宏盟集團 (OMC) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. 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. (OPERATOR INSTRUCTIONS) I will now to the conference call over to the Executive Vice President and Chief Financial Officer of Omnicom Group, Mr. Randall Weisenberger.

Thank you all this morning for taking the time to listen to our fourth-quarter 2003 earnings call. We hope everyone has had a chance to review our earnings release. In addition, we've posted to our website both the press release and a slide presentation covering the information that we'll present this morning. This call is also simulcast and will be archived on our website. We're going to begin the call 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. At the end both John and I will be happy to take your questions. Remember we'll plan to end the call before the market opens.

Good morning. Thank you for joining us this morning. We're very pleased to announce this morning an increase in our quarterly dividend of 12.5 percent from 20 cents a share to 22.5 cents per share per quarter. On an annual basis and dividend will increase from 80 cents to 90 cents per share. We're also very pleased with the Company's performance in the fourth quarter, with revenue increases of 18 percent and net income growth of 9.8 percent. Client spending during the quarter and organic growth accelerated to 7.6 percent. Randy will take you through all the details of our financials when I turn the call back to him.

Looking forward at the marketplace, the United States is recovering nicely. Increased client spending and some of this merger activity will benefit both our traditional and our marketing services businesses and, as Randy will again take you through, in the fourth-quarter our PR for the first time in probably two years recovered with good, solid growth. The marketplace looking around the world, first to the UK, Asia, South America, are also showing signs, although not as strong as the United States, of modest recovery.

Economic conditions in continental Europe we believe are stabilizing, but it's too early to tell how long it will take before a real full recovery comes into place. All of these basic conditions should help our Omnicom companies throughout the world continue to show the growth we've been able to demonstrate even through what was a very long recession.

From a new business point of view, net new business in the first quarter has gotten off to a pretty strong start and we expect that activity, new business activity in general will continue to show strength at least through the first quarter of this year. As we've said in the past, when there's a lot of activity, Omnicom companies traditionally have done well and we look forward to similar performance. With that, I'll turn this over to Randall and then we'll come back and answer whatever questions you might have.

The summary of our results, revenue for the quarter increased $387 million to $2.5 billion. That was an increase of 18.3 percent. Net income increased 9.8 percent to 221.3 million. Diluted earnings per share for the quarter increased 9 cents to $1.17. For the full year, revenue increased 14.4 percent to 8.6 billion. Net income increased 5 percent to 675.9 million, and diluted earnings per share for the full year increased 15 cents to $3.59.

Analyzing our revenue performance, FX continued to have a significant positive impact in the quarter, adding $151.9 million to our reported revenue, or about 7.2 percent. For the full year, changes in FX added 465.6 million or 6.2 percent. Organic growth in the quarter accelerated, as John mentioned, to 7.6 percent, adding 160.3 million to our revenue and bringing our organic growth for the full year up to 347.8 million or 4.6 percent.

Acquisition revenue in the quarter totaled 75 million, adding 3.5 percent to our revenue, and for the full year acquisitions added 271.7 million to our revenue. As for our mix of business in the quarter, traditional media advertising accounted for 43.5 percent and marketing services accounted for 56.5 percent of our revenue. For the full year, the ratios were about the same, with traditional media advertising accounting for 43.4 percent and marketing services 56.6.

As for the respective growth rates, traditional media advertising grew 17.7 percent in the quarter and 14.1 percent for the full year, while marketing services grew 18.7 percent for the quarter and was up 14.6 percent for the year.

Breaking down our marketing services, revenue was approximately 35 percent CRM; 11.6 percent specialty communications; and 9.9 percent public relations. As for their respective total growth rates, CRM was up 23.2 percent in the quarter and 20.5 percent for the full year. Specialty communications, driven by the continued steady performance of our healthcare agencies, increased 14.4 percent for the quarter, bringing the full year growth in this sector to 9.9 percent. Public relations, which began to rebound in Q3, accelerated to 9.5 percent growth in Q4, bringing the full year growth total to 3.7 percent.

Our geographic mix of business in the quarter was 53 percent U.S. and 47 percent international, and for the year it was 55 percent U.S. and 45 percent international. Obviously the significant changes in FX rates, specifically the weakening of the U.S. dollar versus the euro and the British pound, have impacted these relative ratios. In the United States, total revenue for the quarter -- the total revenue growth for the quarter was $174.5 million, up 15.1 percent. Acquisition growth totaled 55.6 million and organic growth totaled 118.8 million.

For the full year total revenue in the U.S. was 436.2 million or 10.2 percent. Acquisition growth totaled 174.7 million and organic growth totaled 261.5. International revenue for the quarter increased 212.8 million or 22 percent. Acquisitions accounted for 19.4 million of that growth, organic growth was 41.5, and FX had a positive impact of 151.9 million. For the full year, international revenue increased by 648.9 million or about 20 percent. Acquisitions accounted for 97 million of that growth; organic growth was 86.3; and FX, as I mentioned before, had a positive impact of 465.6 million.

On the new on the new business front, it was a very strong quarter. Net new business wins totaled 978.2 million. Some of the more significant wins were with Aventis oncology at DDB; McDonald's the media consolidation, which, as you know, since this is media, we would take the total reported gain and divide it by 4; and Novartis with the DA (ph) companies.

Moving down the expense statement, operating income for the quarter was 370.3 million, that was up 11.1 percent. Our operating margin was 14.8 percent, that was down about 90 basis points from last year. On a dollar basis, the change in margin is about $23 million. As we've mentioned previously, we think about two-thirds of the difference, or 60 basis points, is due to changes in our mix of business and the balance is due to less than optimal utilization rates in various locations, increased severance costs, increased costs related to the implementation of Sarbanes-Oxley requirements, and increased professional fees, all obviously offset by savings that have resulted from prior cost actions.

For the full year, operating income increased to 1 billion 164.7 million and our operating margin was 13.5 percent. Net interest expense for the quarter was approximately 10.1 million. That's similar to the third-quarter of 2003, but up from the $7.7 million reported in the fourth quarter of 2002. The increase over the prior year quarter is due to the amortization of the sweeteners that we paid in February and August on our 2031 and 2032 convertible bond issues and the FX effect on the euro denominated interest that we pay on our outstanding euro notes. These increases were offset by the interest savings that resulted from our reduced net debt levels. At the end of 2003, our net debt level was about 1,045,000,000, that's down about 290 million from the end of 2002.

On the tax front our tax rate for the quarter was 33.2 percent. That's up about 120 basis points from the fourth quarter last year, primarily due to timing. For the full year our tax rate was 34 percent, which is about a 100 basis point improvement over the full year rate for 2002. The EPS front, as previously mentioned, diluted earnings for the quarter was $1.17 per share. There was a 9 cent or 8.3 percent increase from the $1.08 we earned last year. For the full year diluted earnings were $3.59, that's a 15 cent or 4.3 percent increase over last year.

As for the share count, the weighted average number of shares outstanding for the diluted calculation was approximately 190 million for the quarter and about 188.7 million for the full year. I also at this time would like to announce that we are planning to adopt FAS 123 and as such will elect to expense stock options through the P&L beginning in Q1 2004. In making this election, we intend to utilize the preferred restatement approach. As a result, prior to releasing our Q1 results, we will restate our prior period financials to show the effect as if we had expensed options since the beginning of 2002. With that, I'll now ask the operator to open the call for questions.

(OPERATOR INSTRUCTIONS) Troy Mastin with William Blair & Co.

Thank you. The recovery here seems to be accelerating and I'm curious if you expect that organic growth will continue to improve as we go forward. I guess the question really is do you think it should be at or above current levels given no changes in the overall economy?

Troy, you know that we don't forecast organic growth, and so we won't break from that tradition. Obviously as the marketplace recovers we're very focused on organic growth as well as other aspects of making investments for future growth and training and some of the other things we've consistently talked about. So that's all part of the mix, and I think the signs being net new business and some other things are all contributing towards a recovery.

No reason to expect organic growth to decelerate, though, I would think?

We really don't focus quite the same way you guys do, especially on the quarter-to-quarter numbers. We obviously see an upward trend in organic growth as the economies, both the United States and around the world, are picking up. The quarter-to-quarter change or the sequential quarter change, obviously some relatively small spending changes by clients can impact those numbers in any given quarter certainly 1 percentage point at least.

Can you estimate when net income can start to grow or earnings per share can start to grow faster than revenue again? Are we close to that tipping point?

Again, that's somewhat forecasting future performance -- trying to be careful not to do that. I would think we're probably a little bit away from that being the case. Our overall incentive compensation levels are lower than what we'd like them to be. We do think we're through most of our severance actions or cost actions, so that's obviously a positive.

Okay, thank you.

Alexia Quadrani with Bear Stearns.

Good morning. On the operating margins, I guess the two-thirds or 60 basis points estimated deterioration in the quarter from negative business mix, is that something you might see easing up now that you're seeing stabilization in Europe and this acceleration in the U.S.?

I guess in the near term -- I guess part of it is dealing with the year-over-year comps. We think from our historic levels we've had about a 60 basis point change in our overall business mix. Once we cycle through on a year-over-year basis, that will obviously go away.

And as we get increased utilization, and increasingly if recovery holds, we'll be (technical difficulty) behind revenue and not worrying about severing people or adjusting staffs. All those little things over time will contribute to a positive result and we're working towards that. But as my old teacher told me, you can't service clients you don't have. And we've worked successfully through this whole entire downturn that the industry suffered and we're watching everything.

And on the share buyback, have you changed your policy there? Should we anticipate some share repurchases in '04?

Yes.

Thank you.

Michael Russell with Morgan Stanley.

Just a couple questions. Number one, what are the number of employees you have at year-end because usually you put that in the 10-K? I'm just wondering if you have an early read on that. And two, could you give us an idea of the 2003 EPS under FAS 123 just as a baseline?

I don't have that number -- the latter number with me. I think the first number, again I don't have the final, but I would guess between 57,000 and 58,000, again plus or minus 1000 or so.

We're finalizing all that for disclosure in the 10-K. And that's not a number we've checked completely yet. But it's around that.

And on Alexia's question about the 60 basis points on the cost, when do you think we would calendar that? Could you refresh our memory on when that became an issue, the mix change in the margins?

It's hard to say exactly, Mike. My guess is about midyear. Maybe it's the second quarter, but I'm not 100 percent sure.

Last question, 30 basis points on the remainder that's professional fees and severance and the utilization issue, is there a way to separate the professional severance, the more onetime issues and the optimal? Is that kind of a 50-50? How would you split that 30 basis points?

We've really don't want to be making excuses saying anything's a one time item or not. We know severance is -- some amount of severance is there all the time. People have asked for some directional items with respect to the margin erosion. In aggregate the first statement utilization rates are lower than what we would like them to be or less than optimal is the aggregate answer. These other things are costs that we just have to deal with.

Great, thanks very much.

Lauren Fine with Merrill Lynch.

A couple quick ones. Randy, any sense of how much you might expect the tax rate to improve in '04? Is it possible to do another 100 basis points improvement? I'm wondering if you could quantify for both the quarter and the year the impact of foreign exchange on earnings. And then, I know you don't break out the organic growth rates for the different disciplines, but just sort of I guess top-level, did the organic growth rate for advertising -- was the organic growth rate for advertising faster or slower than marketing services?

Let's see, one at a time. Tax rates -- we've done a very good job, I believe, in bringing our tax rate down over the last four or five years. Obviously it gets harder as you go. I don't think it's likely that we'll get another 100 basis point improvement in '04. Hopefully no one from our tax department heard me say that, because I certainly don't give them that benefit of the doubt when we're talking about planning or internal expectations, but it does definitely -- it definitely gets harder as we go. Let's see, what was your --?

Foreign exchange the impact on earnings for the quarter and the year?

I don't have it off the top of my head. I'll ask somebody to take a quick look and see if they can come up with an estimate. My guess is it's in the 3 or 4 cent range. It's in that ballpark. A lot of our severance actions this year, keep in mind, were in our international operations.

And quite a bit of utilization issue -- in the marketplace and some (inaudible) recovered more slowly. So there's multiple factors where you see the optics of a topline benefit but there's a lot of things that go into coming up to the end.

And then the organic of advertising versus marketing?

We don't look at it that way, Lauren. As we've said more or less consistently over a long period of time, we're looking to grow our total relationship with a client, and we're agnostic to where the spending comes from. We're very religious about this, even internally, saying that we should be selling the client what the client requires not according to any segments that we have. So, we don't break it out for -- because it's the total health of the Company and it's our ability to deliver all these services to the client that contributes to our organic growth. Even if we were to do the exercise, I wouldn't trust it because it's not the way I'm looking at running the business.

Last question, I guess on acquisitions. Obviously the expenditures were down this year versus the prior year, yet the contribution to revenues is still reasonably significant. And I'm just wondering, what are the bigger pieces of 270 odd million of revenues that acquisitions contributed? Can you break down what the bigger pieces were?

The two that we've talked about before were agency, .com and organic.

And would the two of those be roughly half of that?

Probably not quite half. They were certainly the largest.

No, because of the time of year which we acquired them.

We didn't get a full year effect for agency. I think that was a midyear transaction. You did pretty much have the full year effect for organic.

And have you seen much change in acquisition multiples over the last year?

No.

No.

Not at all. As the marketplace has gotten smaller with the big four differentiating themselves in terms of size, there aren't a great number of buyers out there for quality acquisition targets, and that's something which will probably continue for some period of time. So there hasn't been any real inflation in pricing. It's all just a matter of choice and whether or not -- if we acquire something are we able to integrate it into our strategy?

I think what you've seen over the last year or so everywhere is a stronger focus on fit. We've always had a very strong focus on all of our acquisitions that it was both an approach to business bit, but more important for us has been a fit with our top clients. We use our acquisition dollars to really try to grow our I'd say core relationships, trying to make those deeper and broader around the world. That strategy has done well for us.

There's still a decent pipeline of things to be acquired, but I think as history has proven, buying things is easy, integrating them is what's challenging. And so we continue with our philosophy.

Great, thank you.

Joe Stauff with Schwab.

Good morning. Just finishing out on the M&A. What are the expectations now given some warming up of the ad recovery in terms of your M&A activity in '04? Traditionally you guys have stated that you do roughly 650-700 million or so including earnouts. Is there a change in that expectation going forward?

No, that wasn't necessarily an expectation. People started I guess about a year, 1.5 years ago were trying to analyze the numbers. I had analyzed some of our historic acquisition patterns and tried to remove anomalies from it, which M&A by its nature is an anomaly since they're all a series of one off transactions. Those numbers today are probably as good as they were then. This year's spending was less than that. Last year's spending was more than that, so I guess it all averages out over time. The pipeline is fairly full. As we've gotten through some of our other initiatives over the past 12 months, I think we've got more people that can spend a little bit of time focusing on the right acquisitions, so maybe we won't be quite the roadblock that we were maybe over the last 12 months.

If I could just add something, Joe, we don't budget. There's an amount of money we won't spend more than, but we don't sit and budget what we're going to spend on acquisitions. Acquisition targets are identified by the individual business strategies of the various operating units that we have, and then are they a quality company? And we integrate them into that strategy? Do they have and do we have confidence and visibility in what their client is (indiscernible) targets? And that all goes into a quantitative and very qualitative evaluation of whether or not this potential target should join the Omnicom family. When we reach the conclusion that the targets does qualify, then we move forward. But we're not operating against a budget which says we're going to spend this or spend that. That's classically not -- it's been driven by other things.

Just touchback on severance a little bit more. Just from a broad perspective, were you guys net hirers or firers of headcount in the fourth quarter?

I don't have any idea.

We don't monitor headcount quarterly that closely. We monitor the business, but not the headcount. The headcount is a result of increases or decreases in the business. So we don't -- I don't know, sitting here right this morning, I don't know that number because it's never been of interest to me.

Frankly, it's very difficult and not very fruitful to try to analyze Omnicom in the aggregate like it's a single agency business. We have more than 1000 or 1500 locations around the world and headcount has to be specific to location. Looking at it as a sum of all of it rolled up is not very meaningful.

And then the other part of the severance question that I had was previously you had mentioned your headcount reductions specifically in continental Europe and the accounting associated with that takes a couple quarters I guess to bleed out effectively. As we think about the amount of severance in the fourth quarter, were those new headcount reductions or were they accounting leftovers?

There's no accounting leftover. Once you make a decision to sever someone and those plans are approved, the accounting charge is then.

In that quarter, whatever period in the future it covers.

What we talked about as far as some delays that happened last year is when you go through certain markets in Continental Europe; sometimes your plans have to be approved by various government bodies or courts, etc. The charges and the actions can't actually take place in certain of those markets until that occurs. That was, over the course of the last year, maybe delayed longer than normal. At times it was taking six or nine months in various countries to get some of those plans approved.

In terms of overall (indiscernible) there will always be severance because it's just part of what happens in a business like this when people get traded out. But in terms of restructurings unit by unit or -- I don't know what the proper word would be -- where we have plans for large amounts of severance, but those are more or less behind us because most of our markets are recovering. The place that we continue to watch because there's very modest economic growth is in continental Europe. And right now things are stable, but until he get solid growth it's hard to make a promise of what's going to happen in those marketplaces.

Great. Thank you.

Jason Helfstein with CIBC World Markets.

Just two questions at this point. The first, just trying to compare in the quarter your own markets versus the UK, is there a way to perhaps give us an idea of which of those grew faster adjusting for foreign currency? Was it the euro markets or the UK? And then just a follow-up on severance. Not to beat a dead horse here, but I think in the past you may have given some indication of what perhaps the incremental severance was versus last year in a dollar figure, and if you could give us that? Thank you.

First of all, on your first comment, the UK has been stronger than Continental Europe. And on the second point, no, we haven't done that and we won't now.

Let me ask you how about this way? Would you say the incremental severance in the fourth quarter relative to last year was more than the third quarter relative to last year or about the same or less? So incremental meaning more than the normal course of business?

I haven't looked at it relative to -- quarter-to-quarter. The numbers are larger than what we'd like them to be.

Okay, thank you.

We really don't suggest people analyze our numbers that way, looking for one offs. This is a very large organization. We have a lot of locations. We know there will be severance every quarter. We know there's recruitment costs every quarter. They are costs of doing business. We go through specifically not trying to break these things out. We don't want to make excuses in our business. We think our performance is quite good in the overall state of the economy, certainly extremely good relative to our peers. We think the businesses are getting healthier and the cost actions that we're taking are prudent for the long term.

And just let me give you -- because there aren't massive layoffs planned -- let me just give you an example of a positive situation where there can be severance. A client, which we're servicing out of New York, decides to select a West Coast agency of ours because in their normal cycle they've decided that they're no longer satisfied with the service. To Omnicom, that's a net save because we moved from one place to -- and stayed within Omnicom with that client relationship. What happens, though, once you get beyond the headline of that decision, is there are people who are going to be terminated in New York and severed, and there are people that are going to be hired in the West Coast office that just received the business.

Another example is you can have a client where an account doesn't go into review and the relationship up until this moment was that the creative work was going to be done out of Paris, and there's a change in the client and there's a decision to do the creative work out of the UK. In that case there'll be staffing up in the UK and there'll be downsizing in Paris.

So, there's all sorts of gradations when you get into severance in terms of this negative stuff when you're in a decline as to having to seriously adjust your businesses, but this continual work that goes on as we adjust to what our clients' requirements are. And the second part is always going to be part of the core in our business. So that's another reason why we don't try to -- and that's true through the industry -- try to make it a fine point where we're disclosing it specifically and then trying to make a -- explain something away as a result of it. It's a normal cost of doing business when you're in a service business like ours, and we treat it as such.

I think we understand that and I think the key why everyone is focusing on, including ourselves, is that it does seem that perhaps going into '04 there will be less severance as the headwinds are better and as a result it creates an easier cost comparison for you. That's obviously our focus.

And that's an ambition that we share -- clearly.

And other costs to -- at least to a degree -- may fill up some of that, like increasing incentive compensation pools.

At the onset of the recession people were holding conferences within Omnicom of how to cut back what they were paying employment agencies because at the end of the '90s into 2002 we were expending a lot of money on those things. We're not back to that, but there are going to always be offsetting costs. The net result, as you get wind at your back, should be a positive one, but we don't want to be very specific because we don't know exactly what that is. But we're looking forward to a recovery as everyone else is.

Just a last question and then I'll let you go, thank you. Any comment as to perhaps margin goals for '04?

Our objectives are always to have the highest growth rates and the highest margins in the industry. We think that's a nice combination that allows us to continue to invest money in people and initiatives, to keep the revenue growth going and returns a good amount to our shareholders.

Thank you.

Steven Barlow with Prudential.

I wonder if you can give us the dollar amount of acquisitions you made in the quarter, where you might have focused those acquisitions on. And then, do you have any preliminary numbers here on earnout numbers for 2004 and 2005 based on the acquisitions you've made recently?

That stuff's in the presentation.

Okay, well then at least we haven't been able to pull it up yet on the screen.

I'm Sorry. Earnout obligations as of -- our best estimate as of now or as of year-end is $175 million in '04, $152 million in '05, $462 million in the aggregate. Those numbers are calculated based upon the last 12 months performance for each of the underlying companies. It's assumed that performance will continue at those levels throughout the future, and they're also done based upon FX rates as of year-end. Obviously either of those can change.

And in terms of acquisitions for the quarter, the biggest ones we had are enumerated here.

I'll find that on the Website when it finally comes up.

Acquisition expenditures in the quarter was about $143 million.

Okay. In terms of talking about the dividend --.

That includes new acquisitions, additional investments and affiliates, existing subsidiaries where we may have bought additional interest in existing subsidiaries, that was frankly the largest component of it, and earnout payments.

I'm sorry, you had another question?

Yes, just based on the dividend, just what was the thought process there in terms of why that particular number versus a number higher or lower than that?

We posted a healthy increase and we're always trying to return more money to the shareholders and keep our liquidity and our other requirements in mind as well.

Fair enough. Thanks.

Thank you all for taking the time to listen to our call.

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.