宏盟集團 (OMC) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Omnicom first-quarter 2014 earnings release conference call.

(Operator Instructions)

As a reminder this conference call is being recorded. At this time I'd like to now introduce you to today's conference call host, Executive Vice President and Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead.

Good morning. Thank you for taking the time to listen to our first-quarter 2014 earnings call. We hope everyone's had a chance to review our earnings release.

We've posted on the OmnicomGroup.com website both our press release and the presentation covering the information that we'll be presenting this morning. This call is also being simulcast and will be archived on our website.

Before we start, I've been asked to remind everyone to read the forward-looking statements and other information that's included at the end of our investor presentation. And to point out that certain of the statements made today may constitute forward-looking statements, and that these statements are our present expectations and that actual events or results may differ materially.

I'd also like to remind you that, during the course of the call, we will discuss some non-GAAP measures in talking about Omnicom's performance. You can find the reconciliation of those measures to the nearest comparable GAAP measure in the presentation materials.

We're going to begin the call with some remarks from John Wren about both the state of our business and our potential merger with Publicis. Following John's remarks, we'll review our financial performance for the first quarter, and then both of us will be happy to take your questions.

Good morning. I'd like to thank you all for joining our conference call. I'm pleased to speak to you about our first-quarter business results, and update you on the progress we've made on our strategic initiatives.

At the end of my remarks for the quarter, I'll update you on the proposed merger with Publicis. Randy and I will be available to answer questions at the end of the prepared remarks.

Omnicom's performance continues to consistently demonstrate the strength, diversity, and stability of our business. As you know, 2013 ended successfully as markets improved around the world, and we met all our stated objectives for the year. I'm pleased to report that our excellent performance in 2013 was reflected in the level of bonuses earned by our employees for achieving these objectives.

2014 is off to a very good start. Irrespective of the timing, open issues, or complexities of the proposed merger, our employees have remained focused on our clients and growth strategies. Importantly, we're on plan to meet our targets for the full-year 2014.

Now, back to the quarter. Our growth strategies continue to result in tangible benefits. During the quarter we've made several strategic acquisitions, we continue to enter into innovative partnerships, and made significant progress in advancing our industry-leading digital and data platforms. I'll cover this in more detail in a moment.

For the quarter, organic growth was 4.3%. Our year-over-year margins, excluding merger-related expenses, continue to improve. We also continue to invest internally in our talent and agencies, to expand our partnerships, and to make acquisitions in innovative service areas that will fuel our growth. In many ways, our first-quarter results are a reaffirmation of our performance and the market's improvement we've experienced since the second half of 2013.

Broadly speaking, the US and the UK are showing consistent forward momentum. Euro markets are steadily but slowly improving. For the first time since the first quarter of 2012, we had positive organic growth in this region. Among our larger euro markets, Germany was positive for the quarter while France continued to be negative.

Latin America, Asia, and Eastern Europe continue to perform well, with some countries standing above others -- specifically Brazil, Russia, China, and India. The crisis in the Ukraine occurred late in the quarter, and we do not yet have visibility on the impact it may have in Russia and our other European operations.

By discipline, we experienced positive results across our business. Within the brand advertising category, we had very strong overall growth in media, including high double-digit increases in search and programmatic buying.

In CRM, our sports and event marketing, and shopper marketing operations performed extremely well. And in our specialty category, we continue to see very positive growth in our healthcare business.

Turning to our cash flow and balance sheet, the diversity and stability of our business was once again reflected in both our strong cash flow generation and in our industry-leading return on equity. Omnicom's strong cash flow, balance sheet, and liquidity provide us the flexibility to prudently and opportunistically invest in our people and our operations, as well as in acquisitions that improve and expand our service offerings and footprint. Overall, I'm extremely pleased with the operating and financial performance of our business.

Let me now provide an update on the progress we're making against our key strategic initiatives: recruiting, developing and retaining the best talent; expanding our geographic footprint and service offerings to our clients, particularly in emerging disciplines and economies; investing in our digital and analytical competencies in the key markets around the world; and delivering big ideas based upon meaningful consumer insights across all marketing and communication channels.

Our ongoing investments in recruitment, diversity, and training programs are helping us improve the skills of the many talented individuals at our agencies. An important measurement of our talent is industry, peer, and client recognition.

Let me just mention a few of our achievements during the quarter: Fleishman-Hillard was named agency of the year by PR week; BBDO Worldwide was named the most awarded agency network in the world in 2013's Gunn Report for the eighth consecutive year; and DDB was the third most awarded network.

Also, for the eighth consecutive year, Omnicom's media group, OMD Worldwide, was named the world's most creative media agency by the Gunn Report. I want to congratulate all the people and agencies for their many outstanding achievements.

As I mentioned on our last call, collaboration across different marketing services and geographies is the new normal. Many large, multinational clients are asking us to manage their entire marketing process, bringing them big ideas, and delivering them across disciplines, media, and markets.

At Omnicom, we have formed teams of subject-matter experts from across our agencies for the purpose of delivering integrated solutions, building brands, and driving results for our clients. Our approach is designed to fulfill our clients' needs and desires for integrated services, and allows us to support and grow the iconic brands in our portfolio. We believe our ability to recruit and retain top talent, and to provide the best service to our clients is achieved by ensuring our brands maintain their individuality and collaborate to meet our clients' needs.

To further strengthen our efforts, we've recently announced that Peter Sherman is rejoining Omnicom as an Executive Vice President to lead innovation and collaboration across our client portfolio. Peter is returning to Omnicom from J. Walter Thompson where he served as CEO of North America. In the war for talent there's nothing more rewarding than seeing a former employee rejoin Omnicom after leaving for a period of time to work for a competitor.

Last quarter, we continued to expand our capabilities through acquisitions in the digital and in mobile areas. In February, we completed the acquisition of 22feet, one of India's leading and most dynamic digital marketing firms. 22feet will be merged with Tribal Worldwide India, part of the DDB Mudra Group. The new agency will offer its clients end-to-end digital and mobile marketing solutions.

In Brazil, we took a majority stake in the advertising agency Mood, continuing to expand the capabilities of the TBWA Brazil Group. Mood's culture of innovation and depth of talent will strengthen our business capabilities in that market. Also in Latin America, Omnicom's media group recently acquired Media Interactive, which expands our capabilities in Chile, Colombia, and Peru.

Lastly, in the UK, Omnicom's media group acquired Mobile5, whose work includes creating mobile ads, developing apps, and building mobile sites. Mobile5 will serve as a mobile center of excellence for the group in the European region.

In addition to these acquisitions, we continue making internal investments in our networks, agencies, and service platforms. Today's market complexity demands our agencies deliver their services seamlessly and efficiently across mediums and markets.

Given this backdrop, Omnicom recently announced the formation of eg+ Worldwide, a global implementation and production agency, which will be a leader in leveraging the latest technologies to help global brands implement, amplify, and localize creative concepts across moving image, digital, and print media channels. Today, eg+ delivers services globally through our offices in LA, New York, Paris, London, Singapore, and Tokyo, supported by digital production centers in China, India, Mexico, and Poland. eg+ has 39 offices and more than 1,200 employees around the world.

As I've said before, our industry has become increasingly complex and fragmented. New platforms and technologies come and go at mach speed. We have therefore maintained an open partnership with technological leaders, as opposed to making bets on specific platforms.

This approach allows us to have access to the latest technologies for the benefit of our client's marketing strategy. Consistent with this strategy, last month we signed a first-of-its-kind agreement with Instagram. Instagram product teams will partner with our media and creative agencies, including OMD, PHD, as well as BBDO, DDB, and TBWA to develop highly visual digital concepts for our clients. Overall, our diverse service capabilities and top talent, combined with our open-source approach to technology and extensive partnerships, are unique in our industry and position us extremely well for the future.

Turning to the proposed merger with Publicis, given the merger's complexity and open issues, the transaction is moving slower than we originally anticipated. To better understand our progress, it is important to delineate the three separate approval tracks we are working on.

First is antitrust. Clearance has been obtained in the US, the EU and 12 other countries around the world. China is the only market remaining for antitrust approval.

On April 17, Omnicom and Publicis entered Phase 3 of the Chinese review process. Phase 3 is a 60-day period ending June 16, 2014. If the regulator is not able to resolve all questions by June 16, we will need to withdraw and resubmit our filings and continue the process.

Second is tax. The French tax ruling approval process is pending. In addition, Omnicom and Publicis have made joint applications with other tax authorities for purposes of establishing the desired tax treatment of the new Publicis Omnicom Group.

Specifically, we have jointly applied to the Dutch Ministry of Finance and the UK HM Revenue and Custom authority to establish exclusive tax residency in the United Kingdom. Unexpectedly, to date, we've been unable to obtain the competent authority agreements necessary to establish the tax status. If we cannot obtain these agreements, it could affect the likelihood of satisfaction of the conditions to closing of our deal.

Last, other regulatory approvals. The S-4 is to be filed with, reviewed, and declared effective by the SEC. Similarly, the European prospectus is to be filed with, reviewed, and approved by the AFM, the Netherlands regulatory authority for financial markets.

We have not yet completed or filed documents with either the SEC or the AFM. The timing, financial statement preparation, and other disclosures are in process. Given the proposed merger's complexity and open issues, at this point it's not practical to predict exactly when the transaction will close.

Before I turn the call back to Randy, who will go through Omnicom's first-quarter financial performance in greater detail, I'd like to make a few final comments. Financially, Omnicom has continued to excel in delivering consistent revenue growth, strong margin performance, stable cash flows, and an industry-leading return on invested capital. We remain strongly committed to maintaining this performance.

Strategically, we have a very stable talent base and are making significant progress on our core priorities. We believe we are very well positioned to compete in an increasingly complex and dynamic landscape. Our liquidity and strong balance sheet allow us to further invest in the Business, make acquisitions and deliver value to our shareholders.

Finally, I'd like to acknowledge the spirit and drive of the people at all of our companies that I believe are the best in the industry. The creativity and insights they deliver to our world-class clients, their ability to work together across disciplines and geographies, and their financial discipline are the key factors that show themselves in our top- and bottom-line results. Randy?

Thank you. As John detailed, our agencies continue to make excellent progress against both their strategic and operational objectives. They've continued to make the investments needed to further develop and expand their capabilities, which have consistently resulted in the highest organic growth rates in the industry. I think the mark now stands at 19 of the last 22 years. And equally important, they've made these investments while establishing a track record of delivering outstanding quarter-to-quarter financial performance for our shareholders.

As John also pointed out, our Q1 performance is a great start to keeping that track record going for another year. As we've done for the last couple of quarters, this quarter we have again added a third column of numbers, labeled non-GAAP. The only difference between the GAAP and non-GAAP figures is that we've excluded the incremental costs that we've incurred related to the potential merger with Publicis from the non-GAAP figures.

These costs, which are predominantly professional fees, totaled $7 million during the quarter. Most of these costs are not tax-deductible. Therefore, most of the cost flows straight through to net income. This quarter, net income was reduced by $6.8 million, and EPS was impacted by $0.03.

We believe that the non-GAAP figures help in evaluating the performance of our operations. For the presentation, I will focus most of my comments on the non-GAAP column. But we have included the reported GAAP numbers side by side for easy reference and clarity.

Page 1 -- for the quarter, revenue came in at $3.5 billion. The good news was organic revenue growth, which, following another industry-leading year in 2013, increased again this quarter to 4.3%. The bad news was FX continued to be a fairly strong headwind, negatively impacting revenue by 70 basis points, and acquisitions net of dispositions decreased revenue by another 60 basis points. I'll go into further detail on our revenue growth in a few minutes.

Moving down the P&L, our non-GAAP EBITA increased 4.3% to $414 million. And the resulting EBITA margin was 11.8%, which was up 10 basis points over Q1 of last year.

FX this quarter, in addition to hurting revenue, also negatively impacted operating margins by about 10 basis points. The markets where FX had the biggest negative impact were Brazil, Canada, and Russia, which are generally higher-than-average margin markets, as well.

In spite of the FX challenges, non-GAAP operating income, or EBIT, for the quarter, increased 4.8% to $390 million. And the operating margin of 11.1% increased 20 basis points year over year. Again, the only difference between the non-GAAP and GAAP numbers is the exclusion of the $7 million of incremental merger-related costs.

Turning to page 2, and looking at the items below operating income, first, net interest expense for the quarter was $39 million, down $1.9 million year over year, and down about $800,000 from the fourth quarter. Almost all of the change was due to lower short-term debt balances, driven by both better working capital management and the suspension of our share repurchase program since the middle of last year.

Taxes -- due to the increased benefits from the tax reorganization that we completed at the end of 2012, our operating tax rate for the quarter, and in line with our expectations going forward, will be about 33.2%, down from the 33.6% rate we had for the last couple of years. The GAAP tax rate of 33.8% was higher this quarter because nearly all of the merger costs are not tax-deductible.

Earnings from our affiliates decreased to $600,000 this quarter, primarily as a result of a reduction in the year-over-year performance of certain of our affiliates in the Middle East. And the allocation of earnings to the minority shareholders in our less-than-fully-owned subsidiaries increased $2.8 million, to $22.5 million, mainly the result of the strong performance of our Latin American and Middle Eastern operations, which have local minority shareholders. As a result of the foregoing, our non-GAAP net income for the quarter was $212 million, an increase of 3.5% versus Q1 of 2013.

On slide 3, we show the allocation of net income to common shareholders and to participating securities, which are the unvested restricted shares held by our employees. The resulting non-GAAP net income available for common shares in Q1 was $208 million.

This chart also shows our diluted share count which, with the suspension of our share buyback program, is only down marginally from Q1 of 2013. As a result, our non-GAAP diluted EPS increased 5.3% to $0.80, and our GAAP EPS increased a penny to $0.77 per share.

On slide 4, we take a closer look at our revenue performance. First, with regard to FX, on a year-over-year basis, while the US dollar weakened versus the euro, the pound, and the RMB, it strengthened against most of our other significant operating currencies. The more significant markets included Australia, Brazil, Canada, Japan, and Russia.

The net result reduced our revenue for the quarter by $22 million, or about seven-tenths of a percent. Looking ahead, if FX rates stay where they are currently, we expect FX to turn positive by about 60 basis points in Q2, and about 25 basis points for the full year.

Revenue from acquisitions net of dispositions decreased revenue by six-tenths of a percent. This is primarily due to the sale of a recruitment marketing business during the second quarter of 2013. Our recent acquisitions continue to partially offset the impact of this disposition.

We expect acquisitions net of dispositions to be negative again in the second quarter. But then we cycle through the disposition of the recruitment marketing business by the third quarter, and acquisitions should have a positive effect in the second half of the year.

And, finally, with regard to organic growth, we had another strong quarter, up 4.3% or about $147 million. This was driven by a combination of items.

First, our agencies continue to benefit from the development and expansion of their integrated digital capabilities. Although widespread, the growth of our media business is the most recent best example of this trend.

We also continue to benefit from the strong performance of our agencies in the emerging markets. This quarter, we had excellent organic performance in a number of markets including Argentina, Brazil, China, Colombia, India, Indonesia, and Malaysia. And, finally, although slow, the recovery of Europe and our European businesses continues.

Turning to our mix of business on slide 5, for the quarter, our revenue was split 49% brand advertising and 51% marketing services. As for their respective organic growth rates, brand advertising was up 4.9%, again driven by the strong growth in our media businesses. And marketing services was up 3.8%.

Within marketing services, CRM was up 4.2%, with strong performance across our businesses with our events, sales promotion, production, and research businesses leading the way. Public relations was up 1.2% in the quarter. And specialty communications increased 5.2%, driven by another strong quarter from our healthcare businesses.

On slide 6, our regional mix of business in the quarter was split approximately 57% in North America, 29% in Europe, 10% in Asia Pacific, with the remainder in Latin America, and Africa and the Middle East. In North America, we had organic revenue growth of 4.8%, driven by our media, brand advertising, and CRM businesses. Our other regions all had positive organic growth, as well.

Europe was up 2.3%, led by strong performance in the UK and Russia. AsiaPac was up 5.7%. Latin America was up 7.4%, led by strong results in Brazil. And Africa and the Middle East was up 6.6%.

In our larger European markets, as I mentioned earlier, the UK and Russia continued their strong performance. Germany, Ireland, Portugal, and Spain were all positive this quarter, and unfortunately, France continued to struggle. And, although our organic revenue performance in aggregate for the Eurozone was only marginally positive in the quarter, this represented the fourth consecutive quarter of sequential improvement.

In AsiaPac, we had strong performances across most of the region, with double-digit organic growth in Malaysia, Indonesia, Japan, and the Philippines, and high single-digit growth in India, New Zealand, China, Vietnam, and Singapore. And in Latin America, Argentina, Brazil, and Colombia all turned in double-digit organic results.

We've also provided an additional slide on page 7 that presents our revenue by our old geographic subsets. Obviously, this is the same revenue data, just grouped differently. I'll leave that information for you to review separately.

On slide 8, we present our mix of business by industry sector, keeping in mind these numbers are total growth not just organic growth. And, as you can see, there was only a slight change year over year, with the retail sector increasing on the strength of several client wins over the past year, and the telecom sector lagging behind this quarter.

Now, turning to slide 9, first you will notice we changed the format to this slide. So, you have to let us know off-line what you think about the new presentation.

As for our performance, we had a strong start to the year from a cash perspective, as well. We generated $312 million of free cash flow, excluding changes in working capital during the quarter.

As for our primary uses of cash, dividends paid during the quarter totaled $131 million, consisting of dividends to common shareholders of $106 million and then $25 million paid to minority interest shareholders. This was up significantly from last year when we paid our normal Q1 dividend in the fourth quarter of 2012.

Capital expenditures of $42 million was up about $4 million from last year. Acquisitions, including earnout payments, net of the proceeds received from the sale of investments, totaled $16 million.

And, finally, share repurchases, net of the proceeds received from stock issuances under our employee share plans, totaled only $9 million. This is down $230 million from 2013 because we were required to suspend our share repurchase program following the announcement of the potential merger with Publicis. As a result, we generated $114 million in net free cash during the quarter, again, excluding changes in working capital.

Turning to slide 10, focusing first on our capital structure, the primary year-over-year change was a redemption of $407 million of our convertible notes during the second quarter of last year. As a result, our total debt at March 31st, was down to just over $4 billion. And our net debt position at the end of the quarter was $1.95 billion, down about $420 million from last year.

As a result of the decreased debt, our total debt to EBITDA ratio improved to 1.9 times, and our net debt to EBITDA ratio improved to just 0.9 times. And our interest coverage ratio remains very strong at 10.8 times.

On slide 11, you can see we again delivered excellent returns on both total invested capital and common equity. Although both return figures were negatively impacted by the suspension of our share repurchase program, they remain very strong, with a return on invested capital of 17.1%, and a return on equity of 29%. And, for your reference, these returns were computed on the reported GAAP numbers, not the non-GAAP figures.

And, finally, on slide 12, we track our cumulative return of cash to shareholders for the last 10 years. The line on the top of the chart shows our cumulative net income from Fiscal 2004 to March 31 of this year, which totaled $9.1 billion. And the bars below show the cumulative return of cash to shareholders, including both dividends and net share repurchases, the sum of which during that period totaled $9.4 billion, for a cumulative payout ratio of just over 103%. During this period, as a result of both our internal investments and very targeted acquisitions, we also grew revenue and EPS by 69% and 220%, respectively.

And with that, that concludes our prepared remarks. There are a number of other supplemental slides included in the presentation materials for your review. But at this point, we're going to ask the operator to open the call for questions.

(Operator Instructions)

Craig Huber, Huber Research Partners.

Yes, good morning. Thanks for taking the questions. Can you just elaborate a little bit further on your comments earlier just about what's potentially holding up the merger with Publicis? You mentioned some tax issues and stuff. Just a little bit deeper in depth, if you would, please? Thanks.

Sure. I think as we've said consistently, this is a very complex transaction. As a result there are issues that arise which have to be solved, so there are great deal of challenges.

There is a number of gating items, as I attempted to explain. From a statutory point of view we've cleared everywhere but China where we're in what they called phase 3.

By comparison -- and Randy might have a little bit more color on this -- Aegis, I believe, was in phase 3 for 43, 45 days, something along those lines. And the Chinese will move at the speed the Chinese will move. We respond to their questions as they come up. And we have to satisfactorily answer all of the regulator's questions before we'll get approval.

With respect to tax, I'm going to throw that one to Mike O'Brien who because it is complex, I do have an understanding of it but not quite as good as others.

Craig, I think as John mentioned, and I think as everyone knows, the tax structure of our deal is very complex. And something that's somewhat unexpectedly or probably very unexpectedly, obtaining regulatory approvals from the various tax authorities has become more difficult than I think we originally anticipated at the time we signed the deal.

Our agreements -- you have to keep in mind, too, that our agreements with Publicis have a lot of requirements. There's a lot of conditions and covenants so there's a lot of moving parts, if you will.

You've got to remember the new company is to be incorporated in the Netherlands. The agreements require that Publicis Omnicom's principal place of business be in the United Kingdom. The agreement calls for the merger to be tax-free on a lot of fronts -- tax-free to Omnicom, tax-free to our shareholders, tax-free to Publicis, tax-free to Publicis' shareholders.

And, finally, the agreement also -- our agreements with Publicis require that the new company be a tax resident of the United Kingdom. And that's essential for the new company's tax planning going forward.

So, complying with all these different covenants and conditions certainly presents certain complexities and challenges. And we still have a lot of work ahead of us.

So, it's not a complete answer to your question because we don't know. We're tackling these things as we can, and as quickly as we can. And then we have yet to submit, as I said on the call, the regulatory filings to both the SEC and the AFM.

And then an unrelated question, Randy, if I could just ask -- the performance you guys had in the quarter on the organic revenue front and the EBITA margins of 14 basis points year over year, adjusting for the one-time item and stuff, would you expect that similar type performance for the remainder of the year for core Omnicom, please?

Not 100% sure of that. We are certainly working to drive every efficiency we can from the business. But are we going to have 14 basis points of margin expansion every quarter, I'm not sure.

First quarter is a smaller quarter. We have had great results. Our businesses are working, I think, extremely hard, both on the new business front and the cost control front. But we are focused predominantly on investing in our core activities, expanding our capabilities to drive revenue growth on a long-term basis.

We have gotten hurt this quarter in particular by another 10-plus basis points because of FX. I noted that. I don't know how prominently it came out in my comments.

Most of the time FX is pretty neutral when it comes to margins but this quarter, frankly, the markets where FX was negative happen to be markets that have higher than normal, or higher than our average, margins. So it did have a bit more of a negative impact on margins that we're used to seeing.

Lastly, real quick, if I could, your net new client wins, maybe I missed that in the quarter, but what was that size please? You usually target about $1 billion you hope for.

Yes, we had a little bit under $1 billion this quarter, largely because of the Vodafone loss. It was a pretty solid new business period. But as I've always said, each quarter you get one or two big wins or one or two big losses and it pushes you above or below that $1 billion mark. So, unfortunately this quarter we were a little bit below it.

Great, thank you.

Alexia Quandrani, JPMorgan.

Thank you. Just a follow-up question on your comments regarding the merger. Given the challenges with the tax approvals and the fact that you guys have to wait a bit still for the Chinese approvals, would you likely hold off on filing against the proxy until you get more clarity on these issues?

That is very complex. As soon as we file our Q, we'll have begun to update our financial statements. The auditors will have to do a little bit of work for the first quarter in reconciling our GAAP financials to IFRS. So, we will continue to work on it.

Okay. And then just a follow-up on the cash. I think we've talked about in the past where it wasn't clear if you have to wait until the merger is complete to resume the buyback or just maybe have the filing done. But it sounds like the filing will still be a little ways off here. Should we assume right now your cash balance will just obviously build? Or will you look to maybe acquisitions or other uses of cash? Or any commentary you could give on that would be great.

Cash will obviously build, unless we have uses for it. Our acquisition pipeline is pretty full. But, as everyone knows, we're pretty discriminating when it comes to acquisitions.

We'll continue to be very prudent with shareholders' money and make the acquisitions that we think are beneficial for shareholders. The timing of that, frankly, is when the acquisitions are ready to close.

And I don't think it's really possible for us to spend as much money as we're generating with acquisitions. So, inevitably that means the cash balances will build.

To put it another way, and I'm not sure if this is that easy to answer, but have your priorities for use of cash longer term changed? Or, right now it's you're in a bit of a holding pattern, you still will evaluate acquisitions given the full pipeline. But you've always in the past had a preference for share buybacks.

Is it too soon, given all that's going on with the merger, to make that definitive statement that's still a preference? Or can we assume that once everything is settled and you're free to get back in the market that will likely be a use of cash?

Actually, just to be clear, what I've always stated is we're going to consistently pay a dividend and try to increase that dividend pretty regularly. Our next priority is making acquisitions that are beneficial to our shareholders and growing our business. Then we basically use the balance of cash in share repurchases.

But our first priority has also always been great acquisitions. We generate a lot of free cash.

It's, frankly, difficult to spend that amount of free cash on acquisitions that are accretive for our shareholders. So our historical or recent preference has been through internal development, which is a strong focus of every one of our businesses, to make sure we have the capabilities necessary to serve our clients.

There's nothing to add to that. Those have consistently been our objectives in the way that we've approached it. And Omnicom will continue to do that as long as Omnicom is here.

And a couple quarters delay on the share repurchase program doesn't alter our long-range strategic view or strategic plans.

Okay, thank you very much.

And, frankly, because we have cash doesn't mean we're not focused on making sure we pay every bit of attention possible to our own cash management and working capital initiatives. Frankly, we've redoubled those efforts probably each year for the last couple of years.

Thank you very much.

James Dix, Wedbush.

Thanks very much. Just a couple of things, as you think about the combined company after the transaction. I think you've indicated in the past some expectation for higher organic growth over what the companies could do separately, maybe in the range of 100 basis points or so. I'm just wondering if you could give any more color as to qualitatively where that growth would come from?

Any particular types of disciplines? Any particular types of regions? Just thinking through that so we can understand where that's coming from.

And then just secondly, in terms of the media buying and planning business specifically, how should we think about the greater potential for that business to get leverage in the market? In particular on the digital marketing side where it would seem the benefits of scale are quite different than maybe more traditional areas like television? Thanks very much.

Sure. I'll do the first bit last. Certainly larger media scale is a contributor to growth. Omnicom, and separately Publicis, are large enough individually by themselves to get the best prices as we know it today.

What it will do is give us a broader client base from which to go out, especially from a digital front, and identify premium type inventory those clients may want. And therefore we can service or enter into agreement to get a first look or to do whatever we need to do at the time.

A scenario, by the way, that we spend a fortune -- we spend an appropriate amount of money internally investing in, because if you had a strategy a month ago, it's not necessarily the strategy for the future because the environment is changing so rapidly. And, so, you have to stay on top of it all the time. So scale will help.

In terms of our comments, and I think you're almost going back to our roadshow, and we've been consistent since then, is that post the merger -- and when I say post merger I don't mean a month post the merger but after the companies start to integrate -- we have a fantastic opportunity for a better opportunity than we currently have, not marginally but for cross-selling, for going into new areas, for doing a number of things. Those are efforts which are embedded in the principal reasons for Omnicom's consistent growth over the last 19 years.

So, more clients, more opportunities. We have the systems, we have the people that are trained to run the systems and to nurture the systems. So we look forward to that.

Great, thanks very much.

William Bird, FBR.

Good morning. Are there other important open issues related to the deal beyond the three tracks cited?

There are multiple issues. Important is a qualitative word. The most urgent are the gating items that I mentioned.

It's a large, complex transaction. So, until the day we close there's going to be items that our scores of internal staff and attorneys are focused on. There's a lot to be done here. But those gating items are the primary focus to getting the deal closed.

Thanks. And when will you know the outcome on your tax status? Is that knowable? And how do you think about a Plan B should approval not come through?

I think there are scheduled meetings between the two groups scheduled for the beginning of next week, with the appropriate experts to determine the next steps about going back to the regulators and what we'll need to do and what we won't need to do.

With respect to a number of items that Michael mentioned, there is no Plan B. Those things are requirements to get to a closing.

Thank you.

Dan Salmon, BMO Capital Markets.

Good morning. I'll maybe return to the questions around media planning and buying a little bit more. Thank you for the data around your growth in search and programmatic media. And I was just wondering, John, if you could expand on that a little bit.

Just maybe broadly a broad comment as that business accelerates, just how you see the future of media buying evolving as that group around Annalect and elsewhere in the business starts to move up. And maybe just specifically around the growth you're seeing, if that's more a combination of more clients being willing to come and execute their plans like that, or an expansion of services of Omnicom. I'm sure it's a little bit of both and they overlap but I'd love to hear a little bit more on that.

Sure. To your first question, Annalect is the primary -- and its related services are where we are concentrating Omnicom's efforts so as to make what we're doing, or the strategy and approach that we're taking, very focused and controlled, and not scattered through the diversity of our Company. And that's proved to be very successful and we've been able to move very quickly in becoming world-class.

The marketplace, as you know, is changing. Clients and data to indicate return on investment are becoming accepting digital buys increasingly every week, every day. Some are early adopters, some are a little slower to dedicate an increasing part of their budget.

And mobile is just about to take off. And I don't know sitting here today how much of existing budgets mobile will draw. But we're working under the assumption that between display and all sorts of digital venues it's going to increasingly over the coming years grab more and more of a client's budget, because we'll be able to tailor the messaging as to who we reach, when we reach them, and what the message we're using to reach them is.

So, a lot of effort, a lot of very successful platforms are being developed, a lot of very innovative partnerships are being entered into. And it's ongoing.

We mentioned Instagram on the call. I was hoping to have yet another interesting one done before the call and it will probably come in the next couple of days. So, it's very iterative, it's a very dynamic landscape platform.

Dan, you probably know as well as anybody. You've done some really great work in the space with some of your digital hub work. Frankly, the last one I read I thought you nailed it pretty well.

Thanks. And thanks for all that detail, John. I appreciate it.

Doug Arthur, Evercore.

Yes, Randy just a question on cost trends. Office and general expenses have been flat to down year over year for five quarters. Why is that happening? Is that likely to persist as a trend for the full year?

Before I answer your question, someone just pointed out to me that we are getting pretty close to market open, so we're going to have this be our last call, or last question.

Frankly, there's a tremendous focus throughout the Company, throughout every agency, top to bottom and side to side, focused on increasing the efficiency of our operations. It's a requirement of our clients, it's a requirement in the marketplace to stay competitive.

So, frankly, we're changing the way offices are being structured, we're changing the way we're managing all of our back office and support costs. We have to, obviously, continue to deliver to our clients the level of consulting services, because that's, frankly, what they're buying. But how we're overseeing, how we're housing, how we're managing those operations are getting more and more efficient every day.

I'll say, unfortunately, from the standpoint of our ability to drive efficiencies, we're already pretty efficient in those areas. So, while there's continuous improvement, those improvements can only have a certain degree of ultimate effect because they're a relatively small percentage of our total costs.

Great, thank you.

Did I cover everything you had?

Yes. I was just looking for some color on whether you -- you're implying that you've done everything you can, but is flat to slightly up likely to be a trend for the rest of the year?

No, hopefully I didn't say that. I didn't mean that we've done everything we can do. What I said is we've done a lot and we're going to continue to focus on it and continue to drive those cost improvements.

I think those costs are hopefully flat to maybe slightly declining while we're growing revenue. There are mix issues and there are geographic issues when FX bounces around the way it's done in the last, I'll say, few quarters. This quarter in particular some of the places where FX has had its biggest impact are our higher-margin countries, and therefore it does have a negative impact a little bit on the margins.

Okay, great. I got it. Thanks.

We have still three minutes, so...

I guess we'll take one more question.

Peter Stabler, Wells Fargo.

Thanks. A question for John. One of the primary support points you offered for the merger was the rapid evolution of the tech landscape. Given that it's been about nine months since the announcement, and the tech space and the marketing tech space has been really active, just wondered if you could update your thoughts here and tell us whether things are roughly playing out the way you expected? Thanks very much.

Thank you. I think, as Maurice has said, I've said many times, we continue to operate as two separate companies until the merger is approved. And we continue to enter into partnerships to make internal investment as fast as we can absorb them, and where we see the puck --who said it -- you skate to where the puck's going and that's what we attempt do every single day. And especially in the digital area. And our partnerships with all these technology partners and our importance to them allow us some insights into where they're going and what is going to be beneficial to our clients. And that's how we prioritize our investments.

That's just rapidly growing every day. I have a meeting later on today where I'll approve some significant internal spending to support some programs and some platforms that we believe will start to become normalized by the end of the year. They will contribute to our growth in the future.

So, we continue to make those investments. We have a fabulous team. And there we go.

In terms of what our services are and what they're not, because there's a lot of confusion when you listen to people and see how each holding company is described, what we do is we are absolutely client focused. Most of our people at this point are digitally -- I'd say damn near all -- are digitally competent to a much higher level was true three years ago or five years ago. And that only improves every single day.

Omnicom is very well-positioned. It contributes to our overall growth because there isn't a campaign or an assignment that isn't significantly digital today. So, we continue, as I'm sure Publicis does, in making investments in this area because it is the future and that's where the puck is going to go.

Thank you, John.

Okay. Thank you all very much. We appreciate your time. If you have follow-up questions we'll be happy to try to take them off-line. Have a great day.

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