Omnicom Group Q3 2023 Earnings Call Transcript

Operator

Good afternoon, and welcome to the Omnicom Third Quarter 2023 Earnings Release Conference Call. [Operator Instructions]

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

Senior Vice President-Investor Relations at Omnicom Group

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 An archived version will be available when today's call concludes.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 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 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 materials. 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 up the line up for your questions.

I'll now hand the call over to John.

John Wren

Chairman and Chief Executive Officer at Omnicom Group

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 a $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 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 has been with BBDO for 27 years. Guy Marks, previously Omnicom Media Group's CEO of EMEA was named with 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 U.K. 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 continue 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've broadened 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, top public affairs from and FP1 Strategies, a leading political consultancy. The Beltway-based acquisitions further solidify our 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 months 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 with 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 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?

Philip Angelastro

Executive Vice President and Chief Financial Officer at Omnicom Group

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 3. 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 is 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 4. As mentioned, organic growth in the third quarter was 3.3%, the impact from foreign currency translation reverse 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 was 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 5 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 U.K., which offset negative growth in the U.S. and the Middle East. Execution and support declined 3.6% due primarily to declines in our merchandising business and 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 the slowing of project spend in the quarter. We expect a similar headwind related to 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 6, 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 7. Compared to the third quarter 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 of those smaller in telecom.

Now let's turn to Slide 8, 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 are billed to 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 9, 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 9, operating income margin was 14.8% compared to 14.9% in 2022. Our EBITDA margin in Q3 is 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 will be close to flat for the year as it usually is. Regarding our uses of cash, we used $424 million of cash, pay dividends to common shareholders and another $47 million for dividends to non- controlling interest shareholders. Our capital expenditures of $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 U.S. 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 30,, 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 in the macro environment clears.

Operator, please open the lines up for questions and answers. Thank you.