宏盟集團 (OMC) 2003 Q3 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. If you do need assistance during the call, press the star followed by the 0. As a reminder, this conference call is being recorded.

I'll now turn the conference over to the Executive Vice President and Chief Financial Officer of Omnicom, Mr. Randall Weisenburger. Please go ahead.

Good morning, thank you all for taking the time to listen to our third quarter earnings call.

We hope everyone's 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 the information that we'll present this morning. This call is also simulcast and will be archived on our webcast.

We'll begin the call with briefing calls from John Wren regarding our performance and the state of the industry. Following John's remarks, we'll review our financial performance for the quarter in more detail and at the end, we'll be happy to take your questions. We'll be sure to end the call well before the market opens.

Good morning. Thanks for joining us.

Our performance in the third quarter was in line with what our expectations were and we're generally pleased.

In the third quarter, our U.S. business continued to grow in all areas except for recruitment advertising, which continues to recover at a very modest pace. In Europe, growth in the UK continues at a modest pace and the rest of continental Europe, business conditions, especially in Germany, remained weak, but the decline which started in the second quarter of 2001 is clearly easing. In Asia Pacific, South America and Africa, these areas all delivered consistent growth for us during the quarter.

As we look at new business, Randy will take you through the particulars of the third quarter. The activity was fairly strong. New business in the U.S. continues at the same pace we have seen for the last three quarters. And in Europe where new business activity had been very, very slow for the first eight months of the year, we're seeing some pick up, especially in continental Europe in this area and, ultimately, that will bode very well for Omnicom and it's companies.

With that said, I will let Randy take you through all the details and then we'll be happy to answer any questions that you might have.

Summaries for the quarter, revenue increased $260 million to just over $2 billion. That was a year-over-year increase of 14.7%.

Net income increased 7.2% to $135.3 million and diluted earnings per share for the quarter increased 4 cents to 72 cents per share. For the nine months, revenue increased 12.9% to $6.1 billion. Net income increased 2.8% to $454.6 million and diluted earnings per share increased 6 cents to $2.42 per share.

Analyzing our revenue performance for the quarter, CAP EX continued to have a very positive impact adding $80.2 million to our reported revenue or about 4 1/2%. Acquisition revenue totaled $87.2 million, adding 4.9% to our revenue and organic growth accelerated in the quarter accounting for $92.7 million of our year-over-year growth. For the nine months, CAP EX added $313.8 million, or 5.8%. Acquisitions added $196.6 million or about 3.6% and organic growth totaled $187.5 million, accounting for about 3 1/2% of our growth.

As for our revenue mix in the quarter, marketing services accounted for 58.4% of our revenue and traditional media advertising, 41.6%. For the nine-months, marketing services accounted for $56.7 million and traditional media advertising, 43.3%. As for the growth rates, traditional media advertising grew 12.7% in the quarter and was also up 12.7% for the nine months.

Growth and marketing services accelerated in the quarter to 16.2%, bringing the nine month growth rate up to 13%. Breaking down marketing services for the quarter, revenue was approximately 35.4% CRM. 11.6% specialty communications, and 11.4% public relations.

As for the respective total growth rates, CRM continued to perform very well increasing 19.8% in the quarter. Specialty communication had a strong quarter increasing 17.5%, although that's measuring off of a relatively easy prior-year number. And public relations, which began to stabilize over the first six months of the year, this quarter began to show positive signs of recovery increasing 5.2%.

Our geographic mix of business in the quarter was 55% U.S. and 45% international and while our U.S. business was stronger than our international business on a cost-per-dollar basis, due to the weakening of the U.S. dollar versus British pound and euro, our international business had higher reported growth rates.

In the United States, total revenue growth for the quarter was $119.7 million, or 12.2%. Acquisitions totaled $53.5 million and organic revenue totaled $66.2 million. For the nine month, total revenue in the U.S. grew $261.8 million or 8.4%. Acquisitions accounted for $119.1 million and organic revenue totaling $142.7 million. International revenue for the quarter increased $140.5 million or 18.1%. Of that, acquisition revenue was $33.7 million. CAP EX had a very positive impact of $80.2 million and organic growth was $26.6 million.

For the nine months, international revenue increased $436 million or 19.1%. Acquisitions accounting for $77.6 million of that growth. CAP EX had a positive impact at $313.8 million and organic growth was $44.7 million.

On the new business front, net new business wins in the quarter total $1.92 billion. Bringing our nine-month total to just over $3 billion at $3.1 billion. Some of the more significant wins and losses in the quarter included (INAUDIBLE) Phillips, Dell Computer, the Pan-Europe account, AT&T Wireless and the loss side was K-Mart and KFC.

Moving down the income statement, operating income for the quarter was $234.4 million, that 's up 10.9% year-over-year. Our operating margin was 11.6%, which was down about 40 basis points than last year or at dollar basis, about $8 million. This compares to about 160 bases point decline that we experienced in the first half of the year.

As we stated on each of the last two earnings calls, on a year-over-year bases, we expect our margins to be down about 60 basis points this year due to changes in our mix of business. In addition in the quarter, we continued to have significant year-over-year increases in severance costs, as well as increases in professional fees and other costs, largely associated with our Starbucks implementation. One example for the quarter, the year-over-year increase in severance was just over $12 million. These increase costs were offset by the benefits of our previous cost actions, as well as improving utilization rates in general. As a result, only a 40 basis point decline in margins.

For nine-month operating income increased to $794.4 million and our operating margin was 13%. Net interest expense for the quarter was approximately $11.5 million. That's up from $5.6 million in the second quarter of 2002, but down from $13 million reported last quarter. The increase from last year is due to the amortization of the sweeteners that we paid in February and August on our $850 million and our $900 million dollar convertible bond issues and the FX effect on the interest that we pay on our outstanding euro notes. These increases were offset by reductions in our overall debt levels, which at the end of Q3, our total outstanding net debt was down a little more than $240 million year-over-year.

Our tax rate for the quarter was 33.9%, which was about flat with last year. Our rate for the nine months was 34.3%, which was marginally better than the full-year rate we had in 2002. We're continuing to focus on improving our overall tax structure and believe there are more opportunities for improvement. We're currently working toward achieving a full-year rate for 2003 of around 34%.

Finally on the EPS front, as previously mentioned, diluted earnings for the quarter was 72 cents per share. That was a 5.9% increase over the 68 cents we reported last year. And for the nine months, diluted earnings were $2.42 per share, which was a 2 1/2% increase over last year.

For the quarter, the weighed average number of shares outstanding for the diluted calculation was approximately $189.3 million. And for the nine months, it was about $188.2 million.

And now we'll ask the operator to open the call for questions.

Thank you.

Ladies and gentlemen, if you wish to ask a question, please press the star followed by 1 on your touch-tone telephone. You will hear a tone indicating you were placed in queue and you may remove yourself from queue by pressing the pound key. If using a speaker phone, pick up the handset before pressing the star and 1. If you have a question, again, please press star and 1 at this time.

Our first question comes from Michael Russell with Morgan Stanley. Please go ahead.

Thank you. I wanted to get more color on the acquisition side.

It seems the acquisition growth has picked up from 3 to 5% from the first half to the second half, but it seems like the amount that you're spending on acquisitions has slowed from a pace of about maybe $120 million per quarter in the first half to maybe, like I think, $87 million for the third quarter. And trying to put that together with your potential earn-out obligations, which look like in 2003, a lot of the payments were made. Looks like we're seeing the benefit of earn-outs you have done previous to this, but you're not actually adding to the pile as much.

Is it fair to say that acquisitions were maybe more front-end loaded? That the growth we're seeing from acquisitions, we'll see for the next couple of quarters and looks like it maybe abates a bit? Or am I reading into it too much?

Um, you might be reading into it a bit too much. Acquisitions are a bit front-loaded and, you're right about the earn-out payments. Also in the acquisition, revenue number is the acquisition of Agency.com.

What you're seeing is activity, I guess, over the last four quarters of new acquisitions, has been slower than what it was prior to that. So, you're seeing this -- you're seeing the benefit of the revenue from those acquisitions coming through. Also, we have not been as aggressive during the first three quarters of the year as maybe we have been prior to this. And that has to do with our strategy.

Our strategy has remained the same for quite a long period of time in terms of, we're taking our time, looking at companies which serve our largest 250, 300 clients, which are additive to the portfolio that we have in a very meaningful way, and companies that we believe are easy to integrate and to -- and to add to the future growth of Omnicom. There is a lot of opportunities out there to do acquisitions. We have just been very deliberate through this entire period and we're buying where we have visibility on those companies that we are buying. So the pace really is dictated by our strategy and our strategy has been consistent for a very, very long period of time.

John, just one strategic question.

There has been things in the trades about a client that is not yours, Ford, that's really pushing on the production contracts from a cost plus 30% to a cost plus 12%. How does that impact your business, or what are the implications for your customers or your business when Ford is playing that type of hardball with production companies?

We don't own production companies and I can't speak for -- I'm not privy to, nor do I know, the relationship that people serving Ford had with any of their companies. So I think it -- I think the headlines might be unique to the individual client. I think Martin is -- I think he's having a conference call at 9:30. You might want to ask him.

I was wondering --

There's really nothing -- there is no trend developing here. We are constantly battling costs on behalf of our clients to try to minimize them.

Well, just as you have had some clients that are almost one-client agencies, or what you set up for Chrysler, I think there is another company you had to do for client conflicts and one-client agencies, does that impact your ability to pass along fees or is there some pricing pressure that goes along with having kind of the open-book management that would seem to indicate one would have if you're going on one client per, you know, kind of a specialized agency?

No, there is really -- there is there's nothing to -- to that at all, really. We have -- we have large clients. We have all sorts of different models to service those clients and the fees and the way we're compensated are reflective in the marketplace and so the answer to your question is no.

Okay. Thanks, John, Randy.

Thank you.

We have a question with Joseph Stauff with Soundview. Please go ahead.

Morning.

Could you provide more commentary about, at least the sequential ramp in organic growth, 2.6 the second quarter and then 5.2 in the third quarter. In particular, if I sort of break down the organic growth between U.S. and international, U.S. being 6.7, international being about 3 1/2. What were the largest sort of contributors to both those geographies in terms of organic growth?

Well, I think the trends that were in place, that have been in place for a good part of this year in that -- in the U.S. has shown early signs of recovery across the board. Europe, which has been very anemic and very weak, I guess, starting in -- the recession started later in Europe and the recovery is trailing in Europe in terms of what client business confidence, the economic growth in the European countries and the rest and we're pretty much a reflection of what the -- what the local activity is. So -- so -- it's very consistent, I guess, the world economic scene in terms of what we're seeing.

Also, our benefiting from some of the -- some of our businesses that were having negative growth. Some areas that were certainly more hip than others, PR being one, recruit and advertising being another, and probably the financial services sector being a third.

Those businesses, you know, began to stabilize and have probably started to show some renewed signs of growth, maybe off of lower base levels and the third quarter is a relatively a small quarter as well, so certainly in the quarter we had a little bit of a benefit from that. But I think as the negatives abate the areas that have continued to perform fairly well through the recession will start to have more of an impact.

In particular what, in terms of your U.S. business, what is the strongest portion in your portfolio there? In terms of the segment.

Probably the strongest port -- the strongest attribute we have is the diversity of the portfolio.

Right.

It's not one sector that does going to drive us one way or the other, to be honest.

Okay.

And then could you just repeat what you had mentioned about severance in particular. You had said $12 million, I'm sorry, was that in the quarter or --

In the quarter.

It was a year-over-year increase in severance in the quarter.

And was that concentrated in any geography?

Mostly in Europe.

Germany, France-type --

Basically what happens in Europe is you don't have the flexibility to make the decision to -- to downsize and then act on it. Then there is basically a bureaucratic process you need to go through before you can take action. And so there is a delay, especially when you compare it to what you're -- how you're able to adjust your business in the United States. So, so severance, I mean, activity which has started in the first half crystallized when we were at -- received the proper authorities to move on it in the third quarter and the number on a comparative basis was, as Randy mentioned, $12 million higher than the prior year.

And should I -- or should we assume that that trajectory will continue at least until the fourth quarter?

We hope not. I mean the trajectory's been coming down. We didn't -- I didn't actually expect the number to be quite that high on a year-over-year basis this quarter. I only included it in the presentation as an example. It basically some of these costs, you know, continue, obviously our margins or our decline in margins improved quite a lot this quarter. You know, we think that we should be expecting, you know, margin improvements from -- from the levels that we're experiencing the first half as we go forward.

Sure. Um, another point is we constantly adjust our business to be reflecting what our clients are spending with us and the economies that we're operating in, but at this point, there are not any major staff -- since most of the businesses are either growing or we believe are stabilizing, there aren't a level of conversations we have had at various points over the last three years about, um, any major adjustments to any particular parts of our business at this moment.

Great. Thank you.

Thank you.

We have a question from William Bird with Smith Barney. Please go ahead.

Okay.

I was wondering if you could comment on the rate of recovering and advertising going forward what, are clients currently saying about the spending plans coming up.

Secondly, there is a case to be made, that with a higher proportion of the revenues coming from fee-based activities that you may not participate as fully in the recovery as you have in the past. Wondering what your perspective is on that? Thanks.

2004, I believe, all the indications are that the marketplace should improve and the spending should continue to increase. With respect to, between here and the balance of the year, we're -- there is always a question until you get to the end of November as to what the absolute end spend will be because people do have a flexibility to cancel the odd project. If they want to do window-dressing for their own P&L's in the fourth quarter.

When you get to 2004 and beyond, I think, you're seeing a more bullish attitude with respect to our clients who have spent, as you know, the last couple of years focused on their costs. Now the trends are, anyway, that they're focused on their revenue growth and the companies that are going to be successful going forward will have to grow their revenue in order to be successful. Also, the recent merger activity that you're seeing, if it sticks, will be good for segments of our business that have been very quiet these past two years.

Second part of your question -

Second part of the question was just, you know, is a case to be made that with more fees that you may not participate as much in recovery. Just wondering what your point of view is.

If you look at our business, I mean, which is predominantly marketing in services, not advertising, that has always been a fee-based business. If you look at our general median advertising, since 1988, it's been moving towards fees and been moving that way even prior to the recession occurring, so we're not a Viacom or another media entity.

We have been living with fees as part of the way we get compensated for a very long period of time. So, we stopped thinking about, you know, the days of when media raised its prices, we got an automatic bump. Really ended in the beginning of the '90s, it hasn't been a part of our economics or a for a great deal of time.

Also, could you refresh my memory on what the increase in severance was in the second quarter year-over-year?

I don't have it on the top of my head. If you want to call back later, I'll pull it out of the archives.

Okay, thanks.

Thank you, we have a question from Lauren Rich Fine with Merrill Lynch. Please go ahead.

Thank you. I'm just wondering if you

Could you speak up, Lauren?

Yes, I can.

Could you comment within specialist communications which categories improved in the quarter? And then also in the fourth quarter, I presume margins will be down again. Would it be more similar to the decline in the third quarter than in the first half of the year?

Actually on the first with specialty healthcare continues to perform very well. We started seeing some recovery in a couple of the other, you know, smaller areas, financial services. I think we're probably the drivers.

As far as your last question goes, I don't have any -- we try not to provide a forecast as far as margins go. I would generally believe that, you know, utilization rates are picking up, therefore that should be, you know, an improvement on margins. And I think some of the costs have certainly been abating and the benefits of some of our prior cost actions, you know, are taking more and more toll. So, you know, you can read into that what you think margin should do.

And then I guess related to that, in terms of accruals for insensitive composition, was that number up materially in the quarter in.?

I'm not sure. I believe on a year-over-year basis they were up.

Great. Thank you.

Thank you, Lauren.

Thank you. Our next question is from Troy Mastin with William Blair. Please go ahead.

I wanted to get back into operating margins, I think last quarter you had said you were targeting those to be flat and I just want to confirm what was different than your expectations. Was it simply the higher severance?

First of all, I never targeted margins. I would have -- if I said anything, I would have probably said about what I said to Lauren's question right now.

Okay.

You know, answering the second part of your question, severance cost was higher, the year-over-year increase in severance cost was higher than I expected it to be in this quarter. That's a difficult number to necessarily predict, you know, we're dealing with a lot of locations, and as John mentioned, you know, we always try to manage our cost structures on a location-by-location basis. Those managers adjust their business or adjust their staffing levels to their client activity, so it's, you know in, most quarters we have severance cost and we have recruitment costs. I'm sure this quarter we have the same.

Can we dig into some of the specific expenses in operating expenses? You mentioned severance and professional fees. Are you seeing any material increases in other employment expenses like healthcare, workman's comp. If not, is that a concern? Is there a risk that these could be dragging margins going into next year?

The things we constantly have to management. Healthcare costs are rising and insurance costs are rising, on a percentage basis fairly substantially. They tend not to have a significant impact because they're not huge numbers, you know, in the mix.

I think if you tracked us in the short-term, near-term, and long-term we have always been able to manage our costs very well, and we just continue to do that. So we don't see any unanticipated costs in those areas impacting our margins going forward.

In terms of the incremental, maybe expenses this year versus last year, professional fees and severance seem to be the two primary ones. Certainly I think severance would be one-time in nature. Do you expect professional fees to be maintained at these levels or also a one-time-type of an increase that next year we would see not impacting margins as much?

That one's a tough one. Certainly -- certainly there is one-time costs in those numbers, but I'm not sure. We're going to be -- they're going to be increased moderating cost and other costs as we go forward as well.

Sure, but I mean the large increase in professional fees, I think, occurred with the new legislation that came in in 2001. Obviously, 2002 for all companies. So I think you probably, hopefully, we've seen the greatest bump in the comparative period 2003 to 2002.

If you asked a question about the future, while we don't have any expectations the costs are going to be reduced very much, I would think the rate of increase would stabilize. In terms of the impact on margins.

Certainly the rate of increase will stabilize. Sarb-Ox is something that is very expensive, it consumes a very significant amount of internal time complying with, you know, the various new regulations and will continue to, you know, absorb a lot of time going forward.

And finally, I think in your prepared remarks you mentioned that Continental Europe was soft for the first eight months of the year. That suggested to me that you saw some sort of a pick up that was more isolated in September. I wanted to conform that and also, is that something that you see carry into October?

I must not have been clear. What I was referring to was that new business activity.

They're at -- the number of accounts in review, therefore the opportunities for us to win business have been very slow in the first eight months. What we have seen in the last 30 days is quite a number of businesses actually evaluating and reviewing the agencies or marketing services companies and serve them. So there has been a pick up in that activity.

So, it was not an indication that there was a grand turnaround, um, in actual client spending but that there was new business activity occurring. Which is a good indicator for the future, especially when it happens in this time period because, if history tells us anything, companies who are looking to increase their spending going forward, who have not evaluated their partners and their suppliers, try to go through that process so when they get to January 1st, their new partners are in place when the new activity starts to occur. So it's just an indicator but it's a very positive indicator in terms of the countries we have visited and the people we spoke to. So that's what I was talking about when I was talking about new business activity.

Okay. Thank you.

Thanks. We have a question, then, from Alexia Quadrani with Bear Stearns. Please go ahead.

John, most of your agencies appeared to have been making headlines with regards to great new business wins over the past several months. I haven't noticed as much from TBWA. How is that agency performing versus your expectations? Do you feel you need to recruit more talent there? Could you comment on that agency.

I'm very happy with TBWA and this management team. In probably, it was the second quarter, Randy's looking at the third, they had one, Nextel, a huge win for them in the United States. Overseas, they continue to be very strong. The management team at TBWA is a very, very strong management team.

I'm very pleased with everyone in that company, not only domestically but as I go through the entire system. It's a great company.

Okay, and Randy in the past you have sometimes given revenue trends among your top 250 clients. Is that a number you have for the third quarter?

I have it, yes. It's not something we normally do on a call because it takes longer to accumulate it.

Okay, one follow up on your share buyback. Any plans to resume it?

We have always, you know, taken somewhat of an opportunistic approach, you know, in our share buyback program. We try to many take our overall share levels. I don't see us picking it up in any major way in the near

Okay. Thank you.

Thanks. We have a question from Steven Barlow with Prudential. Please go ahead.

Thank you.

Back on labor here again. In the second quarter conference call you talked about a higher level of employee training concerning some of the margin pressure and you talked about investment and key personnel. Did those two activities continue hitting the labor line in the third quarter? Thanks.

Absolutely.

We continue to invest more money because we see the return from it in terms of trying to develop our people. It's actually one of those areas that has been unaffected in terms of any cost actions we have taken over the last three years and something we will continue to make investments in going forward.

Actually, the cost in that area has increased quite a lot. Frankly, there are more opportunities in the marketplace today than there were, you know, two years ago. We've tried to use the difficult environment as an opportunity to, you know, increase our training programs, you know, improve the retention what have we believe are our key people on a long-term basis, sort of superstars of the future, as well as increasing recruiting of, you know, MBAs and others that, you know, as most people would know in 2002 or in 2000 it was a very difficult thing.

Thank you. And, Randy, is there room on the tax rate to go down more in '04?

Not 0 yet, so my view is yes.

Okay.

Probably have to be more realistic.

Yeah.

I would like to get the Martin's rate some day. That's a ways away. There is room. It's just getting harder as we go.

Thanks.

Thank you. We have a question from Dan Burkery with UBS O'Connor. Please go ahead.

I think this will be the last question as well, so we can finish this well before the market opens, and I believe Martin's putting out his release too.

I'll try to make it quick, Randy. CAP EX, I didn't see it in the slides. Do you have what it was in the quarter?

Again, it's not something that we tallied up yet. I don't think we normally put it out on the earnings call.

Okay.

I think we normally put it out in the Q.

Yup.

I think it's probably in line with the last quarter, probably a little bit down. May be a line with last year, down probably from the 2001 level.

Okay. As we look at CAP EX for all of '03 it's going to be close to the 117 in '02?

I think so, yeah.

On the acquisitions on the slide, the 331, does that correspond to the acquisition number in the cash flow statement?

Yes.

Okay. If we look at that, it picked up, you know, from a, you know, from the first six months you almost did as much in Q3.

You have been talking on these calls about picking up acquisition in the second half of the year and you also, I think, this is from memory and I might be wrong. You were talking about having higher acquisitions in '03 than '02. It seems like you might be a little hard-pressed to get up to the 586 number that you did in '02 this year, so that's my first question. Will you be that high and if you're not, how should we think of '04? Should there be, you know, a catch up or should you be around that 500, 600 million or closer to the 800 million that you were in '01 and '00.?

I have always said on those numbers that, you know, we don't really target the dollar amount we spend. We target our strategies. We do acquisitions when is we think it's the right time to complete an acquisition.

In the first half of the year, actually through the first nine months, the number of new acquisitions has been certainly slower than we have had in the past. In the fourth quarter, I think, we'll have a few more acquisitions completed than we did in Q3. A few of those I thought we would have completed in Q3. We didn't get them, you know, done. Again, we're not going to accelerate an accession.

We're going to do them when the due diligence is complete when we think we have the right strategic fit, you know, when it's the right time and when we, you know, are able to make the acquisitions on terms that we're happy with. So I guess in the past when I have talked about acquisition dollars, I have basically said those same things and said, gee, you know, these averages kind of worked out over a period of time and will probably work out over a period of time going forward. Not necessarily in any given quarter or given calendar year.

Just a follow-up.

It seems with sort of a month into this first quarter, even if you have a lot of little ones, $250 million seems like a lot to get done with the holidays coming up to just to equal last year's.

Probably correct.

That's a correct assumption.

Okay. Okay. Thank you very much, good luck the rest of the year.

Thank you all for taking the time to listen to our call. Buy-buy now.

Thank you. And ladies and gentlemen that does conclude our conference for today. Thanks for your participation and for using AT&T's Executive Teleconference. You many now disconnect.