宏盟集團 (OMC) 2002 Q1 法說會逐字稿

Good day, lady's and gentlemen. And well to the Omnicom Group conference call. At this time all participants are in a listen-only mode. Later on we will conduct an question and answer session and instructions will follow at that time. As a reminder, this conference call will be recorded. I would like to introduce in...

Randall J. Weisenburger. Thanks for taking the time to listen to our 1st quarter 2002 earnings call. We have to open the conference call with a standard disclaimer. I'm sure all of you are already familiar with this. The -- this call may involve forward-looking statements under the securities law. But actual results could be materially different. And second, to refer you to CR 2001 10-k posted on our web right and generally available that could affect the results. Now with that out of the way. We'll begin the call with brief remarks from John Wren with brief remarks about the state of the industry and our performance. Following John's remarks we'll review our performance in more detail and at the end we'll be happy to take questions. We'll be sure to end the call by 9:15.

Good morning. Our company continued to perform well in our 1st quarter. Our revenue growth of 8.2% was in line with our expectations given the different year-over-year comps that we faced. The biggest challenge in the quarter, the biggest area where we were challenged was in public relations where our revenue was down 9% versus the 1st quarter of last year. The good news about that is that the decline was due almost entirely to a fall-off in spending by technology clients. That spending really was curtailed in the second half of last year and we faced really only one more difficult quarter of year-over-year comps with respect to those clients. Our net new business, which has been the area that is the status of all last year and continues to sustain us today, was in excess of a billion dollars for the 1st quarter. Randy will take you through that in a lot more detail when he gets to speak. At this point, we are staying with the guidance that we gave you in December and in February suggesting that we will do 10% growth for the year. Let me just talk for a minute about what we see in the marketplace. From a clients' perspective, spending has really stabilized. There are quite a number of clients who are really prepared to increase their spending, but no one wants to be first. What the market we believe needs is a catalyst, as -- if we refer back to the last recession, in 1993 P&G came out and once they did all the clients ready to spend actually followed suit. I don't know what the catalyst will be this time, but that seems to be what's required in order to get spending increased and for people to commit to dollars that we're talking to them about at this point. One positive note is that unlike last year, the pre-negotiations surrounding the up-front market are far more positive this year. If clients can get the kinds of deals that they want, maybe that will provide the catalyst. It should help matters in the second half as we go through the balance of the year. With that I'll turn this over to Randy who will take you through the detail, then we'll be available for your questions afterwards.

Hopefully everyone has had a chance to see our earnings release this morning. Along with that release, we have posted to our web site a summary presentation of what will be available on this call. As most of you already know, starting this quarter in compliance with FAS-142 we stopped amortizing goodwill and other intangible assets that had indefinite lives. As a result there was a substantial increase in operating income and margins. Since the substantial portion was not tax deductible, it was a reduction in our reported tax rate. There was also a decrease in the net of the equity income and minority interest line. As a result of these changes, there's an increase in net income and EPS. To make the year-over-year analysis kind of an apples to apples comparison in the earnings release and for this call, we have adjusted the Q1 numbers to reflect the amortization and intangibles with indefinite lives. So the summary of that is a Q1 numbers will be slightly different than reported. Moving on, despite in this quarter and for that matter the first half being up against very strong comps from last year, for those of you that don't remember, our agencies were not significantly hurt until the 3Q and 4Q of last year. We are pleased to report the 1Q was up in both revenues and earnings. For the quarter, the $131 million to 1.7 billion it was an increase of 8.2% over last year and net income for the quarter increased to 128.6 million. A portion of the increase in net income is due to a conversion of the bond issue into equity at the end of 2001. That reduced our reported interest expense, it increased our basic outstanding shares. Adjusting for the conversion, net income growth was approximately 9.7%. Since those notes were already assumed to be converted for purposes of computed diluted earnings per share. The conversion had no impact on our EPS calculations. Therefore diluted earnings for share increased 9.7% to 68 cents per share, up from 62 cents last year. That's 62 cents is obviously adjusted for the goodwill. As a mentioned, despite the very difficult comps from last year, reported revenue growth for the quarter was up a positive [INAUDIBLE]2%. Which due to continued strong growth from net new business performance consisted of 3.7% organic growth with acquisitions adding another -- and foreign exchange which continued to be negative reduced our revenues by 17 1/2 million or 1.1%. On a constant currency basis, revenue growth for the quarter was approximately 9.3%. From the perspective of [INAUDIBLE] earnings, foreign exchange cost shareholders approximately 1 cent per share in the quarter. As for the revenue fix, marketing services accounted for approximately 55% of the revenue. Traditional media advertising ab 45%. Those figures are consistent with last year. Marketing services had total growth in the quarter of 7 1/2%. The additional media advertising had total growth of 9.1%. Breaking down marketing services a bit further, revenue was approximately 30.2% from CRN businesses. 11.8% from our specialty communications. And public relations accounted for 13.1%. As for the respective total growth rates, our CRN businesses were up 14.6% in the quarter. Specialty communications, the largest contributor being health care, continued to perform well with 12.8% growth and public relations, which has clearly been the most severely impacted by the market was down approximately 9.3% year-over-year. Our geographic mix of business in the quarter was 59% U.S. And 41% International. Of which the UK and the Euro mark gets combined for 29.1% of the revenue. In the United States, total revenue growth for the quarter was 14%. That consisted of 6.6% organic growth and 7.4% acquisition growth. For International businesses, organic growth for the quarter was just about flat year-over-year and acquisitions provided 3.3% growth. As I mentioned foreign exchange we made negative, bringing down the International growth by 2 1/2%. The most significant foreign exchange impacts in the quarter came from the UK and the Euro countries, primarily due to their percent of our revenue and also from Japan. The sum of those growth rates brought our International growth to about 1%. Net new business, as John mentioned, remained fairly strong. Our agencies continued to perform quite well. Benefiting significantly, knock on wood, from holding onto their clients. It also appears there has been an increase in the overall level of new account activity. As a result we were able to meet our goal of a billion dollars for the quarter. With a net of 1.23 in. Some of the significant loads in the water was horizon, Saturn. And a couple of the losses were Texaco, Pep Boys and Earthlink. Moving down the income statement, operating margins for the quarter were 13.2%, which after adjusting 2001 for the elimination of good will amoretyization are down about 20 basis points on a comparable basis. While our agencies generally reacted quickly by office to changing market conditions by diversifying their staffing levels and incentive compensation, it's been much more difficult than the current environment to adjust some of the infrastructure costs, technology and real estate lease costs. As a result, our salary and related costs are down year-over-year and our other operating [INAUDIBLE] are up. While with your focused on this point, this is likely to continue through at least the 2nd quarter. Net interest was 1.3 million, down from 20.3 million in the 1st quarter of last year. Down from 14.9 million in the 4th quarter of [INAUDIBLE]. The year-over-year decrease in interest for the quarter was due in part of the 2 1/4% convertible bond issue at the end of 2001. Versus last quarter the decrease was primarily due to strong cash flow and improved working capital management. Our tax rate for the quarter was 36.7%, which again on an adjusted basis was approximately 20 basis point improvement over last year. This obviously continues to be an area of focus and we hope to see further signs of improvement going forward. Finally EPS, as previously mentioned, diluted earnings for the quarter was 68 cents per share, which was an increase of approximately 9.7% from the adjusted 2001 figure of 62 cents. For calculation purposes for the quarter, the weighted average number of shares outstanding for the basic calculation was 186.7 million shares, and for the diluted calculation was approximately 189.5 million shares. For people's models going forward, the fas-142 adjusted diluted EPS figures for 2001 are again 62 cents for Q1, 92 cents for Q2, 61 cents for Q3 and 98 cents for Q4. We'll also shortly a have up on our web site adjusted P&L quarters for 2001. With that I'll ask the operator to open up the call for questions.

Thank you. If you do have a question as at this time, press no. 1. If your question has been answered, please press the pound key. If you do have a question, press the number one. One moment for questions. Our first question is from Lauren Fine of Merrill lynch.

It's Eve calling for in for Lauren. I just had a couple questions. Can you talk about what's going on in your international markets. Organic growth dropped off significantly in the quarter. If you could go through on a country by country basis, that would be helpful and then I have a follow-up.

Sure. Well, the biggest markets affected, Randy has them, I think, were the UK, the Netherlands, and Germany, Latin America. Really there's nothing terribly dramatic that occurred. Most of the new business activity that occurred in the 1:00 quarter and the 4th quarter of last year, was in the domestic area, the U.S., which was kind of improving first. Clients spending in those markets remains flat. They kind of follow what occurs in the U.S. There's. There was a quarter delay. The first one that got shocked after the 3rd quarter of the last year was the UK. It's creeped a little bit into the continent. And people in Europe are spending in Europe is really about the same state as it was in the United States and people are really waiting for signs of recovery in the United States before they can recommit to budgets.

On a toll growth basis, the UK was down about 5%, Germany and France were flat, Netherlands was down about 5%. The balance of Europe was up about 5%. Australia Asia, which is driven by the acquisition of INS was up about 20%. Those are also relatively small numbers. Latin America was down about 20%. Quite a bit driven by negative FX in some of those marquettes and Argentine. It's not a significant fact but has impacts in the region.

How do you see organic growth playing out for the remainder of the year both domestic and international?

We are not really giving guidance for organic growth. Total growth will be 10% for the year. It's too close to call at this point, and I wouldn't want to mislead anyone. We'll keep you posted as things occur. What's driven our organic growth thus far has been new business, when clients restore spending we are prepared for it. It will increase our performance, but that spending really has to occur first.

All right. Then separately, can you just talk about management succession within BBDO and DDB and what you're planning there. I think you have named someone or grooming someone for BBDO, but we are seen insider selling at the top of both of those agencies.

We respect to -- with respect to DDBD, the transition in that management occurred last year, January 1 of 2001. Keith Reinhardt became the Chairman of that company and Ken Case became the CEO of it. He's in his second full year as the CEO and Keith remains as Chairman. This company has a an incredible history for very smooth transitions. I took over from Bruce Crawford over five years ago. Bruce is still with us. Keith Reinhardt and Ken Case are following that same example in what's going on within DDBD-DOM. There are plans, there are candidates, there is -- there will be a transition sometime in the next couple of years within BBDO, dates have not been established and people have not been anointed, but whenever we do get to doing a transition, I fully expect it will follow the patterns that we have followed and established in Omnicom and in DDBD-DOM. With respect to that, that's great. What you have in terms of management, and I haven't looked at what trading there has been, but what you have is you have a management group, I have been the CEO for over five years, that's kind of defined by me being the old man at 50 and everybody younger than me. Then you have all these other folks who had led the company since its formation who remain as Chairman so therefore they remain as reporting entities who are in their mid to late 60s who at this point in their career after holding the stock for 20 years are looking to their estates and trying to balance those out. So I don't think you have a great deal of selling that's going on from any of the current leadership within the company, and it's just people who are just reorganizing their lives who are at retirement age.

Frankly, if you look at the proxies, the people that have been selling some shares, Alan and Keith, one, they have been doing it consistently for a while in estate planning and, two, they still have very significant holdings and percentages of their net worth in the stock.

Thank you. That's really helpful.

It's good that all their options were in the money so they can do that.

All right. Actually I have one more question just on net new business. We have been hearing that new business pitch activity has slowed down. Can you just talk a little bit about that.

Ympz it hasn't slowed down.

Just recently.

I'm not sure you can track it that close to be honest.

It's not a weekly event.

It's also -- I mean it's very multinational with a lot of different agencies doing a lot of different things at a lot of different levels. I would have said that the activity has actually picked up.

Right. Maybe some of the headline type of accounts are not moving junction but there's a lot of activity going on in all of our agencies.

Thanks.

Thank you.

Our next question is from Alexia Quadrani of Bear stearns.

Good morning. John, could you comment a little bit about the outlook in the marketing services area understanding you had difficult comps for another quarter. Would you expect the rebound in marketing services to be coincident with the advertising rebound when it comes?

Absolutely. I read something in the Journal this morning which couldn't be more off-base. What happens is if you -- if public relations had grown in double digits as opposed to declined 9%, you'd find marketing services up at a much greater pace -- at a greater pace with advertising. It's just that one area, and I think if you listen to WPP, they're suffering in that area, but I think their suffering is a little worst than ours and I expect that -- worse than ours and I think that will be present in public releases later this week. Not speaking for them, but I would imagine that's the case. And the good news is, people haven't abandoned public relations. There was a sector associated with dot-coms and all the technology companies which have really curtailed their spending, and we have to let the calendar work on our behalf and cycle through that. Our PR companies are actually winning business and growing in other areas like consumer and health care, and so it's just really gotten to a point where we can identify what the problem is and we can move through it. It's just going to take us a couple months to get totally past it.

Then just a follow-up on the acquisition front, could you comment on the acquisition pipeline, should we expect to see a roughly similar amount of activity in [INAUDIBLE] as we did in [INAUDIBLE].

What we are doing from an acquisition perspective, we have stayed focused on companies who are services our largest clients who complement the services that we have. We have also been looking to geographic extensions of some of our brands in marketplaces where we can do sensible deals to move forward. Every one of those transactions gets evaluated from a client perspective, their profitability and whether or not they fit within the Omnicom family and our style of management. To the extent they do, we are prepared to move forward. To the extent that they don't or don't meet all of our parameters, we don't acquire them. And so there isn't a budget per se which we are trying to achieve or spend or whatever. We are just trying to follow that perspective. Each one of our junior business platforms has a strategy which in addition to organic growth provides for the ability to do acquisitions to supplement that growth and to the extent the right targets are identified, we move forward.

I got something, right now. The pipeline seems pretty full. There's a lot of activity, a lot of discussions, and evaluations that are ongoing. That's generally always the case. The timing of how deals close, that's -- that, as John said, is not really something you can budget.

Lastly on your Saturn win, historically the big three auto companies have been somewhat sensitive to conflict. Can you comment about whether Saturn moved to [INAUDIBLE] is a big concern or do you think the client concerns are loosening a bit.

Omnicom has had a very good history of being able to service clients and I think that clients that are happy with us who are happy with the major brands that service them don't -- aren't really concerned about what other parts of the family are doing. The quality of our creative work and the consistency of that quality, I think puts us in an enviable position, and so I wouldn't -- because others in the industry might have had difficulties in areas, I don't think that necessarily applies as the rule and it certainly doesn't apply to us.

Thank you.

Thank you Alexia.

Thank you. Our next question from Kevin Sullivan of Lehman Brothers.

Good afternoon, guys. I was hoping, John, you could touch on in light of the announcement yesterday one of the Japanese agencies whether or not you have any change in your strategic views of that region especially in light of the inaudible agreement.

I don't know what you're talking about, Kevin.

The announcement yesterday that you guys took an increased stake in one of he Japanese agencies in your network, I was just wondering with the pull [INAUDIBLE] rb-com 3, if you have any change in your strategic view in that region.

Somebody's checking. I don't know what you're read, but you're a little ahead of me on this one. It might be that we bought a couple more shares. Which was just a planned calendarized event of getting the particulars on it, I'll give you what it was.

Do you feel that changes the competitive landscape at all in that area?

Not at all. I now have the press release, so forgive me, this was part of a plan which was agreed several years ago for us to incrementally move up in equity so I have not watched the calendar to when it was happening. What you're referring to just so I don't sound silly, we increased our ownership in INS, which we are the majority shareholder of, from 51% to 61%. That was a scheduled event, an agreement which was reached probably five years ago in terms of us moving to increased ownership in that company. So there was nothing -- there was no change in strategy, no change -- this is not an indication of anything other than just us fulfilling old agreements. In terms of all the rest of it, Japan is a very important market. Japan and the Japanese agencies have not been open to U.S. investments or Western investments, let me put it that way, English either, of -- across the board, at least the larger ones. They try to form alliances and get involved in different ways. Densu's 15% ownership is just that, but we don't -- we have a strategy, a steady strategy, we cooperate with a number of agencies, we are interested in a number of agencies, but that interest has to be mutually shared in order for it to go forward. As of the moment there has been no change in that environment.

Thanks.

Thank you. Our next question is from Fred of JP Morgan.

Good morning. It's [INAUDIBLE]. Couple questions. Could you talk just about your domestic numbers was fairly strong and much stronger than what we expected from your competitors. What area did you expect to see strength. Can you talk about the categories in traditional advertising in the U.S. where you're seeing strength and if you could give us a sense of where your debt levels ended the quarters and where you expect to see them at the end of the year.

The reason for our strength domestically really is due to a strategy which we have talked about before on these conference calls and in conferences, which is our strategy to get greater share of our largest client relationships and we have a number of programs in place as well as with the activities are within the individual subsidiaries to try to provide additional services to those clients and to try to increase our importance to them. I think that, more than any reason, is driving some of our success in the United States. That's a program that's multi year, multi task. I think we have used numbers in the past if we got 100% of our top 25 clients, we could probably increase our revenues by 2 1/2 million dollars. That's how much we have left on the table with our closest and largest relationships. So we are actively engaged in trying to penetrate those clients and extend those relationships. There has been some good news. I mean some of the consumer companies that we have are spending money, and investing more. The car companies are spending -- at least our car companies are spending slightly more year-over-year in terms of money spent with us. So our strategy is working. It's not a game where you're throwing hail mary passes, it's more a game where it's 3 yards a cloud of dust and get up and try to make the next 1st down. Nonetheless it's working and penetrated pretty deeply into the psyche's of the management of all of the major U.S. subsidiaries in terms of what is expected of them. They're out trying to accomplish those tasks.

Is it working better in the U.S. Was it somewhat unexpected how strong your U.S. growth was than your International?

We refer to in other calls as a catalyst program, which is a corporate program to drive this, which has been in place for two years. The catalyst program is functioning primarily in the United States. Only in the 1st quarter of this year did we roll it out into the UK and we have not rolled it out into continental Europe yet. We wanted the success of the program domestically to be where we had case studies where we could take them to other parts of the world and demonstrate this really works and improves growth. So that one program to the extent that it's contributing has really been a U.S. program which is just for the first time being brought outside the United States. That is contributing in large part to what's going on.

Thank you. Can you give me a net debt number and where you think you'll be at the end of this year in interest expense for this quarter?

The interest expense for Q1 was $1.3 million. As far as the net debt at year-end goes, I'm not sure. I would say up slightly from last year. Basically we focus more on our average daily balances because the cash flows move around quite a bit. As far as year-over-year interest expense goes, again, I think we'll be down substantially from prior year for a couple reasons. One is the conversion of the 2 1/4% convert. Second, due to the zero that we issued in March. Which basically takes out or reduces our funding from commercial paper. Commercial paper rates are fairly low. The impact this year will not be as significant as it may be in the future if rates start to rise.

What was net debt at the end of the quarter?

I don't know. I don't have the number finalized yet.

Thank you.

Thank you. Our next question is from Bill Warmington of SunTrust.

Good morning, everyone. Question for you on the net new business figure of just over a billion dollars, and what I'm trying to do is reconcile the figure with some of the other figures that I have seen out there and I'm specifically referencing the pile -- the data that Skip pile puts together. I know there's a lot of debate in terms of what's captured and what's not captured, I think what he tries to do is present something on a consistent basis. If you look at his figures from the 1st quarter down to the 4th quarter from Q2. And you are also seeing the net new business wins going down from a billion 3 in the 4th quarter and 3rd quarter down to 900 million in the 1st quarter. I'm trying to reconcile. You guys have been consistent of coming in at a billion plus for a number of quarters in a row. I'm trying to reconcile that with what looks like a down tech in the market activity in the 1st quarter.

It basically shows you that what's not being measured or not being captured is actually quite significant. Most of what gets captured in these studies, and there's a few of them that are out there, are advertising spending and on a size basis, they are basically picking up predominantly U.S. and multi national brands. They are not picking up PR and a lot of the marketing service areas, project work and Diabetes management work, not picking up the smaller countries. It actually shows you -- you see it from the mix of the business how much of our business is that and how much of our business even on the advertising side that's international. On a percentage basis, I think it's very difficult to draw conclusions when there's such a large piece of the pie not being measured. And the potential volatility in the numbers, given they're picking up advertising on a billings basis, we picked up much of our marketing services on a revenue basis. There's just too many missing links.

I mean when you look at our business, there are only 20% of our revenues coming from U.S. based media advertising. That has hardly been that's the area, those are the companies that love to put out press releases announcing the movements of what's going on. When you get into all the marketing services and get into advertising outside of the United States, which is where our advertising business is dominant, there's a revenue mix. It's just there. Everybody tries to capture this, it's impossible to capture it. We are in over 100 countries, and so what we are reporting is the cumulative activity of 1800 offices in 100 countries around the world, not just what's going on in New York and Chicago and L.A..

Well, last question for you on the credit card marketing side. There's been a lot of talk about the Equifax reported last week increased demand from the banks to do some additional credit card marketing. You've had a number of the larger banks come out and talk about doing that the same. I'm curious if that has any potential impact for you guys, whether you're seeing, but it's not going to mean much?

We service two of the largest credit card companies in the United States, and a company we don't service, my brother is the Vice-Chairman of MBNA. I know what he's spending. [INAUDIBLE] single sector is can move the needle just from incremental spending in that sector. And that's up and down. And so -- so.

It's always positive when accounts -- when sectors are improving, it's always negative when sectors aren't improving, but we have tried to build the business in such a balanced way that generally, there's enough things that are up if our businesses are focused on the quality of their service and growing their client base, that they kind of overtake the downs that are out there.

I just wanted to confirm that you were seeing a pick-up there. Is that consistent what with what you're seeing? Have they started to pull the trigger on the actual spending or just thinking about it?

I think they're thinking about it now. I don't -- certainly in the 1st quarter we didn't see any dramatic evidence of increased spending.

Also take into mind that at our -- from our revenue standpoint much of our revenues, the vast majority is now fee based, not necessarily their volume of spending.

Right, right.

If you're worried about the media companies, they might get a more positive impact quickly, but on a fee basis the way we try to structure most of our [INAUDIBLE], it's a much more stable environment.

Is your percentage of revenue coming off of commission still less than 10%?

In aggregate?

In aggregate.

That's probably right.

Thank you very much.

I think we have maybe time for one more call, it's already almost 9:20, we'll try to make this fast.

The last question is from Katherine Kim from Warburg.

One quick question, if you could just describe what the incentives are for the catalyst program and what -- in terms of reaching that 2 billion or 2.5 billion in consolidated business, if you get all the 100% of the 25 top clients, would that require any acquisitions or do you have the infrastructure in place to meet those targets.

In terms of the incentives there, specifically targeted against people doing certain things on certain accounts. So there's 200 different -- incentive programs, and I wouldn't -- there's obviously incentive enough for them to do things. I wouldn't want to lay the program out in great detail for my competitors who will also pick this call up after this is done. So it's working and it's working pretty well, so I'll just have to leave that at that. With respect to our acquisition strategy is what I stated before. We are looking for companies that complement the services that we already provide with the same quality criteria of the companies that are already part of the group.

With respect to actually achieving the 2 1/2 billion of incremental revenues from the top 20 or 25 accounts, when we have used that example, that's not a realistic goal in anything like the near term. Many of those accounts are unlikely to consolidate all of their spending with one company like Omnicom, at least in the near future, but it shows you the magnitude of the marketplace that's out there across all of the lines of business we are in. The 2 1/2 billion figure is with our top 25 accounts. Obviously we have many, many more accounts. And we are probably with less penetration in those accounts than we are with the top 25.

Great. Thanks very much.

Thank you all very much and thanks, everyone, for taking the time to listen to the call.

This concludes today's conference. Thank you for your participation. You may disconnect at this type. Have a good day.