宏盟集團 (OMC) 2007 Q3 法說會逐字稿

Ladies and gentlemen, good morning. Thank you and welcome to the Omnicom Group third quarter 2007 earnings release conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow-up at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded.

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

Good morning. We hope you have had a chance to review our earnings release. We have also posted to our website both the press release and the presentation covering the information that will be presented this morning. This call is being simulcast and will be archived on our website.

I would like to remind everyone to read the forward-looking statements and other information included on Page 1 of our Investor presentation, and to point out that certain statements discussed today may constitute forward-looking statements, and that these statements are present expectations, 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 our financial performance for the quarter in more detail, and at the end of the call both John and I will be available for questions.

Thank you. Thanks for joining our third quarter call this morning. Our third quarter performance and that of the first nine months of the year I believe was was excellent. Our advertising agencies and marketing service companies, they continue to grow across all of our disciplines throughout the world.

The only thing we saw this quarter, the only two sections, or two small business units which are primarily U.S. based, and they are in recruitment and advertising in the Yellow Pages business. Besides that, we are very pleased with the growth we have seen across all of our companies.

As Randy will cover in a lot more detail, our net new business for the quarter and the first nine months reflects our continued ability to extend our services to the finest companies in the world, and our continued investment in development of our people, we believe is still the cornerstone of our consistent performance.

At this point, I will turn the call back over to Randy, and he will take you through our presentation, and we will be happy to answer any questions you might have.

As John pointed out, we are very pleased with the performance of our agencies across the board. Before I get to the results, I would like to remind everyone that the results are adjusted for the 2-to-1 split that occurred earlier this year. All of the current prior period first per share amounts and weighted average share amounts have been adjusted in accordance with SFAS 128.

We start with revenue. Revenue growth in the third quarter increased $327.1 million to $3.1 billion. That was an increase of 11.8%. As a result, revenue for the nine months increased 11.1%, it is almost $9.1 billion. Operating profit for the quarter increased 13.9% to $350.2 million, that is an operating margin of 11.3% which is about 20 basis points higher than the third quarter of last year.

At nine months, operating profit increased 11.7%, to just over $1.1 billion. That made an operating margin of 12.4%, which was in-line with last year's recording margin. However, excluding a couple of one-time items that impact of last year, margins improved roughly 10 basis points. Over the past nine months of the year, we continue to increase our investment in our people, in training, in technology, and in numerous new business development initiatives, which together have resulted in strong year-over-year growth. We believe the position of the Company is well going forward.

We believe these investments have significantly benefited our new business record, which this quarter totaled $1.25 billion, and year-to-date has been about $4.2 billion We believe that these investments have also been key to our consistent industry leading revenue performance. Interest expense for the quarter was $19.3 million.

That was down about $7.4 million from last year. The year-over-year, improvement was primarily the result of not needing to pay any supplemental interest on our 2031 and 2032 bonds. That savings was offset by higher overall interest rates on our short-term borrowings, and increased daily average borrowings, resulting primarily from our share repurchase activity.

On the tax front, our reported tax rate for the quarter and year-to-date was 33.9%. That was a bit up from last year. As you may recall, last year's rate was favorably impacted by a couple of non-recurring items. Absent those items, the underlying tax rates were fairly consistent year-to-year.

Net income for the quarter increased 14.2% to $202.2 million, bringing the year-to-date total up to $661.9 million, that was an increase of 12.8%. Diluted earnings per share reflected our performance for the quarter, as well as the impact of our share repurchase activity increased 19.2%, to $0.62 a share, bringing the year-to-date earnings to $2.00 per share, up about 18.3%.

Analyzing our revenue performance, FX in the quarter was positive 3.6%, or adding $99.1 million to revenue. Looking ahead to Q4, if rates stay where they are, FX should continue to be positive, in the 3 to 3.5% range.

Growth from acquisitions, net of divestitures, was also positive, increasing revenue by $33.4 million, or about 1.2% in the quarter, and by $41.6 million, or about 0.5% year-to-date. In Q3, we finally cycled out of the impact of the sale of the healthcare business, which had been pulling down our acquisition growth over the past several quarters. During the quarter, we closed five new acquisitions, and appear to be on-track to close several more in Q4. Organic growth continues to be very strong, coming in at 7% in the quarter, and accounting for $194.6 million, of our revenue growth. Year-to-date that leaves organic growth at 7.2%, adding about $590.7 million to our revenue.

As for our mix of business, traditional media advertising accounted for 41.7% of our revenue, and marketing services 58.3%. As for the respected total growth rates, advertising was up 12.1%, and marketing services increased 11.6%. Breaking down marketing services revenue for the quarter, CRM was approximately 37.6%, public relations 10.2%, and specialty communication 10.5%.

As for their respective total growth rates, CRM continues to be very strong at 14.2%. Public Relations slowed a bit from the first six months. However, the performance remained quite strong at 9.7%. Specialty communications increased 4.8%. In this sector, Healthcare was fairly strong in the quarter. This sector was pulled down by weakness in recruitment, advertising, and Yellow Pages.

Our geographic mix of business in the quarter was 53.4% U.S., and 46.6% international. In the U.S., total revenue growth in the quarter was $114.4 million, or 7.4%. Acquisitions accounted for 1.4% of that growth, or $21.6 million. Organic growth was up 6%, adding $92.8 million. International revenue increased $212.7 million, or 17.2%. Acquisitions added $11.8 million. FX as I mentioned was very positive adding $99.1 million. Organic growth accelerated to 8.3% in the quarter, adding $101.8 million.

Our international organic growth was driven largely by strong performances in North America by Canada and Mexico, in Europe by Germany, the Netherlands, and Italy. And in the large emerging markets of Brazil, Russia, China, and India. I should also mention Australia and New Zealand also posted very positive results.

Cash flow for the third quarter has been strong, and consistent with our historical trends, our cash management programs continue to perform well. We believe everyone knows our primary source of cash is net income, adjusted for basic non-cash charges, which for us are primarily stock based compensation charges and their related tax benefits, and depreciation and amortization.

Our uses of cash dividends which were recently increased by 20% to $0.15 per share on a split-adjusted basis, year-to-date our dividends have totaled $133.7 million. CapEx totaled $160.8 million. Acquisitions net of dispositions and asset sales, including earn-out payments on prior acquisitions year-to-date totaled $317.9 million. Share repurchases, which year-to-date have totaled $846.5 million, we also received $68.4 million of proceeds from option exercises and stocks sold under employee stock purchase plans, resulting in net repurchases of about $778.1 million. As a result, our average diluted share count for the quarter was reduced to 328.2 million shares, and we finished the quarter with diluted shares outstanding of approximately 326 million.

With that, I will now ask the operator open to open the call for questions.

(OPERATOR INSTRUCTIONS) First question this morning comes from the line of Troy Mastin of William Blair & Company.

Thank you. Advertising growth remains pretty strong, I think you outpaced marketing services growth in the quarter, despite some challenges in traditional media. Is there anything specific, changes maybe to the way you are selling or doing the markets, that is driving this outperformance by the challenges in traditional media, or something else?

No.

The only thing that is worth noting, our digital business is in two buckets, our stand-alone digital business are showing up in CRM. However, the digital work that is being done in our traditional agencies is being categorized as traditional media advertising, it is the way our systems work. That is somewhat, I don't know if inflating is the right word, but it is keeping the strong growth in digital in our traditional agencies is aiding driving the growth of what is coming through as tradition.

You will see that Troy, I mean there has been some publicity for companies like Goodby, Silverstein, which two years ago were 100% traditional. We don't track it exactly, because we are trying to migrate everything to an appropriate model, where the trade press and stuff has come out, and said that the mixed area is 60/40 today, a story you will probably see in this next week, is a similar story with a company called 180, where a year ago it was all traditional, today it is not.

That is also embedded in the activities of some of our bigger agency offices throughout the networks. At this point, we don't draw such a fine distinction in the way that we gather the numbers, because our objective is to make certain that every one of our companies is moving in that direction as appropriate, and reflecting the needs of our clients.

It is a little bit of a mixed result that way.

It is fair to say that your exposure to traditional media is declining as part of your mix over time?

Yes. That would be fair. That would also be consistent with what has been going on in the company for the last 10 or 12 years. Yes.

It is just not so obvious from the numbers. It is good to have that color.

It is important.

You mentioned the two small U.S. units that you had some challenges in on the marketing services side, recruitment and the Yellow Pages. I am curious what you think about the long-term outlook of these two business, are we just facing a secular headwind in the near-term, or are there some issues here long-term for these business that you feel like you need to be involved in in the long run?

Recruitment, these are not big business platforms for us. They just happen to be good companies which are part of the group. We are constantly evaluating that, in the case of recruitment advertising, I have seen this happen now, I can't tell you how many untold times. Starting in 1988 when the company was formed, it is a cyclical business to what is going on directly in the economy in the U.S. The Yellow Pages is traditionally a more challenged business model as you move forward. Again, it is not a very big unit within Omnicom Group. It is just organic growth would have even been greater domestically had these two individual units have not been challenged.

Acquisitions they picked up nicely in the quarter. Curious what we should expect going forward? Would you can say about the market, in terms of where you are focused, where valuations lie, and so forth?

As you know, largely through the absence of acquisitions over the last several years, we are extraordinarily disciplined, in terms of what our needs are, and the prices we are ultimately willing to pay, and increasingly, especially when you get into areas of digital and some of the new emerging technologies, in 85% of the cases of the opportunities that present themselves, you are faced with a build versus a buy strategy on many of those things, and oftentimes we have opted to go to the build side of it.

The pipeline still remains very robust. If market trends continue in terms of private equity and other things, I think we should see prices come more in-line with what our disciplines say we should pay. There is no way to predict it, other than say we that we will in fact be disciplined, and do whatever is appropriate for our businesses.

If those prices come in-line with your discipline, do you think we could see a return to the 2 to 3% range that you used to talk about years ago?

I am not in a position to forecast that. What we do is our acquisition policies, we base it on the needs of the business units, in transforming them to whenever they should appropriately be, or to extend our geography or to extend our product lines. That is a process which starts at the business unit planning level.

We keep the pipeline because we do talk to everybody. I think we are aware of what is available and what isn't. but our actions are based on further analysis of what is pricing, is there another way to accomplish that task? Which oftentimes is an investment in people, which gets reflected in our P&L, but contribute to our long-term growth. We are really are not in a position to predict what acquisition revenues will be. I don't know if Randy might be able to add some color to that.

I think that is right. Over the last couple of years, acquisition revenue has been pulled down a little bit, because of a couple of divestitures. As I mentioned in my comments, we finally cycled on the sale of that healthcare business that we did last year at the beginning of the third quarter. That is really the primary reason why this quarter's acquisition revenue had a step-change. We are constantly evaluating our portfolio companies as well. Again, it is difficult to predict exactly what is going to happen.

Thank you.

Thank you.

Next question is from Alexia Quadrani of Bear Stearns.

Thank you. In your conversations with advertisers, is anyone talking about a pullback in spending going forward due to fears of the economy, or are they generally their tone is generally the same as the past couple of years?

First of all, in a macro sense we will be spending the next 60 days going through our profit planning cycle, we will garner more information from individual companies. There is no question that especially in the United States, with all the stuff you see on the news channels, and all the rest of it, there are certain sectors, and the price of oil that will be challenged for the next couple of quarters. That is offset by emerging markets and some of the growth we are seeing outside the United States.

Most of the companies we are servicing are multinational in nature. Total budgets do not shift, maybe where they spend their money, or how they spend their money, is subject to change. We are not seeing anything other than the obvious at this point. We have always been, and we will continue to be very conservative in the way we approach our own company and running it.

When you have these discussions over the next 60 days or so, do you have a sense from past experience how firm they tend to be? I know there are there are the initial discussions, but do you have a good sense of the revenue for '08 based on discussions, or is there a lot of volatility?

There is always volatility. It is volatility offset by a model which produces consistency. On an individual client, or an individual sector, there is always volatility. I don't think we garner enough information in our year end profit planning cycle to predict 2008.

We look at trends and factors, and other things. I think some things which I have seen in the past which have benefited advertising and marketing will occur in 2008, even though we are not directly involved in the elections, they do have an impact. We have the European soccer, we have the Olympics. So where there are headwinds in certain sectors, there are certain underlying benefits out there as well, it is just too early to call.

Lastly, any major really significant changes throughout the quarter? I know you don't give monthly data, but if there was any significant change in trying to slow down as the quarter progressed, if you could highlight that? And if that would, any reason we shouldn't expect very good growth that you can see you have all year in to Q4?

Q4 is always our largest quarter, so it is always the most challenging when you look growth, reading in to your question. We don't see anything fundamental which challenges our performance at this point.

I certainly think there is nothing that seems to be changing going in to Q4. Obviously, there has been a lot of economic noise in the marketplace, but as John pointed out, we really haven't heard anything from clients, other than general market concerns I guess. I haven't heard about any change in spending patterns yet.

One theme that is constant is clients are interested in ROI on their advertising marketing investments. That is an area which I believe will continue to grow. Than I am very comfortable that that trend is only going to accelerate, not decelerate.

The point I was going to make earlier on predictability of revenues, a large percentage of our model is predictable, maybe 85% or 90% or maybe even a little bit higher, of our base revenue is highly predictable. That last, let's say it is 5%, or 10%, the fact that it is volatile or potentially variable but spread across a large number of clients, ultimately created a lot of consistency because of its diversity. But that percentage can certainly vary year to year. You don't start the year with knowing what that is going to be.

Okay. Thank you very much.

Thanks. Next question comes from Jason Helfstein of CIBC World Markets. Please go ahead.

My question was already answered, thanks.

Thank you. We are going to go to a question from Craig Huber of Lehman Brothers.

Good morning, thank you. You guys have got a question a lot over the last couple of years, if a large firm like Google had potential to take a lot of your potential revenues away in the coming years, what do you typically tell investors in your defense against that argument from investors?

We are one of Google's largest customers, which is something I don't think anybody focuses on. We are essentially in the area of content, and managing clients down to the consumer. What I see Google doing is providing, aspirationally providing a platform which is more challenging to existing media networks, than to what we do.

Google seems that they have two pieces of business. They started out with some fairly interesting content, tools for consumers to better utilize the Internet, frankly an indexing tool, and they obviously came out with a lot of other very interesting products, between Gmail and Google maps, et cetera. In order to get paid for their content, they needed to develop and were pretty intelligent in developing an advertising based model, and/or advertising based platform in advent, that allows them to monetize the text.

Today, it seems like they are going down similar paths, thinking about more ways of adding content, and utilizing their technology to develop a better and better ad serving platform. I have never heard him wanting to get into the services model. Our companies are about helping clients market their products, and obviously we are going to use every tool and every service that is available, that generates the best return on investment for our client. Google is certainly an innovative company, in both creating interesting content, as well as creating a useful platform and technology for marketers to get to their customers with.

And then if I could switch over and talk about margins for a second, Randy, you have been pretty loud going in to the [inaudible] to keep margins basically flat for the year, they were up slightly in the quarter. Was that just noise in the quarter, or the revenue has actually come in a little bit better than you expected? I assume you didn't pull down any of your investment spending. Can you just talk a little bit? Thanks.

We have not pulled down the investment spending. I think our agencies and certainly at the Omnicom level that probably continue to increase. Plus or minus 10 to 30 basis points is pretty tight to predict. When I tell people flat margins, that is what I am kind of tell them to model, and obviously we are hoping to achieve that, or even achieve a little bit better than that.

Lastly a nit-pick question, looking at your cash flow statement, can you explain the differences between the working cap this year, the 300 to $350 million more of a use, and CapEx is up about $40 million. Is that just timing issues and what should investors expect for the full year for both of those capital expenditures?

Working capital is purely a timing issue. I find the GAAP cash flow statements personally difficult to read. On the working capital front for this quarter in particular, this quarter ended on a Sunday. That resulted a couple days more cash in our lockboxes, which makes it working capital, and you can have as much as 200 or $300 million a day in working capital cash flow swing. Internal, we tracked daily averages more than these quarter end numbers. The other number that I do is I look year-over-year, I go back to the third quarter of last year and track net income, depreciation/amortization, acquisition stock repurchases, et cetera. Showing on a year-over-year basis, it tracked very well.

CapEx, two things, some of that is timing. Our big CapEx items are associated with real estate relocations, basically increases in buildouts, there have been a couple of those this year that probably moved the numbers a little bit. I have mentioned a couple of times in the past, that we will probably shift some of our traditional leasing, operating lease capital to more of a CapEx model, or capital leases. That probably accounts for maybe as much as $10 million on a year-over-year increase.

Lastly if I could, have you done the calculation, if you pulled out your recruitment in the Yellow Page business, and other small, what would the organic revenue growth have been in the quarter in the U.S.?

I don't know. I didn't know the numbers. I didn't look at it that way.

Okay. Thank you.

Thanks. Next question comes from the line of Paul Ginocchio of Deutsche Bank.

Thanks. Quick question about margins for those pure play digital operations, because of higher digital salaries for people in the interactive, are those margins better or worse than your more traditional agencies? Thanks.

They are pretty much in-line with our traditional agencies. Right now the demand for those services are pretty high, so the utilization rate. in those units are pretty high. The services and the growth of those agencies is actually probably coming faster than we can recruit the qualified people.

Thank you.

We now have a question from Karl Choi of Merrill Lynch.

A couple of questions for you. The first one is with economic headwinds that the U.S. has been facing, do you think that your revenue growth maybe will continue to flail a little bit and the cash and revenue growth for the next couple of quarters?

Second, looking at the reported revenue growth for international markets outside the U.S., they went from 9% to almost 20% in third quarter, was it just the assumption of recycling through the Australian [inaudible] or was that the underlying kind of [coloration]?

I didn't quite get your first question. I didn't quite hear it.

If I got your first question, was U.S. economic growth?

Well, U.S. organic revenue growth versus international, international this quarter outperforming the U.S. I believe for the first time I think in about a year. I am just wondering whether you think this business trend will continue?

We don't know. The two businesses that we mentioned in recruitment advertising Yellow Pages those are our domestic businesses. Or the vast majority of domestic businesses. So that negative is impacting here, and not internationally. Internationally, certainly some of the larger emerging markets, Brazil, Russia, India, China, they have exceptionally high organic growth rates.

Another area that has got a very good organic growth rate, extremely high, is the Middle East. Those are certainly pulling up. The U.S. compared to Europe I think is pretty consistent. The combination of those two factors, at least this quarter, it gave International a bit of a tailwind.

Your second question was the divestiture. Last year we were pulled down because we sold the business in Australia. The healthcare business that we sold a year-ago that was predominantly a U.S. business.

Okay. Based on the acquisitions that you have done, Randy, can you give us a sense of about what you think [the tax position] might be, can be in the fourth quarter?

I would say probably some place in the 1% to 1.5% range is probably in the ballpark, obviously depending upon dispositions, or anything that we might do.

Great. Thank you.

Thanks. Next question comes from the line of Michael Nathanson from Sanford Bernstein.

Two questions for John. The first question is, you said that the recruitment of Yellow Pages is a small number. Any sense of what percentage of your revenue base is exposed to domestic in the Yellow page? Would it be less than 2% or so?

Yes, that much I know, without looking. These are relatively small businesses. That is what they are. They are a good businesses for us. You look at them constantly, as we look at our entire portfolio. But right now they are okay. It is not unexpected that we have the impact we have.

The question I have is, people are trying to ask this question, but have you seen any change in behavior among certain U.S. client groups, like consumer finance? You are not really seeing any material change in spending behavior. But I wonder has anyone's mix shift changed? Have you seen the past couple of quarters, maybe some of the sectors that have been under more pressure, changing their spending behavior, from a change in mix?

Not that I would call a trend, other than to say from a macro perspective, as I mentioned earlier, clients increasingly are spending their money in areas that are measurable. That is why you see the growth in CRM and some of the other areas. I think that is a trend that will continue. That is both online and offline, in the way that it gets delivered. We are not heavily exposed to the financial areas that you are referring to in terms of our client base. We might not be a very good proxy for macro trends in that area.

The point would be maybe perhaps the spending is still there, but it is just coming in different buckets. People may be asking the wrong question essentially.

For the last couple years I have seen incremental increases in marketing budgets go to new areas. That has not necessarily destroyed the base, or come at the expense of the base. You see incremental dollars being spent, against that macro trend of ROI.

Thanks.

I also think as you see further and further segmentation of the consumer, is making it where marketers are needing to use more and more avenues to get into their ultimate consumer. Obviously they want greater measurability, or better metrics for return on investment. People who have been seeking those things and improving technologies have been allowing for better metrics. Obviously, as an industry we are not where we ought to be yet.

Fortunately there is more and more technological platforms and tools being developed, that will allow our companies to do a better job at that.

That is very consistent with our business model, which is share of wallet. We are not married to any particular technique or area in delivering that consumer, no matter how complex the market becomes for the benefit of our clients.

Thank you.

We have time for maybe one more question.

Very good. That question comes from the line of Catriona Fallon with Citi. Please go ahead.

Great. Thank you for letting me in a last question. Randy, excuse me if I missed this, but did you give the percentage of the total commissions and fees that went toward salaries and related costs?

No. We did not.

Is that something you have now, or should I follow up with you afterwards?

I don't have it off, right off my fingertips. If you could please follow-up afterwards, it would be better.

Okay, great. Then just big picture-wise, as we see more growth in digital, maybe mobile advertising, are you seeing an increase in the types of salaries that you need to compensate these people with, with more of the high technology skills, or is it just all lost in the wash?

I think right now, because of the rapid growth in digital, certainly what I am hearing is that is an area that, it is a very competitive recruiting marketplace. Generally our clients, they will allow us to get a more reasonable return after our costs. All of the people in the industry providing those services are faced with the same labor pool from a cost perspective. So it doesn't really impact our margins, as much as our ability to recruit and retain that talent.

Fortunately it is a pretty liquid marketplace a over a couple of year timeframe. More and more people are being trained in how to use the new technologies, new marketplaces in the digital media, et cetera, and at the same time, more and more tools are being developed to make work in that area easier. And more marketing focus versus pure technology focus.

Ultimately we are benefited in the long run by pure demographics of the age of our workforce. There are not too many 24-year-olds coming to work for us today, that remember the Michael Jackson TV commercials of the 1980s. They were barely born.

As time progresses, and we have a relatively young workforce, especially in the United States, but throughout the world. Those people grew up in an environment of the complexity that we are talking about, and they have become employees of what traditionally have been perceived as traditional agencies. That is why I think you see the rapid change in examples like Goodby Silverstein, or as I said, a company like 180, and others in terms of the way we deliver services. Our employees don't think in traditional terms, because they grew up in the environment that is present today.

Just one question. I know there was a question about Google. If I could jump over to the other large technology player, what do you think will happen with Microsoft and that aQuantive acquisition? Do you see an, are they losing any clients at Avenue A or Razorfish? Are you benefiting in any way? And then also, do you think that is a viable path for a company like Microsoft to go in, or do you foresee that over time they might divest those businesses?

You would have to ask Microsoft. As I look at it from the outside, it seemed like the primary aspect of their acquisition was the technology platform that they got from aQuantive. Razorfish is a very good digital agency. I would think it is a great internal beta site.

If their objective is to build tools and technology platforms to serve the advertising and marketing community, which is ultimately what I think their core objective is. One of their challenges is to get people to spend the time to beta their product and services, to help in development without the insight being spread around the industry, before the product or service can be unveiled. I would guess having a captive agency to aid in that might not be a bad thing.

I do know that they still remain a very large client of two of my competitors. They haven't betad everything.

Wonderful. Thank you so much.

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

Thank you very much. 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.