Omnicom Group Inc.
Q4 2019 Earnings Call Transcript

Published: 11 Feb 2020

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Omnicom Fourth Quarter 2019 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.At this time, I’d like to introduce your host for today’s conference, Senior Vice President of Investor Relations, Shub Mukherjee. Please go ahead.

[Shub Mukherjee:]

[Technical Difficulty] 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 statements 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 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 can find the reconciliation of those measures to the nearest comparable GAAP measures 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 review our financial results for the quarter, and then, we will open the line for your questions.

[John Wren:]

Thank you, Shub. Good morning. Thank you for joining the call this morning. I’m pleased to speak with you about our fourth quarter and the full year 2019 results. Our fourth quarter performance was very solid with organic growth of 3.5%. For the year, organic growth was 2.8%.We also exceeded our margin targets for the quarter and for the year. EBIT margin for the quarter increased 30 basis points to 15.6%. For the year, EBIT margin was up 40 basis points to 14.2%, excluding the effect of our third quarter 2018 dispositions and repositioning actions.And EPS for the quarter was up 6.8% to $1.89 per share. In the face of a dynamic yet challenging environment, I’m very pleased that our strategies, talent and execution have allowed us to consistently deliver solid financial results. I will speak more about our achievements in these areas later in my remarks. But let me first provide more color on our financial performance.Looking at fourth quarter organic growth across the disciplines, Advertising and Media was up 5.1%, CRM Consumer Experience was up 3.3%, Healthcare was up 12.9%, PR was down 2.5%, and as expected, CRM Execution & Support was down 6%.By region, the U.S. was up 2.8%, driven by solid results in Advertising and Media, and CRM Consumer Experience. And we had double-digit growth in Healthcare. CRM Execution & Support was down double-digits in the U.S. and Public Relations also had negative growth. The UK was up 3.3%. Advertising and Media, Healthcare and PR performed well, offset by weaker performance in both of our CRM disciplines.Overall growth in the euro and non-euro region was 4.7%. Results in the euro markets was mixed. Germany and Spain performed well. France had negative growth as it continued to be impacted by weak performance in our specialty print production business. Our events business was also negative due to difficult comps.The non-euro markets performed quite well overall, led by the Czech Republic and Russia. Asia Pacific growth was 4.5%, as China and Australia had good results in the quarter. Latin America was down 1.3% due to challenges in Brazil and Chile. Our smallest region, the Middle East and Africa was up 19.5%.Looking at our cash flow in 2019, Omnicom generated $1.7 billion in free cash flow and returned more than $1.1 billion to shareholders through dividends and share repurchases. Approximately $120 million in cash was used for acquisition related spend during the year. At this point, our acquisition pipeline is good and we expect activity to pick up in 2020.Our plans for the use of free cash flow remains unchanged, paying our dividends, pursuing strategic acquisitions and repurchasing our shares. Finally, our balance sheet and credit ratings remain very strong.Turning now to our strategy and operations, we are focused on key strategic objectives that have consistently served us well. These strategies are centered around hiring and retaining the best talent; driving organic growth by evolving and expanding our service offerings; investing in areas of growth with a particular focus on data, analytics, digital transformation, CRM and Precision Marketing, e-commerce and Healthcare; and remaining vigilant on managing our cost and improving operational efficiencies in areas such as real estate, accounting, purchasing and IT.To meet our clients’ desire for simplicity and to be better able to recruit and deliver the best talent to them, we’ve structured our service offerings around our practice areas and our Global Client Leaders Group.The Global Client Leaders Group provides clients a single point of access to our network of thousands of industry specialists in a variety of marketing disciplines. From late 2017 through early 2019, we established 12 practice areas, including CRM and Precision Marketing, Advertising, Media, Public Relations, Retail, Branding, Healthcare, Experiential and several others.The practice areas bring together strong expertise within a particular discipline, provide our people greater opportunities for training and development, better match the needs of our clients with our service offerings, and help develop strategies for internal investments and acquisitions.Together, the global client and practice area leaders can deliver expertise and talent to our clients that is aligned with their business strategies and can tackle their marketing challenges. One of our longstanding practice areas, which is very well aligned with our Global Client Leaders Group is Omnicom Health Group. This group had an outstanding year, which contributed to our overall growth in 2019.Omnicom Health Group is one of the largest healthcare communications groups in the world. The group services over 250 different client companies including the top-25 pharma and biotech companies in the world. Omnicom Health Group is able to manage communications across the entire healthcare ecosystem, due to its breadth and depth of specialty healthcare agencies that are focused on 4 key healthcare customers

[Philip Angelastro:]

Thanks, John, and good morning. John just described, fourth quarter results represented a very solid end of the year for us, reflecting the quality of our employees and the services they deliver to help our clients achieve their goals. And for the full year, our results were in line with the upper end of the range of our expectations. As always, our agencies remain focused on responding to our clients’ ever changing requirements and delivering effective solutions to meet their needs, and at the same time, managing their agency cost structures in an efficient manner. We also continue to see the positive effects of our ongoing company-wide efforts to identify opportunities for improvement and efficiencies.Starting on Slide 7. Regarding our revenue for the fourth quarter, we had organic growth of 3.5% as our agencies overall did a good job capturing the year-end client project spend. For the full year, organic growth was 2.8%, which was at the upper end of the range of our expectation of 2% to 3% growth, as we had positive performance across most regions and major markets.FX was once again negative reducing our revenue by 0.9% in the fourth quarter. And while the reduction in revenue from dispositions made during the last 12 months exceeded revenue from acquisitions in the quarter and net reduction of 1.2% this quarter is lower than it was in the previous four quarters as we cycle through the largest tranche of our 2018 dispositions during the third quarter. As a result, our reported revenue in the fourth quarter increased 1.3% to $4.14 billion when compared to Q4 of last year. I’ll discuss the components of the changes in revenue in more detail later in my comments.Turning back to Slide 1, our operating profit for the quarter was $646.4 million, up 3.1% when compared to Q4 of 2018. While our operating margin of 15.6% represented a 30 basis point increase over the last year’s fourth quarter. EBITDA for the quarter increased 2.5% and Q4’s EBITDA margin of 16.1% was up 20 basis points when compared to last year. The improvement in margins when compared to Q4 of last year, primarily resulted from the change in business mix we’ve experienced from the strategic disposition of several noncore or underperforming agencies and our ongoing efforts to be more efficient throughout the organization, particularly in the areas of real estate, back-office operations, IT and procurement.Net interest expense for the quarter was $38.6 million, down $14.5 million versus Q4 of last year largely driven by the refinancing activity that took place in the third quarter of 2019, and down $10.7 million compared to the third quarter of this year.As a reminder, I’ll recap the refinancing activity. In early July, we issued €1 billion senior notes in 2 parts

[Operator:]

Thank you. [Operator Instructions] Our first question will come from the line of Alexia Quadrani from J.P. Morgan. Please go ahead.

[Alexia Quadrani:]

Thank you very much. My first question is really on more of the detail on the outlook for 2020, if you could give us a sense of how we should be thinking about organic growth and then margin efficiencies that you had highlighted that benefited Q4 and actually full year 2019. Can they continue in 2020? How should we think about profitability as well? Thank you.

[Philip Angelastro:]

I’ll start and then John can add his comments. I think for 2020 in terms of where we are in our planning cycle for the year right now, our expectations are similar to what they were at this point in 2019. So we see an organic growth range of 2% to 3% again for 2020. And with respect to margins, we’re going to continue to focus on growing EBIT dollars. That’s been our focus all along. That’s how we approach planning and executing our business and it’s been successful.We’re always looking for opportunities for improvement and efficiencies throughout the organization. We’re particularly focused or have been in the last 3 or 4 years in the areas of real estate and back office, and IT. We’re going to continue to do that. And at the same time, we’re going to continue to invest for growth, especially in the areas of data and analytics.Training and some other initiatives as we always strive to find the right balance between those investments and finding sustainable growth. So for 2020 at this point in our planning cycle, we expect margins to approximate what they were in 2019, so flat for now. And we’ll see how it goes as the year evolves.

[Alexia Quadrani:]

And then, John, can I ask a follow-up question, is you touched on – or maybe Phil touched on China, Asia and the region in your region in your opening remarks. I’m curious – I know it’s not a huge market for you. But how are the multinationals sort of dealing with ad-spending in China right now?And then, just a lot of question for Phil or John, the CRM Execution business, which continues to be a tough area for you, do you see more divestitures there or opportunity to sort of – I guess, what’s the – how do we fix that business? Do we get out of some of the businesses or is it a question of sort of just cyclical and then it will come back?

[John Wren:]

First, Alexia, we’ll first take China. We like most other people are playing day to day at this point. Our primary focus is the safety of our employees. January, which we know the results were fine. It wasn’t until after that that this became a full blown public crisis. It depends on how long it goes on.Our people have been working primarily from home. And work goes on for most clients. Some of them are even spending more because of the products that they’re selling to the marketplace. The one area for the quarter anyway that I think will be affected would be our Events business in China, because so any planned events has been cancelled at this point and we don’t know if they’ll be done later in the year or whatever.But as you said in your comments, China is an important, but it’s not a terribly large market for us in our numbers. And your second question?

[Alexia Quadrani:]

The CRM Execution, just a question if you can do more divestitures there or what’s your outlook really?

[John Wren:]

You want to do it or…?

[Philip Angelastro:]

Sure. I think we’re going to continue to look at the entire portfolio as we through our planning process and all throughout the year. Identify businesses that strategically may make sense for disposition. We’ve been through – we believe we’ve been through the bulk of that process as far as acquisitions of size. But we’re always open to reconsiderations and there is a lot of change that’s happened in our industry. We expect that change to continue.We don’t have any particular meaningful businesses targeted to disposition at this point. And we think a bunch of the execution and support businesses that we have are going to get back to being positive growth, maybe not high growth businesses with good returns, with some exceptions. There are some that is still cycling through some of the issues that they faced in 2019.But the part of the portfolio represents is a smaller part of our portfolio now than it was over the last few years. And some of those businesses are really good businesses and have always been. They’ve overshadowed by some of the underperformers within that group or grouping.So I think you can expect we’re going to continue to work with the management teams to look for opportunities for growth and improvement and to the extent that we feel strategically we’re not going to continue to invest in them and they’re not – and they are opportunities for good returns for disposition we may continue to consider going down that route too.

[Alexia Quadrani:]

Okay, thank you very much.

[Operator:]

Our next question then will come from the line of Craig Huber from Huber Research Partners. Please go ahead.

[Craig Huber:]

Good morning. Thank you. I’ve got a few questions. Can you just size for us, if you would the China revenues for last year? What percent of revenues that was and what was the organic revenue there? We get that question a lot.

[John Wren:]

The size of China or us is – it’s probably a little bit less than 1.5% of our revenues. And I think given that size, we typically don’t disclose every country-by-country organic revenue growth percentage, but if you give me a minutes, I’ll just double check it.So for the year, the year China – China’s organic growth was negative, so I think in the mid single digits in 2019.

[Craig Huber:]

Thank you for that.

[John Wren:]

Sure.

[Craig Huber:]

My next question, John, I guess, you’ve – various conversations you’ve had with your larger customers particularly here in the U.S. Just curious, how are the tone of businesses with them? And as you sort of think about the U.S. economy what’s your sort of sense of that? Is it holding you back? Is it helping you? And the same question is for Continental Europe as well? What’s your sense of the economy in both places, please?

[John Wren:]

Sure. Most of the conversations we’ve had, lot of that was clients in the U.S. U.S. economy continues to be strong and clients are trying to take advantage of the growth that they see in the marketplace. Obviously, with the election coming up, there is some cautiousness that goes along with that. But for the most part, I’d have to say it’s a net positive.Once again into Europe, the markets – it changes market by market. The real behind-the-scene conversations about Brexit are – is uncertainty, not so much for 2020, but post-2020, as businesses decide where they have to be positioned and what needs to get done. France is – the market’s okay. We’ve suffered an individual loss in some of our execution businesses, which affect our numbers, but the market’s okay. In Germany, Germany is a question market at this point. Not a negative, but a question mark, especially since, I think, it was last night, the expected success that Angela Merkel decided she would not be running to that position. So we don’t have any better information at the moment. Russia continues to be a strong performing market for us. I don’t know if that covers most of the things, you want me to cover.

[Craig Huber:]

No, I appreciate that. Every year in the fourth quarter, you tend to have some variability around your project related work, obviously, here in the fourth quarter. Can you maybe size that for us? How did – in terms of dollars, maybe how you want to do it the fourth quarter of this year versus last year, please?

[Philip Angelastro:]

I think, we typically see as we head into the fourth quarter, there’s somewhere around $200 million to $250 million of project work that is typically available for our agencies to achieve. And our agencies do typically achieve something in that range. Some years, it’s a little bit lower. Some years, they actually do a little bit better. And there is a whole variety of factors, and it’s not just when we speak about that in the fourth quarter, it’s not just our project based businesses alone that are actively pursuing year-end project opportunities with their clients.So I think, this year was probably similar to maybe a little bit better than last year’s fourth quarter, and I think, if you go back to 2018, it probably wasn’t as good a performance where there wasn’t as much of it that we were able to convert in that fourth quarter. But that’s a typical range that we see, it’s hard to actually put your finger on every dollar, and whether where – what exactly the client situation was that led to us being able to capture those dollars. So that’s traditionally what we found, and it’s been pretty consistent over the years.

[Craig Huber:]

Got you. Thank you very much.

[John Wren:]

Sure.

[Operator:]

Our next question then will come from the line of Dan Salmon from BMO Capital Markets. Please go ahead.

[Daniel Salmon:]

Thanks for taking the questions, and good morning, everyone. John, I was hoping you could comment on the recent news about Accenture reportedly closing their media auditing division. You commented, I think, on that specific issue on prior calls, and I’d love to hear an update on that specifically. But really, more importantly, I’d love to hear just your broader thoughts, particularly as you enter 2020, about the competitive environment and particularly with that group.And then just you mentioned all the sort of success of the Healthcare division, and the numbers are clearly robust there. I hate to ask about one of the markets that are seeing challenges, but I’d just love to hear an update on the PR division. In particular, just we know that that’s a business where it might have lagged in adopting technology within marketing traditionally, but where it does appear to be really picking up. And I’m wondering how you see the role of technology in helping bring that division back to growth going forward this year. Thanks.

[John Wren:]

Well, first, on Accenture, I did comment, I forget when it was back a while ago that some of their ambitions and the fact they’re still in the media auditing business was inconsistent. And I’m just happy to see that they got out of the business. And we’ll continue to compete with them where we see them, although we haven’t run into them very often on major pitches. Your second question was about Healthcare, and could you just reframe it for me for a second?

[Daniel Salmon:]

Rather you emphasized the strength in Healthcare. What I was hoping to just hear a little bit more about was the PR division and how you aim to get it back to growth. And in particular, the role of technology and whether you’re seeing that become more significant within those businesses?

[John Wren:]

Sure. Well, I think the utilization of Omni and especially Q, which I mentioned in my remarks, will benefit PR business in some of their assignments. The other activity that’s going on – now let me frame it, even though, we’ve had some difficulty with a couple of percentage points loss here and there, the profitability of the PR division has been and remains very strong. So the opportunity is a marketplace opportunity, it’s not anything structurally to do with the business at this point.And we’re continuing to go through and evaluate. Recently, John Doolittle took over for Karen van Bergen as the head of that practice area. And we’re sitting down and taking into the hard look at where we get our revenue, what we can expect in the future and what changes we want to make to the business. So it’s an opportunity from my perspective, it’s not really a problem. It’s just constantly running 1% or 2% below the prior year. And technology will help that as well. Q especially, which has just been – it’s been in development for over 5 years, but it’s just been added to the Omni offering. I believe will particularly help the PR business in some of the things that they’re doing.

[Daniel Salmon:]

Great. Thank you.

[John Wren:]

Sure.

[Operator:]

Our next question then will come from the line of Julien Roch from Barclays. Please go ahead.

[Julien Roch:]

Yes. Hi, there. Thank you very much for taking the questions. Coming back on China quickly. You said it was less than 1.5% of revenue and that so far the only impacts were you events business, because no event was taking place in China. How much is events either out of the Chinese revenue or out of the 1.5%? That’s my first question.The second one is could you give us some color on the organic growth of your media practice in full year 2019? You said it was solid. It’s one of your largest practice, and it’s been the growth engine of agency in the last few years. So organic would be great, and if you don’t want to give a precise number, maybe a range, I don’t know, 2.5% to 5% or 5% to 7.5%? And then last question is on the number of shares. It was flat in Q4. Well, it usually goes down by about 1-plus million a quarter. So what happened in terms of number of shares in Q4? Thank you.

[John Wren:]

I’ll let Phil answer some of these. Are you applying for a job? Because some of the detailed questions are probably questions a few employees that actually look at it. We are not in the business of segregating our businesses in a particular market. We haven’t done in the past, but our events business – our main business is Media, Advertising and Public Relations in that market. Events add something to it, but I’m not going to get into the dissection of that for disclosure. So I apologize for that. But what was the second? The – go ahead.

[Julien Roch:]

And then – no, I mean, if you knew that, I just wanted to have an idea of the growth of media in 2019.

[Philip Angelastro:]

I think overall, it wasn’t disproportionately higher or lower than our overall growth rate. I think, if you go through the numbers we’ve been through on the call. You can see Media, Advertising and Healthcare grew better than the overall portfolio, and some of the overall portfolio, namely PR, CRM Execution & Support, in particular, either didn’t grow. So by that, you can include the 3 that did grow or the primary drivers of our growth grew at a little bit higher rate than our overall average rate for the quarter and the year.And I think, each of those businesses had a good year and did well and drove our growth overall. But as far as the specific percentages, I think, we provide quite a bit of information to give you a good sense of that. But I don’t think there’re any dramatic – anything dramatically different about that part of our portfolio.And some of our Media business is actually in like markets such as Brazil and some others are integrated into the advertizing businesses. They aren’t standalone media businesses, so it’s hard to pull out exactly how much of the growth in those markets came from standalone media versus advertizing, because they are integrated.And as far as shares go, in the fourth quarter, I’m not quite sure I follow in detail your observation. But we can go through that after the call. I think certainly we bought back through share repurchases as little bit more in the fourth quarter this year than we did in the prior year. And maybe what you’re seeing has something to do with just the way the year-end averages get complied. And we haven’t seen the effects just yet.

[Julien Roch:]

Oh, is that just the timing, because 219.3 diluted number of shares in Q4 and you had 219.4 in Q4? So it’s just the timing of the average then?

[Philip Angelastro:]

Yes, yeah, you kind of – you will see I think more of that or an acceleration of that effect when you get into 2021as the averages start over.

[Julien Roch:]

Okay, very clear. Thank you very much.

[Philip Angelastro:]

Sure. I think given when the markets open, we probably have time for one more call – one more question.

[Operator:]

Thank you. Our final question then will come from Adrien de Saint Hilaire from BoA. Please go ahead. One moment, please go ahead.

[Adrien de Saint Hilaire:]

I’ll try to be quick. I’ll try and be quick. Thank you very much. So first of all on the Chinese points, you said it was down mid-single-digits. I’m just curious if you have any explanation why it is indeed down mid-single-digits in an economy which is still growing 5% to 6%. Second question is on your expectations around the phasing out of cookies at Google. Do you think that’s bad news in the short-term, good news in the long-run, or maybe the other way around or is that good news in all cases?And then, lastly, about your performance in the Middle East, should we expect some carry over into the first half of 2020 as well? Thank you very much.

[Philip Angelastro:]

I’ll take the China question. I think – our growth this year in China was largely due to some performance challenges. I think we lost a couple of clients. And frankly, as a portfolio, our agencies, with some exceptions, but our agencies didn’t perform as well as they did the year before frankly.I think the current situation presents a very different set of challenges. So until we get some more clarity and so the situation resolves itself, I think our expectations are similar to everybody else is there is just little bit too much uncertainty to have a clear picture as to how it’s going to roll out in China.And in the Middle East, I think we’ve got some good businesses that we expect to continue to grow. But as an overall percentage of Omnicom’s portfolio and Omnicom’s growth, we don’t expect that to be significant or meaningful. But it’s been a nice part of our portfolio and we’ve got some nice businesses over there that have been doing well and we certainly expect them to continue to do well.

[John Wren:]

With respect to your first question regarding cookies, honestly, we’ve been expecting this for some time now. It’s not new news to us. It will make targeting a little bit more challenging than it was in the past. Then it certainly will make Google stronger. But in anticipation of it, that’s why we work so diligently on the creation of Omni and the enhancements that we made to it.In the future, it’s not just going to be the data, it also has a lot to do with the execution, which you actually do with that data and how you process it. Clients, other people have other sources, which we can get access to from first-party data, which can be used to accomplish many of the objectives that were made a little bit easier with cookies.

[Adrien de Saint Hilaire:]

So you don’t expect any impact on your media activities, just to be clear from that news?

[John Wren:]

Very minor. But I expect, because we’ve been adjusting and we’ve been anticipating this for some period of time. There will be changes to everything. What happens today will be different to what happens tomorrow. But we’re not threatened by it. And it makes us more valuable.

[Philip Angelastro:]

Yeah, the more complexity there is in the marketplace, the more clients need our expertise and need us to help them solve some of the challenges that this creates for them, not just for us.

[Adrien de Saint Hilaire:]

Many thanks.

[John Wren:]

Good.

[Philip Angelastro:]

Okay. Thank you everybody for taking the call and for joining us. And have a good rest of the day.

[John Wren:]

Thank you.

[Operator:]

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