宏盟集團 (OMC) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Omnicom first quarter 2007 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded.

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

Thank you all for taking the time to listen to our first quarter 2007 earnings call. We hope everyone has had a chance to review our earnings release. We've also posted to our website the press release, and a presentation covering the information that we will present this morning. This call is also being simulcast and will be archived on our website.

I have been asked to also remind everyone to read the forward-looking statements and other information that's included on page one of our investor presentation, and to point out that certain of the statements discussed today may constitute forward-looking statements, that these statements are our present expectation, and actual events or results may differ materially.

We will begin the call with some brief remarks from John Wren. Following John's remarks, we will review the financial performance for the quarter in more detail, and then both John and I will be happy to take questions.

Good morning, and thank all of you for joining our call this morning. We are very pleased with the Company's performance for the quarter. Revenue, operating profit, net income and EPS all reflect a really good start to 2007.

Revenue growth for the quarter was very strong in all of our markets except for Japan, which has been difficult for us since the middle of last year, but it's tied to a specific client's issue. Despite this one market, revenue growth everywhere else in the world was strong.

In the United States, across all of our services, Europe was especially strong in all the traditional markets, and then non-Euro markets. In Asia, we continue to make real progress in China and other markets performed very well. I think it was a second-quarter event but we were able to win -- one of our subsidiaries won the Singapore airlines business, which is in and of itself very prestigious.

South America, the Middle East and Africa were all exceeding their planned growth rates.

From a portfolio perspective, we continue to make investments in new areas, which we believe reflect the shifts in client spending, and our traditional agencies by all measures are clearly the best in the industry.

With that brief commentary I'll turn this over to Randy who will take you through our results and then as [Jean] suggested, we'll be open for questions.

As John noted, we're very pleased with the performance of our agencies, and overall Q1 was an excellent start to the year. Revenue in the first quarter increased $277.7 million to $2.8 billion; that was an increase of 10.8%. Operating income for the quarter increased 10.9% to $315.5 million. There was an operating margin of about 11.1%, which was the same as reported in Q1 of last year. However, last year in the first quarter there was a one-time pre-tax benefit of $3.6 million due to the adoption of FASB 123R. On a like-for-like basis, operating margins, therefore, increased about 15 basis points.

Net interest expense for the quarter was $18.3 million. That was an increase of $3.2 million versus Q1 of last year, and a decrease of about $5.8 million from the Q4 of last year. The increase from Q1 of last year is due primarily to our issuance of [$1 billion] of ten-year, fixed-rate notes at the end of Q1 in 2006. The interest rate on those bonds is about 6.1% or about $15 million a quarter.

The increase in interest was offset by a reduction in other short-term debt, not needing to pay a supplemental interest payment on our 2031 bonds in February of this year, and further improvements in our working capital management. Given the current interest-rate environment and our current debt levels, we would expect net interest expense in Q2 to be between $23 million and $25 million.

On the tax front, our reported tax rate was 33.8% for the quarter, [and was] basically in line with last year. Net income for the quarter increased 10.4% to $183 million, and fully diluted earnings per share for the quarter increased 17.2% to $1.09 per share.

Analyzing our revenue performance, FX in the quarter was positive, adding 3.4% or $87.3 million to our revenue. Looking ahead to Q2, if rates stay where they are, FX should be positive between 2.5 and 3% for the quarter. Growth from acquisitions, net of divestitures was marginally positive in the quarter, increasing revenue by $2.1 million or about 1/10 of 1%. We completed four small acquisitions in Q1, and a potential acquisition pipeline continues to be fairly strong.

While Q1 acquisition revenue was positive, this increase was still being muted by the divestiture of a health care business that occurred in the third quarter of 2006. Based on activity to date, we expect that net acquisition revenue will again be only marginally positive in Q2, before cycling out the impact of last year's divestiture in Q3.

Organic growth continues to be very strong, coming in at 7.3% for the quarter, adding $188.3 million to our revenue.

As for our mix of business, traditional media advertising accounted for 43.1% of our revenue, and marketing services, 56.9%. As for their respective growth rates, advertising grew 10.6% and marketing services, which was driven by the continuing strong performance of our CRM business was up 11%. Breaking down the marketing services revenue for the quarter, CRM was approximately 35.8% of our revenue, PR 10.4% and specialty communications, [10.7%].

As for their respective growth rates, CRM accelerated to 14.2% in the quarter, public relations remained very strong at 13.6%, and specialty communications, which was impacted by the disposition of the health care business in Q3 of 2006 decrease 8/10 of 1%. Adjusting for that disposition, specialty communications grew about [5.7%].

Our geographic mix of business in the quarter was 54.3% U.S. and 45.7% international. In the U.S., total revenue growth for the quarter was $110.9 million or 7.7%. That consisted of acquisition growth of $400,000, and organic growth which remained very strong at about 7.7% added $110.5 million.

International revenue increased $166.8 million or 14.8%. Their acquisitions added $1.7 million. FX had a positive impact of $87.3 million, and organic growth was 6.9%, adding $77.8 million. Our international organic growth was driven largely by strong performance in the UK, Germany, Canada, Netherlands, Spain, Italy, Russia, China, Singapore and Australia; basically fairly broad-based, strong organic performance.

Cash flow in the quarter was quite strong and consistent with our historical trends. Our cash-management programs have continued to perform very well, as indicated by our quarter-to-quarter improvement in net interest expense. As we believe everyone already knows, our primary source of cash flow is net income, adjusted for basic non-cash charges which were also primarily stock-based compensation charges and other related tax benefits, and then depreciation and amortization.

Our primary uses of cash -- first, dividends, which are currently running at $0.25 per share. They totaled $42.6 million in Q1. Capital expenditures in the quarter totaled $34.9 million. Acquisitions, including earnout payments on prior acquisitions, net of dispositions and asset sales totaled $19.4 million. And then share repurchases which in the quarter totaled 451.3 million, offset by receiving 47.7 million of proceeds from option exercises and stocks sold under our employee stock-purchase plan, resulted in net repurchases of just over $400 million. As a result of those stock repurchases, our average diluted share count for the quarter was 167.8 million, which at this time looks to be a pretty good estimate for Q2 as well.

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

Thank you. (OPERATOR INSTRUCTIONS) Steve Barlow with Prudential Equity.

Very, very strong organic revenue growth on a tough comp. What is your outlook for the rest of the year on organic revenue growth?

Steve, we don't provide that guidance.

I guess pockets of strength that you think will continue. I mean, you mentioned a dozen countries that are doing well; any reason to think those won't do well going forward?

At this point, no; our natural bias always is to be conservative about what we see while striving for what our objectives are, which is at least double-digit revenue growth for the year, reported revenue growth. But that's a combination of organic growth, FX and potential acquisitions that we do.

I am encouraged by the new business wins we've been able to get in the beginning of the second quarter, which have been very strong. It's a good start to the quarter. Following just traditional patterns, they won't start to impact our revenue until the third quarter of this year, but all the fundamentals of the Company are strong, and we don't see any real pockets of weakness.

Okay, and then for Randy, share count remaining the same in the second quarter; any particular reason why you would pull back a little bit from what you just did in the first, and trying to get to potentially about $1 billion or so that you've traditionally been getting about $1.3 billion in buybacks in 2006, partly because of the bond issue, but any thoughts on that?

Two things. When you look at year-over-year change in share count, you really have to look at the last 12 months. So the Q1 share count reduction from Q1 of last year [was] in part because of large purchase activity last year. This year in Q1 we bought in a net about $400 million.

I would think for the year maybe we're looking at $600 million or $700 million, but again we're not -- we'll see how the year plays out. The average share count in Q2 also gets impacted. Generally we issue our restricted stock sometime in the beginning of Q2, so that also has to be offset. That's why I'm saying, I'm thinking flat share count, maybe slight reduction in share count for Q2 is a fair estimate at this point.

Also know, Steve, we're constantly looking at acquisitions. We're very disciplined as to what we pay when we buy things. But if we found -- if we were able to reach agreement on some of the acquisitions we're potentially in conversation with, we would use cash for those, which is just part of our theme.

And obviously we prefer to be doing acquisitions on the basis that we do them than using our cash to buying stock.

Great. Thanks, gentlemen.

Craig Huber with Lehman Brothers.

Very impressive quarter. The acquisitions -- I mean, historically you guys have clearly done a series of small acquisitions over the years. I assume that won't change going forward if there's anything medium-sized or larger. And second question, can you just break down, if you would, the salary and service costs percent change in the quarter versus your office and general costs, just give investors an idea of what those 2% changes were in the quarter?

I'm going to pull up some numbers. I'll let John --

We have traditionally done small acquisitions which have been either an extension of one of our business platforms from a geographic point of view, or the addition of product or areas where we've determined it's cheaper to buy than to build. And I don't see that philosophy changing very much in the near -- in the predictable future.

We're very comfortable with our business platforms; they're very robust. We are very engaged in where we think we can make improvements, and acquisitions play a role, but simply that. And we're not -- as an organization, we're very good when we make those kinds of purchases to integrate them, as opposed to doing large deals which others have done, which in my opinion take a long time to get incremental value from. So we're steady-as-you-go in terms of what that is.

We also, I would guess over the last several years, have probably made an increasing amount of investments in talents which runs through our payroll line, where we've decided that to build certain services out is in the long-term interest of the Company, as opposed to making purchases. And Randy is dutifully looking at that variance. I don't know if you've --

Yes, I think salary and service costs will be around 72.2%, and office in general will be about 16.7% for the quarter.

But, again, know that when we decide to start something in India or start something in China or start something -- or enhance our client service coverage by bringing senior people in, that's payroll that actually runs through these lines. And we value them and evaluate them against how would we accomplish the same thing if we would have made acquisitions, which would be treated as a capital item. So it's a steady combination of a lot of little decisions that you get made, but for the purpose of sustaining our growth and our consistency.

Yes, I need to maybe add a touch to what John just said, and I've pointed out in many of the meetings with investors. Any investment we make for the future -- and keep in mind our focus is on creating consistent, high-end organic growth on a long-term basis -- any of those investments run through basically the salary and service cost line on a current basis. There is no CapEx to go out and build a plant; it's all a current expense. And for us, balancing those long-term investments to achieve the consistent long-term organic growth is, I'll say, the challenge.

My other follow-up if I could, in the past, Randy, you've mentioned in the first and third quarter your company was benefiting from -- many of your clients were switching more to a monthly retainer. Fee arrangements were sort of smoothing off, smoothing the revenues over the course of the four quarters, I think helping your first and third quarter by roughly 1%, 1.5% towards organic revenue growth. Did that happen again here in the first quarter and also what's your outlook on that basis for the rest of the year?

I don't know if it happened again or not. It's a trend that we've seen for the last several years, that we've had greater organic growth in the first and third quarters than in the second and fourth quarters. At some point that trend is bound to slow down. Obviously, we have tens if not hundreds of thousands of individual client engagements; those fee agreements were all structured somewhat differently. It's not possible to go through and say, well, that contract changed; therefore, X changed. But we definitely have been seeing a smoothing over the past couple of years through organic growth, and I would suspect that we'll see greater organic growth in Q1 and Q3 this year, whether or not it's one percentage point or 1.5 percentage points or 0.5 percentage point, I don't really know.

Also understand that from the dawn of time, the cycle in the industry -- and certainly we're a reflection of this -- is the fourth quarter is always the largest, the second quarter is the next largest, then the first and the third. So there's a base there that you're operating off of, and that base has been built over 20 years.

Alexia Quadrani with Bear, Stearns.

Thank you, a couple of questions. First, do you have a number for net new business in the first quarter? And also, I know we only see a sliver of your new business activity here in the U.S. in the trades, but would you agree, however, that this second quarter started off very strong? And then I have a follow-up.

The net new business in Q1 was right around $1.3 billion, and yes, you're right, the trades tend to only pick up -- it's kind of U.S.-centric advertising-centric wins, given our mix of business and obviously what gets picked up in the trade is not terribly reflective of our total. And I think John pointed out, new business wins in the first quarter certainly started off very strong.

Then historically, your business hasn't seen that much impact from the presidential elections or the Olympics. Is there any reason that 2008 should be any different?

Well, the Olympics impacts the business a little bit. The elections affects media. I mean, what happens is, all these politicians go out and buy space, which -- but we're not engaged in that business domestically -- in the United States, so we're not the beneficiary of it, but we have to deal with it because our clients, if they want to be on air in places that the candidates are, the networks and the stations, generally their pricing increases during that period of time. So it does have an impact on our client's business, and it's a slight impact, but not measurable for us in terms of what the political cycle does.

But the Olympics being in China, any reason that --should that maybe -- I mean looking at the 2008 numbers and what your clients are thinking about in terms of spending around the Olympics in 2008; any reason that should have a material impact here to your outlook for 2008 or --?

A material impact? Absolutely not. I mean, Omnicom is a very, very large company. I mean, we passed [Habosis'] revenue for the first -- for the year, somewhere around February 15th, and you report on them in the same fashion that you report on us. So you have a large number, so it has a positive impact but what that is, given the size of the Company and the continued growth of the Company.

And just last question, any consideration of possibly splitting the stock?

That's a Board decision, which the Board takes those things up periodically. So, I can't preempt my Board in conversation over that.

Karl Choi with Merrill Lynch.

A couple questions here. First one is, some of your competitors have suggested there has been a slowdown, general slowdown in the U.S. in the first quarter, which you clearly didn't see. Just wonder what you think is the market-share situation. Were more clients in specific spending? And I have a follow-up.

Yes, it's difficult sometimes with organic growth to compare one company versus the other. Certainly something that impacts all of us is the economy. Secondly, when you're looking at us versus our competitors, we have a bit of a different mix of business. We are much larger in the marketing services area relative to any of our leading competitors. You know, I definitely think that's been a significant advantage for Omnicom over -- probably forever but definitely for the last five or six years, and maybe even accelerating over the last couple of years.

You see it more in the organic growth area, I think, than anywhere else. You know, I think this quarter WPP, I think they just put out their numbers, they were at about 4.3% organic growth; definitely very good numbers. Our number was about 70% higher than that.

Well, I noticed that the advertising revenue on a reported basis, at least growth, accelerated in this quarter; anything in particular that drove that? I don't know if the trend also represents an acceleration on an underlying basis.

I don't have anything specific to it. I mean, it's hard to distinguish between execution, meaning strong new business activity and performance of our agencies versus an economic expansion.

We also have, the way we collect our numbers, a lot of the digital work that we do is now getting captured in our traditional agencies, because we don't separate those out. Now, if an agency -- like a Goodby, Silverstein is a good example; as they build their digital capabilities in digital services, but that's still coming through as traditional media advertising, so I think the numbers are not at 100% pure.

The numbers are pure; the nomenclature of how we've traditionally described things probably hasn't caught up to some of the language used by other people in the way that they distinguish stuff. But we've always believed that there will be a large convergence of the methodologies that an agency and/or a CRM company and/or whomever ultimately used to reach the consumer base that they are targeting.

Last question, as you look at acquisitions, just wonder what are your thoughts on about acquiring technology as clients increasingly are migrating online.

We have a tremendous base in that, and oftentimes depending on what it is we're trying to accomplish, it's more sensible, and this is probably the trend over the last two years on our part, to acquire the talent and to build those capabilities rather than go out and try to purchase them. (multiple speakers)

(multiple speakers) we've got a pretty robust acquisition, I'll say target list or discussion list, and with each one we go through the criteria. It's kind of a buy or build sort of scenario. If we can acquire it at lower risk and a cheaper price than we can build it for, we'd certainly prefer to acquire it.

And this isn't something new to us. I've been engaged or studying or evaluating this for at least the last 11 years, since we made our first investments in this space. So we know exactly or at least we believe we know where all the real talent is and we go out and acquire them, the individuals as well as the companies.

William Bird with Citigroup.

Yes, I was just wondering if there was much reinvestment in the quarter that may have limited margin expansion. And also, was there anything in particular that drove the more negative swing in working capital?

Let me just comment on one thing, Bill. The margins are the result of what we do, and we don't target margins because we think if we would, it would drive bad behavior and ultimately stint consistent growth over a long period of time. What we are focused on is revenue growth, we're focused on being able to service our clients in more and more areas. Then we're interested in operating profit, but we're more interested in net income and then EPS.

We wouldn't hesitate nor do we hesitate to make investments in people and/or startup operations, because it would be popular for us -- more popular for us to not spend that money and put up operating margin growth because we think that's a short-term strategy.

We also continue to make incredible plans, taking Omnicom University this year to China and to other places. So we are always balancing what decisions do we make. We don't get every one of them right, in terms of investing in people and resources which get reflected in our P&L, as opposed to making acquisitions, you know, for those same type of activities.

And in this quarter as well, operating margins were actually up about 15 basis points. To be comparable, I think you need to take out the one-time benefit of adopting FAS 123R last year, so frankly I think operating margins were very strong, especially given the investments that we've made in the business.

As far as working couple goes, working capital actually did quite well in the quarter. Our working capital and cash-management programs -- we stepped them up a notch again starting about a year and a half ago, which I think were already quite strong.

If you're looking at the year-over-year differences, you really need to look at where the year-ends started. Year-end 2005 I believe was a weekend, so you ended up having extremely strong first quarter performance last year, which was really kind of making up for the starting points from year-end 2005. This year in the first quarter, we're coming off of a different starting point for year-end 2006, but still on an absolute basis or historical basis, Q1 working capital was quite strong.

Great, thank you.

And I think the proof of that, Bill, is to always look at the interest expense and not to look necessarily the balance sheet dates. Because one should tie into the other. You know, it's a reflection of what the real operations are like.

Jason Helfstein with CIBC World Markets.

Two quick questions. First, so obviously net new business is strong in the quarter. I think the actual number is up 26% year-over-year, but that's not the best way to look at it. But maybe if you can talk about relative to last quarter where you talked about the gap or the -- there wasn't the tailwind going into this year as there was last year from new business. How much of that gap have you closed and how do you feel about closing what's left in that gap?

And then secondly, John, can you talk about -- so far, I guess, of the S&P 500 companies that have reported so far this year, most companies tend to be beating earnings, so I've got to believe that's good for their ad spending outlook. How would you compare your tone kind of as far as this quarter or at the beginning of this year relative to how you felt in years past? Thanks. We're always trying.

Yes, I know. The first question.

The new business, Brian. Obviously, new business, there's two pieces to it; I've said this to a number of people. There's kind of what I describe as the engine room, which is the tremendous number of smaller sort of bread-and-butter wins and losses that happen every quarter. You know, that section of our new business activity has been very strong for quite some time. Then on top of that, there tend to be a handful of larger wins and losses and they happen when they happen. It's not a consistent quarter-to-quarter kind of thing.

Going into 2006, third quarter 2005 was extremely strong with the Banc of America and Lowe's wins. Those were two very, very significant wins in that quarter and again, you can't expect that quarter-on-quarter or every quarter. Yet Q1 of this year seems to be quite strong; Q2 is off to a very good start.

And just one comment on that. The key to it, and we never really focus on it in conversation, is it's net new business. So how do you win business when you're able to pitch for new accounts, and all your current clients giving new product assignments? But also mitigating the amount of business which you lose is a very important factor in the long-term trend there. And I think Omnicom probably does as good a job or better job than darn near anyone in mitigating losses through shifts in clients, even within our own system.

So it's a combination of a lot of factors, and what goes into review is driven by clients, and then we are responding to it. It's not -- we can't cause somebody to put their account in review, so we tend to be -- it's a reflection of what's going on in the marketplace in any given quarter.

It's true that the fourth quarter last year was slightly below what we would have liked, but we seemed to be on track. But again, the numbers are not material to our long-term growth as long as there's a correction. You have to look at the trends, not a specific quarter, to get a sense of what's going on. And we feel pretty good about it.

Now, your second question -- how did I feel last year? I don't remember. I really don't. Things are good. We tend to be very conservative in our outlook. There's a -- the constant conversation which goes on with clients is, how to make marketing/advertising more measurable, and I think that's an underlying current which impacts almost all of the conversations that I have with our significant clients. And that's what we endeavor to do every day now, is to try to make whatever efforts we're providing on the part of clients, more measurable. And I think we have the asset base to accomplish that.

Megan Friedman with William Blair and Co.

I have two questions for you. First, with the newspaper companies reporting slowing growth online, just on a macrolevel, or you seeing any signs of a broader slowdown in online growth?

And then second, if you could talk a little bit about your thoughts on Google double-click? Do you see that impacting your agency's willingness to use their technology?

Let's see. On the first one, no, we're not seeing any slowdown in the push towards digital. And again, we look at -- we see digital in a much broader perspective than I'll say just online advertising. We see it as online marketing and branding. It seems all of our agencies are doing more and more experimentation and development work with their clients digitally or on the Internet. Digital is probably a broad word. So it's very strong and continues to grow.

On the whole Google double-click thing, I have a few points. Some of them may be off point.

One is, Warren Hellman is a very good friend of mine and I have to credit him and his ability to generate an outstanding return for his own shareholders, so that would be my first point.

The second point is, I ultimately feel, although it will probably take a year, that that deal will be done. I think what it's going to raise -- and this will be a very good conversation in the marketplace -- are privacy concerns, in terms of the technology that exists far exceeds I think the laws and the thinking of the people that are going to be impacted by it, so I think this will be a healthy debate as they get through and try to seek approval for this deal, to find out where that comes out.

It will be -- we're a big client of Google's already, so we have a relationship with Google. I think depending on how this deal gets proved or not, it will be very beneficial for a company like Omnicom.

I've been studying for what Google and double-click can do for the last 11 years. If there is clarity as to where the privacy lines are and where they're not, by the time this deal gets approved and then implemented, we'll be well ahead of everybody else by acquiring the right talent and building out incremental needs that we'll have to be a very important client to them, and a very important asset to our clients, once the lines of where privacy -- what can be done and what can't be done are better defined.

So I'm encouraged by the deal, because I'm most encouraged by the discussion that the deal is going to cause the marketplace to have. And any definition will be positive for us, because we in fact know how to respond to it.

We're also a significant user of double-click services, as well.

Yes. So I think it's pretty cool.

Great, thank you.

Joel Arms, Banc of America.

Do you have any -- your plans to add talent this year, do you expect your headcount to increase this year as much as it did in 2006? I think last year you added roughly 4,000 employees.

I'm sorry. We didn't quite -- if you could speak just a bit --

Sure. You talked about plans to add talent this year. The question is, do you expect your headcount to increase this year as much as it did last year? I think last year you added maybe 4,000 employees versus 2005. I'm just curious as to what the headcount increase might be in 2007.

Our headcount tends to grow with revenue. The only minor modification to that is the location of the revenue growth.

Obviously, you get higher revenue per head, say, with growth in New York than you do in places like Asia. And also, you have differences in the type of businesses that you add. You can get a different revenue per headcount. But I think our head count has been pretty consistent with our revenue growth, and we would forecast it probably the same way. It's not a metric that we spent a lot of time focusing on. I think we have time for one more question here.

Paul Ginocchio with Deutsche Bank.

You can see in the other region, growth was a little bit slower than the rest of the regions. Was there anything in particular with that or is that just noise?

I'm sorry, I didn't hear the beginning of your question.

The other regions you've got geographically, it seemed a little bit slower than the rest of the groups. Is that a specific country or is that just noise?

Are you talking about -- do you mean slower than the United States? (multiple speakers)

The way it's presented in here. You know, as we said, the performance around the world was actually fairly consistent. It was much broader-based than it has been in, say, the last two or three quarters. John mentioned Japan being weak. That was one client specific event that occurred; I think it started about middle of last year. But for the most part we had pretty strong growth globally.

The other thing that's happening, these numbers that you're seeing on this page, these are total growth. So you have differences in FX impacts in some various markets as well.

Okay, great. Thanks.

Thank you. And thank you all for taking the time this morning to listen to our Q1 call.

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