Omnicom Group Inc. (NYSE:OMC) Q4 2023 Earnings Call Transcript
Omnicom Group Inc. (NYSE:OMC) Q4 2023 Earnings Call Transcript February 6, 2024
Omnicom Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Omnicom Fourth Quarter and Full Year 2023 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [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, Gregory Lundberg. Please go ahead.
Gregory Lundberg: Thank you for joining our fourth quarter and full year 2023 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President and Chief Financial Officer. Also joining for the question-and-answer session will be Duncan Painter, CEO of Flywheel Digital; and Paulo Yuvienco, Omnicom Chief Technology Officer. On our website, omnicomgroup.com is a press release and the presentation covering the information we'll review today as well as a webcast of this call. An archived version will be available when today's call concludes. Before I start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we have included at the end of our investor presentation.
Certain of the statements made today may constitute forward-looking statements. And these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our '22 Form 10-K and our '23 10-K, which we expect to file shortly. During the course of today's call, we will also discuss certain non-GAAP measures. You can find a reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We'll begin the call with an overview of our business from John, then Phil will review our financial results for the quarter. And after our prepared remarks, we'll open up the line for your questions. I'll now hand the call over to John.
John Wren: Thank you, Greg. Good afternoon, and thank you for joining us today for our fourth quarter and full year 2023 results. I'm pleased to report our fourth quarter performance was very strong. For the fourth quarter, organic growth of 4.4% exceeded our expectations and full year organic growth was 4.1%. Excluding acquisition transaction fees related primarily to Flywheel, operating profit margin for the quarter was 16.3%. For the full year, operating profit margin adjusted for certain non-GAAP items was 15.2%. Earnings per share for the quarter adjusted for acquisition transaction fees was $2.20, up 5.3% versus the fourth quarter of 2022. For the full year, EPS adjusted for certain non-GAAP items was $7.41, an increase of 6.9% compared to the full year 2022.
In 2023, we generated approximately $1.9 billion in free cash flow and returned $1.1 billion to shareholders through dividends and share repurchases. Our liquidity and balance sheet remain very strong and continue to support our primary uses of cash, dividends, share repurchases and acquisitions. On January 2, we closed the acquisition of Flywheel Digital. It is the biggest acquisition in Omnicom's history and brings scaled capabilities in the fastest-growing segments of the industry, retail, media and digital commerce. Flywheel enables brands to sell goods across digital marketplaces such as Amazon, Walmart, Alibaba and more than 100 other marketplaces around the world. Flywheel opens up an entirely new market opportunity for Omnicom, transforming us from an advertising and marketing focused company to a marketing and sales-focused company.
We can now seamlessly integrate end-to-end services from brand media to precision marketing to e-commerce and in-store comers, ultimately delivering superior results for our clients. In January, we began combining Omni's audience and behavioral data with marketplace point of purchase sales data in Flywheel's Commerce Cloud, giving us an unmatched set of data not only to more effectively drive sales for clients, but to be fully able to measure return on advertising spend. It's a unique offering that no one has been able to achieve, and our competitors can't match. I'm also proud to inform you that last week, Flywheel captured its first significant win as part of Omnicom, winning the highly owned e-commerce business in Europe from one of our competitors.
This is a unique partnership and opportunity. In January, we welcomed CEO, Duncan Painter and more than 2,000 Flywheelers around the world to Omnicom, and we are excited about what we can achieve for our clients together. In the fourth quarter, we acquired Coffee & TV, a UK-based creative studio that specializes in CGI and visual effects. The acquisition is part of our strategy to leverage the scale of our production operations and launch a holistic suite of global content and production services under a single unit, Omnicom Content Studios. Omnicom Content Studios creates content for brands across all consumer experiences and touch points from long and short-form videos to social, experiential, digital and everything in between. In addition to these acquisitions, we continue to invest in high-growth areas through internal investments and partnerships.
Last month at CES, we introduced several new ways to offer planning and measurement in the booming area of influencers. We announced several first-of-the-kind partnerships with TikTok, Google, Amazon and Meta to optimize the use of influences, seamlessly integrate creator assets in campaigns and measure influencer-driven commerce. In November, we announced the first-mover collaboration with Getty Images that provides us early access to this new generative AI tool. It pairs Getty's library of creative content with Omni's data and AI technology. So our agencies can produce commercially safe and legally indemnified customized images for our clients. In 2023, we launched Omni Assist, a virtual assistant our people use to create, plan and execute ad campaigns using the trove of data in Omni.
Omni Assist accesses Open AI's GPT miles through Microsoft. As the first holding company and second company overall to be giving full access to Open AI models in Microsoft Azure environment, we have a significant first-mover advantage, allowing us to experiment, prototype and launch applications within our platform before any other organization. Historically, we've invested tens of millions of dollars in AI. Going forward, Generative AI investments and partnerships to enhance our platforms and educate our knowledge workers are expected to require greater resources. These investments will result in increased productivity and success for our clients. From e-commerce to influencers to Generative AI, we are investing in all the areas that will shape the future of our industry.
When these capabilities are combined with our legendary creativity, we remain positioned at the forefront of change in innovation. In new business, we had a very successful 2023. We secured record business with Amazon, Beiersdorf, HSBC, Jaguar, Land Rover, Novartis, Phillips, Telstra, Uber, Under Armour, Vans and Virgin Voyages, among others. And we closed the year with exciting news that BMW consolidated its U.S. creative, digital and CRM and its media accounts with us. Before I discuss our outlook for 2024, I want to welcome the newest member of our Board of Directors, Casey Santos, who was recently appointed as an independent director and a member of the Finance Committee. Casey joins one of the most diverse boards within the Fortune 500.
Now at 11 members, our Board is proud to have seven women and six diverse members. Casey's deep expertise in technology makes her a valuable addition to our Board. I also want to thank our people around the world for helping us successfully close out 2023. Your dedication and commitment to do outstanding work allow our agencies, clients and Omnicom to succeed. We entered 2024 from a position of strength, supported by our solid financial performance and balance sheet, new business wins and key strategic investments in the areas that will drive significant growth in the years ahead. While we continue to plan cautiously, given the uncertainties in the macroeconomic and geopolitical environment based on current marketing conditions, we are targeting 2024 organic revenue growth between 3.5% to 5%.
Our range of organic growth during the year will be impacted by new business won in the fourth quarter which doesn't positively impact us until the second quarter and Flywheel's growth, which is typically stronger in the second half of the year. I'll now turn the call over to Phil for a closer look at our financial results. Phil?
Philip Angelastro: Thanks, John. We finished the year on a strong note in terms of revenue growth and profitability, even though the business environment was uncertain in 2023. As we look towards 2024, we're optimistic about the performance of our agencies and an improving economy. Let me spend a few minutes reviewing the financial details of the quarter and then we'll open the lines up for questions and answers. Let's start with a review of our revenue performance on Slide 4. Organic growth in the quarter was 4.4%. The impact on foreign currency translation increased reported revenue by 1.2%. If rates stay where they are currently, we estimate the impact of foreign currency translation will be close to flat in Q1, 2024 and for the full year.
The net impact of acquisition and disposition revenue on reported revenue was negative 0.7%, primarily reflecting the sale in Q2 of '23 of our research businesses. In 2024, we expect a positive contribution beginning in the first quarter with an increase of about 1.5% and around 2% for the full year, reflecting recent acquisitions and are having moved past recent dispositions. For the full year, organic revenue growth was 4.1%, this was in line with our revised guidance of 3.5% to 5%. We made some good progress toward this target, despite a challenging comparison to 9.4% growth in 2022 and an uncertain macroeconomic environment during the year. As John discussed, organic revenue growth outlook for the full year 2024 is between 3.5% and 5%. Now let's turn to Slide 5 to review our organic revenue growth by discipline.
During the quarter, advertising and media growth was very strong at 9.3%, once again driven by Global Media performance, which was partially offset by softer results from our advertising agencies. Precision marketing growth contracted 1.1%, reflecting a difficult comp to 11.5% growth in Q4 of 2022 and cycling some client spending reductions from earlier in the year. As we look forward to 2024, we expect this to once again be one of our fastest-growing disciplines. Commerce and branding grew by 1% compared to growth of 7.5% last year, driven primarily by growth in specialty production, offset reductions in the quarter at our branding and commerce agencies. Experiential was down 8%, reflecting a difficult comp of 17% growth in Q4 of 2022 with the FIFA World Cup in Qatar, primarily offset by strong growth in Europe in the quarter, while quarterly results can be choppy based on the timing of certain client events.
Experiential remains a solid business and is important to our clients' marketing plans. Execution and support declined by 0.4% with mixed results that included a solid performance in field marketing. Public relations declined 2.9% in the quarter due to difficult comps related to the U.S. midterm elections of 2022, when growth exceeded 12%, as well as softness in certain international markets. Finally, Healthcare continued its steady growth of 3.6% during the quarter. Turning to geographic growth on Slide 6, we saw growth in our five largest markets offset again by declines in Canada and the cyclical impact of experiential revenue in Middle East and Africa. The U.S. was up 0.6% in the quarter on solid performances by advertising and media, led by media, and our healthcare businesses, offset primarily by execution and support, public relations and commerce and branding.
Slide 7 shows our revenue by industry sector for the full year and the quarter. Looking at the full year which tends to eliminate the volatility of client changes in the quarter, we saw a notable increase of 2 points in automotive and 1 point increases in both food and beverage and financial services. Weaker markets in technology and entertainment, which have been discussed widely in the industry over the course of the year, resulted in reductions of 3 points and 1 point, respectively. Now let's turn to Slide 8 for a look at our expenses. In the fourth quarter, salary and related service costs were higher due to increased staffing levels, but were down as a percentage of revenue year-over-year, driven by our repositioning actions earlier in the year and through ongoing changes in our global employee mix.
Third-party service costs increased in connection with the growth in our revenues. We generated profit on these costs and the higher levels in the fourth quarter of 2023 compared to '22 were driven primarily by strong growth in our media business. Our disposition activity during the quarter and the year did not have much of an impact on this cost category. Third-party incidental costs were close to the same level as last year and reflect client-related travel and incidental out-of-pocket costs that a bill declines directly at our cost with no profit. Occupancy and other costs were down in both dollar amount and relative to revenue, driven by ongoing rationalizations in our real estate portfolio. SG&A expenses were up primarily due to $14.5 million in professional fees related to acquisition costs incurred in the quarter, the majority of which related to Flywheel.
Excluding these costs, quarterly SG&A levels were comparable to last year. Now let's turn to Slide 9 and look at our quarterly and annual income statement. To make the numbers more comparable, the table and footnotes describe some of the other adjustments that were made during this year and last year that we discussed on prior calls. Our operating income margin was negatively impacted by $14.5 million of costs in connection with the Flywheel acquisition, as I just discussed; adjusting for this amount results in an operating income margin of 16.3% and an EBITDA margin of 16.8%. For the full year, our adjusted operating income margin was 15.2%, within our expected range of 15% to 15.4%. As a result of the Flywheel acquisition, we'll have higher levels of amortization expense than past dues and we will be focusing our margin expectations on EBITDA.
We continue to expect integration costs, as well as operating synergies and related to the Flywheel acquisition during 2024 and the acquisition will be accretive to diluted EPS adjusted for amortization expense by the fourth quarter. For the full year 2024, we expect adjusted EBITDA as a percentage of reported revenue to be close to flat with last year. Also in this slide, you can see that our non-GAAP adjusted income tax rate of 26% for the full year 2023 and was comparable to 2022. We do not expect the Flywheel business to change our tax rate outlook for 2024, but the 2024 rate will be negatively impacted, primarily related to increases in the statutory rates of certain international countries. For full year 2024, we expect our rates to approximate 27%.
Acquisition costs related to Flywheel and better performance at agencies with minority shareholders contributed to a decrease in reported net income of 1%, but an increase of 2.1% and on an adjusted basis. Lastly, adjusted diluted EPS of $2.20 for the fourth quarter increased 5.3% from last year. For the year, adjusted EPS increased by 6.9%. Slide 10 is our cash flow performance for the year. We define free cash flow as net cash provided by operating activities excluding changes in operating capital. Free cash flow for 2023 was $1.9 billion, an increase of 6.5%. This increase was driven in part from operational improvements compared to 2022 and the use of operating capital, which we expect to improve further in the future. Regarding our uses of cash, we used $563 million of cash to pay dividends to common shareholders and another $71 million for dividends and non-controlling interest shareholders.
Our capital expenditures were $78 million, similar to last year and we expect 2024 levels to be higher due to growth investments at Flywheel. Total acquisition payments were $249 million, although we closed the Flywheel acquisition on January 2, 2024, using cash-on-hand of approximately $845 million. It remains our intention, as we stated in the October 30 announcement to finance two-third of the purchase price with new debt, which I'll discuss in a moment. Finally, our stock repurchase activity, net of proceeds from stock plans was $535 million year-to-date within our expected range. Our capital allocation in 2024 will be consistent with our practice of returning cash to shareholders through a healthy dividend, making strategic acquisitions that lead to accelerated growth and using a portion of residual cash to repurchase common stock.
Since 2024 began with the closing of a larger-than-normal acquisition, we expect the total share repurchases in 2024 and or approximate 50% of our recent average. Slide 11 is a summary of our credit, liquidity and debt maturities. At the end of the fourth quarter of 2023, the book value of our outstanding debt was $5.6 billion. There were no changes in outstanding balances during the quarter other than foreign exchange translations. Our $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program remains undrawn, and our cash equivalents and short-term investments were $4.4 billion. We will continue to monitor the credit markets throughout 2024, and we expect to enter the debt markets to finance approximately $550 million or 2/3 of the $845 million we spent on Flywheel acquisition.
And during the year, we will refinance the $750 million of 3.625% senior notes, which are due November 1, 2024. Financing the Flywheel acquisition will increase our interest expense in 2024. It's also likely that refinancing November notes will increase interest expense by some amount, but it is too early to estimate. For 2024, we expect that our internal financing of the Flywheel acquisition in early January with cash on hand prior to an expected financing of two-third of the purchase price, coupled with a decline in global interest rates. Will lead to lower interest income in 2024 compared to 2023. Slide 12 presents our historical returns on two important performance metrics for the 12 months ended December 31, 2023. Omnicom's return on invested capital is 26% and return on equity was 41%, both reflecting very strong performance.
Healthy returns like these reflect the strength of our industry our operating discipline and the preservation of our conservative balance sheet. Operator, please open the lines up for questions and answers. Thank you.
Operator: [Operator Instructions]. Our first question comes from the line of Cameron McVeigh with Morgan Stanley.
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