宏盟集團 (OMC) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Omnicom Group second quarter 2005 earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. If you need assistance during the call today, please press the star followed by the zero. As a reminder this conference call is being recorded. At this time I would like to introduce today's conference call host, Executive Vice President, Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead, sir.

Thank you. Good morning, and thank you all for taking the time to listen to our second quarter 2005 earnings call. We hope everyone has 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'll present this morning. This call is also being simulcast and will be archived on our website. We'll begin the call with some brief remarks from John Wren, following John's remarks we'll review our financial performance in a little more detail and then both John and I will be happy to take questions at the end.

Good morning, and thank you for joining us. We are very pleased with the performance of Omnicom for the second quarter and for the first six months of 2005. Our business continues to be strong in the United States, South America, Asia. Europe, with the exception of the U.K., showed some improvement during the quarter, but still lags the other regions of the world. Both from a marketing services point of view and from our advertising they continue to grow supported largely by increased client expenditures and our new business gains. Cash flow, which has been a focus here for quite a few quarters, was very strong. Randy will take you through the details of all this. And with those brief comments I will turn that over to Randy and then we'll be happy to answer whatever questions you might have.

Thanks, John. As John mentioned we're very pleased with the performance of our agencies, both from a financial perspective and the success they have had in winning new business and the exceptional showing that our agencies recently had at the Cannes Advertising Awards Festival.

Revenue growth in the quarter increased 208 million to 2.62 billion that was an increase of 8.6%. As a result, revenue for the first half increased 8.2% to just over 5 billion. Operating income for the quarter was 382 million, up 11.1% that was an operating margin of 14.6%, which is up about 30 basis points from last year. For the 6 months operating increased 11.6% to 639.3 million and the operating margin was 12.7% which was also up about 30 basis points from last year. The primary drivers to our operating margin improvement were improvements in our utilization rates mostly in our rent or occupancy -- rent and occupancy costs. The other primary line-items like severance and personnel fees were basically flat and Sarbanes costs, I believe are pretty much in-line on a year-over-year basis. Professional fees in total are up about $2 million. Net interest expense for the quarter was 14.3 million, which was an increase of 2.2 million over Q1 and a $7 million increase over Q2 last year. These increases are primarily the result of having to pay a sweetener/consent payments at the end of last year on our various convert issues, as well as rising short-term interest rates.

On the tax front, our tax rate for the quarter was 33.8%, which was an increase of about 20 basis points from last year. Primarily due to the impact of certain legislative changes in Europe, we expect our full-year rate to come in marginally higher than last year's rate of 33.6%. Net income for the quarter increased 9.6% to 225.8 million bringing the year-to-date total to 376.3 million that was an increase of 10.1%. And diluted EPS for the quarter increased 12.7% to $1.24 per share bringing the year-to-date earnings up to $2.05 per share, which is an increase of 13.3%.

Analyzing our revenue performance, organic growth was strong in the quarter accelerating from 5.8% last quarter to 7% in Q2 and accounting for 168.4 million of our revenue growth. Acquisition revenue in the quarter was a net negative 14.3 million, actually reducing our revenue growth by approximately six-tenths of 1%. The negative growth is due primarily to the divestiture of the sales force agency in Australia and New Zealand that we discussed in Q1. FX continued to have a positive impact adding almost $54 million to our reported revenue for the quarter or about 2.2%.

However, as most of you probably are aware the U.S. dollar began to strengthen versus most currencies toward the end of Q2. As a result, if FX remain -- FX rates remain at their current levels for the balance of the year, we would expect FX to have almost no impact on our revenue growth in Q3, and would be negative by about 2% in Q4. If that case holds the full-year FX impact would remain positive by about 40 to 50 basis points.

As for our mix of business in the quarter traditional media advertising accounted for 44.1% of our revenue, and marketing services accounted for 55.9%. As for their respective growth rates traditional media advertising grew 8.9%, bringing the growth rates through the first six months up to 8.2%. Marketing services, which was driven by the continuing strong performance of our CRM and healthcare businesses, offset by the divestiture of the sales force business, grew 8.4% in the quarter and 8.2% year-to-date. Breaking down marketing services revenue for the quarter, CRM was approximately 34.2% of our revenue; public relations, 10.1%; and specialty communications, 11.6%.

As for their respective total growth rates CRM continued to be strong at 10.5% in the quarter and 9.4% for the first six months. Remember that that again was reduced by the sale of the sales force business. Public relations grew seven-tenths of 1% in the quarter, bringing the year-to-date growth rate down to 3.7% and specialty communications accelerated to 9.8% growth bringing the first six month growth rate up to 8.9%.

Our geographic mix of business in the quarter was 54.6% U.S. and 45.4% international. In the U.S. total revenue growth was 122.7 million or 9.4%. Acquisitions accounted for 8.8 million of that growth and organic growth totaled 113.9 million. On the international side, revenue increased 85.3 million or 7.7%. Acquisition growth was a net negative 23.1 million. Organic growth was 54.5 million and FX had a positive impact of almost 54 million.

Before getting into a discussion on our after tax free cash flow I would like to take a moment to talk about our recent changes to our credit facilities. At the end of May we amended and extended our five-year revolver to May of 2010. In addition, we increased the size of the revolver from 1.5 billion to 2.1 billion. At the end of June we also put in place a $400 million 364-day credit facility replacing our previous $500 million credit facility. The other basic terms of these two facilities are consistent with our old agreements. In total, we now have 2.5 billion available to us in committed credit facilities, and as of June 30th we had no borrowings outstanding under either facility.

Now, after tax free cash flow. As we've previously mentioned our business is very straight forward. Our primary source of cash flow is obviously net income, then adjusted for basic non-cash charges, which for us are primarily depreciation and amortization, and stock-based compensation charges, specifically, stock option expense, restricted stock amortization, and their related tax benefits.

In addition, we have a fairly significant difference between our book taxes and our cash taxes. Primarily due to the tax differences associated with our convertible bonds and tax deductible goodwill amortization. Working capital is also consistent source of free cash flow, however, due to 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 8.

During the first six months of 2005 our after tax free cash flow, excluding working capital changes, and cash receipts from the sale of businesses in Q1, was about $200 million more than our net income for a total of 576 million. Our primary uses of cash are first CapEx and dividends. Our CapEx is generally limited to furniture/fixtures, leasehold improvements, and PCs and servers on the tech front.

Year-to-date capital expenditures totaled $67 million and our dividend payment, which is currently $0.90 per share, per year totaled just over $82 million. Our next use of free cash is acquisitions, which for the first six months net of the $29 million received from the sale of businesses in Q1 totaled only about $105 million. And finally with our remaining free cash flow we continue to repurchase shares. Year-to-date we've repurchased $524 million of our stock. We have also received proceeds of $67 million from option exercises and stock issuances under our employee stock purchase plan, bringing the net purchases to around $457 million. And now on that positive note, John and I will be happy to answer any of your questions.

Thank you very much. [OPERATOR INSTRUCTIONS]. And our first question comes from the line of Lauren Fine with Merrill Lynch. Please, go ahead.

Thank you very much. Couple of quick questions, one, if you could comment on and quantify new business activity in the quarter? Secondly, if you could comment on the slow down in public relations, what you think is going on there, if there's any kind of bigger picture takeaway? And then, third, your share repurchase activity in the second quarter was relatively modest, I believe it was under 80 million. I'm wondering if there was a reason for that, if there's some maybe acquisitions you were looking at that didn't happen, and any comment there?

Randy, new business.

Yes, let's see, new business in the quarter was 1 billion 242. Some of the bigger wins were Nextel, Levitra, and Cisco, that was a marketing services contract in Europe. But as far as PR goes, I actually think -- I'm look into the number in a little bit more depth -- I actually think it was probably just a quarterly anomaly. I don't know if it was -- we're cycling off of a big quarter last year or if it was just a shift in spending from one quarter to another. As far as buybacks go, I think we actually spent about $170 million in the quarter. I think we bought in about 2.1 million shares. So it was a little bit more than what you thought.

But what I might just add to that Lauren is there were one or two deals that we looked at very, very closely, and we were seriously considering. And at the end of the day, there's still not -- they are still open and available to us, and there are other deals that are -- that we have approved which are in the queue to happen in the second quarter. But in a few instances, we have found -- and we think this is only a temporary situation -- we have found that there's an awful lot of equity money sloshing around out there. And there are some groups that have come in, and in our opinion, over paid or were willing to overpay for things; and we have been very disciplined. We won't change our objectives.

We also believe that as the interest rate environment continues to go up, that some of this equity money will get smarter, and get smarter pretty fast when they realize that maybe they have made a mistake. Maybe that -- they are treading in water that they truly don't understand and don't have other deeper relationships with the clients to be supportive of some of the monies that they are willing to pay for some of these companies. So we have been very, very disciplined. We'll continue to be disciplined. That did have some impact, because we were close. But acquisitions, as this silly money goes away, we'll continue to improve, I think. I don't know if Ran -- I believe, Randy agrees with me.

Absolutely.

Can you give us a sense of what kind of acquisitions you are looking at? Are there more marketing services? Are there certain geographies?

Well, the largest list of acquisitions, which haven't been approved but are being investigated, really are in Asia, where Michael Berkin has been out there for a quarter. And he just visited New York, and I said yes to about 10 things that he was interested in. But if you are looking beyond that, we're -- our focus really is CRM, and companies where there is truly a measurable return that -- return on investment that can be substantiated, that -- that's where we're focusing our attention.

Great. Thank you.

Yes, on a dollar basis, it's certainly a bigger focus on the CRM and marketing services area.

Yes.

Terrific. Thank you.

Thank you.

Thanks and we do have a question then from the line of Alexia Quadrani with Bear Stearns. Please go ahead.

Thank you. In the quarter, Randy, we saw a real nice acceleration in organic revenue growth. And I'm wondering is the acceleration continuing or can you give us some outlook on how we can expect it in Q3? Because I know you are going to circle against really tough comps in the third quarter. I believe you had 8.4% organic revenue growth in Q3 last year. And if you could give us maybe an idea of what we should expect in the third quarter? And then the second question, is John, given your comments on the acquisition activity that you have already seen pick up a bit in Q3, should we expect, therefore, a higher level of acquisitions sort of done this time, I guess, in the third quarter?

Let's see, focusing on organic growth. We don't give forecasts. You're correct on -- we're cycling on a relatively high comp. Last year in the third quarter I think we had some -- what we believe was pull forward of Olympic spending in the quarter. So it was kind of an abnormally high quarter. Last year was about 100 to 150 basis points higher than the norm. I think what we saw in Q2 was a little bit of a pick up in Europe. As John mentioned, U.S., Asia, and Latin America has been pretty strong for a few quarters now, and Europe had been flat. Other than the U.K. in Q2 Europe was starting to show a -- some modest signs of recovery. If that continues, then I think the organic growth rates should come in at these levels maybe even a little bit higher. But, again, we're not trying to give a forecast. We would think some place in the -- for the year in the 6 range -- 6.5% range plus or minus 1% is probably reasonable numbers until we outperform it.

And I'm sorry the second question, Alexia, I was trying to --?

I just want to clarify in your comments earlier about acquisitions. Did you sort of suggest that you're already getting some more deals done in the third quarter and we should expect a higher number in the second half of the year?

We're very hopeful, but it's also cautioned by -- the answer to your question is yes. But it's cautioned by -- we are not going to change our discipline. The entire Company is focused on growing our existing clients, acquiring new business where we can. And in a very stable environment, we believe that our strategy of focusing on our clients vis-a-vis acquisitions with the only geographic exception to that being Asia-Pacific is the right strategy which has proven very well for us for a very long period of time. And we have been able to successfully integrate those things that we have spent shareholder's money on. So, yes, there are some things that we have said yes to. The pace at which they get closed, but the second half will be a little bit more robust than I think the first.

And just one follow-up, sort of a bigger picture question. You did a great job as you referenced in your opening remarks at the Cannes Awards, I believe last month. Do you see an immediate impact over sort of such positive -- I guess a positive showing? Or is it just more of a longer term benefit I guess to the reputation of your agencies in terms of new business, net pitch activity invites?

I think it's a broader statement as to the quality of our work, and it's judged -- it's a crafts fair. It's attended by quite a few clients. Increasingly, every year there are more and more clients that come to it. As it’s been reported, I was a little distracted at Cannes this week -- this year, but successfully distracted. But I think it has a longer term impact. I mean, I don't think clients look at the awards and say, you know, in the next two months let's change to so and so. I think it has a longer term impact on the quality of the firm and how we're evaluated by prospective clients in the marketplace, and it has proven out over time.

I think it also has an impact on how we're viewed by the participants in the industry as well, which help us with retention and attraction statistics, or help our agencies in maintaining the quality of their staffs.

Thank you.

Thank you.

Thank you. We do -- thank you we do have a question from the line of Michael Nathanson with Sanford Bernstein. Please go ahead.

Hey, thanks. I have one for Randy. I realize you said twice I would -- 30 basis points improvement, first half and second quarter. I know that the goal is to try to get margin improvement about 10 to 15 basis points per year, and I wondered if you think this year could be exceptionally better than that, maybe the 30-basis point run rate given the incentive comp and the Sarbanes-Oxley lapping from last year?

Well, no, you are mixing up a little bit of my statement. The 10 or 15-basis point margin improvement that I talk about is a long-term trend. Right now given -- where our starting point is at, our hope is certainly to have a higher 10 or 15-basis point margin improvement, this year and maybe next year as well. Right now the margin improvements are coming largely from improved utilization rates in our rent and occupancy costs. The salary and service costs are basically growing in-line with revenue growth.

We're not seeing a drop-off in severance yet because we still have pockets of right sizing, I'll say. We're actually seeing a bit of an increase in our personnel costs as -- some of our agencies that are recovering have to spend that money even if other agencies are not. And we're still continuing to try to focus on building our incentive comp pools which, again, all of that is kind of keeping those salary and service costs in-line with the revenue growth. Eventually, we'll start seeing some utilization rates -- or utilization pick up there as well.

Okay. Thanks.

Thank you.

Thanks and we do have a question then from the line of Troy Mastin with William Blair and Company. Please go ahead.

Good morning. Thanks. A quick follow-up on the earlier question on acquisitions. Can you tell us definitively if we can expect to see acquisition growth going forward? Do you have visibility on acquisitions that you've made, that would mean Q3 and Q4 will be positive rather than negative? And an add-on to that the 23.1 million in negative acquisition growth internationally, was that all the disposition of the Australia/New Zealand property or is there some acquisition benefit to that?

The second question first, the ac -- the disposal we made was a large and successful call center that had been started from scratch a number of years ago. And we decided that we had gotten as much from that as we could and someone came in and offered us a pretty nice price for something that we didn't find to be mainstream, and so we were interested in selling it and we did. In terms of forecasting acquisitions, we're not trying to be difficult, but were not fore -- we don't forecast anything other than the performance of the Company. And as I said what you can depend on us to be is very, very disciplined in terms of how and when we'll buy companies.

We've kind of indicated to you our focus, the timing of when a transaction closes is very difficult to predict. And, again, this silly -- I shouldn't use the word silly. There's aggressive equity funds out there who have kind of missed the point that the industry is pretty largely consolidated, so if they are willing to pay more for a company than we are willing to pay for it, it's -- I'm confounded by their expectations that they're going to be able to run it better than, say we could, or one of our competitors, and then resell it to us at a premium.

So I don't think that realization has occurred yet with some of the aggressive money that's running around. And if you are a seller, it -- it's an evaluation that you have to make. Where we have had the greatest success is where these acquisition targets have been employee-owned and those people are looking for careers, and they see us as an opportunity to enhance their growth, and enhance their careers.

Where it gets more difficult, is where companies have been restructured, I guess, coming out of the recession that there's third-party money. People who are not engaged in the business, who are looking for an exit strategy, and if an equity fund shows up with money and is willing to pay them the kind of premium that they want, those people get to vote on that. So it really -- we're looking for the former not the latter anyway, because we're not an organization that provides an exit strategy for anybody. We're most interested in acquiring companies that are client(ph)[indiscernible] service, looking to join a group that's going to help them move forward. So there's all of those very soft issues which come into play when we're making a determination. But we've passed on one or two -- what would have been, very good companies, largely because we weren't willing to provide an exit strategy to people who weren't engaged in the business. But that can't go on for much longer because they have to realize that they don't have an exit strategy and they will[audio difficulty]. And as interest rates get higher, I think -- and people get a bit smarter, I think they're going to find out that they can't be as aggressive in terms of what their spending is.

Your numbers are slightly off, your negative 23 million that was an international number. The negative acquisition number for the quarter was really $14 million. So that's -- your 23 million was on the international front and we had positive acquisition growth domestically.

Yes, and what I really was trying to get to is that negative 23 million pretty much linked solely to the disposition because that was international. So were there any acquisitions to offset that, I guess, is another way to ask?

On the international side?

Right.

Probably, but they were very small.

Okay. And then if I could ask one more regarding real estate utilization. Can you give some perspective on where you might be in this process? So you've come out of a period where you probably had too much real estate and have been optimizing. Are we fairly far along in this process or do you see quite a bit of room left? And if there's any sort of a metric you might have that you can share with us regarding your real estate utilization or effectiveness that would be helpful as well? Thanks.

I think we're fairly far along, but the number is -- it's a difficult number to get to, it's something that you are constantly focused on. We have roughly 18 million sq. ft. of office space globally. We have roughly 1,000 different leases. If you take that statistic and just say the average lease was 10 years you have 100 new leases coming up -- or 100 leases coming up each year. So it's pretty much a continuous process of managing those costs, which is both a combination of space utilization, as well as pricing.

And there are other factors that -- in terms of deployment of that -- what we have followed successfully in some of the larger cities, and we continue to roll it out around the world is what we kind of call a "hub building" strategy. Where when the market is right, we'll find fairly large space, commit to it at very reasonable prices for a fair size of our utilization or our needs in a particular country and then put multiple companies into those buildings, and then take shorter leases where we can. Even if -- even sometimes at higher prices. So we have the flexibility in the event of a downturn to move out of the shorter leases or suffer for a shorter period of time and benefit from increased utilization in our "hub" organizations. So it's an ongoing process and Randy just enumerated the size of the whole process.

Plus, as revenue grows we get increased utilization, and as -- I have to be honest, I was a little surprised slightly by the size of the severance cost that we incurred in the second quarter, and it just has us right-sizing our businesses wherever we can. So there are many line items on the P&L that are subject to improvement, so we continue to focus on as many of them as we can.

Quickly, one more if I could, U.K. given the events there recently. Any signs of any sort of a change in the marketplace there, if there's a shock to the system, a slowdown of any sorts, any anecdotes maybe?

Well, one unfortunate thing is we lost an employee in the subway. The British people are very tough. They have been going to work, but there's been some disruption. It's way too early to tell what ongoing impact there may or may not be in the short-term. But the British are remarkable people, and -- but as you can imagine, having lost one of the -- having a victim in a -- has a -- there's an impact to that, and we can't gauge it at this point.

Thanks. Very sorry to hear that.

Well, thank you, Troy.

Thanks, and we do have a question now from the line of Steven Barlow with Prudential. Please go ahead.

Thanks. Actually the bombing in London, it appeared that maybe the U.K. market was slowing down. If you could just discuss what is going on, on the ad side there? And then in previous calls you've cited France, Germany, Benelux countries as being the weaker part of Europe. It looks like things may have gotten a little bit better. If you could just talk a little bit about those countries, please?

Well, the U.K., as I said earlier, way too -- it would be naive to think that it wouldn't have any kind of an impact. What that impact is, it's way too early to tell. And God knows the British are resilient. More resilient than anybody else, because if you go back 15, 20 years, they faced these types of things way before America or a lot of other countries did. So any impact, which we can't predict, I'm sure will be short-lived. Our companies continue to be very successful in that marketplace, so they'll win business and they'll continue to grow as we move forward. In terms of the other countries, we do show positive growth in the second quarter. I don't have the numbers --.

Well, we showed a positive growth in all of those markets. France actually probably picked up the most. Germany remains somewhat slow. The Netherlands remains somewhat slow. The other Europe countries are tending to outpace those larger markets. And -- I'll say Eastern Europe, has done -- is doing quite well.

Okay. And Randy could you give me the number of basic shares at the end of the quarter, please?

Yes, but it's going to take a minute. Why don't we do this, I -- we'll look for that number -- do you have another -- if you have any other questions I'll do those while someone is looking for that number or --.

Well, I'm done, let the next person go on.

And when I get the number I'll just say it on the call.

Great.

Great, thanks a lot. And we do have a question then from the line of William Bird with Smith Barney. Please go ahead.

In marketing services I was wondering if the scale is becoming more important? And also, are you seeing a greater breadth in terms of the number of clients utilizing your capabilities? Thanks.

We are certainly seeing a greater number of our clients using our capabilities. It's a process which we're constantly working at, and we have a number of programs to try to improve that situation constantly. We don't measure it quarter-by-quarter selectively. We tend to take a look at what the overall growth is at the end of the year, only because the individual numbers may be small and collectively and aggregately. You need to look at it on a larger basis. And marketing services continues to be strong, that's our focus, when we're looking at -- for acquisitions and other areas to invest our money. But I'm not quite sure I answered the first part of your question.

Well, the first part relates to -- is it -- do you think it's a competitive advantage being 2x times your next nearest competitor? And are more of the assignments more global in nature?

The global part -- the answer to your question is, yes, we do. We believe our portfolio -- that will, in the long run, benefit us the greatest in terms of continued, consistent-type of growth. Because you see reports in the paper that large advertisers were cutting back in the upfront. You see that the drug industry, pharmaceutical industry is coming up with rules to self-impose restrictions on direct to consumer, which oddly enough has never been a very large part of our business. We have always been much stronger in the ethical materials that are delivered to physicians where I think most pharmaceutical companies are going to redeploy that spending. So -- and on the advertising side, I think we can continue to gain market share because of the quality of what we have.

So I'm bullish about advertising largely because of the quality of what we have, and I'm very bullish about marketing services because I think that's the sweet spot as you move forward and clients increasingly try to redeploy money in the internet, in CRM, in other measurable areas. And so I'm very -- the part -- we are very pleased with the portfolio of companies we have and we think we're in the right place.

Thanks.

Thank you. And we do have a question then from the line of Paul Ginocchio with Deutsche Bank. Please go ahead.

Yes, thank you.

I think I'll also make this the last question.

Great. Thanks Randy. Two questions, first on the dividend, what is your view on that? I think it has been stable for six quarters now. And second, anyway to decompose the organic growth between -- just increased fees because of marketing services or nontraditional advertising versus just new business wins? I would expect that that first reason is starting to really drive revenue growth as well. Thanks.

Let's see answering the second part, no.

Well, we have never attempted -- we don't attempt to do it really.

Yes, but -- I mean -- we don't attempt to do it and it would be a phenomenally difficult task to try to do that with any kind of degree of accuracy. So I don't see us making that -- getting that leap any time soon. You also have to keep in mind that a lot of your new business is with your existing clients. We continue to focus on trying to penetrate our clients with more and more agencies. So you get into a lot of definitional issues as to what is new business and what is organic -- or what is other forms of organic growth given it's really an existing client.

Sure. And another -- just one other aspect, I mean, I spent three hours Saturday talking to a group of about a 100 of our senior executives at Babson part of Omnicom University. And the constant message that we're communicating to all of those leaders is, we want you to focus on what is best for the client. We don't -- we're very agnostic as to where the spending is or isn't, so come up with the best strategy for that particular client, and then advise them accordingly as to how they should be spending and investing their money. So it would be -- the last thing in the world I would want to do would be to start to segment that down because it would lead to a contrary message then the one I'm trying to send across the Company.

Great. Just a comment on the dividend?

Well, the Board decides the dividend. My personal view is we should grow the dividend modestly. I think our history has been to increase at about 2.5 cents per quarter, every six or eight quarters. But, again, that's a Board level decision.

Answering the share question -- see I don't -- well, maybe it's walking in -- I don't as of yet have the exact -- well, yes I do have the exact number. The exact number is about 181 million. That's exact for you. The weighted average basic share count for the second quarter was 181.4 million. So extrapolating that to assume that -- well, the quarter end number was probably just under 181 million. And on that note, I'll thank everyone for taking the time to listen to our call, and we'll do this again next quarter. Bye bye.

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 may now disconnect.