宏盟集團 (OMC) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Omnicom Group teleconference at all. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. If you wish to ask a question at that time, you will need to press one on your touch-tone phone. You will hear a tone indicating you have been placed in queue and you may remove yourself from queue at any time by pressing the pound key. As a reminder, this teleconference is being recorded. I will now turn the call over to the executive vice-president and Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger.

Thank you and thank everyone for taking the time to listen to our fourth quarter 2002 conference call. We hope everyone has had a chance to review our earnings release. We posted to our Web site both a press release and a slide presentation covering the information we will present this morning. This call is also archived on the Web site. We will begin with remarks from John Wren regarding our earnings and the industry. We will review our performance in more detail and at the end John and I will be happy to take questions. We will plan to end the call before the market opens at 930.

Good morning. 2002 was a very challenging year on many fronts, but the team at Omnicom and our subsidiaries significantly out performed the industry and met our opens of continued growth. Despite a difficult environment we addressed soft spots and took advantage of opportunities that became available to us. Our operating margins although stressed by economic conditions and the efforts required to adjust to the environment have remain. We performed exactly as planned. In terms of outlook, while we are cautious because of the outcome because of growing political concerns, we are bullish, more than anyone in the industry. We have the best balance of business, many of the best agencies and the high efs level of creative talent and outstanding roster of clients. While we still face adjustments in public relations in places like Italy it Germany and Brazil. We business continues to perform well, especially in the U.S. market.

Our strategy, which has been our strategy for the past several years of focusing on the top 250 clients and our continued investment in the training and development of our people and the continued investment in the hiring of the best talent in the industry I believe will allow us to grow and to win new business at a consistent pace. But before I turn the call back to Randy, I want to take this owe indication to thank the employees of Omnicom for their loyalty and outstanding performance this year.

Thanks, John. You never know the quality of an organization or business model until it has been stress tested. I certainly feel at this point we have been well tested. It is gratifying to see how well the organization performed in the market conditions we faced this past year. As a result of that and the hard work of our agencies, I am able to say once again we are pleased to be able to report that the fourth quarter was Omnicom's 46th consecutive quarter and 2002 was the 16th consecutive year of year-over-year revenue growth. In summary, revenue increased 148 mil to 2.119 billion,000,000,000. An increase of seven and a half over next year. 8.7% net income to 201.5 million. Revenue increased 9.4 percent to 7.536 billion net income increased to 643.5 million. Diluted earnings per share for the quarter increased 10 percent to $1.08, up from 98 cents last year and full year EPS increased 10 percent to $3.44 per share, up from are 3.13 last year.

All of the numbers in this presentation for 2001 have been adjusted to eliminate the amortization of good will. So they are on a like to like basis and vary slightly from what was reported Analyzing the various components of the revenue performance. Organic growth totaled 34.6 million, 1.7 percent of our revenue growth. For the year, organic growth totaled 193.1 million. That was 2.8 percent of our growth. Incremental revenues in the quarter from acquisitions totaled 52.7 million, adding 2.7% growth and for the full year, acquisitions added 362.5 million or 5.3% growth. For the third consecutive quarter, foreign exchange had a positive impact on our reported revenue. This quarter, the impact was $61 million or about 3.1%. For the full year, had an impact of 91.3 million. Positive FX impact after the quarter at the end of the year was the result of the weakening of the U.S. dollar versus the British pound and the Euro.

As for our business mix in the quarter, marketing services accounted for approximately 56.2 percent of our revenue and traditional media advertising 43.8 %. The full year mix was basically in line. As for the relative growth rates, marketing services increased 5.5 percent in the quarter and was up 9.7% year-to-date. Traditional media advertising total growth of 10.2 percent in the quarter and was up 9% year-to-date. The breakdown of our business within marketing services is approximately 33 and a half percent C R M, 12% specialty communications and public relations was 10.7%. For the full year CRM 32.1, specialty 12.2% and public relations 12.2% as well. As for the respective total growth rates, C R M remained steady for us, increasing 8.7 percent in the quarter and 14.2% year-to-date.

Within this category, our direct marketing and promotional marketing businesses performed very well. Our brand consulting businesses struggled due to the slow down in new product introductions and the somewhat slower M and A market. Specialty communications increased 14.4 percent in the quarter and 17.6 percent for the year. Driven by the strong performance of our health care agencies, offset somewhat by weak conditions in the recruitment advertising and financial services sector. Finally, public relations, which continues to be our most difficult sector was down 10.4 percent in the quarter and 6.2% for the full year. Our geographic mix of business in the quarter was 54.4 percent U.S. and 45.6% International. That compares to 56.9 percent U.S. and 43.1% full year International for the full year.

Our U.S. business was stronger than our International business in the quarter on a real basis or constant currency basis. Due to the weakening of the U.S. dollar versus the Euro and the British pound, the mix shifted towards the International business. The UK and Euro user Europe markets come find for 31.3% and 30.2 percent of our revenue for the quarter and full year respectively. For growth rates in the United States, total revenue growth in the quarter was 89.5 million or 8.4%. Incremental revenue from acquisitions was 22.7 million of that Oregon organic growth was the remaining 66.8 million. For the full year total revenue growth in the U.S. was 567.6 million. That's up 15.3%. Incremental revenue from acquisitions totaled 269.1 million organic growth 298.5 million. On the International front revenue for the quarter had total reported growth of six and a half percent or 58.8 million. That consists of negative organic being a negative 32.2 million offset by incremental acquisition revenues of 30 million and positive FX impact of 61 million.

For the full year International revenue increased a total of 79.3 million or two and a half percent. That consists of negative organic growth of 105.4 million again offset by acquisition revenue of 93.4 million positive FX of 91.3 million. On the new business front, net new business wins in the quarter totaled 1.1 billion bringing the full year figure to just over 4.2 billion. The significant win wins in the quarter included Sony, which is a media which is business. I saw that was reported by a few people at 500 million. Keep in mind on the media front we divide that number by four. So for our figures, that's 125 million. Siemens at 25 million. Cardinal Health 15. Walkers, part of quake (ph), 23 million. Pre-vast id, fee medical. Consolidated 12. AA the auto club up $37m. Losses included Gillette's media, Novell, and American Isuzu.

Moving down the P&L to operating income. For the quarter, $333.4m annual (ph) operating margin was 15.7%. That was down about 100 basis points from last year. Somewhat in line with the third quarter. For the full year, operating income was 1.141 billion. Operating margin of 14.7 percent which is down about 70 basis points from last year. Analyzing the margin a little bit, on a dollar basis the year-over-year decline in margins for the full year represents approximately $59 million. The prime arrest contributors to this variance are increased severance and related costs, increased professional fees, increased cost costs due to the under utilized or less than optimal utilized structures and we estimate $10 million or 15 basis points of the decline is due to changes in our mix of business.

While we are not happy with the decline in margins we feel our agencies in general have done a did job of getting cost structures in line with changes in the business level levels. However, we do expect that given the current economic conditions in parts of Europe there may be, need t fob another round of cost actions taken in the last half of this year. Last year we limbed the actions taken across Europe because of the high severance in those markets. Net interest for the quarter was 7.7 million approximately. That's down from 14.9 million in the fourth quarter of last year. Full year net interest expense was 30.5 million, down from 72.8 million last year. The year-over-year decrease in interest was due in part to the conversion to equity of our two and a quarter convertible bond issue at the end of 2001. The benefit of the new convertible bond issue generally lower short-term interest rates and continued improvements in carve management.

On the tax front, the scene where (ph) we continue to make progress. Tax rate for the quarter was 32%. That brought the full year rate down to 35%. That's about 190 basis points improvement over last year. The reduction in our tax rate this year reflects the realization of some of the International and other tax planning initiatives that we have implemented over the last several years. This is an area that we've discussed in the past and an area that we continue to focus on. On a going forward basis we expect that further improvements from our current levels will be slower and more difficult. Finally, EPS as previously mentioned diluted earnings for the quarter was $1.08 a share. A 10% increase from a comparable 98 cents last year. For the full year EPS was $3.44, up 10 percent from a comparable $3.13 last year. As I mentioned before the 2001 figures have been adjusted to reflect elimination of good will amortization. The actual reported figures for EPS in 2001 were 87 cents for the quarter and $2.70 for the year. For the quarter, the weighted average number of shares outstanding for the diluted calculation was approximately 186.9 million. And for the full year the number was approximately 187.6 million. With that, I'll go back to the operator and open up the call for questions.

Thank you. Ladies and gentlemen, once again if you wish to ask a question, please press the one on your touch-tone phone. You will hear a tone indicating you have been placed in Q queue and you may remove yourself from queue at any time by pressing the pound key. If you are using a speaker phone, press pick up the hand set before pressing the number. If you have a question or comment, please press the one on your touch-tone phone at this time. The first line we'll open is William Bird of Salomon Smith Barney. Please go ahead.

Hi, nice quarter. I wonder if you can comment on your margin expectation for '03 and I was wondering also if you could give a point of view on Europe and the prospects for recovery. Thanks.

In terms of our margins, Bill, we continue to monitor them and manage them to what we feel is the optimal level. As Randy mentioned and one question ties into another. The businesses which continue to face some stress are public relations, although that's moderating quite a bit. Germany, which the economy in Germany is not very strong. And to a lesser extent, although I believe we are past most of it, Brazil. Those are probably the three spots within the vast group that are most challenged.

When you get into Europe, because the social laws, the costs of severing people tend to be very high. And the business decision you are making is a projection of how long the decline is going to continue versus what your staffing level is. That is a fairly complex decision. When you make a decision to sever people, it tends to be fewer people but more expensive. As we continue to manage our business for the reality of what is happening market by market and business unit by business unit, it is hard to give you an exact prediction as to what our margins are. I would say that if you look at our margins and our margin performance, especially, during these past 36 months, which has been the moats difficult time the industry has ever been in, we still have by far the highest margins of anybody in the industry and we are focused on that.

One other thing which again is near term versus long-term. There have been press reports and you've seen some of this. We have been taking advantage of the marketplace to hire talent that I believe is exceptional talent that will really add to our continued success in the United States and especially more recently in Germany. We are making investments because we have a more positive long-term outlook. We are managing the business for the long run. We are cognizant and aware of optimizing our margins, but that's not done on a quarter to quarter basis. That's done for what we believe the continued relentlessness (ph) of the business is going to be. And in terms of Europe, as I mentioned, Germany still remains the softest spot.

To a lesser extent France. The rest of the - excuse me, the Netherlands is a little bit soft as well. The rest of the market in Europe seems to be very stable. And we expect that while there is gee owe political concerns which we hope will get solved in the near term, it is hard to make exact predictions. We are far more bullish about what comes after that in terms of hopefully the later part of this year and going into the next. So that's the best I can answer at the moment.

Just as a follow on, could you comment on how the geopolitical concerns are affecting your business in the near term and what clients are saying about spending plans going forward? Thanks.

If you listen to the news and listen to almost every CEO in the world, they are all echoing this, you know, immediate issue. You know, until we - some resolution, peaceful or not, commences, everybody is going to be a bit concerned about new product interests deducts and consumer confidence and some other issues. When you are looking at a company as vast as ours and as important as ours in terms of future revenue growth of all the clients we serve, we feel that that's a short-term issue, not a long-term issue. That is reflective of most of the CEOs and heads of the marketing areas that we speak to.

Thanks a lot.

Thank you very much. The next line we'll open is the line of Alexia Quadrani of Bear Stearns. Go ahead.

John, following up on some of your comments. Would you say it's fair to say there's a fair amount of penitentiary up demands once we see stability on geo geopolitical front and we should see more robust spending?

Yes. You see, people who are out of the market breaking in, you know, cisco, the technology sector has been absent for the next few months. Cisco co-stepped up and put a campaign in place. I do believe that companies across the board have restructured their costs to the point where there is not a lot more for them to do and they have to start addressing themselves to their market share and their revenue lines. Nobody wants to be taught in the first 120 hours of war coverage. So it makes everyone everybody a little bit cautious. Everybody looks at it more closely. But having said that, you know, the up front markets in broadcast are supposed to be strong. Super Bowl was strong. Academy awards is strong. So people are weighing their concerns, which they are very legitimate. But on the other hand they don't want to be excluded from the marketplace either. So I think that there is a fair amount of penitentiary up demand and we'll start to see that after the clouds fade and the immediate geopolitical concerns fade away a little bit.

Randy, when you discussed the margin pressure, you didn't mention pricing at all. Can you comment on how the pricing environment is that you're seeing, any particular pick up in pressure from your clients?

You know, I think you hear a lot of excuses, but frankly I think it's a responsibility of our companies to manage those measures pressures. They are the same pressures faced in every other industry. We have to learn how to deliver our services in an efficient manner. You know, I have productivity gains and the things we do. That certainly has been the case across our agencies. They have been able to do that quite well. I haven't really seen a lot of, I think margin pressure because of pure pricing initiatives at this point.

Just to add to that Alexia, where no one could do anything wrong in the mid 90s, the pricing pressure has been the same since 1988. The growing segment in our business, C R M, which is a very measurable business, where clients know exactly what to expect and get in return for exactly what they are spending. As that becomes an increasing part of business, that tends to mitigate anything that is out there. Having said that, you know, this recession, this difficult environment has been going on for a long time. Our clients are stressed and the whole marketplace is stressed. So you have to justify and make sure that you can talk to a client about what they are getting from a return on investment for the money that is being spent. That's just probably very healthy for the long-term prospects of the business.

Keep in mind, every industry has to figure out how to deliver their products and services that they offer in a more and more efficient, productive manner. Bar none, our clients of faced with it every day. They will probably make sure we are faced with it every day. Our agencies have been able to do it.

Randy, a quick question on the convert. Maybe if you can talk about the long-term strategy, understanding there are numerous advantages of the security. If we were to see a prolonged period of where the economy is weak and Omnicom (inaudible) stress, is there a point where you would consider - them?

There is a point where I would consider anything. But they are good securities, good for Omnicom, good for our shareholders. You know, almost irrespective of where Omnicom's stock is trading on a near term basis, underlying the converts is effectively short-term financing. Cost of that financing is consistent with the market. In addition, while it is effectively a cost effective financing on its own, the other benefits that we get are pretty significant.

Okay, thank you.

Thank you. The next line we'll open is the line of Kevin Sullivan from Lehman Brothers. Go ahead, sir.

Good morning. You noted that there is still some efforts to be done Internationally in terms of taking some head count out. Do you think from where we are today that severance would be the, incremental severance in '03 over '02 or should it be the same amount? Randy, I wonder if you would comment on equity and affiliates, minority interests seemed to have jumped up a little year-over-year.

We don't forecast severance, Kevin. What we do and we have consistently done, we have managed, I think, even our biggest critics would have to look back at our performance and say that we have been able to manage very well and very appropriately adjusting those businesses that needed adjustment, taking advantage of those that we can take advantage of. So since we don't forecast it, I don't want to forecast it. Because we don't look at it that way. We look at it on a business unit by business unit basis. The second part was --

What I'm getting at, severance has been an issue on margins. Will it be incrementally worse next year or this year, I should say, than it was in '02?

I don't think so.

No. We don't expect that to happen, no. But we'll a adjust our businesses to what we have to. But everything that we see at the moment, no.

That's it, thank you.

Then the minority interest?

Minority interest and equity and affiliates? Basically minority interest is up. Several of the new acquisitions relative to performance of companies, a couple of the affiliates on a year-over-year basis were consolidated and now become subsidiaries which frankly ends up flipping them from being an equity affiliate to having a minority interest. That's about it.

When they are consolidated that does that show up in acquisition revenue or organic?

Acquisition revenue.

Yeah.

Great. Thanks very much.

Thank you very much. The next line we'll open is Jackie beer co-with Merrill Lynch. Go ahead. Jackie beer co-your line is open. We'll move on. The next line we'll open is Joe Stauff with CSFB. Go ahead.

Good morning. Can you comment in terms of anything you can provide us with respect to your met new business, net new business you won in the last couple of quarters? Are clients spending now in line with what they are telling you in terms of a sort of follow through?

I think it is certainly taken in the current environment, it seems that it's taking longer to ramp up. There certainly, certainly some of the wins are taking very long times. May not even, I guess in a near term environment pan out to quite the levels that are hope hoped. I think that trend has been going on for probably the last 18 or 24 months.

But just to put it into some kind of perspective for the business, you can't service clients you don't have. And these people have traditional traditionally spent the amounts of money they reported as their billings. And lost, instead of getting started in three months, sometimes it takes four and a half or five months to get it up to where it is. Those clients are there. And obtaining those clients is a long-term prospect once you have them. In 99 percent of the cases. So it bodes very well for the long-term continued growth of the business, even though you don't maybe get the short-term pop you would have in the '90s.

Okay. For the client losses in the quarter, do you have an idea of the average age of those client losses?

I don't. Some of them, frankly like Gillette, we lost media, but Gillette is still a client. Frankly, no, I don't. That's not something that we track.

Okay. And just head count now versus maybe at the end of the year, 12/31? Has there been a significant difference?

One more time?

Head count currently versus at the independent of the year, 12/31? Or has there been a significant difference?

Twelve/31/'01?

'02.

Versus today? There have been a few cost factions taken in a couple of markets. Given the fact we are 50,000 plus people, it's not a significant number of people.

Okay.

That's not something that we track that frequently because, frankly, there's too many change changes.

There are a couple places that reduced some staff in early January. Not huge amounts.

Okay, fair enough. Thank you.

Thank you.

Thank you. The next line we'll open is the line of Troy Mastin.

I want to get your commentary on the pipeline how the environment looked for acquisitions right now and what your expectations might be for '03 relative to '02.

You know, we'll see how it turns out. There's an awful lot of - there's quite a few interesting opportunities in the marketplace. I think probably the number of realistic buyers is less than what it may have been a year ago, which means maybe some of the opportunity is even more interesting. We have never really had a shortage of things to look at. We have had more of a shortage of time to go through the process that we want to go through to make sure that the acquisitions that we do complete are companies that we can really fill in our business strategically the way we want to, that we have very specific plans on how those companies are going to proceed in the six or nine months after the acquisition. Understanding the client overlaps between target acquisitions and our existing business. As John Wren mentioned, a I mentioned a couple times, the bulk of our acquisition resources are focused around building our business across, our core 250-client base. Most of our acquisitions have a significant revenue overlap with that client base.

The good news, Charlie, is that if you look across our businesses, our disciplines, our geographies, we are not - we have a full dance card. We have completeness (ph). We are very happy with what we have. So we don't have the need to acquire in order to fulfill our service capabilities. We are making very deliberate intelligent decisions about what that means in terms of servicing our client base. Oft times it is in the best interests of the shareholders to buy something versus build something. So at this point the marketplace is as strong as it ever was and as Randy mentioned, the competition to look at those potential targets is really diminished. So we don't have a budget. We are just - in continuing to stay with our business line

Can you comment whether you are more, lessor equally active in '03 versus '02?

I would guess equal. Certainly at the beginning of '02 you know, things probably started off sort of on a normal basis. We got a little bit pre- pre-occupied in the summer. And I'll say the summer, in the fall. You know, as things calmed down on a few fronts there are certainly plenty of things to focus our attention on.

The activity in the first quarter will be less than the activity in the last year, probably. We are taking our time looking very hard at things, making sure that the targets have visibility as to what their business is. Are going to generate in the future as opposed to what they might have generated in the past.

Okay, great. Finally on valuations for acquisition targets, have valuations come in to the extent of perhaps the valuation of the overall industry, I guess, if you were to look at the relative valuations of ad hold holding companies relative to targets? Have they adjusted adequately in your opinion?

I think a lot of them have. You know, we have always in our acquisitions on a pretty cost effective basis. I think there is certainly a few companies that were for sale that had high expectations in the past. My guess is their price expectations have been adjusted. So that most of the types of companies that we acquire, most of time it's agencies that want to become part of the Omnicom group and price, we pay a fair price. They are happy to receive a fair price. It's a marriage that works for both parties.

Thank you.

Thank you. The next line we'll open is the line of Steve Barlow (ph) at Prudential. Please go ahead.

I wonder if you'll talk about the earn outs going forward. Say your price goes up to 75, 80 bucks over the course of the next six months, hypothetical. What does that do to your earn out schedule that you have here to try to anticipate what the '03 and 04 earn outs will be?

It does nothing to it.

They are all cash based.

We don't use the stock.

I don't know none of the stock? Okay, thanks.

Thank you. The next line we'll open is Raj Daab (ph).

I want to get a idea of the line of options, how the banks are going, if you can give us an update there and on the general earn outs, if you can maybe give us a sense of the schedule that you provided. Is that a minimum benchmark that you provided? Thank you.

First of all on the bank front, probably one generation behind. The current bank lines were redone in November. That actually, the turn out of the 364 or the new 364 would not be due until November of this year. Which we redid the bank deals last November. As far as the earn outs go,

You're asking for a fair prediction of what we believe the performance is going to be during the remaining term of them what their negotiated price is. So we are not expecting large adjustments one way or the other.

We do those calculations, we use the formulas that are in the agreements and we update them based upon the current performance of each of the underlying companies. If the underlying performance of the company is improves, the numbers can rise but by the same token if they don't improve, the numbers can go down. The other factor which this quarter was a pretty significant factor in estimating those numbers is currency. Coming up with these estimates, you have to keep in mind there are, you know, many, many estimates that go into each calculation. One of the most substantial estimates is the exchange rates for any acquisitions that are done in a foreign currency

Great. Thanks very much.

Thank you. Getting close. Why don't we take one more call, one more question and then we'll let everyone go for the market opening.

Thank you. The last question will come from the line of Chris Darbyshire (ph) at Parabus (ph).

Domestic growth 12 and a half in the quarter down to 6.3 % in the fourth quarter. Can you shed some light on that, please?

I don't think the quarter to quarter number numbers are that important. Hold on. Let us just check the number. For a second. I apologize. We'll have a moment of silence while we grab a book here.

Here comes the book. We will be able to tell you in a second.

Thanks.

Frankly ...

It's in the ...

(inaudible).

Any particular projects? Any particular if one client wins?

Part of what is happening, you are dealing with - once you get into the quarter and you start break breaking it out into segments, 1% was $8 million. of revenue last quarter. So you are dealing with potential movements of client spending from one quarter to the other. I think the primary factor is the year before's quarter, basically you are comparing - when you look at Q3, Q3 this year, you are making those comparisons to Q3 of last year, which included the impact of 911. Our U.S. business was hurt particularly all our PR oriented businesses were hit hard at the end of Q3 last year. The International businesses were really unaffected in the third quarter. They got affected in Q4 a little bit. Some of these numbers for Q3 are ...

We had about ten or 12 business businesses below 14th street in Manhattan. When 9/11 happened, they just closed down and people were scared to death to go to work for a couple of weeks.

When you deal with year-over-year growth, the first point is relatively small numbers, only $8 million is a one percentage point movement. You know, it doesn't take very much to make those percentages on a quarterly basis look out of line.

Right. Okay, thank you.

Good. Maybe the conclusion to that is, the fourth quarter numbers or the numbers that we had in Q1 and quo Q2 are much more representative of what we would think normalized numbers, normalized percentages are.

Okay, thank you.

Okay. With that, thank you all very much for taking the time to listen to the call. We hope you all have a good day. Good by, now.

Ladies and gentlemen, that does conclude the teleconference for today. Thank you for the participation and for using the AT&T executive teleconference service. You may now disconnect.