宏盟集團 (OMC) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Omnicom Group First Quarter 2005 Earnings Release Conference Call.

[Operator Instructions]

At this time, I would like to now introduce you to today's conference call host, Executive Vice President, Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead.

Good morning. Thank you all for taking the time to listen to our first quarter 2005 earnings call. We hope everyone had a chance to review our earnings release. We've also posted to our website both the press release, and a presentation covering the information that we will present the morning.

This call is also being simulcast and will be archived on our website. Today's call will also be a test of modern technology, as John is joining the call from Asia. Following John's remarks, we will review our financial performance for the quarter in more detail, and if the technology holds up then both John and I will be happy to take questions.

Good morning. And thank you all for joining our first quarter conference call. We were very pleased with the company's performance for the first quarter. All of our group companies continue to make progress and 2005 is off to a very good start. Revenue growth throughout the world continued to improve during the quarter. Our focus on growing our market share with existing clients and winning a healthy share of business opportunities as they come up are the primary drivers for that growth.

From a geographic point of view, and Randy will cover this in a little more detail, as in 2004, the US, Asia, and South America, were the strongest regions for us. But there was better performance in virtually all the regions of the world during the quarter. Also, as Randy will cover in a lot more detail, our margins continue to improve during the quarter and that's a trend, which started when we stabilized margins in the third quarter of last year. As we have discussed in the past, our objective is really to improve our margins as we continue to invest in the development of our people and the services we offer clients.

With that brief introduction, I will turn this over to Randy, who will take you through in great more detail and then we will answer your questions.

Thanks John. As John mentioned, the first quarter remained strong and the year is off to a good start. We're continued to be pleased with progress our agencies are making in managing the cost structure and the success of the business development initiatives.

As a result, revenue in the quarter increased $172 million to $2.4 billion. That was an increase of 7.7%. Operating income for the quarter was $257.3 million, up 12.2%, and operating margins were 10.7%, which was about a 40 basis point increase from last year.

Net interest expense for the quarter was $12.1 million. That was an increase of $1.7 million over prior year. The increase was primarily the result of having to pay sweeteners/consent payments at the end of last year on our various convert issues. Offset by the benefits of generally lower average debt levels in the quarter.

On the tax front, our tax rate in the quarter increased to 35.1% from 33.6% last year. I'll come back to the cause of that increase in a minute. Net income increased 11% to $150.5 million, and fully diluted earnings per share increased 13.9% or $0.10 per share to $0.82 cents for the quarter.

Those are the GAAP reported results. However, there were a couple of capital transactions in the quarter, which even though this is considered non-GAAP, we feel should be isolated from our results to more clearly understand the performance for operations.

In the first quarter of last year, we also had a couple of similar transactions, which many of you remember, we also broke out from our results. For those of you who have printed out the investor presentation we posted to our website, you should turn to page 7, where we have isolated the financial impact of these transactions for both quarters. Now, going down to P&L again, the transactions themselves obviously had no impact on our revenue in the quarter, although without the businesses our revenue was reduced in the quarter and we will be lower going forward.

For 2005, the transactions resulted in a net pre-tax gain of $6.9 million, primarily from the sale of our 60% equity interest in a sales promotion agency with operations in Australia and New Zealand, offset somewhat by loss in the sale of non-strategic domestic business. Excluding the gain, operating income in the quarter was $250.4 million, and our operating margin was 10.4%. Excluding the small gain in the Q1 of 2004 for compatibility, operating income increased 10.7% and operating margins increased about 30 basis points. These transactions had no impact on our interest expense.

The transactions, however, did have an impact on our reported tax rate. Due to an unusually high book tax rate caused by the non-deductibility of allocated booked goodwill, the book tax cost of the transactions was approximately $6.1 million or a tax rate of 88%. Excluding the taxes on these transactions, our tax rate in the quarter would have been 33.6%, which is consistent with our tax rate last year and in line with our expectations for the full year of 2005.

There was also a small minority interest in the gain associated with the business in Australia, totaling about $350,000. As a result, net income impact to the transactions was about $400,000. On a comparable basis, the capital transaction activity in the first quarter of 2004 increased our net income by 1.1 million. On a comparable basis, excluding the transaction results, net income increased 11.6% to $150.1 million, and diluted earnings per share increased 15.5%, to $0.82 cents a share from $0.71 cents last year.

While we continue to believe that it's most important to evaluate our cost structure taken as a whole, a few of the larger items that impacted our margin in the quarter include, on the positive side, further improvements in our overall utilization rates, driven by a combination of prior cost actions, market share gains, and generally improving market conditions. Just to note, utilization rates are generally, and this quarter was no different, the most important driver of our overall margin performance.

We're also beginning to cycle our Sarbanes-Oxley costs as a result reducing the year-over-year increase of these costs. On the negative side, as we have discussed previously, as our businesses continue to improve, we expect to increase our aggregate incentive compensation pools. This quarter our charge for incentive compensation reflected an increase of approximately $10 million, bringing a total of $68 million for the quarter. As I mentioned, excluding the effect of the transactions, overall our operating margins increased about 30 basis points to 10.4% for the quarter.

Analyzing our revenue performance, organic growth continue to be quite strong in the quarter, accounting for $128.7 million of our revenue growth or about 5.8%, which was consistent with the first quarter of last year. Acquisition revenue was a net negative of $4.8 million, reducing our revenue growth by 2/10th of 1%. FX continued to have a positive impact, adding $47.7 million to our reported revenue or about 2.1%. Consistent with the trends of last year, FX changes are primarily the result of the weakening of the US dollar versus the euro and the UK pound.

Based on current exchange rates, we would expect the impact of FX in Q2 and Q3 to be a bit over 3% and net only about 1% in Q4. As for a mix of business in the quarter, traditional media advertising accounted for 43.7%, and marketing services for 56.3%. As to the respective growth rates, traditional media advertising grew 7.4% while marketing services grew 7.9%. Obviously, it was marketing services that was impacted by the divestiture in Australia and New Zealand.

Breaking down marketing services for the quarter, CRM was approximately 33.7% of our revenue, public relations 10.7%, and specialty communications 11.9%. As for the respective total growth rates, CRM continues to be strong and steady performer, increasing 8.1% in the quarter. Again, excluding the disposition, which occurred in 2005, CRM would have grown about 10.6%. Public relations continue to build off the momentum, which began to develop last year, growing 7.1% in the quarter and specialty communications increased 8%.

Our geographic mix of business was 54.6% US, and 45.4% international. In the US, total revenue growth for the quarter was 91 million, or 7.5%. Acquisition growth totaled $13.2 million of that and organic growth totaled $77.8 million. International revenue increased $80.6 million or 8%, acquisition revenues was a net negative $18 million, organic growth was positive at $50.9 million, and FX had a positive impact of $47.7 million.

Last quarter we added a couple of slides to our investor presentation covering cash flow. A few investors said they thought the slides were useful, so we've continued them again this quarter. They are actually pages 8 and 9 of the presentation. Our primary source of cash flow is obviously net income, adjusted for basic non-cash charges, which for us, are primarily stock-based compensation charges, that is stock option expense, restricted stock amortization, as well as their related tax benefits and then depreciation and amortization.

In addition, we have a fairly significant difference between our book taxes and our cash taxes. This was primarily due to the tax benefits associated with our convertible bonds and tax-deductible goodwill amortization.

Working capital is also a consistent source of free cash flow, however, due to the large swings in these numbers month-to-month, internally we analyze our cash flow excluding changes in working capital, which is the way we have presented the analysis on page 9, page 8 is the long form. During the first quarter of 2005, our after-tax free cash flow excluding working capital changes and the cash proceeds from the transactions we discussed was approximately $107 million more than our net income, for a total of $257.6 million.

Our primary uses of this cash are fairly straightforward. First, they are CapEx and dividends. Our CapEx is generally limited to furniture and fixtures, leasehold improvements, and PCs and servers. In the first quarter of 2005, CapEx totaled approximately $30 million and our dividend payment, which is currently 90 cents a share per year, totaled approximately $42 million in the quarter.

Our next use of free cash flow is acquisitions, which in the first quarter of 2005 totaled only approximately $23 million and the sale of the businesses generated $29 million of proceeds. Our acquisition activity has remained very light, investing only $2 million in new acquisitions in the quarter. I have said it before, this is an activity that is beginning to pick up. I think the first quarter was really just timing, I expect to see this number increase in Q2.

And finally, with our remaining free cash flow, we have continued to repurchase shares. In the first quarter of 2005, we repurchased approximately $378 million of our stock. We also received $58 million of proceeds from option exercises and stocks sold in our employee stock purchase plans, bringing the net amount to $320 million and reducing our diluted average share count for the quarter to about 183.8 million shares.

Now, I will ask the operator to open the call for questions.

Certainly.

[Operator Instructions]

And your first question today comes from the line of Jason Helfstein from CIBC World Markets. Please go ahead.

Thanks. A few questions, first, what was the share count at the end of the quarter?

I am not sure. The average share count for the quarter was 180 38 (ph)

I was just curious if it was lower than that because you had bought more shares back. I will ask my second question, if you can look that up.

It, obviously, have to be lower. I don't have the exact accounting for the quarter.

Okay. And then, I mean, you had said, I guess, even without the divestitures and including, clearly, marketing services or direct marketing grew faster than the ad related businesses, can you talk just about that? Do you think that's a trend that we will see this year and perhaps what's behind that? Or do you think it just happened to work out the way this quarter?

That's a trend that has been going on for the last four or five years. It has been fairly consistent that our marketing services businesses have grown faster than traditional media advertising. I think in probably 2003, may be in the first part of 2004, larger because of the impact on our PR business, the growth rates narrowed, but I think even during that period, marketing services outpaced traditional advertising.

Okay. And then, I guess, just one follow-up, has there been any change as far as private market values for companies you are looking at purchasing since 12 months or 18 months ago?

I don't believe so, no.

Okay. Thank you.

And next we'll go to the line of Lauren Fine from Merrill Lynch. Please go ahead.

Thank you. A couple of quick questions. I'm wondering, if you could comment on new business activity in the quarter in terms of being able to quantify it? And then, I'm wondering also if there is a way to quantify, what portion of your revenues come from total auto clients and no one specifically but all you auto clients together as a percent of the total?

And then third, I'm just wondering, if you could speak generally, if you've seen any real big changes in the competitive landscape whether, on pricing or otherwise as a result of some of the misfortunes of one holding company and the major acquisitions of another?

What you're looking up, some of those other things, Randy, pricing, no, we haven't seen much shift, the selection game for the most part is done on quality. So there's really nothing on that, if steps, which would from answering the question you asked on?

I was asking that question but I guess just generally speaking, have you seen tightened competition on your business in, in terms of -- some of the consolidation and maybe desperation?

There is a good deal of new business going on, there is probably more important is there is more conversations about what business could possibly be put into review. If that is the result of acquisitions in some of the other troubled areas having, I can't trace that line. But there is quite a bit of activity, formally and informally going on as we speak.

Okay. Thanks.

Let's see couple of the other questions, first, going back to the first question we had that I bypassed over. I think the share account at the end of the quarter was about 182 million shares. So you asked what was our auto related revenue in some effects as that depends upon the definition of auto. I think if you deal with OEMs, it was around 8% of our revenues.

And that is worldwide, Lauren. So the car market in the United States is different from the car market in China or in the other places. So, I don't know how useful it is to understand that number just in the aggregate.

From the new business?

New business was about 1.135 billion, 1.150 billion. That is net new business wins, some of the bigger ones, Mitsubishi, Abbott Labs, Cap Pharmaceuticals. Again, those are numbers that we set on numerous times their billing numbers, there's disconnect between those numbers, and our revenue growth. We at -- on this point agree with IVG that those numbers are not terribly meaningful.

Right. Thank you.

And next, we'll go to the line of Steven Barlow from Prudential. Please go ahead.

Thanks. Wren, if you'd comment maybe on acquisitions, in terms of it looks like you did one in the first quarter. What is the pipeline look like? I guess, related to that, would the finance group seems to be spending a lot of time last year on Sarb-Ox. Had they stopped spending as much time on Sarb-Ox? And then related to Sarb-Ox, what are the costs looking like year-over-year?

No, they are still spending a lot of time on Sarb-Ox. We have more people. I hope to spend that time and because of some of the other things on top as to beginning of the conference. We said it for a while the actual acquisition pipeline is fairly full.

We happen to get the transactions close, and it takes some time to do that. I would have expected the acquisitions in the first quarter to be higher than what they've turned out to be. I'm not saying that it's that I expected to go up, and then they will just work on their own, but I do expect acquisition activity for deals that closed to increase in the second quarter and throughout the balance of the year.

As far as year-over-year increases in Sarbanes costs, I would think you'll probably would be in the range of 8% or 10%, probably more or less in line with our overall cost structure. I think, we obviously got through Sarbanes, we spend sizable amount of money in our approach to Sarbanes. Right now, I don't see that changing dramatically this year.

Okay. And to do you have a board authorization for the amount of stock you can buy back if so what is left in that?

We do not have a formal stock repurchase program. We basically look at our free cash flow. And as we've said, we have some fairly simple things to do with our free cash flow. We pay dividends, we have CapEx, and then basically, we're looking at acquisitions and stock repurchases.

Fair enough. Thank you.

Thank you.

And next we'll go to the line of Alexia Quadrani. Please go ahead.

Thank you. Could you first give us some more detail on your European operations, I guess, particularly the countries where you're still seeing some weakness, and how you expect growth to track going forward for the rest of the year? If you have any indications on that.

And secondly, Randy, if you could give us a little more color on some of the metrics, particularly utilization rates that impacts profitability? I guess just generally, how you think they're tracking today versus historically, and is there any meaningful change at all in terms of pricing?

Yes, as I don't have the exact numbers in front of me. I think the only two markets that didn't show growth in Europe were Denmark and Switzerland last quarter, and that was more related to actions that we took in the business, or individual client situation. We did see growth in places like Germany where last year that wasn't the case.

It's modest at this point, but at least we've come to a period where it's stabilized and we can expect growth to a market share gains or just sustaining ourselves as the economy is flat now. I don't know, if you want to add anything to that, Randy, you have more detail for you than I do.

(inaudible-technical difficulties) Right. The only thing that I would add as a caveat is and I said it numerous times quarter-to-quarter, these growth rates especially will start dividing the company up into small segments. It can be relatively small change that can be just a shift in timing of spend, it could be a new businessmen or lost, they can impact these organic growth numbers on a quarterly basis. So...

I guess I'm trying to get a better sense of just of sort of Germany and France, and UK, the larger markets that have been relatively weak for a while. Do you sense that on the business is improving little bit?

I believe their stable in terms about business and our expectations of from clients. And we expect modest growth, not at the level that we see in the United States, South America, and Asia at the moment. But that's a vast improvement from what I've would have been able to say first quarter of last year.

And then on the utilization rates, Randy?

In the utilization rates again, we track-the utilization rate is most important company or agency by agency. In the aggregate, we looked the numbers we've made very good progress on real estate or options costs. And totally, we actually are taking new leases in New York, which it's been a while since we've utilize all of the space that we had in New York, and actually needing to get new space is a good example.

We're seeing slightly slower growth in our salary related costs relative to our revenue growth. Those differences are smaller, obviously in this business, you need people to continue to grow in your business, and you are pushing against regular salary increases etcetera. Overall, the utilization rates are inching up. Probably the most significant changes is we have flat to declining cost on the real estate options cost an aggregate despite our increases in revenue growth.

Thank you, very much.

Thank you.

And next, we'll go to the line of William Jury (ph) from Credit Suisse First Boston. Please go ahead.

Thanks. A couple of questions. First off, Randy, I think in the slideyou said 211 million in potential turnouts for 2005 based on current business conditions. I was just wondering if there was any material upside to that number if business conditions improved from current levels. And then two, I was just wondering on the growth rate 7.4 for media, and 7.9 for marketing, if you would expect based on what you're seeing in the market right now that gap to widen between those two?

Well, couple of things. First of all on the turnouts, turnouts can move a little bit from variety of reasons, as far as material movement goes, no, I wouldn't say especially for the 2005 payments, I wouldn't think that the numbers can move materially from those. Let's see, your second question, can you say that again?

Growth rate spread between marketing and new media?

First of all, the marketing services growth rate was already reduced a little bit because of the divestitures and vendors-really isolated marketing services field. So the gap is naturally a little bit wider, anyway.

Our acquisition activity is more likely to be in marketing services than at traditionally the advertising. That also will tend to as we pick up acquisitions we'll tend to spread that number back at maybe at some more normal level.

And half of percentage point growth in the quarter amounts to transaction to $5 million. So I don't think the variances are very meaningful nor trend like, other than in very broad terms.

And just one follow-up Randy, if I could. Any other quarters where we'll see the tax rate move around? You said the full year is still on track for expectations, anything in Q2 or any other quarter that might jump around like Q1?

Q1, the tax rate only moves because of these transactions.

Right.

The underlying tax rate for the business was 33.6%. I think that's a pretty good tax rate. We obviously have focused a lot of attention trying to get our tax structure more efficient. I don't see the rate coming down from the 33.6% significantly. As we go forward, that's a pretty good rate. I think most of the efficiencies are- we've gotten them, although, we continue to look. I also don't see that rate going up in the near term. So again, excluding the transactions, I think the rate is pretty stable.

Great, thanks. Have a nice quarter too.

Thank you.

And next we'll go to the line of Michael Nathanson from Sanford Bernstein. Please go ahead.

Hi. Thanks. I have one on revenue and one on cash flow. On revenue could you just give us some more data on what would have acquisition revenue growth been without the disposals in the quarter? Do you have any idea on what that might have been?

Those was about $17.5 million, so I would say 4.8.

Yes, that's well.

Okay?

Okay. And then on the cash flow statement, there was a huge positive variance on other investing activities. 556 million swing on the positive side. What was that related to -- is that?

No. I didn't get the question.

If you look at page 8.

Yes.

On the other investing activities on the cash flow.

That was at year-end when all the cash comes in, we basically put our cash in tax-free short notes. Now that this was a thing at year end, basically, the municipals that we buy tend to have a relatively long life, say 20 years, but they re-priced every 7 to 30 days. Accountants have decided that since even though they re-priced every 7 days, it's not a cash equivalent because the underlying security has a long life, and therefore they take it out of the cash equivalent and put into investment activity.

Okay.

So it shows up as investments. But it was really just swings in our cash equivalents account.

And that's what the last year gain was as well?

Yes.

Okay, great. Thank you.

And next we'll go to the line of Troy Mastin from William Blair and Company. Please go ahead.

Morning, thank you. Last week, we saw some normal growth numbers out of the marketing letters. But your exposure to the entire media landscape, do you any insight or you tried to reconcile what that dollars might be coming from and has it surprise you leading you to change your acquisition or investment focus at all?

John, do you want take that one or do you want me to?

In the first, we are very appropriately invested I think in Internet related assets. I can -- it's the law of big numbers and little numbers as opposed to big growth percentages and little growth percentages. So I don't know what the absolute revenue you're talking about to drive the percentages, which you're talking about, Troy, so I don't know how to properly respond.

But we've said, and we believe, and have believed for a long time, that this is an important medium that the percent of increase for those type of activities should be greater than some of the more traditional businesses that exist. And so it's a very interesting area, but will it change our acquisition activity? No, this is something we've been keen and focused on since 1996. We remain that way and it's very much a part of the strategic planning and of the assets and the underlying platforms that we have.

And do you have any insight as to where those dollars maybe coming from? While they are still small and the context of all the media, they are getting pretty significant now, and I'm just curious if your clients give you any indication where the dollars maybe be coming from, or if they are just media gross spending is flowing into that medium, if you have any insight?

Not that I could -- not that I could be very articulate about. I mean, when we said with our clients on a media planning people sit with our clients, we don't have any vested interest in one medium over another. We have been recommending for quite a while that they test, they put more and more money into Internet related activities.

But for the most part, what we're constantly advising our clients is-is to the extent that there is a medium that you can measure the ROI, that's where we recommend clients spend their money, and that -- for most industries, the Internet lends itself for that. So, I think it's different, client by client, but it is an area that if general media grows by 5%, you can expect that area-that component to grow faster than the aggregate rate.

Okay. Then also, could you characterize summaries that the state of the US and global economy, has it changed it all throughout the quarter from what you can see or is that too hard to discern over a short period of time?

Since I'm in Tokyo, and Randy is in New York, I'll tell you that I can't do it. If Randy can do it from New York, that's great.

I'd be a better investor if I could tell you what the economy is doing. We're really not economists. In general, our business similar to the trends we saw last year, the US seems like it's doing fairly well. Asia seems like it's doing fairly very well, Latin America seems like it's doing very well, Europe is maybe it's flat to- beginning to show some signs of economic improvement. If I can -- other than those broad terms and basically reading what the various economists and frankly, banks like yours put out, we don't have any great insights.

Okay. Thank you. I think we have time for one more call.

And that question will call from the line of Paul Ginocchio from Deutsche Bank. Please go ahead.

Yes. I had a just few questions are you looking at the dividend, I guess at your shareholder meeting and second --

I'm sorry, I couldn't hear you.

When you're talking about the looking at the dividend at your shareholder meeting, and second, what's head count done year-on-year? Thanks.

The board periodically takes a look at the dividend, and that's a board driven activity, so I can't comment. Randy-?.

I will not comment on the dividend. As far as the head count goes, I don't have the exact number. That's not a schedule we've completed yet. I do know that the headcount is increasing modestly from the fourth quarter. But I don't have an exact number, I'm sorry. But my guess is, we'll have those -- that analysis done probably before the end of the week, so if you want to give me a call, I can update you on that.

But there wasn't any dramatic increase from the 63,000 reported.

No.

And I think with that, we will thank everyone for the time they spent on the call, and we will do this again next quarter. Bye-bye.

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