宏盟集團 (OMC) 2003 Q2 法說會逐字稿

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 is being recorded. I will now turn the conference call over to Executive Vice President and Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead.

Thank you. Thank you all for taking the time to listen to our second quarter 2003 earnings call. We hope everyone has had a chance to review our earnings release. In addition, we posted to our website both the press release and a slide presentation that covers information that we will present this morning. This call is also simulcast and will be archived on our website. We will begin the call with some brief remarks from John Wren regarding our performance and the state of the industry. And 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 your questions.

Good morning. Thanks for joining us. Our performance in the second quarter was our expectations (technical difficulty) We had expected that the first half of 2003 would be negatively impacted by the war, economic concerns in Europe, and that the second half would show improvements as these concerns subsided. At this point, it appears that we are correct. In the second quarter, our U.S. business continued to grow in all areas except for recruitment advertising. Public relations which has been an issue for a great many quarters now has appears to have stabilized. While the war had an impact on many of our event and project businesses, it was far less significant than we had feared.

In Europe, business conditions especially in Germany and its neighbors remains weak; the decline which started in the second quarter of 2001 appears to be easing. Our business units in the non-Europe countries are continuing to grow at a nice pace. As mentioned in our last conference call we continue to take staffing actions in the U.S. and Europe in the second quarter. At this point, the significant actions we had planned have been taken. Finally, net new business activity picked up in the second quarter and continued into the third quarter. That is always a good sign for Omnicom. With that I will turn it over to Randy who will take you through the quarter and then we will be happy to take your questions. Thank you.

First let me go through the numbers in summary. Revenue for the quarter increased 233 million to 2.15 billion; that was an increase of 12.2 percent over last year. Net income increased 1.8 percent to 190.7 million, and diluted earnings per share for the quarter increased 2 cents to $1.02. For the six months revenue increased 12 percent to 4.087 billion; net income increased 1.1 percent to 319.3 million, and diluted earnings per share for the six months increased 3 cents to $1.70.

Analyzing our revenue and performance for the quarter, organic growth in the quarter totaled 49.9 million, accounted for about 2.6 percent of our total year-over-year revenue growth. That was consistent (technical difficulty) Acquisition revenues in the quarter totaled 56.7 million, that added 3 percent to our growth. For the six months acquisitions added 109.5 million; that is also about 3 percent, both quarters were fairly consistent.

FX continued to have a very strong positive impact on the quarter, adding 126.3 million to our revenues, that was about 6.6 percent and for the six months FX added 233.6 million or about 6.4 percent. As for revenue mix, in the quarter, marketing services accounted for 56.1 percent of our revenue, traditional media advertising 43.9 percent. For the six months, marketing services accounted for 55.9 percent and traditional media advertising 44.1 (ph). Marketing services grew 10.1 percent in the quarter, that was up 11.4 percent for the six months, while traditional media advertising grew 14.9 percent in the quarter and was up 12.8 percent for the six months.

Breaking down our marketing services revenue into the spectors that we report, CRM accounted for 32.3 percent of our revenue, 12.2 percent was specialty communications, and 11.6 percent was public relations. As to the respective total growth rate, CRM was up 17.7 percent in the quarter. Specialty communications driven by the steady performance of our health-care agencies offset by the weaker advertising increased (technical difficulty) and public relations as John mentioned turned the corner reporting year-over-year growth of about 1.4 percent.

Our geographic mix of business in the quarter was 55 percent (inaudible) international, while our U.S. business was stronger than our international business on a real basis, due to the weakening of the U.S. dollar versus the British pound and significantly the Euro; our international business had a higher reported growth rate in the quarter. In United States, total revenue growth through the quarter was 64.7 million or 5.8 percent. Acquisition revenue growth totaled 32.1 million and organic revenue growth totaled 32.6 million. For the six months total revenue growth again in the U.S. was 142.2 million or 6.6 percent. Acquisitions totaled 65.6 million and organic revenue growth totaled 76.6 million.

The International front, revenue for the quarter increased 168.2 million or 21.1 percent. Organic growth was positive at 17.3 million, acquisitions added 24.6 million and FX had a positive impact of 126.3 million. For the six months international revenue increased by 295.6 million or 19.6 percent. Organic growth was 18.1 million. Acquisition revenue growth was 43.9 million, and FX had positive impact of 233.6.

Net new business front, net new business wins in the quarter were again very strong. Did 1.118 billion in total. Some of the more significant wins in the quarter included the Gap which was a media account, the Royal Mail, Alltel and Nextel. As John mentioned, the third quarter also was off to a very good start with several major wins including Philips, AT&T Wireless, and Midas.

Moving down the income statement, operating income for the quarter was 336.6 million that is up 1.8 percent. Our operating margin was 15.7 percent which was down about 150 basis points from last year. For the six months, operating income increased to 560 million and our operating margin was 13.7 percent which was down about 160 basis points from last year. On the margin front, we estimate that 60 basis points was the year-over-year change in margin as a little result of changes in our mix of business. The balance of the change in margin was primarily due to increased severance and related costs most of which was in Europe. Increased professional fees and increased investment in key personnel that was done in an effort to further accelerate our new business efforts and take advantage of the competitive opportunities that exist in the marketplace today.

These costs were offset by savings that resulted from our prior period cost actions. At this point, as John mentioned, we believe that most of the significant severance actions are behind us, and as a result, we would expect to see our operating margins begin to improve over the next several quarters. Interest expense, net interest in the quarter was approximately 12.9 million. That is that up from 5.9 million in the second quarter last year. And up from 8.3 million reported in the first quarter of 2003. The increase is due predominantly to the amortization of the sweetener that we paid in February on our $850 million convertible bond issue and the FX effect on the interest that we paid on our outstanding Euro notes. Those increases were offset by lower interest rates in general, and reduced overall debt levels. At the end of the second quarter our total outstanding debt levels were down a little over $100 million year-over-year, and our net debt was down a little more than 200 million dollars year-over-year.

We continue to make progress on the tax front; our tax rate for the quarter was 34.2 percent bringing our year-to-date rate down to 34.5 percent. That is about a 50 basis point improvement over last year's full year rate. We continue to focus in this area and believe that there are more opportunities for improvement.

Finally on the EPS front, as previously mentioned diluted earnings for the quarter was $1.02 per share. The 2 percent increase from the one dollar we earned last year. For the six months, diluted earnings were $1.70, that is a 3 cents or 1.8 percent increase over last year. For the quarter, the weighted average number of shares outstanding for the diluted calculation was approximately 188.1 million, and for the six months the weighted average number of shares was 187.7 million. Now I will ask the operator to open up the call for questions.

(CALLER INSTRUCTIONS) Kevin Sullivan with Lehman Brothers.

Two quick questions one is on PR turning the quarter here in the second quarter. From where you stand today do you imagine we will stay in positive territory going forward? If you could talk about the branding business as well that would be helpful. Secondly, in the quarter you bought back agency.com, I was just wondering if you could talk about what is left in Seneca and what really the balance sheet application is? Thanks.

As you know, PR seems to have stabilized. Our indications are that will continue. Naturally, it is a business that has a shorter lead time than many of our other businesses, so it is subject to economic events. But right now, everything that we see, the declines that we have suffered probably for the last eight quarters in PR has subsided which is a good sign for Omnicom. Agency -- you want to know our branding businesses. Our branding businesses are stable. There was more activity in the second half, second quarter than in the last several. It will come back as financial transactions occur, as companies start to address issues that they have in terms of their own identity issues, and new product introductions. So, the future will be good in a relatively soft business, but a small part of our business. In the first half of this year.

They did a nice effect from MNA tends to be a lot of over branding assignments surrounding major MNA, there seems to be a pickup in MNA activities. Better than I do but I just want to follow it looks like that is starting to see signs of life. As far as agency and Seneca we did buy agency back or we did buy agency from Seneca. We did it for the redemption of the remainder of our preferred stock. We do have a continuing interest in Seneca, basically the accrued dividends that we have never taken through the P&L, we made a commitment that until we got paid cash, we would not recognize any income from that.

There are several significant I should not say significant, there are several remaining investments at the Seneca partnership or Seneca fund has. (technical difficulty) doing quite well. Whether or not they are monetized in the near future is hard to say.

Great. Thank you.

Alexia Quadrani with Bear Stearns.

Good morning. On the new business win front you have obviously done a very impressive job winning new accounts recently. Are these new business wins turning into revenue, at sort of historical rate or is there an extended lag before the business actually comes to the market?

(inaudible) Some of them have three months termination clauses with their existing agencies; I think one of them has a six-month termination clause with the existing agency. So, but in terms of the rates that we are seeing, they are more in line than our historic expectations. We fully expected these companies to spend and continue to spend because they are important consumer organizations and they have to reach their customers in order to expand their revenue base. So, we are very happy with the wins. They are real quality blue chip companies and those are not the ones that you have any difficulty with.

And the second question following up on your comments about the profitability. When you say you expect margins to improve in the second half, do you mean actual year-over-year increases in operating margins or do you mean to see less of a decline than we have seen in the first half?

I say less of a decline in the first half. Margins started to slip a little bit last year in the second half. I think we will have a very substantial reduction of any decline, let's put it that way. Whether we get back quite to last year's levels, I'm not necessarily predicting that yet.

Last question on the acquisition front, it seems to have picked up a little bit in the second quarter but still fairly below your historical levels. Do you expect to see more activity in the second half and how is your pipeline looking?

Pipeline is pretty strong. I think we will have a little bit more time to focus on the acquisition front, which would probably suggest that there will be a little bit more activity than we did in the second quarter than the first quarter.

Thank you.

The strategy on that is going to be the same as it used to be.

Lauren Fine with Merrill Lynch.

A couple of questions. The domestic organic revenue growth slowed in the second quarter relative to the first and I am wondering if you could help isolate what pieces changed relative to close in the first quarter? And really the same question on international it obviously improved, was that outside of your predominantly that you saw the improvement? Third question, equity interest line was a bigger drag than we were looking for that was a relatively big number and I am wondering if you can isolate the big changes in that figure?

Net equity interest, you mean the minority interest?

Exactly.

That is predominantly FX. To give you an example on the euro, the euro in the quarter was up 23.7 percent year-over-year. To give you an idea of the magnitude. A very substantial FX impact and most of our minority interest, the predominant are in Europe.

Domestic second quarter our domestic revenue was harmed a little bit by projects canceled in some of our event businesses, as we as you recall in the beginning of the quarter we had SARS in Europe, and we had the war which was starting. People that had planned events canceled those events, postponed them because they did not want their folks traveling and moving around and stuff -- so that had a minor impact on organic growth in the quarter itself domestically. Those businesses now that those concerns has subsided are back to tracking and a relatively normal rate. So, is there some little things not big events which caused kind of a shift.

You are also dealing with extremely small numbers on the differences that its possible especially when you are getting into the quarters and then you are cutting it up between domestic and international, our clients are the multinational clients are spending their money in one large diverse market (indiscernible) relatively small project quarter to another quarter. I would not necessarily think that the differences between Q1 and Q2 are significant or meaningful.

Okay. Just one follow question. You made a comment about the investment that you are making in key personnel for new business in some competitive opportunities. Could you comment on some of the -- what you saw as competitive? I guess hires is what you are referring to? Where there any specific ones in the second quarter in terms of key personnel?

There are significant ones, they are not people that you would necessarily know from a U.S. point of view. As we have gone and made changes the staffing levels in Europe we have upgraded the leadership in quite a number of our operating units. In our proximity unit in the UK we have just brought in a gentleman who is prepared to lead us into the future. We made some additional hires in the second quarter in Germany from a leadership point of view. We increased almost doubled the amount of money we spent on employee training in the first six months of the year, and we are going through a similar change in upgrading the management of one of our major unit (indiscernible) brands. The domestic acquisition part was the last part of last year and the first part was the lead offering; those are the names that are probably more familiar to the folks on the call. But we have been very deliberate in especially in Europe and going through and acquiring people who we believe are going to really add to the growth of the company as we move forward.

Great. Thank you.

Troy Mastin with William Blair & Co.

Good morning. Thank you. I was hoping maybe you could give me a little more clarification on what gives you your confidence or comfort maybe I should say in a recovery coming in the back half of the year? If it has to do with the new business bidding activity that your are involved in, the tone of your clients or some other macro drivers. Also if you could maybe give any clarification on what you (technical difficulty) maybe not specific numbers but due to severance, I'm assuming there is effectively no severance in the back half of the year versus the first half of the year. If you can give any more numbers in terms of basis points impact that you expected or have seen I guess in Q1 and Q2 from severance so we can kind of shift that out for the back half of the year? Thanks.

First half, first part of your question, I am extremely happy probably the happiest I've been in some period of time with the operating management that we have in the various units within Omnicom. I think or I know there is a great deal of stability, everybody is truly focused on their existing clients and making certain that any new business opportunities that come up, we're well-positioned to get our better than average share on. My confidence is really, our confidence is really based upon that sense plus what we are seeing in some sectors from our clients base and also we have taken cost actions to correct things which we did not like to adjust for clients in certain regions in areas of the world.

So, we believe that from a competitive point of view, with the stability and the motion that our subsidiaries the successes have had that we're really poised as we get any good news to start to translate that into tangible growth.

A little bit of a quantitative measure on that. We are starting to see a pickup in the number of RFPs number of new business opportunities that are coming in around the world. And our win rate percentage is actually up very significantly over the last couple of years. That is due to a combination of the competitive factors in the marketplace, as well as the quality of the people and the focus that our people have on the new business front.

As far as the second half of your question with respect to margins and severance. Probably (indiscernible) like to have qualified the way you do. I don't believe we will have year-over-year increases in severance for the second half of the year. It looks to me like the major severance actions are certainly behind us. That should give us obviously a little bit of margin boost. There are lots of things that go into the margins, lots of things that offset each other as I mentioned through the margins there are various negative factors, various positive factors. Some of the positive factors are the benefits the savings that we get from prior cost actions that we've taken. We have offset that, we have made significant investments in the business. Some of those investments are not realistically going to start turning into significant revenue dollars until maybe the fourth quarter or the beginning of next year. It takes time when you put people or investments in place to actually go out and win business. After it is won, there's generally a lag time before the revenues start up.

So, again, I would not put numbers to it but I think the margins will improve substantially in the second half. Versus the client rate that we have had in the first half as some of those cost factors fall off and some of the benefits of the positives start coming (inaudible).

Maybe just one more question about organic growth and your expectations for organic growth into the next several quarters. Based on your tone I would assume that organic growth should begin to pickup also based on your new business win progress over the last several quarters. Can you give any sort of qualitative measures of how it might pickup versus this quarter? Will we see a minor or modest pickup or will it be a fairly healthy and start to look like more historic rates, or that require a few more quarters to pass and a more healthy overall economy? Thanks.

The first thing we would never forecast organic growth at this point. I think what we are seeing is a trend; it is not a water faucet, it does not turn on and off. We're bullish that we're seeing the declines we thought which were harming have subsided. As I said, we are well-positioned with the companies that we have. So, I think that we will start to see improvements and we are very happy about that, but I don't think anybody, I don't think the economy is recovered so much that you're going to see us return to as you referred to historic trends. I think what you're going to see is improvement which is a very good sign.

Thank you.

Dan Burke with UBS O'Connor.

Two questions. The first one has co-parts and then I will hit the second one. On the Seneca dividends what is the amount of dividends that you are owed that you have not recognized on your balance sheet? On the agency.com purchase did you use any cash in that purchase or was it completely the Seneca Preferred Stock? Then I have a second one.

The Seneca Preferred Stock, we did I believe Agency did have a little bit of a debt that we assumed or came over with it. As far as the dividends go, I do not have the exact number off of the top of my head. The Preferred Stock paid 8.5 percent dividend. You can probably do just a little bit of math.

Basically you reserved against those but you could use them to buy other properties from Seneca?

I don't think there is anything else in Seneca that we are likely to buy. I am hoping that as they -- as those assets in Seneca mature as Seneca continues to execute on its strategy that they will monetize those assets in the future and we will get paid.

Second question is the zero percent convertible bond due in 2032 is puttable at the end of this month. Last time you issued a sweetener, this time again I am traveling so if there is a press release in the last half-hour I've not seen it, but you haven't said anything. Could you tell us what your thoughts are or are you just going to let that bond be put to you?

We prefer to keep the bond outstanding as a starting point. We have been pretty clear about that. I am not exactly sure what we're ultimately going to do; we will probably put a press release out tomorrow morning. Telling people what our intentions are with respect to the bond.

Okay. I just asked a small favor I know you want to let the option go as long as possible, but we have some back office work that we need to get done in order to sort of make a decision that needs as much lead time as possible. So, if you could just consider holders in your time frame as well. Thank you.

Scott (indiscernible) with UBS O'Connor.

My question has been asked. Thanks.

Any other calls, questions?

Let's take one more call, one more question.

Karen Vicar with Advanced Consulting.

Good morning. You alluded to this in your comments and some of the Fortune 500 companies that recently reported better-than-expected earnings suggested reinvesting in a marketing infrastructure. I wanted to find out whether you are seeing anything category specific and then I have a follow-up question? Are there any sectors coming back a little bit stronger than others?

No, technology is probably spending a little more than it has been spending in the past several quarters. Everything else is just incremental to what has occurred. The automotive sector still is under pressure, pharmaceuticals continue to just spend pretty steadily, both on ethical drugs and direct consumer type of activities. And consumer product companies are spending with the introduction of some new products and diversity of their line.

So, the activity -- there is no real sector that would be with the exception of technology which has been absent for a long time that we see or we are hearing signs of coming back. The other thing that we're seeing some signs of which benefits some of our businesses is M&A type of activity picks up. That bodes well for quite a number of our businesses and while you know what has been reported, there is quite a number of conversations going on, people looking at targets and people making plans or at least discussing things which in the last year or so that type of activity is bullish.

The follow-up question pertains to a comment that Randy made earlier. You mentioned an increase in new business activity; and I guess RFPs that are out there. I wanted to find out if you believe that is more a function of I guess recent merger activity in your own sector, or maybe the new business rollouts etc. etc.?

I think it is more new business rollouts. I don't think the number of RFPs out there really relates very much to activities in our industry specifically. At least we don't have any signs of that. I would think it's people preparing for new product initiatives or what we hope is they are expecting a rebound in the economy or they are trying to take competitive advantage and start spending behind the marketing dollars again.

Great. Thank you.

Thanks everyone for taking the time to listen to our call. We will look forward to doing this (technical difficulty)

(CONFERENCE CALL CONCLUDED)