宏盟集團 (OMC) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Omnicom Group Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I will now turn the conference call over to the Executive Vice President and Chief Financial Officer, Mr. Randall Weisenburger. Please go ahead sir.

Thank you and thank you all for taking time to listen to our First Quarter 2003 Earnings Call. We hope everyone had a chance to review our earnings release. In addition, as we've done through last few quarters, we posted to our website both the press release and a slide presentation covering the information that we will present this morning. This call is also being simulcast and will be archived on our website. We are going to begin the call as usual with some brief remarks from John Wren regarding our performance and the state of the industry. Following John's remarks, we will review our financial performance for the quarter in more detail and at the end, both John and I will be happy to take questions. For everyone's convenience, we will be sure to end the call before market opens.

Good morning. Thanks for joining us. Our performance in the first quarter was in line with our expectations. We had expected that first half of 2003 would be negatively impacted by the war and economic concerns in Europe, and the second half would show improvement if geopolitical concerns subside.

In the first quarter, our U.S. business continued to grow in all areas except for PR. While the war had an impact on many of our businesses, it was less significant than we had feared.

In Europe, business conditions, especially in Germany and its neighbors, remains weak. Our business units stalled in the non-euro countries continued to grow at a modest pace. As we mentioned in our last conference call, we took staffing actions in Europe in the beginning of the first quarter in order to adjust our workforce to the current conditions. In Asia, the impact from SARS did not have a significant impact on our business in the first quarter, and we are going continue to monitor that situation; hopefully it will resolve itself pretty quickly. With that, I will turn this back to Randy who will take you through the numbers and then, as he said, we will be happy to answer your questions.

Thanks John. In summary, revenue for the quarter increased $205m to $1.937b; that was an increase of about 11.8% over the last year. Net income was up marginally at $128.6m and diluted earnings per share increased one penny to 69 cents. Analyzing our revenue performance for the quarter, organic growth totaled $44.8m or about 2.6%, acquisition revenues totaled $52.7m, that added about 3% and FX was significantly positive, adding $107.3m to a reported growth of about 6.2%. The primary drivers of FX, as it has been the case in last couple of quarters, are the British pound and the Euro. As far as mix of business in the quarter, marketing services accounted for approximately 55.6% of our revenue and traditional media advertising 44.4%. As per their respective growth rates, marketing services increased 12.9%, and traditional media advertising grew 10.5%. Due to higher concentration of revenues from the UK and Euro markets in our traditional media advertising businesses, they benefited more from the changes in FX.

Breaking down marketing services, 32.6% was CRM, 11.4% specialty communications, and 11.6% public relations. As per their respective total growth rates, CRM remained steady for us, increasing 20.8% in the quarter; within that category, direct marketing and promotional marketing performed the best. All our brand consulting businesses continued to be challenged and later in the quarter our events businesses were negatively impacted by the war.

Specialty communications in aggregate performed well with 8.2% growth. Within this group, healthcare continued to perform very strong although was offset by weak conditions in the recruitment advertising sector and financial services. And finally, public relations, which has been our most difficult sector for the past few quarters, was down 1.1% for the quarter; however, prior to the start of the war, PR appeared to be recovering, and now that the war is largely behind us, we expect to the PR sector will start to show a positive year-over-year growth in the coming quarters. Geographic mix -- our business in the quarter was 56.8% US, 43.2% international. Our US businesses are much stronger in the quarter on a real basis due to weakening in the US dollar versus the British pound and the Euro. Our international business had a significantly higher reported growth rate. In the United States, total revenue growth for the quarter was $77.4m or 7.6%, acquisition revenue totaled $33.4m of that, and organic revenue was $44m.

Internationally, revenue for the quarter increased to $127.4m or 17.9%. Organic growth was only up marginally at $0.8m or $800,000. Acquisition revenue was $19.3m and FX, as I mentioned, had a positive impact of $107.3m. New business wins -- the net new business wins in the quarter totaled $868.3m. Our few of the more significant wins and losses in the quarter included on the win side, AOL broadband, Lubriderm, and Office Depot(ph); and on the losses side, the most significant loss was Gateway and has got $150m, Bank of America and XM Satellite Radio.

Moving down to income statement, operating income for the quarter was $223.4m and our operating margin was about 11.5%; that was down about 170 basis points year-over-year. On a dollar-for-dollar basis, the year-over-year decline in margins represent approximately $32m. We estimate that about 50 to 60 basis points of the year-over-year change was the result of changes in the mix of our business. The balance was primarily due to increased severance and related costs, most of which, as John mentioned, was in Europe. That has somewhat of a double impact; the severance charges combined with the significant year-over-year changes in FX had an exaggerated impact on the quarter. Basically, the businesses with the lowest margins, the hardest hit businesses, came back on a relative basis more impact over normal.

While we prefer not to see our margins down, our focus has been on optimizing our cost structures while at the same time making sure that our agencies are well positioned to take advantage of some of the competitive opportunities existing in the industry today and be prepared for recovery. As a result, our utilization levels at some of our agencies are currently not quite as high as we would like to see normally, over as I mentioned more focused on taking share right now and expect that the utilization levels will come back in line -- will come back to more optimal levels as the market recovers.

Moving on to interest expense, net interest in the quarter was approximately $8.3m; that’s down from $11.3m in the first quarter of last quarter, up from about $7.7m in the fourth quarter. On a year-over-year basis, the first quarter decrease in interest was due in part to the benefit of our current convertible bond issue in March of last year, generally lower short-term interest rates, and strong cash management, offset by the 1.5 months of amortization of the [sweeger](ph) that we paid last February to our February convertible bond issue. On a year-over-year basis, at the end of the first quarter, total debt was down about $410m and net debt was down about $240m.

On the tax front, our rate in the quarter was 35%; that's consistent with our full year rate in 2002 and was about 170 basis-point improvements over our first quarter 2002 rate. And finally, EPS as previously mentioned, diluted earnings for the quarter were 69 cents per share and that was about 1% increase from the comparable 68 cents last year. For the quarter, the weighted average number of shares outstanding for the diluted calculation was approximately $187.3m, and that compares to $189.5m in the first quarter of last year. And now we will ask the operator to open up the call for questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the "1" on you touchtone phone. You will hear a tone indicating that you have been placed in queue and you may remove yourself from queue at anytime by pressing the "#" key. If you are using a speakerphone, please pick-up your handset before pressing the number. Once again, if you do have a question or comment, please press the "1" on your touchtone phone. The first line we'll open is Joseph Stauff at CSFB. Please go ahead.

Thank you. Good morning.

Good morning, Joe.

Can you comment with respect to organic growth, I guess in US you are just over 4% in -- where did you see that relative organic growth, I mean pocket of strength that is giving you four divisions, same international? And then I have one follow-up.

Organic growth wasn't 4%, Joe.

In Europe.

Domestic.

Just looking to reconcile a little bit more and trying to figure out where in fact you are seeing, you know, relative strength and try to figure that out geographically?

Well, the U.S. is stable and growing. It is no longer in the kind of the decline it was last year or the year before. I'll attribute the organic growth that you are seeing to the impact of the new business wins in the prior quarters coming through our results. And this muted a little bit by the decline in the PR business which is primarily a domestic U.S. business although we have some outside U.S. So, business is [spiraling] I think across the board. What we saw in the first quarter as some of our project business -- some of our bench driven businesses where we could [definitely had] than they might have been, if that wasn't a fear of a war, and people fear of traveling and all the rest of it. That will come back as we go on to the rest of the year.

So, the US, I think is stabilizing as we expect that it would and if we get a good upfront market and some encouraging signs, I think we will see steady improvements through the rest of the year going, setting up into 2004. And with respect to Europe, what we are seeing is the UK is okay, France is okay, countries like Germany and The Netherlands are still suffering and that is just having an impact on the psychology of our clients and how they spend money in those markets. We started to see the German issue in the latter part of the second -- third quarter of last year, sort of in the fourth quarter. As I mentioned in the last call, if it continued, really we're going to take some staffing actions which we did very early in the first quarter, just to get our workforce in line with what the current expectations were. But, the German market is still -- if I have to characterize everything with the exception of Asia, we just have a unique issue going on.

Germany still remains the real force spot. Other than that, there is a fairly stable environment and setup for a potential growth. But our opportunity going forward also is continuing to take market share as you see some of our -- the war prevented new business pitches from happening at the same pace that would have occurred in prior similar periods. Now the war is over and with some weaknesses as reported of some of our smaller competitors, I think there will be greater opportunity for market share as we move now through the rest of the years as well.

Okay, so would it be fair to characterize that hey at least it relates to your businesses, marketing services in general where the margin weaker than your traditional advertising businesses, both in the US and internationally?

No, I don't think so.

No, that's an overstatement, I think.

I think that were selected, I mean there is certainly a couple of pockets in marketing services that get impacted a little more significantly because of the short-term nature of some of the project business, basically branding and somewhat PR. So the war had a little bit more of an impact on them. But in general, you know, I think the businesses were probably not equally strong. One of the other things, I guess, John did mention, our media businesses have been coming together and they have also grown, you know, shown some pretty good time to growth OMB and PHD both.

Okay and I apologize, I missed your introductory comments. But in terms of the severance in the quarter, will then it be fair to say hey most of it came or a lot of it came in terms of the margin impact in Germany and some of those other countries, high severance type?

Yes. In Europe we, severed I think over 500 people.

In Germany?

Half of that in Germany and then -- a little more than half of that Germany and in other places that are surrounding it. So, whereas what we have been doing for the last three years, being able to show pretty good growth in the environment, is trimming specific businesses with specific events. It’s probably of the largest one place that we had to severe people. The other thing that we done though at the same time to see get a view as to how we are carrying the business as we have made some significant investments in some very top creatively management people in some of those markets late in the fourth quarter of last year and continued to do that in the first quarter. So, we haven’t abandoned into a whole, we are just adjusting our businesses to be reflective our what clients are spending and where we can improve our management, improve our product, we are continuing to make those investments even though we are having the [inaudible] cost of some of these actions.

Okay, great. Thank you.

Thank you.

Thank you. And the next line we will open is Alexia Quadrani at Bear Stearns. Please go ahead.

Hi good morning. Just a follow-up on your comments on the severance expense taken in Europe/ Do you believe most of those were already taken in the first quarter or do you expect to see some more expense in the second quarter?

Until we get through the re-forecasting process, probably don’t know if there is more to be taken or not, we certainly were planning and asked our companies to be pretty aggressive in their actions in the first quarter.

And would you categorize, and you said Germany is still suffering, would you categorize the operating environment there as deteriorating further or just sort of still bad?

I would say it’s still weak. So, we haven’t yet -- whereas in comparison, you can see it's firming in the US and some other markets, we haven’t -- it’s still weak in Germany at the moment. So…

I think we mentioned in the press today that I think this is the third consecutive year of less than 1% growth or maybe it’s the third consecutive year forecasted less than 1% growth for Germany. You know, the economy there is difficult, that’s one thing that we can’t really impact.

And just lastly on the strength you saw in CRM business, was that also aided by some acquisition revenue -- the 20% plus growth?

No, that’s -- those are total revenue growth.

Okay, good, is there any idea...?

That also includes currency.

And is there any idea sort of gauging what the organic growth would be in CRM business?

We don’t put that out. We don’t break it out that way.

Okay. Thank you.

Thank you. The next question will come from the line of David Doft at CIBC World Markets. Please go ahead.

Good morning.

Good morning.

Just -- I know the severance is being the depth here, but could you give a sense of the magnitude of that in terms of the hit to margins or in terms of the change year-over-year? If you didn't can you give us that sense?

What I broke out was our overall margin change was about $32m, you know, effective last year’s margins kind of this year’s revenues. Of that $32m, you know, roughly a third of it is probably business mix, and the balance of it is impacted by severance and related cost and somewhat by utilization that I mentioned.

Okay, got it. And the CRM business, some of the pure play companies in the space had extremely difficult quarters, I mean, were they beyond the branding you mentioned? Were there pockets in others areas that were weak or they're just company specific things going on among competitors maybe?

Well some of the competitors -- some of the public competitors are in from different businesses, I mean we are not really direct competitors like the last [inaudible] or some of the others, I guess that came out in the quarter. You know, late in the quarter our events business faltered a little bit because of the war, but in general, I think the direct marketing, promotional marketing businesses, sports marketing they were reasonably strong.

Okay. And then lastly clearly the last couple of days there was a lot of news about quoting it this morning, there is some news on [inaudible] about possible sale parks, I mean are those sort of assets that would be of interest or too broken to really pay much attention to?

Appliance is certainly of interest.

Our primary focus is appliance and we see some of the reports as to some of the concerns that other clients probably share that with ones that they have recently lost.

So, there's a lot of opportunities in the marketplace. One of the comments that I was trying to mention, I mean, when we tried to manage our margins, we have always said we want to optimize our margins. Our objective is to have the highest margins and the highest growth rates in the industry. Our utilization levels right now are probably not what we normally like to see. On the same token, there some very significant opportunities out in the marketplace, because of some of the competitor issues that are out there.

We feel we have got the best agencies and the best people in the industry. We want to make sure that the agencies are sufficiently staffed to try to take advantage of some of those share growth opportunities. Even if that has a bit of an impact on margins today, on a long-term basis it will position us very well for the future. Those utilization rates as the market recovers will come back in line and will be far better off.

Okay. So, that is incremental wins, it is does not necessarily have the same level of incremental head counts at this point, you have more thoughts to it?

Yes, absolutely.

Okay, great, thank you very much.

You have to have a lot of people working on taking advantage of those opportunities.

Got it, thank you.

The next question will come from the line of Lauren Fine at Merrill Lynch. Please go ahead.

Yes, just a couple of quick questions, I am wondering Randy if you could quantify what you think the EPS impact was on foreign exchange in the quarter. Whether it was positive or negative and by how much? And then secondly John, you made a comment about certainly seeing the tone of the upfront market will give you a better sense of, you know, sort of the rest of the year improving and helping you for 2004. Have you talked to your media agencies that altogether sense of what they are expecting in terms of the upfront market?

I will go first. Everybody is optimistic, I guess this downturn has been going on for so long that nobody probably wants to risk being bullish, but there is a lot of positive signs, a lot of positive conversations, which are going Lauren, and so -- and as Randy said, we have seen growth in our media businesses last of couple of quarters especially. So, I think it becomes the past, we have no reason to believe that it won’t, that we get a good upfront market on, I think that’s going to be one of the catalyst, which shows there is a real foundation for spending in new products and other things, which have been muted during this period of time, and that’s what we are seeing, that’s what we are planning for, and we are somewhat cautiously optimistic that we have seen a lot of the worst things that could happen behind us, and we are preparing for first the modest and then hopefully a more full grown recovery.

On the FX front, FX is about a penny or so positive impact.

Okay, and then a couple of quick follow-up. Was there any share repurchase activity in the quarter and on the acquisition side its been very modest in the quarter, is that something what we could expect to see the expenditures and the acquisitions pick up as the year remains?

Yes. We said it for a while, I mean this was an extremely white quarter. I mean it takes a lead time and as we have mentioned in the past, I mean every acquisition has to get approved here at corporate. There is just -- we've had time issues to be able to go through our process and close some of transactions that were in the pipeline. So -- yeah it definitely will pick up from this quarter. Your other -- the other question? I am sorry.

Share repurchases.

Oh, no share repurchases in the quarter.

Alright. Thank you.

Thank you Lauren.

Thank you the next line we will open is Kevin Sullivan with Lehman Brothers. Please go ahead.

Hi good morning. Two questions; one is you mentioned you know the PR business, to me actually the improvement seems to be pretty good. In the quarter you got the positive growth. Do you think you were seeing some increased demand there or can we see increased demand there over the next couple of quarters or are we just facing the easier comps? And secondly, there has been a lot of buzz recently on the interactive advertising -- or online advertising and several of your acquisitions over the past couple of quarters have been in that area. Do you sense the clients have a renewed or on increased interest in that area?

PR, I will stay with that first. We think PR will improve as we go through the rest of the year. We haven’t tried to dissect how much of it is comp versus non comp but we have seen -- we think it is going to be positive growth. As Randy mentioned January, February were pretty decent months, the war kind of muted some PR activities in March. We expect that probably continued in to April because the war was still going on, but there was a positive signs in momentum in that area. That has been a pretty large drag on us in the prior -- in the last year and again as we said it was down one point somewhat percent in the first quarter. It will be helpful to our growth rates and to our margins and profitability as we get better utilization in our PR companies and so we are looking forward to that.

And we are starting to see some pick up in areas like tech. You will see it in the press as well as and the tech company seems to be coming back to life and they are spending as may be some of the purchasing cycles recover or return in US. The second question was interactive?

Yeah. You know there has been a lot of buzz that online advertising is strong and looking back of the past couple of quarters you've made several acquisitions in that area. Do you sense inclines that the renewed interest or an increased demand for online advertising?

Our focus hasn't really been on online advertising. While that is something that our media businesses perform as a service. We've always been very strong on online marketing. We think the internet is certainly something that is here to stay. We believe the internet is a place that makes most major purchases. Consumers go to the internet these days before they make purchases. Clients, think it's an important marketing medium as do we. We've invested in that space for sometime. We still believe we are wise at that in important future space from a marketing perspective and continue to focus on building out our capabilities globally. Those are the types of acquisition that you've seen from us in that area.

Sure -- just want to add one thing Kevin. As part of the mosaic of the balance and diversity of offerings that exist within Omnicom, so it will contribute and continue to contribute to our growth as we move forward and as Randy said, we structure our [guns] since we got originally invested in 1996, and we are confident that our strategies are paying off and we will continue to add to our growth moving forward.

Great thank you.

Thank you Kevin.

Thank you. Our final question will come from the line of William Bird with Smith Barney. Please go ahead.

I was just wondering if you could comment on second quarter and full year margin expectation. Also cash versus accrual impact of severance and finally just prospects for new business. Are you seeing much in the way of new product development? Thank you.

Let me do some of the easy ones. Cash versus accrual -- pretty much the same. Cash is a very little -- very little severance gets paid out over time. This is probably a little bit but not much and the charges -- once you announce the severance or make a decision on the severance, you take the charge. That was one question, what was the other?

The other was in an area where we do not give that level of guidance so as to guiding as to what are operating margins would be. As Randy has said, we have said it repeatedly, we are looking to optimize our margins based on the business conditions that we see, and that is what we will continue to do. I think for those who have followed the company and certainly understand the company, there is a dedication to improving margins as well as optimizing them over in the long term. So you can depend on that, but we do not manage margins to a quarter or any real 90-day period. We are looking to long term. And there was another question in it.

Adding to the margins you are thinking about from the economy conditions and what I described and talked about with respect to utilization rate, it might be reasonable to expect that you kind of grow in to some of these utilization levels. I would think that that would be more second half than second quarter improvement.

And then I think the other thing you asked, what was our new business. New business was kind of muted in the first quarter of this year versus in the past. I do not have specific results, real longer list of robust new business that has been announced. Having said that, intuitively when you look at some of the problems that some of our competitors are having, it will follow in the next coming weeks that more and more accounts will probably go into review. So we can put them into review, we can be prepared to go and present our credentials and pitch them when they come into review, and I think we have had a consistent tract record there, so we are hoping that that part of it continues and it picks up there.

And are you seeing any kind of improvement in like new product launch, interest, or activity?

You know the automotive companies are all -- they have their new products which they are launching, I think Chrysler I think introduces something new every quarter for the next four or five -- same with some of the other car companies. We have -- there has been a lot of extensive conversations but nobody has pulled a trigger on some the things that I think are in the pipeline. With the geopolitical concerns and some of the other things which may subside, I think you will see those come back to the market with kind of a renewed position in it, and we will probably -- we will start to see this when the PR business picks up. You will see that as kind of a leading indicator of some of these things coming back into place. But the budgets have not been released yet.

Thanks

Thank you. Thank everyone again for taking the time to listen to our call. Talk to you soon. Bye

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