Omnicom Group Inc. (NYSE:OMC) Q3 2023 Earnings Call Transcript

Omnicom Group Inc. (NYSE:OMC) Q3 2023 Earnings Call Transcript October 17, 2023

Omnicom Group Inc. reports earnings inline with expectations. Reported EPS is $1.86 EPS, expectations were $1.86.

Operator: Good afternoon and welcome to the Omnicom Third Quarter 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 third quarter 2023 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President, and Chief Financial Officer. On our website, omnicomgroup.com, we’ve posted a press release along with 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 An archived version will be available when today’s call concludes.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 we start, I’d like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we’ve 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.

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Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2022 Form 10-K. During the course of today’s call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation. We will begin the call with an overview of our business from John and then Phil will review our financial results for the quarter, and after our prepared remarks, we will open the line up for your questions. I’ll now hand the call over to John

John Wren: Thank you, Greg. Good afternoon, everyone, and thank you for joining us today for our third quarter results. Before we discuss the quarter, I want to touch on something that is top of mind for many of us. The horrific attacks on Israel and the subsequent war have been devastating to witness. We’ve seen a complete lack of humanity displayed and that hate has no place in this world. We mourn the innocent lives lost and our thoughts remain with all those personally impacted. Turning to our results. Organic growth was 3.3% for the quarter, which is in line with our expectations. Operating income margin was 15.7% and diluted earnings per share for the quarter was $1.86, up 5.1% versus the comparable period in 2022. Our results for the quarter keep us on pace to maintain our full year organic growth target of 3.5% to 5% and our operating margin target of 15% to 15.4%.

Phil will cover our results in more detail during his remarks. Our cash flow continues to support our primary uses of cash, dividends, acquisitions, and share repurchases and our liquidity and our balance sheet remain very strong. During the quarter, we continue to make solid progress on our key strategic priorities to position Omnicom for sustainable and profitable long-term growth. Starting on the talent front, we made several key leadership changes as part of our succession planning. Alex Lubar was named Global CEO of DDB worldwide. Alex served as the Global President and Chief Operating Officer of DDB and succeeds Marty O’Halloran who will become Chairman. In addition, Glen Lomas, currently CEO of DDB EMEA has been elevated to Global President and Chief Operating Officer in partnership with Alex.

Nancy Reyes is moving from her post as CEO of TBWA New York to become CEO of the Americas at BBDO. Nancy succeeds St. John Walshe, who’s been with BBDO for 27 years. Guy Marks, previously Omnicom Media Group’s CEO of EMEA, was named the CEO of PHD Worldwide. Guy succeeds Philippa Brown, who is leaving the media industry after nearly four decades. Dan Clays, who led Omnicom’s Media Group UK as CEO, will fill the CEO of OMG EMEA’s position. I want to congratulate Alex, Glen, Nancy, Guy, and Dan and extend my gratitude to Marty, St. John, and Philippa for their many years of service to Omnicom. This series of announcements is a testament to our emphasis on succession planning and ensuring our networks and practice areas have the right teams to lead them into the future.

During the quarter, we continued building our Generative AI capabilities with the rollout of Omni Assist, our proprietary version of ChatGPT that enhances every task within Omni. Omni Assist is just one example of how we are improving our capabilities and efficiency through Generative AI. We continue assessing how Generative AI will affect the way we work across the organization and preparing ourselves for the future. We broaden our capabilities through strategic acquisitions in high growth areas in the quarter. In July, Omnicom Media Group acquired Outpromo and Global Shopper, two of Brazil’s leading connected commerce and retail media agencies. These acquisitions create a dedicated end-to-end e-commerce and retail media performance agency in the Brazilian market for Omnicom Media Group.

OPRG strengthen its services through the acquisition of PLUS Communications, a top public affairs firm, and FP1 Strategies, a leading political consultancy. The Beltway-based acquisitions further solidify OPRG’s leadership position and portfolio in public affairs and crisis communications, particularly in the healthcare and technology. We recently announced the formation of Omnicom Advertising Services India comprised of Omnicom’s creative agencies located in India, BBDO, DDB, and TBWA. Omnicom Advertising Services will be able to offer the best creative capabilities and talent for our clients across the group. The formation of Omnicom Advertising Services India follows the launch of our global delivery services and centers of excellence in India, which we announced earlier this year.

Today, we have over 4,000 people in global centers of excellence in four major cities supporting our clients and agencies around the world. We are rapidly scaling the operations and expect to triple the size over the next 24 to 36 months. Our centers of excellence are helping our company transform from within, improving our client offerings and providing operating efficiencies. While we position Omnicom for the long-term, we’re driving growth through significant new business wins. Some of these wins this quarter include Omnicom Media Group won the Global Media Business for Uber and HSBC. Beiersdorf selected OMD as its media agency of record for Europe and North America. On the creative front, adam&eveDDB picked up Amazon’s creative business in Europe.

Omnicom Health Group and our advertising collective also continue to grow their relationship with Novartis, expanding in oncology and winning significantly in pharma, including their renal portfolio. Finally, TBWA was awarded the creative duties for Telstra, Australia’s largest mobile network. Overall, we are pleased with our financial results and our progress on our key strategic initiatives. While we remain optimistic entering the fourth quarter, as in past years, our performance in the fourth quarter will be impacted by the amount of year-end project spend that our clients execute and that our agencies are successful capturing. We continue to plan cautiously, given the uncertainties in the macroeconomic and geopolitical environment, including high interest rates, oil prices, instability due to the wars in Ukraine and Israel, and the continuing risk of a recession in the United States.

I will now turn the call over to Phil for a closer look at our financial results. Phil?

Phil Angelastro: Thanks, John. As John said, our business is solid despite the challenges of the current macroeconomic environment. Before we open the call up for questions and answers, let’s go through our third quarter results in more detail. Starting with the summary income statement for the second quarter on slide three. Reported revenue increased by 3.9% and organic growth was 3.3%. Reported operating income increased by 2.7% to $560.8 million and the related margin was 15.7%. Net interest expense was $38.3 million for the quarter, an increase of $9.2 million compared to the third quarter of 2022, due in part to lower interest income on cash and short-term investments. Q4, we expect that, compared to the prior year, net interest expense will experience a similar increase.

Our reported income tax rate was 26%. This was lower than our 27% estimate from July due to a reduction in tax expense resulting from the vesting of share-based compensation. For the fourth quarter, we estimate our tax rate will be 27%. Reported net income in Q3 increased by 2% and diluted earnings per share was up 5.1%, driven by both higher net income and by lower shares outstanding, resulting from share repurchases. Let’s turn to revenue on slide four. As mentioned, organic growth in the third quarter was 3.3%. The impact from foreign currency translation reversed course in the third quarter, increasing reported revenue by 1.7%. If rates stay where they are currently, we estimate the impact of foreign currency translation will be a benefit of approximately 0.5% for Q4 and a reduction of approximately 0.5% for the year.

The impact of acquisition and disposition revenue is negative 1.1%, primarily reflecting the sale in Q2 of our research businesses. We expect a reduction of 75 basis points for the fourth quarter and expect that the recent acquisitions will result in an increase in reported acquisition and disposition revenue next year. As John discussed, our organic growth outlook for the year remains unchanged at 3.5% with a stretch target of 5%, which still factors in some uncertainty about the level of year-end incremental marketing spend and project work that we expect our agencies will be successfully capturing in the fourth quarter. Now let’s turn to slide five to review our organic revenue growth by discipline. During the quarter, advertising media posted 6.1% growth, its strongest this year, driven by continued strength in our media business globally.

Precision marketing grew 4.3%. Solid performance given the comparison to the 16.2% growth that experienced in Q3 of ’22 and the challenging backdrop of certain of their technology and telecom clients that we discussed last quarter. Commerce and Branding declined by 1.7% driven by reductions at our shopper marketing agencies. Experiential grew 9.2%, led by Asia, Europe, and the UK, which offset negative growth in the US and the Middle East. Execution and Support declined 3.6% due primarily to declines in our merchandising business. The Public Relations was down 5.5%, reflecting difficult comps against the 12.6% growth we delivered in Q3 of 2022. Approximately half of the reduction relates to less revenue connected to the 2022 election cycle and the balance was due to a slowing of project spend in the quarter.

We expect a similar headwind related to a reduction in revenue in Q4 compared to the benefit from the election cycle in Q4 of 2022. Finally, Healthcare grew 3.8% with good momentum at several large clients. Turning to slide six, we saw growth across our larger regions offset by a decline in Canada as well as a decline in the Middle East and Africa, which grew by 12.2% in Q3 of 2022, caused in part by the cyclicality in Experiential. Looking at the year-to-date revenue by industry sector on slide seven. Compared to the third quarter of last year, we had higher relative weights in two of our larger categories, food and beverage and automotive and, as expected, a lower relative weight in technology and a reduction, although smaller, in telecom.

Now let’s turn to slide eight where you can see good progress on our expenses year-over-year. Salary and related service costs were down as a percentage of revenue year-over-year driven by our repositioning actions and through changes in our global employee mix. Third-party service costs increased in connection with growth in our revenues. These costs include third-party supplier costs when we act as principal in providing services to our clients. They are an integral part of our service offering to our clients, and we generate profit on them. Third-party incidental costs increased due to an increase in client-related travel and incidental out-of-pocket costs that have billed the clients directly at our cost at no profit. Occupancy and other costs were helped by reductions in our real estate portfolio in the first quarter of 2023.

Reductions in rent expense were offset partially by an increase in operating expenses from higher levels of in-office work globally. SG&A expenses were up a bit, primarily due to higher professional fees related to the acquisitions we recently completed. Turning to slide nine. Operating income in Q3 was up 2.7% on a reported basis, and the related margin was 15.7%, down slightly as expected from 15.9% in the third quarter of 2022. For the full year, we remain comfortable with the expected operating margin range of between 15% and 15.4%. On a nine-month year-to-date non-GAAP adjusted basis, as presented here on slide nine, operating income margin was 14.8% compared to 14.9% in 2022. Our EBITDA margin in Q3 was 16.2%, also down slightly from 16.4% in the third quarter of 2022.

On a nine-month year-to-date non-GAAP adjusted basis, our EBITDA margin was 15.3% compared to 15.5% in 2022. Slide 10 is our cash flow performance for the first nine months of the year. We define free cash flow as net cash provided by operating activities, excluding changes in working capital. Free cash flow for the third quarter of 2023 was $1.3 billion, an increase of 9.4% from last year. We continue to expect changes in working capital to be close to flat for the year as it usually is. Regarding our uses of cash, we used $424 million of cash to pay dividends to common shareholders and another $47 million for dividends to non-controlling interest shareholders. Our capital expenditures were $64 million, similar to last year. Total acquisition payments were $202 million.

And our stock repurchase activity, net of proceeds from stock plans, was $530 million year-to-date. Most of this took place in the first half of the year. Slide 11 is a summary of our credit, liquidity and debt maturities. At the end of the third 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 US commercial paper program, remains undrawn. And our cash equivalents and short-term investments were $2.8 billion. Our next debt maturity is not until November of 2024. Slide 12 presents our historical returns on two important performance metrics for the 12 months ended September 30th, 2023.

Omnicom’s return on invested capital was 23%, and return on equity was 47%. These metrics continue to be an excellent indicator of our conservative capital structure and the health of our business. In closing, despite a challenging macro environment, we’re pleased with our financial results and our year-to-date organic growth of 4%. We believe we are positioned very well for strong growth in the future when the caution on the macro environment clears. Operator, please open the lines up for questions and answers. Thank you.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Benjamin Swinburne from Morgan Stanley. Please go ahead.

Benjamin Swinburne: Thank you. Good afternoon. John, I guess I’ll ask you the standard fourth quarter question around the macro and just trying to parse your words a little bit and understanding whether you’re feeling that the caution that you guys referenced today has increased from earlier this year. Obviously there’s a lot of things happening in the world that would necessarily explain that. But I’m just wondering if you could add a little more color on how clients are feeling about Q4 and looking into next year. And then I’ll just ask my follow-up, maybe for Phil or whoever wants to take it. Is it fair to call the tech sector a clear and sort of different headwind to sort of the overall business for Omnicom? I noticed, I think year-to-date, that vertical was down 300 basis points year-to-year.

It’s been a big theme across the industry sort of the year of efficiency. I’m just wondering if you think that’s a fair way to think about what we’re seeing in the business in 2023.

John Wren: I do believe — I can probably go back 21 years where, at this point in the year, I’m saying it’s very similar, if not the same thing. A very large part of the project work that occurs, which adds to our growth or doesn’t provide our growth, comes from project spend and clients doing things that they’ve hesitated to do or pushed back throughout the year. At this point, it’s not a lot different than in past years in that we won’t have clarity until probably Thanksgiving or thereabouts. And you’re correct in what you said, there seems to be a lot more going on as we’re entering this quarter, as we’re going through it. We were already facing Hollywood strike, the auto strike, although that doesn’t really impact us as much as it may others and now what’s going on in the Middle East and Ukraine continues as well.

But so none of these are great signs. And it depends on what the headlines are in the newspapers every day, which dictate some of the spend that occurs or doesn’t occur. So our people are very experienced at this. In those 20-plus years, we’ve only had two years where a significant part of the spend didn’t actually come through. And both of those were around recessions in the 2008 and 2001 time frames. The rest of the times, it’s eked out. Although some years, you feel a little bit more confident about it because there aren’t all these macroeconomic and geopolitical issues occurring. So we’re — having said that, and you’re certainly aware of it, as I look past the quarter and past this project work to next year, with all the new business wins we’ve recently had and some of the signals that we’re getting, I’m very confident, I’ll say, confident — about our performance for ’24 because I think we have the right products and we certainly have expanded who our clients are.

So some of those wins that I announced, we will not enjoy really any revenue in the fourth quarter. That revenue principally start January 1st, but it’s a good tailwind to have.

Phil Angelastro: Yes. I’d certainly echo John’s comments as far as the Q4 outlook and the very typical process we go through to capture as much of that project spend as we can in the fourth quarter, agency by agency, all across the world. Regarding your tech question, Ben, I think from our perspective, given relative comps, we don’t really see the tech headwinds as significantly different than the broader macro at this point in time, now that we’re through nine months of 2023. Maybe they close out the year not as strong as they did last year as far as spending, but at some point in the near future, we don’t see this as a permanent decline. We think they’re going to come back and invest in their brands and begin to spend at a higher level at some point in the near future.

John Wren: Yes. The only point I would add to what Phil’s comments were is most of that decline is a decline with existing clients. So it’s not because of client loss. So as their products get released into the marketplace and they get through whatever problems they’ve adjusted to during 2023, we’re still very confident about this sector.

Benjamin Swinburne: Sure. Thanks, John. Thanks, Phil.

John Wren: Sure.

Operator: Our next question comes from the line of Steven Cahall with Wells Fargo. Please go ahead.

Steven Cahall: Thank you. So John, when you think about the trends this year, it seems like tech and telco has been a headwind and maybe the overall macro and geopolitical environment that you talked about has cast some additional uncertainty, more recently. And then I think you have new business and maybe M&A as tailwinds. So heading into next year where a lot of your clients are probably in their budget cycles now, do you feel like it’s setting up for a more challenging industry backdrop? Or do you think that those tailwinds you have or the AI investments that you’ve been making can lead you to have some acceleration as you move into next year? That’s the first one. And then second, maybe for John or for Phil, I think you last raised the dividend in February 2021.

Your dividend then was pretty competitive versus the rate environment. Obviously, the rate environment has changed a lot since then. So when you think about recommendations to the Board about capital allocation, how are you thinking about what the right level of the dividend should be and whether this is an environment that you feel comfortable growing it? Thank you.

John Wren: To answer your first question, we’re not quite ready to give you guidance for ’24 just yet because our people are out doing a bottoms-up plan, which they won’t present to us for another six or seven weeks, and then that gets tweaked throughout the balance of the year. But with the experiences that I’ve had, with the new business wins that we’ve enjoyed and the places where we faced headwinds this year, we’re set up very well to have a very successful 2024. And that’s what I anticipate to see when we actually get that bottoms-up review back from our companies. So I’m confident and I don’t see any significant adjustments that we have to make to our portfolio, which, in and of itself, is very flexible, to service those client needs and enjoy the growth that’s associated with it. Do you want to take the second question? Or I can do the dividend, too.

Phil Angelastro: Yes, go ahead.