact of the gain on the dispositions and repositioning charges and the additional tax expense recorded in connection with the Tax Act of $18.2 million, our net income was $290.2 million, which represented an increase of $9.5 million or 3.4% versus last year's adjusted non-GAAP amount of $280.7 million. On a reported basis, our net income decreased by $8.7 million year-on-year.

Now turning to Slide 6. Our share repurchase activity over the past 12 months decreased our diluted share count for the quarter by 2.9% versus Q3 of last year to 219.4 million shares. Diluted EPS for the quarter was $1.32 per share, up $0.08 or 6.5% versus our non-GAAP diluted EPS of $1.24 in Q3 2018. Since these adjustments added $0.08 to last year's quarterly diluted EPS, on a reported basis, EPS was flat versus Q3 of last year.

On Slides 3 and 4, we provide the summary P&L, EPS and other information for the year-to-date period. We've also provided the non-GAAP adjusted presentation for the 9 month results on Slides 7 and 8, which also excludes the third quarter items that we separately reported last year.

Since the year-to-date results are in line with our Q3 performance, I will just give you a few highlights. Organic revenue growth was 2.5% during the first 9 months of the year and in line with our expectations. FX translation decreased revenue by 2.5% and the net impact of acquisitions and dispositions reduced revenue by 3.5%. Over the year-to-date period, reported revenue totaled $10.8 billion, a decrease of 3.5% compared to the first 9 months of 2018. EBIT totaled a little under $1.5 billion and our year-to-date operating margin of 13.6% was up 40 basis points when compared to last year's adjusted 9-month numbers. On a reported basis, EBIT margin was up 20 basis points and our 9-month diluted EPS was $4.17 per share, up $0.19 or 4.8% versus the adjusted diluted EPS of $3.98 and up $0.11 compared to the amount reported of $4.06.

Returning to the details of our revenue performance in the third quarter starting on Slide 9. Because of the dollar's continued strength in the third quarter, the FX impact on our reported revenue again created a headwind to our quarterly performance. The impact of changes in currency rates decreased reported revenue by 1.5%, $57 million in revenue for the quarter. The impact was once again widespread. On a year-over-year basis, the dollar strengthened against most every one of our major foreign currencies except the Japanese yen and Russian ruble. The largest FX movements in the quarter continued to result from changes in the dollar compared to the euro, the U.K. pound and the Australian dollar.

Looking forward, currencies stay where they currently are. We anticipate that the FX impact will again reduce our reported revenue by approximately 1.5% for the fourth quarter. For the full year, we're currently estimating that the FX impact will be negative by approximately 2.25%. The impact of our recent acquisitions net of dispositions decreased revenue by $117 million in the quarter or 3.1%.

As we have mentioned, we completed the disposition of Sellbytel, our European-based sales support business, at the end of August 2018. So we have now cycled through the impact of that disposition.

During the quarter, we acquired Smart Digital, a marketing technology agency based in Germany and a welcome addition to our best-in-class precision marketing and digital transformation capabilities. Based on transactions completed to date, we estimate the impact of our acquisition activity net of dispositions will be a net negative of about 1.5% for the fourth quarter, resulting in a net negative impact of 3% for all of 2019.

And finally, while remaining mixed by geography and by discipline, our organic growth for the third quarter was up 2.2% or $83 million. Geographically, our strongest performance was from our agencies based in the U.S., the U.K., Japan and Spain.

Regarding our disciplines, our Healthcare and Advertising disciplines had solid performances and our CRM Consumer Experience discipline also performed well while our PR and CRM Execution & Support disciplines lagged.

Slide 10 shows our mix of business by discipline. For the third quarter, the split was 56% for advertising and 44% for marketing services. As for their organic growth by discipline, Advertising was up 3.4%. Our Media businesses and Advertising agencies continued to deliver solid performances, particularly domestically and in the U.K. CRM Consumer Experience was up 1.8% for the quarter.

Once again, Precision Marketing had a very strong quarter, offsetting slightly sluggish performance elsewhere in the discipline which faced difficult comparisons to the prior year, especially in our branding businesses, while CRM Execution & Support was down 1.5%. PR, while mixed by market, was down 3.8% and Healthcare continued to turn in a very strong performance, up 9.5%. And once again, we saw solid growth across our agencies and the geographies they operate in.

On Slide 11, which details the regional mix of business, you can see during the quarter the split was 55% in the U.S., 3% for the rest of North America, 10% for the U.K., 17% for the Eurozone and the rest of Europe, 12% for Asia Pacific with the remaining 5% split between our Latin America and Middle East and Africa markets.

Turning to the details of our performance by region on Slide 12. Organic revenue growth in the third quarter in the U.S. was 2.7% led by our Advertising and Media agencies and our Healthcare and Precision Marketing agencies. Partially offsetting this was the performance of our PR agencies as well as our CRM Execution & Support agencies including our not-for-profit and merchandising point-of-sale agencies.

Our other North American businesses were up 2.7% with Media driving the organic growth. The U.K. was positive again this quarter, up 3% driven by strong performance from our Advertising, Media and Healthcare agencies. The rest of Europe was up 1.6% organically in the quarter, however, the performance remains decidedly mixed by market and by discipline. In the Eurozone, our strongest markets were Italy, the Netherlands and Spain. Germany was slightly positive in the quarter while France, driven by weak performance in our CRM Execution & Support businesses locally, once again lagged. And our organic growth in Europe outside the Eurozone continues to be positive across most markets.

Several of our largest markets in Asia Pacific facing difficult comps versus Q3 of 2018 when the region's organic growth was in excess of 14%. Organic growth this quarter was a modest 0.4%. Our Greater China agencies were down mainly due to decreases at our media agencies. As was the case in the second quarter, China was facing a difficult comparison to Q3 of 2018 when its growth was also double digits. Elsewhere in the region, we saw strong performance from our agencies in India, Japan and New Zealand.

Latin America was up 6.6% organically in the quarter. Mexico and Chile were positive, while Colombia was down organically. Brazil had positive organic growth, but our businesses there are continuing to encounter significant macroeconomic issues. And lastly, Middle East and Africa, which is our smallest region, was down for the quarter.

Turning to Slide 13, it presents our mix of revenue by our clients' industry sector. In comparing the year-to-date revenue for 2019 to 2018, we continue to see a small shift in our mix primarily as the result of the reduction of the contribution from our technology clients resulting from the Sellbytel disposition.

Turning to our cash flow performance. On Slide 14, you can see that in the first 9 months of the year, we generated just over $1.2 billion of free cash flow including changes in working capital for the first 9 months of 2019.

As for the primary uses of that cash, on Slide 15. Dividends paid to our common shareholders were $423 million, up slightly versus the first 9 months of the last year. As you'll recall, we increased our quarterly dividend by $0.05 per share effective with April's payment. The increase in the cash payment was partially offset by a reduction in common shares over the past 12 months. Dividends paid through our noncontrolling interest shareholders totaled $72 million. Capital expenditures were $77 million year-to-date, down compared to 2018 due to less leasehold improvement activity this year as well as an increase in our equipment leasing program. Acquisitions, including earnout payments, totaled $76 million, down when compared to last year when we executed on several acquisitions. And stock repurchases net of proceeds received from stock issuances under our employee share plans increased to $540 million. All in, we generated a little over $20 million in net free cash flow year-to-date.

On Page 16, we present our capital structure as of September 30, which reflects the changes we discussed earlier regarding the refinancing actions we took in the quarter.

Regarding our capital structure at the end of the quarter, our total debt is just a little over $5.1 billion and our net debt position at the end of the quarter was in line with our expectations at $2.67 billion, down $90 million from this time last year and up $1.4 billion compared to the year-end 12/31/2018.

Over the first 9 months of the year compared to year-end, the increase in net debt was primarily the result of the typical uses of working capital that historically occur as we progress through the year. Year-on-year, improvement in net debt primarily due to improvements in our working capital management. As for our debt ratios, they remain solid. Our total debt-to-EBITDA ratio was 2.2x and our net-debt-to-EBITDA ratio was 1.1x. And while our interest coverage is 9.6x, down due to the increase in interest expense and a reduction in reported EBITDA, we anticipate that our refinancing activity will positively impact this ratio going forward.

And finally, on Slide 17, you can see we continue to manage and build the company through a combination of well-focused internal development initiatives and prudently priced acquisitions. For the last 12 months, our return on invested capital ratio was 23% while our return on equity was 54.6%.

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 JP Morgan.

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

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I guess first off, just for -- maybe for John. Any color you can give us on how the advertisers you all was dealing with sort of are feeling about the overall outlook? Are they incrementally nervous about the economy? Or is it more business not more so than usual? Just any update on the tone of business would be great.

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [3]

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I'd suggest that it's business as usual. There are always macro concerns and they change from quarter to quarter or period to period, but there's always something out there. Our folks are focused on our clients' needs and we don't see any significant change for the quarter.

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

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And then on the CRM Execution business, it sounds like it's remaining weak in the U.S., and I think also you mentioned the U.K. Is that a business that you should ultimately see turning or improving? Or is it maybe something that you're still assessing for potentially picking out more potential divestitures?

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [5]

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We're constantly -- that's the one sector we've been focused on over the course, really, of the last 2.5 years and we continue to evaluate properties in that particular sector. Many of the companies there are affected by changes in technology and that has an impact on the growth that we experience. So that's something -- having said that, we continue to look at the entire portfolio, but...

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [6]

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Yes. There's certainly some good businesses in the portfolio in several categories that we think are promising. They may not be on the top of our list of categories that we're going to actively pursue acquisitions in, but there are parts of the portfolio that we continue to work very hard with management on to improve and there are other parts of the portfolio that are doing just fine.

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Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [7]

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And I guess just lastly, just overall in the U.K. where there's still a little bit of softening of the otherwise good growth you've seen, do you think anything sort of Brexit-related? Or is it just more kind of normal course of business?

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [8]

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This quarter, I couldn't attribute it to Brexit. It's just some of the Events businesses and some of the things that our projects timing was off in terms of when they hit. I don't know.

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [9]

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Yes. We really haven't seen any negative impacts of Brexit in our businesses at this point. We still, certainly with our management teams, keep close eye on what the impact might be. Nobody knows really when or if, never mind what the impact's going to be on our agencies themselves. But overall, we have a great portfolio of companies in the U.K. and they've been doing a great job for quite a while.

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Operator [10]

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

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Julien Roch, Barclays Bank PLC, Research Division - MD & European Media Analyst [11]

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The first 2 for John, the last 1 for Phil. John, are you seeing any slowing in Media like Publicis or is it specific to them? Because that's one of the 3 reasons they said that the organic was poor in Q3, that Media was starting to slow. That's my first question.

The second one is Q4, in the past, you've always talked about it as an adjustment quarter. How do you see the adjustment this year? Again, business as usual or will macro make advertisers more nervous? That's the second one.

And then for Phil, just a housekeeping question on Accuen impact. And then on the net interest guidance, you said $9 million savings. Did you mean quarter-on-quarter or year-on-year?

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [12]

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I haven't read the Publicis transcript, but our Media business continues to perform very well as reflected in our numbers. And it's a very vibrant business and we continue to win our fair share or more than our fair share of accounts.

With respect to the fourth quarter, I think I'll say something very similar to what I've said the last 22 or 23 years of fourth quarters, and that is there's always unidentified projects in the fourth quarter. They generally, in our case, start off looking like they're $200 million around the end of September. And I think all but one of the years, [with no impact] of the Great Recession. We've been able to fill those gaps in for projects and budget releases from clients who might have been holding back as of September 30. So we're cautiously optimistic as usual and a lot of people are very focused on maintaining that revenue.

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [13]

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Then on your last question, Julien, on net interest expense. The reference was quarter-on-quarter for Q4. We anticipate savings in 2020 as well. But I think that might vary a little bit for each of the quarters in 2020 based on how much of the benefit we had already achieved. So as we get closer to starting to plan for 2020, we'll be a little more definitive on what those numbers are as far as an expectation in 2020.

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Julien Roch, Barclays Bank PLC, Research Division - MD & European Media Analyst [14]

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And Accuen?

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [15]

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Accuen is just about flat. I think the number overall was down about $4 million.

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Operator [16]

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

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [17]

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Great. Yes, I have a few questions. John, what's the updated thought right now on the U.S. economy and (inaudible)?

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [18]

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Can you..

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [19]

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You guys (inaudible) other issues?

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [20]

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I don't know if it's your cell phone, you're breaking up a little bit. Can you please repeat it?

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [21]

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Yes, it is a cell phone. I'll speak a little slower maybe. What's your thought, John, on the U.S. economy? Do you feel like that's holding you back on your organic revenue in the U.S?

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [22]

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I think the U.S. economy is strong. I think, as I said in my remarks, when we look at our core businesses, the ones that we anticipate growth from, it grew very well, mid-single digits. They were dragged down by Events and some projects which did not come through in the quarter, and there has been some variance in that business this year, also some impacts in the shopper marketing area which we expect we'll grow through at some point.

And then as Phil was mentioning before in the earlier question, some of the CRM Execution businesses were a bit challenged. And as I mentioned in the call, our PR business was challenged this quarter. If that had simply been flat, our reported organic growth would have been a lot higher. So I mean you can do the math simply by looking at our presentation, and we're working on that.

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [23]

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Also John, can I ask (inaudible).

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [24]

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I'm sorry, Craig?

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [25]

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Yes, we're having trouble hearing you, Craig.

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [26]

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Yes, I'm not sure what's going on. Is there much difference each of the 3 months for your organic growth in the third quarter versus that 2.2% overall?

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [27]

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Yes, I think I heard that. I think the question was, was there much of a difference month-by-month in our organic growth?

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [28]

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Yes.

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [29]

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I think the answer is we don't really look at it that way. Each month, we don't do a hard close like we do each quarter and at year-end. So while directionally we certainly are focused on the monthly results that our agencies submit, we're also looking at their forecast for full quarter and the year as we review the results with the companies. Because the timing might vary month by month of when a project was completed or how the month played out versus last year. So we're really focused on the quarterly results and the full year. So I don't think I would say there was anything significantly different month by month or year-on-year relative to each month in terms of how we look at the business.

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Craig Anthony Huber, Huber Research Partners, LLC - CEO, MD, and Research Analyst [30]

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Another question if you can hear me. The consumer package goods client, CPG, are you seeing any stabilization there with the revenues?

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [31]

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I think in our case, CPG relative to some of our competitors is not as large a component of our portfolio of clients. And I think our results are probably mixed with our CPG clients. Some of them have in fact -- some of our revenues have in fact come down, and some of our revenues on other clients in the CPG space have gone up a bit. So I think it's probably a mixed performance for us as opposed to 1 overall trend for all of our clients in that space.

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [32]

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The only thing I would add to that, Craig, is we've been fortunate to be winning business in that category. As I mentioned in my comments, Unilever has signed 2 of its biggest brands to us recently. So net, net, net, we're okay.

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Operator [33]

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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 [34]

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A couple things, please. First off, can you remind us, maybe Phil, what the timing is on rolling off of the effect of the dispositions? It looks like the effect is slowing into Q4 with less of a negative impact. Do you cycle through that as of Q1? And relatedly, is there any impact on the organic growth that you could call out as it refers to that, i.e. has them coming off this year helped raise the organic growth a little bit this year?

Secondly, and more kind of broadly strategically on the data-driven businesses, the digital transformation businesses you're talking about, now you've mostly built these and you've talked about this quite a bit in the last few years. You've now referred to a couple of acquisitions. I guess they're relatively small. I just wondered if there's any shift in strategy toward more acquisitions in the space. And if you could comment maybe on where you see this line of business going. You're talking a bit more about IT, a bit more about consulting, maybe what kind of work may be emerging in this area?

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [35]

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Sure. So I'll start with dispositions, and then I'll pass your second question on to John, first.

As far as the impact in 2020 and Q4 '19, Q4 '19, I think in our prepared remarks, we said we expect dispositions to outweigh acquisitions by about 1.5%, so 1.5% negative in the fourth quarter. In the first quarter, based on dispositions and acquisitions we completed to date and in the past, the first quarter, we expect probably is going to be somewhere around negative 0.5%. And after that, it kind of flattens out. And our expectation is similar to our strategy that we've been pursuing pretty consistently, we're going to continue to try and find accretive acquisitions and as many as we can find that are in line with our criteria in terms of it being a good fit with our existing portfolio of businesses and/or clients. It's on strategy and the pricing is fairly reasonable. We're going to pursue those acquisitions. And if we can do more, we want to do more. So the expectation, though, is -- or the number is just based on what we've completed to date. Our expectation is we're going to continue to pursue those acquisitions and the goal would be for that number to turn positive again.

In terms of just the second part of that question, the impact of those dispositions on our organic growth in the quarter in '19, I'd say it really hasn't impacted organic growth one way or the other in a meaningful way. There might have been a little bit of a benefit but not meaningful enough to call it out.

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [36]

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And in terms of our focus, I'll refer you back to my prepared remarks, where I said that our primary focus in pursuing acquisitions is in the area of data, analytics, digital transformation and precision marketing for us, most of our practice areas. But to echo Phil's point, we won't throw reckless money at things we're capable of building. So we're very disciplined about the acquisitions we make.

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [37]

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So just one last one, I mean I think in terms of some of the deals we completed recently, Credera, which has been with us for a little while now, has really worked out well. It's been integrated into our Precision Marketing group and is growing quite nicely. And to the extent that, as John said, we can find more deals in the areas that we're particularly interested in, we're going to pursue them.

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Operator [38]

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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 [39]

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Two questions. One, I was curious, John, I know you mentioned you didn't read or listen to the Publicis call, but -- and I feel bad asking you about someone else's comments. But one of the things they've talked about for a long time has been the impact of attrition in the U.S. sort of in-housing or in-sourcing particularly around media. And they're obviously a large company. I'm just curious if you see that as a trend. If you do, it doesn't seem to be impacting your financials. So how are you sort of offsetting that? Or maybe you just don't see it as, as much of a factor in the business as they do.

And then I just wanted to ask about the Disney win. I know you guys don't want to talk about specific account wins and losses too much, but that's a sizable one. I'm just curious if you could help us think about how incremental that is to the existing Disney business and when we might see that start impacting your results?

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [40]

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Again, I haven't studied Publicis' media business. I was a little bit shocked to see it was in decline because earlier in the year, they won a couple of very large accounts. I'm not on the inside of it, so I can't tell you the answer. They probably have suffered more than we certainly have because of their CPG clients and some of the changes that are happening there. But again, I can't speak for Publicis with any accuracy. So you have to take that comment with a grain of salt.

The Disney win is very important, but part of that win was business we already had. So there was incremental business that we received, but we were able to defend our business very well. And so we're very pleased with our relationship there and look forward to it growing as we go forward.

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [41]

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Yes. As far as when the transition exactly is going to benefit us, I'm not sure that it's going to be any different than any other client situation. There'll be a transition period, and I think our intention will be to transition what we don't have as quickly as we can. But a lot of that is based on how quickly the client wants the change to occur.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [42]

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Maybe just, John, as a follow-up. Is bringing more and more media in-house a CPG-specific trend in your mind? Or do you think it's broader? You mentioned that piece of the puzzle before.

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [43]

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I haven't truly studied it that closely. I mean technology changes, what comes in-house and what stays out in an agency. Oftentimes, somebody was doing something with us and they decided to in-house. We follow them in-house to help them set up and grow and that just enhances the relationship. But I think the most dramatic changes that we've noticed on in-housing has really been in the CPG area. Others do it, but they do it for a while, so I'm going to do it for a while and then decide that they can't do it and come back to us. So it's just a constant.

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [44]

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Yes, I mean clients have been experimenting with in-housing for years. We expect they'll continue to do so. With your question specifically geared toward media, there's some significant investments required and we made them and we've been making them over the last 10-plus years, and they're not easy to duplicate. In our business, we've been looking to do more outsourcing to specialists who can do some of the functions that we've been performing internally more efficiently and effectively. So we don't see this trend as much different than ultimately clients eventually going back to the specialists and the people that have made the necessary investments and that can get the scale and the skills to help them achieve what they're trying to achieve.

I think given the timing and the market's about to open, we have time for one more call.

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Operator [45]

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That question comes from the line of Michael Nathanson of MoffatNathanson.

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Michael Brian Nathanson, MoffettNathanson LLC - Founding Partner & Senior Research Analyst [46]

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I'll be quick. One for John and one for John and Phil. So John, given the problems that these European competitors of yours have in North America, it's pretty obvious they're losing a lot of share here to you. Are you seeing any change in the competitor pressure to either retain talent or on deal terms? Is there anything that you see happening in the marketplace due to their weakness?

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John D. Wren, Omnicom Group Inc. - Chairman & CEO [47]

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Not that I could call out individually. We've always -- in terms of talent, we're always in search -- we think we have the best talent in the industry. We're always in an effort to acquire more of that better talent. So in that regard, there's a lot of recruiting that goes on within the industry. I don't know if that quite fully answers your question, but...

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [48]

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Yes, I don't think we've seen dramatic changes in terms of deal terms. And it certainly hasn't eased if -- as a result of our competitors maybe being less active on the acquisition front.

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Michael Brian Nathanson, MoffettNathanson LLC - Founding Partner & Senior Research Analyst [49]

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Okay. And then let me ask you both, on dividends versus buybacks, you've called out where you financed your long-term paper at. It's incredibly cheap and you know how low rates are. Is there any internal thinking about maybe positioning more of your capital returns to dividends versus buybacks as time goes on, I guess to make the stock market attractive? Is that a conversation you guys have entered into at all?

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Philip J. Angelastro, Omnicom Group Inc. - Executive VP & CFO [50]

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Dividends are a matter that our Board considers on a periodic basis and it's something that we certainly discuss a few times a year. And the Board looks at it very seriously. We certainly want to be as consistent as we can in terms of our dividend policy and our capital allocation policy. And I think -- we think we've certainly done that. I don't think we have any intentions of changing it in any significant way, but it is more of a Board decision.

Thank you all for taking the time to join us on the call.

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Operator [51]

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