宏盟集團 (OMC) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Omnicom First Quarter 2018 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

At this time, I'd like to introduce you to your host for today's conference, Senior Vice President of Investor Relations, Shub Mukherjee. Please go ahead.

Good morning. Thank you for taking the time to listen to our first quarter 2018 earnings call. On the call with me today is John Wren, President and Chief Executive Officer; and Phil Angelastro, Chief Financial Officer. We hope everyone has had a chance to review our earnings release. We have posted to www.omnicomgroup.com this morning's press release along with the presentation covering the information that we will review 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 we have 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 would 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 measures in the presentation materials. We are going to begin this morning's call with an overview of our business from John Wren, then Phil Angelastro will review our financial results for the quarter and then we will open up the line for your questions.

Thank you, Shub. Good morning. I'm pleased to speak to you this morning about our first quarter 2018 results. It's been about 60 days since our last earnings call, and I'm pleased to report a lot has happened in that time, including some big wins for Omnicom. Before I get into the results, I should note that on January 1, 2018, we adopted a new accounting standard, ASC 606. The impact of the required changes were not significant to our results. Phil will cover this change in more detail during his remarks.

Financially, the year has started off in the range we expected, with organic growth in the first quarter of 2.4%. First quarter EBITA margin was 12.4%, was flat versus the prior year period, and EPS for the quarter was up 11.8% to $1.14 per share. These results serve as a continued commitment to the consistency and diversity of our operations, our strong competitive position across advertising and marketing disciplines in key geographic markets, our market-leading digital data and analytical expertise and our ability to provide customer-centric solutions for our clients.

Looking now at our first quarter organic growth across geographies and disciplines, overall North America revenue was flat. Growth in the U.S. was offset by weak performance in Canada due to primarily the loss of the significant client in that market and due to the shift of some client work from Toronto to New York. To a lesser extent, North America was also impacted by the revenue decline in Puerto Rico. CRM in North America was up middle single digits across both CRM Consumer Experience and CRM Execution & Support services. Healthcare was positive in the low single digits and PR was flat in the quarter. These increases were offset by declines in North America advertising and media for the quarter. Several of our U.S. ad agencies experienced client losses early in 2017, and we are still cycling through. In addition, while PHD and Hearts & Science continue their strong performance in both the U.S. and globally, OMD continues to cycle through client losses from 2017, and Annalect continues to see the transition of some clients from our performance-based bundled solution to a more traditional agency pass-through offering. Globally, all of our disciplines had positive growth in Q1, including Advertising and Media, as international markets performed well across all major regions. After experiencing a decline in Q4, the U.K. bounced back nicely and was up 3.1% in the first quarter. Advertising and Media, PR and Healthcare all performed well in the U.K. This growth was offset by declines in CRM Execution & Support services due to weaknesses in field marketing and research. Overall, growth in euro and noneuro regions were very strong at 9.7%. Euro markets were up middle single digits, driven by France, the Netherlands, Belgium, Ireland, Italy and Spain. Germany was the only significant exception to positive growth. Non-euro markets overall were up double digits, led by Russia, the Czech Republic and Sweden. Asia Pacific first quarter organic growth was also solid at 7.3%, as Australia, China, India, Japan, New Zealand and Singapore performed well in the quarter. Latin America increased 3.1% for the quarter, as Colombia and Mexico offset the continued negative performance in Brazil. We did see significant sequential improvement in Brazil as compared to Q4; however, it's too early to tell if this trend will continue for the remainder of 2018. Our smallest region, the Middle East and Africa, had very weak performance for the quarter with a decline of 8.5%. Most of the decline was the result of reductions in media spend in our operations in the UAE. In the first quarter of 2018, we generated $375 million in free cash flow and returned $368 million to shareholders through dividends and share repurchases. Looking forward, our practice of the use of free cash flow, dividends, acquisitions and share repurchases remains unchanged, as does our commitment to having a strong balance sheet and maintaining our investment grade rating.

Before I cover some changes occurring in our industry and business, I'd like to address a few corporate governance changes we recently made and which were disclosed in our proxy. In 2015, we undertook a board refreshment initiative that led to a number of meaningful steps, including expanding the responsibilities of our lead independent director, adopting a mandatory retirement age for board members and bringing greater diversity into the board and committee leadership. Most recently, we welcomed Ronnie Hawkins, our newest Independent Director. He is currently Managing Director and Head of International Investments at EIG Global Energy group. Throughout his career, Ronnie has had broad experiences spanning positions at GE, Citigroup and Credit Suisse. We are delighted he has agreed to join our board. Following our May Shareholder meeting, Bruce Crawford will step down as Chairman. Bruce has been a remarkable leader within Omnicom, starting his long career at BBDO in 1977, taking over as President and CEO of Omnicom in 1989 and then transitioning to the role of Chairman in 1997. I would like to extend my deep gratitude to Bruce for his wisdom, guidance and numerous contributions to the Board of Directors and to me personally over the past 2 decades. In addition, long-serving Board Members, Jack Purcell and Reg Murphy, will also be stepping down from the board in May. We would like to recognize both Jack and Reg and extend our thanks for their outstanding leadership and dedication and loyalty to Omnicom over the years. Following these changes and the anticipated approval of our shareholders at our annual shareholders meeting on May 22, Omnicom's Board will have 10 independent members, including 6 women and 4 African-Americans. In addition, female directors chair both the audit and compensation committees and a majority of our audit, compensation and governance committees are comprised of female directors. These changes strengthen Omnicom's governance structure and demonstrate our commitment to onboarding exceptional candidates who bring a wealth of experience and diverse points of view.

Let me now discuss what we've been seeing in the industry and how our strategy has enabled us to achieve consistent financial results. In terms of market trends, we continue to see market as rapidly adjusting their businesses, keep pace with technological disruption, new competitors and evolving consumer behaviors. Today, our clients, more than ever before, need a valued partner to help solve business problems and grow through the lens of marketing. As market has tackled these challenges, they are transforming their companies with ever-increasing focus on placing their customers at the center of their strategies to drive growth. In this environment of the empowered consumer, the root of all transformation is about helping clients build individual relationships with their customers and exceeding customer expectations through compelling experiences. This means that communications need to be designed around how individuals seek out products and information, and experiences need to be tailored in a highly personalized, targeted way that can be executed at scale. For this reason, Omnicom has been increasing our internal investments on data, analytics and precision marketing. Today, our clients expect us to have engaging creative supported by precision media buying, fueled by data and technology. Quite frankly, being able to deliver the right message to the right person in the right context on the right platform is becoming table stakes in our industry.

Unlike consulting firms or even our peers, Omnicom's intellectual property, or IP, is our ability to bring deep consumer insights to our clients in the lockstep with bringing creative ideas. As the world of media gets more fragmented, the premium on big creative ideas has never been greater. We believe it is not enough to target individuals with more precise messages at the right time in the right place. To us, it is equally important to have effective creative content in those messages. This is why Omnicom has always stayed true to its roots of developing the best creative minds in our industry. While some of our competitors are pursuing data and analytical solutions to compete with consultants and tech firms, we are taking data and analytics and marrying it to expansive capabilities we have in our creative, PR, Shopper, CRM, Healthcare and experiential agencies to deliver one-to-one consumer marketing at scale. These investments are paying dividends for us, and we are continuing to expand our capabilities to meet the changes in the marketplace. The focus of our investments is simple, to help our clients achieve their strategies to transform their businesses, to be more consumer-centric and deliver faster growth. In the past few weeks, we have further invested in several key new hires with experience in transformation and e-commerce, and you'll be hearing more from us on these investments and strategies over the coming weeks and months. We are investing in people because clients want access to top talent, no matter what agency they sit in or where they're located. We have simplified our organizational structure and service offering to ensure that our client teams consist of the very best talent in a nimble and flexible fashion. With strong leadership from each of our practice areas, we can better collaborate and execute growth strategies across our key client matrix organization, strengthen our new business development efforts, share experience and knowledge, target our internal investments and create more career opportunities for our people. We started the formation of specialized groups in 2016, offering our clients a single point of access to our network of thousands of industry specialists in specific marketing disciplines. We now have practice areas in precision marketing and CRM, healthcare, PR, national brand advertising agencies and our global advertising agency networks. Data and analytics and media platforms, like Annalect, are being used to inform creative insights across almost all of our businesses. Recently, we announced the Specialty Marketing Group practice area under the leadership of Stacey Hightower. This new practice area combines our portfolio of industry-leading companies in field marketing, sales support, merchandising and point-of-sale and consulting for not-for-profit organizations as well as other custom communication services. The new group addresses both the growing demand for highly specialized marketing services and the need to integrate those services seamlessly into clients' marketing efforts across disciplines around the world. And we're happy to have Stacey, who has led many of these initiatives for Omnicom at the helm. I'm pleased to report we're seeing clear benefits from these established practice areas. As an example, in the first quarter, Omnicom Health Group agencies, Entrée Health and Adelphi collaborated on a new offering around health economics and outcome research. This is a rising area of investment for clients as patient outcomes become more closely tied how products and services are reimbursed. And looking at other practice areas, the Precision Marketing Group continues to aggressively evolve its precision platform and is closely integrating with both Annalect and Omnicom Media Group services and systems. This is a unique integrated model at the heart of the new contract awarded by the BBC in the U.K. We are also in the process of following 2 other practice areas for brand consulting as well as experiential and events. And we will be enhancing our capabilities of our shopper marketing services by establishing a joint technology investment strategy that can provide best-in-class data and analytic platforms and solutions focused on how to better connect shoppers to brands.

Turning now to new business. Amgen selected Hearts & Science as its new consumer media agency after competitive review. It's important to note that 2 Omnicom Health Group agencies played an integral role in the win. Our agency, BioPharm communications, work closely with SSCG, which retain media duties for Amgen brands marketed to health care professionals throughout the pitch. This is an example of growing our business with an existing client by collaborating across the group.

In terms of other recent wins, we are exceptionally pleased that BMW chose Goodby Silverstein & Partners as its lead creative agency in the U.S. following a competitive review. In announcing the win, BMW recognized Goodby's outstanding creative and their ability to reach millions of consumers with the feeling of speaking only to you. This is a sentiment that reinforces the importance of one-to-one consumer marketing at scale.

Long-term client, Johnson & Johnson, recently asked our agencies to provide integrated solutions that will help them grow their market share. We formed a dedicated agency called Velocity OMC, which consists of talent from BBDO, DDB, Roberts & Langer, CDM and our public relations group. We are very proud of this winning team and happy to be supporting numerous consumer brands for J&J across multiple and highly coordinated disciplines.

In addition to these wins, we continue to expand our global footprint and service offerings. On the acquisition front, Omnicom Health Group reached an agreement to acquire the Pharma Communications business in Japan of Elsevier. The newly named agency will be called EMC. With EMC, Omnicom Health Group expands its unmatched capabilities and depth and breadth of dedicated health care communication services in Japan, which is the second largest pharmaceutical market in the world.

In Germany, Omnicom Media Group acquired Brain Group, a digitally focused agency for media planning, marketing transformation consulting and content creation.

On the topic of winning, let me just mention a few of the recent highlights of our agencies being recognized around the globe. Margaret Johnson, Chief Creative Officer and Partner of Goodby Silverstein, was named Ad Age Executive of the Year; last year, Wendy Clark of DDB won. So it's nice to have 2 senior women from Omnicom win this honor back to back. BBDO topped the Gunn Report as the world's most creative agency network for the 12th year in a row. Omnicom was ranked the top holding company. In the WARC 100 rankings, BBDO was named the most effective and strategic agency network in the world for the fifth consecutive year. TBWA was named Dubai's Lynx network of the Year.

Our investments in talent, technology and partnerships are making the difference for Omnicom and our agencies. They're critical to our success. We will continue to strategically invest in these areas as the marketing environment increases in complexity.

In closing, we're pleased with our financial performance in the first quarter. While it's early in the year, we're on track and we are cautiously optimistic that the back half of the year will be stronger than the first half.

I will now turn the call over to Phil for a closer look at first quarter results. Phil?

Thank you, John, and good morning. As John said, our results for the first quarter of 2018 were in line with our expectations. Our agencies continue to meet our clients' needs, while operating in an ever-changing marketing landscape.

As summarized on Slide 3, our reported revenue for Q1 grew by 1.2% to $3.6 billion. The components of that growth included organic revenue growth, which was 2.4% in the quarter, which fell within the range of our expectations for organic growth of 2% to 3% for the full year. With regard to FX, due to the general weakening of the U.S. dollar over the past year, the impact of changes in currency rates increased reported revenue by $151 million or 4.2%. Dispositions continue to exceed revenue from acquisitions in the quarter as we come close to cycling through the disposal of Novus, our print media business, which we sold early in the second quarter of 2017. Acquisition revenue partially offset the disposition impact, including revenue from recent additions of Snow Companies in the U.S. and Brain Group in Germany. The net impact reduced our first quarter revenue by $153 million or about 4.2%. And lastly, as you are aware, we are required to adopt the FASB's new revenue recognition standard known as ASC 606, effective at the beginning of this year. The impact of applying the revenue recognition standard reduced our reported revenue by approximately $42.5 million or 1.2% for the quarter. Later in my remarks, I will discuss in more detail the drivers of the changes in revenue, including the expected impact of the new accounting standard going forward.

Turning to Slide 1 and the income statement items below revenue. Operating income, or EBIT, for the quarter increased to $422 million or 1.4%, with operating margin of 11.6% unchanged versus Q1 of last year. Our Q1 EBITA increased to $449 million or about 1%, and the resulting EBITA margin of 12.4% also was level with Q1 of last year. There are a few items to note regarding margins. ASC 606 did have a minor impact in our operating profit due to a change in the timing of recognition of some of our incentive compensation from our clients. Had we followed the same revenue recognition rules as last year, our EBIT would have been approximately $6.5 million higher in Q1. However, because this change is principally timing related, we expect the net impact for the year to also be minor and less than the Q1 impact overall.

In addition to the adoption of the new revenue recognition standard, on January 1, we adopted ASU 2017-07, which requires that we reclassify a portion of our pension and post-employment expense, primarily the interest-related components from salary and service costs to below operating income as part of interest expense. The new accounting presentation requires us to restate the prior periods so they are comparable. The amount reclassed for both Q1 of 2018 and Q1 of 2017 was approximately $6 million. The new standard does not have an impact on pretax profit or net income. We continue to pursue our ongoing companywide internal initiatives to increase efficiencies, particularly in our back-office operations, while balancing the need for continued investments in our businesses to pursue sustained growth in the future. Additionally, given the vast majority of our expenses were denominated in the same local currencies as our revenues, the impact of changes in FX rates on our Q1 operating margin was negligible. Net interest expense for the quarter was $46.9 million, down $3.1 million versus the $50 million for the fourth quarter of 2017 and up $1.5 million versus Q1 of 2017. As previously discussed, in 2018, we adopted ASU 2017-07, and as a result, a portion of our pension and post-employment expense has been included in net interest expense, and the prior year has been restated to be consistent with the current year's presentation. The run rate for these expenses in 2017 and 2018 is approximately $6 million per quarter. Gross interest expense in the first quarter was up about $0.5 million compared to the fourth quarter, and interest income was up about $3.5 million also when compared to Q4. Gross interest expense increased by approximately $3 million compared to Q1 of 2017, primarily due to a reduction in the benefits from our interest rate swaps, and interest income increased by approximately $1.5 million.

Turning to taxes. Our effective tax rate for the first quarter was 24.3%, down from 29.2% last year. The primary driver of the lower effective rate was the lower U.S. tax rate as a result of the 2017 Tax Act, which reduced the federal statutory tax rate to 21%. Tax Act also imposes a minimum tax on foreign earnings, partially offsetting the benefit to our effective tax rate from a lower statutory rate. For the full year 2018, we're anticipating an effective tax rate of 28.1%, excluding any potential tax benefit from our share-based compensation, which is difficult to estimate because it is subject to changes in our stock price and the impact of any future stock option exercises. This would be a reduction of over 4% versus our normalized rate of approximately 32.4% in 2017, which excludes the incremental tax charge that was incurred in Q4 2017 in connection with the Tax Act and also excludes the impact of the tax benefits realized in 2017 related to share-based compensation. Q1 rate is lower than our anticipated rate of 28.1% by approximately $13 million, primarily as a result of the successful resolution of foreign tax claims in the quarter.

Earnings from our affiliates totaled $800,000 for the quarter, up versus $100,000 last year. And the allocation of earnings to the minority shareholders in our less-than-fully owned subsidiaries was flat with last year at $20.6 million. As a result, net income for the first quarter increased 9.2% to $264 million.

Now turning to Slide 2. Income available for common shareholders for the quarter was $264 million, and our diluted share count for the quarter decreased 2.1% versus Q1 of last year to 231.5 million. As a result, our diluted EPS for the first quarter was $1.14, up $0.12 a share or 11.8%.

Turning back to Slide 3, which details our revenue performance. Let me start the discussion by reviewing the impact of ASC 606, the new revenue recognition standard. In summary, after a detailed review of the impact the standard would have on our businesses, including detailed reviews of our client compensation agreements, we determined that, as we expected, the new standard does not have a material impact on our revenue or operating results. Consistent with the disclosure in our 2017 annual report, the new standard does not materially impact the method or the timing of when we will recognize revenue under majority of our client arrangements, including our fixed fee retainer-based or commission-based client arrangements. The new standard impacted the timing of the recognition of certain performance incentive provisions that are included in our client agreements. The achievement of certain qualitative or quantitative objectives can result in incremental compensation or revenue for the services we deliver. Previously, performance incentives were recognized as revenue when our performance against qualitative goals was acknowledged by the client or when specific quantitative goals were achieved. This often occurred on a lag, resulting in recognition of these incentives late in the year or early in the subsequent year. The new standard requires these items to be estimated and included in the total consideration in the year the services are performed and to be evaluated throughout the contract period. Additionally, the new standard resulted in a reduction of revenue and operating expense in Q1 of '18 of approximately $30 million in one of our CRM Consumer Experience agencies. Because the impact of 606 was not material to our results, we adopted the new standard by the modified retrospective method of adoption. Under this method, 2017 results were not restated. Accordingly, for comparability purposes, on Slide 17, we present revenue for Q1 2018 as if we follow the previous standard, ASC 605, and we applied our previous revenue recognition policy. As I mentioned, we estimate the impact of applying the new revenue recognition standard reduced our reported revenue in the first quarter of 2018 by approximately $42.5 million or 1.2%. And the impact on EBIT and our results from operations as well as the balance sheet and cash flow were not material. This reduction in revenue is roughly in line with the anticipated impact we expect to see for the remainder of the quarters in 2018 or a reduction in revenue of approximately $150 million for the full year. And as previously discussed, had we followed the same revenue recognition rules as last year, our EBIT in Q1 2018 would have been approximately $6.5 million higher. However, because the impact on EBIT is principally timing related, we expect the net impact for the year to be minor. As we go forward, the impact on our quarterly reported numbers will ultimately be based on the specific mix of business in that particular quarter.

Turning to FX. During the first quarter, the U.S. dollar continued to weaken year-over-year against almost all of the foreign currencies we operate in. As a result, the impact of changes in currency rates increased reported revenue by 4.2% or $151 million in revenue for the quarter. The major driver of our FX movement continues to be the euro, which accounted for nearly half of the increase in revenue due to changes in FX during the quarter. Additionally, the dollar weakened against the U.K. pound, the Australian dollar, the Chinese renminbi and the Canadian dollar. Also in the first quarter, the dollar strengthened against the Brazilian real, only slightly offsetting the increase in revenue due to FX. Obviously, making an assumption on how foreign currency rates will move over the next few months, let alone the balance of 2018 is speculative. But looking forward, if currencies stay where they currently are, FX could have a positive impact on our revenues of approximately 3% during the second quarter and approximately 2.5% for the full year. The impact of our recent acquisitions, net of dispositions, decreased revenue by $153 million in the quarter or 4.2%. Dispositions continued to exceed revenue from acquisitions in the quarter, as we come close to cycling through the disposal of Novus, our print media business, which we sold early in the second quarter of 2017. So while there will be a modest effect in the second quarter, Q1 represents the last quarter that our revenue will be significantly impacted by that divestiture. Based on transactions we've completed to date, and since we will cycle through the Novus disposition early in Q2, our current expectations and that the impact of our acquisition activity, net of dispositions, will reduce revenue by about 1% in the second quarter of 2018 and then range between flat and positive 1% for the remainder of 2018. As we've done in the past, we will continue to pursue strategic acquisitions that enhance our service offerings and make internal investments in our agencies that are consistent with our strategic plan, and we will also continue to evaluate our current portfolio businesses in the context of our strategic priorities.

And finally, organic growth was positive on a global basis for the quarter, up $87 million or 2.4% for the first quarter. Each of our 5 disciplines were up organically for the quarter in total, though performance within the disciplines remain mixed by agency. Geographically, our European and Asian regions led the way. U.K. returned to positive organic growth and the U.S. was marginally positive. However, weakness in Canada resulted in North America being slightly negative for the quarter.

Slide 4 shows our mix of business by discipline. For the first quarter, the split was 52% for Advertising and 48% for marketing services. As for the organic growth by discipline, our Advertising discipline was up 1.6%. Advertising's organic growth continuously led by our media businesses, with a strong performance by Hearts & Science and PHD, offsetting challenges still faced by OMD, while our global and national advertising agencies saw mixed results this quarter. CRM Consumer Experience was up 6.9% for the quarter, primarily on the strength of our events business domestically and in Asia. A portion of the increased activity in events can be attributed to the Winter Olympics in February. Results for the rest of the discipline was mixed. Shopper Marketing was up, while Direct Digital Marketing and Branding were marginally negative. CRM Execution & Support was up 1.2% in the quarter. Our Field Marketing, Not-for-Profit and Merchandising and Point of Sale businesses were all positive for the quarter, which were offset by declines in research and specialty production. PR was up 0.7%. Performance in the discipline was mixed by geographic region. The U.K. led the way, while North America and Continental Europe were both essentially flat, with Asia and Latin America both slightly down in the quarter, and Healthcare was up 2.7%, nice recovery after a negative performance in the fourth quarter. Performance was balanced with positive growth across all regions. As a reminder, in Q4 2017, we revised the detail we provided regarding our marketing services agencies to reflect the realignment of our discipline to better capture the expanded scope of our services. As a result of this realignment, our CRM discipline has been disaggregated into 2 separate categories: CRM Consumer Experience, which includes direct and digital marketing agencies and Omnicom Precision Marketing Group as well as our Consulting and Branding agencies, Shopper Marketing agencies and our Experiential Marketing agencies; and CRM Execution & Support, which includes our Field Marketing, Sales Support, Merchandising and Point of Sale as well as other specialized marketing and custom communication agencies. We also realigned and renamed our Specialty Communications discipline, so that it now exclusively includes agencies offering health care marketing and communication services.

On Slide 24, we have provided the 2017 quarterly historical data that reflects the realignment of the disciplines.

On Slide 5, which details the regional mix of business, you can see during the quarter, the split was 55% for North America, 10% for the U.K., 20% for the rest of Europe, 11% for Asia Pacific, 3% for Latin America and the remainder in the Middle East and Africa markets.

Turning to the details of our performance by region. Organic revenue growth in North America was down marginally at 0.1%. The marginally positive performance from our U.S. business was offset by a decrease in Canada. While in the region, we saw positive performance from our Events businesses as well as PR and Healthcare agencies, the Advertising and Media agencies in the region continued their softness. The U.K. was up 3% after a down fourth quarter. Results of this quarter was solid across most of our disciplines with Advertising, Media, Healthcare and PR more than offsetting decreases in our Field Marketing and Research businesses. The rest of Europe was up 9.7% organically in the quarter. Within the eurozone, we had growth in all of our disciplines. By country, Spain once again led the way, but we also saw a strong performance in Netherlands and France. Additionally, Belgium and Italy performed well, while Germany lagged behind. Growth in Europe outside the eurozone continued to be positive as well. The Asia Pacific region was up 7.3%, and we continue to see organic growth across our major markets in the region, including Australia, India, Japan, New Zealand and Singapore as well as Greater China. Latin America had organic growth of 3% in the first quarter. Brazil was negative, but at a lower level than we saw in the past few quarters. While there are some preliminary positive signs regarding the local economy, the ongoing political climate in Brazil makes it difficult to be confident that they are entering a sustained period of stability. Elsewhere in the region, Colombia had a strong quarter, while our agencies in Mexico continued to perform well. And the Middle East and Africa, which is our smallest region, was down due to decreased media activity by our clients in the region and nonrecurring projects, primarily in the UAE.

Turning to Slide 6, we present our mix of business by industry sector. Comparing the first quarter revenue for 2018 to 2017, the mix was fairly steady.

Now turning to our cash flow performance. On Slide 7, you can see that in the first quarter we generated $375 million of free cash flow, excluding changes in working capital, which represents an increase of about $20 million over the first 3 months of 2017.

As for our primary uses of cash on Slide 8, dividends paid to our common shareholders were $139 million, reflective of the 5% per share increase in the quarterly dividend that was approved last October, which is partially offset by the reduction in our outstanding common shares due to repurchase activity over the past year. Dividends paid to our noncontrolling interest shareholders totaled $16 million, while capital expenditures were $36 million. Acquisitions, including earnout payments, totaled just under $200 million, and stock repurchases, net of the proceeds received from stock issuances under our employee share plans, totaled $229 million and were similar to what we repurchased during the first 3 months of the last year. All in, we outspent our free cash flow by about $245 million in the first quarter.

Turning to Slide 9. Regarding our capital structure at the end of the quarter, our total debt is $4.9 billion. Our net debt position at the end of the quarter was $2.3 billion, up nearly $1.2 billion compared to year-end December 31, 2017. The increase in net debt was a result of the typical uses of working capital that historically occur in our first quarter and the use of cash in excess of our free cash flow of approximately $245 million. These increases in net debt were partially offset by the effect of exchange rates on cash during Q1 that increased our cash balance by about $30 million. Compared to this time last year, our net debt is down $133 million. The decrease was primarily the result of generating approximately $80 million in net free cash flow over the past 12 months and the effect of exchange rates on cash that increased our cash balance by about $190 million. These reductions are partially offset by the changes in operating capital, which negatively impacted our cash by approximately $100 million over the past 12 months. Our working capital was also negatively impacted this quarter as a result of the acceleration of the payment of certain bonuses in the U.S. to take advantage of the change in tax rates. Comparable bonus payments were made in Q2 of last year, so this was a timing item between Q1 and Q2. The net effect of these items was a reduction in working capital of approximately $275 million compared to Q1 of 2017. As for our debt ratios, they remain solid. Our total debt-to-EBITDA ratio was 2.1x and our net debt-to-EBITDA ratio was 1x. And due to the year-over-year increase in our interest expense, our interest coverage ratio decreased to 10.4x but remains quite strong.

Turning to Slide 10. We continue to manage and build the company through a combination of well-focused internal development initiatives and prudently priced acquisitions. For the last 12 months, our return on invested capital ratio was 21.3%, while our return on equity is 46.7%. Both are down year-over-year due to the additional tax charge we took in Q4 in connection with the passage of the Tax Act. That impact should be more than offset by the positive impact the lower tax rate will have on our results going forward.

And finally, on Slide 11, we track our cumulative return of cash to shareholders over the past 10-plus years. The line on the top of the chart shows our cumulative net income from 2008 through March 31, 2018, which totaled $10.3 billion. And the bar shows the cumulative return of cash to shareholders, including both dividends and net share repurchases, the sum of which during the same period was $10.9 billion, resulting in a cumulative payout ratio of 106% over the last decade.

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

(Operator Instructions) Our first question is going to come from the line of Alexia Quadrani from JPMorgan.

Thanks for the color by growth by region. But I was hoping if you can kind of take a step back and sort of maybe more broadly generalize, you've seen kind of underperformance -- a relative underperformance in the U.S. now for quite some time and this outperformance globally internationally. I guess, if you were to say there were a few reasons or a reason that really is sort of responsible for that disconnect in growth, I guess, how would you generalize that? And then I just have a follow-up question really on account losses. It sounds like you're still seeing some headwinds from OMD impact in 2018 from losses there. I guess any more color when we can circle those we might see more favorable comparisons?

Sure. This is John, Alexia. Good morning. When you take a look at our geography, 8-plus -- $8.5 billion, $8.8 billion of our revenue is generated in the United States, and so it's a big number. Before you start any kind of division or subtraction or addition, where some of our largest accounts, not the biggest accounts we have, but $10 million, $20 million accounts is where we suffered losses as we suggested in our comments in the beginning part of the last year. So that's one of the reasons, so that constrains our overall growth. We -- and it has for 3 quarters of last year and will probably for the first and possibly the second quarter this year before we cycle fully through those losses and offset it by gains. Now there's a lot of activity going on in the marketplace, and we've won quite a number of pieces of business and a significant portion of them are based in the United States, but we won't start to see -- because of the 60, 90-day clauses that our competitors had in those contracts, we won't see the addition of that revenue until later on in the year. So that's the primary reason for it. It's not that we're underperforming, we're not. We know full well what and why we're performing at the level we are, and where we've had to make management changes because we aren't getting that kind of level of activity that we wanted, we've made those changes. It takes a while for those people to make a contribution. So there's a lot of activity underlying the numbers. But you have to look at the sheer size of the United States to our portfolio in order to fully sort of understand why you're not getting the similar growth in smaller markets, you know a $10 million or $20 million account win can add from a percentage point of view, a much larger percentage.

That's very helpful. And then if I could just ask a follow-up on the account movement that you sort of highlighted? When you look at sort of where you are in the industry today, maybe versus 10, 15, 20 years ago, do you find that the client conflict issues are less of a constraint and there does seems to be a lot of accounts in review right now and like you've highlighted you've won a fair share of them, are you more -- is there more flexibility to kind of pitch or win business because client conflict is less of an issue or is that not necessarily the case?

I would -- if I had to make a generalization, I'd say client conflict is less of an issue, far less of an issue. Quite a number of our clients or prospective clients, or RFPs that come in really wanting Omnicom solutions. They are no longer simply looking for a particular brand or particular aspect of our business. And that allows us to create different types of business models and ring-fence them in such a way that conflicts are not what they once were when we were smaller.

Our next question is going to come from the line of Craig Huber from Huber Research Partners.

In the quarter, you generally give us the net new billing wins or losses, we generally target about $1 billion each quarter, what was it for the first quarter, please?

It was probably in the neighborhood of $1 billion to $1.25 billion.

Okay. Can you give us a little more detail on your expectations when you think the OMD agency may start to see some better numbers? Are you hopeful for the second half of the year or we should be thinking more like 2019?

Well, assuming everything stays at a steady state, and we fully expect it to, in terms of wins, losses, opportunities, we should start to see improvement in the latter part of the year and certainly 2019. We made a complete change of top management, both globally and in the United States about 2 quarters ago. And as I said, it takes some time and it takes opportunities that are provided by clients, we -- then we have to win them. So -- but we should have cycled through whatever losses we had and then I'm expecting positive growth. The other thing, which becomes a smaller problem each particular quarter is the -- this isn't just OMD, this is in the media group, is programmatic in a way we do it. A lot of our clients over the course of last 5 quarters have shifted, especially, in the United States, shifted from a bundled -- unbundled -- excuse me, from a bundled way of purchasing to an unbundled methodology of purchasing. It doesn't necessarily change our profitability or the number of accounts or the number of people that we serve, matter of fact, we're growing in that area. What it does do is, it has an impact on reported revenue. So that also has an impact, which, to -- if somebody is just focused on top line, it's, oh my god; if somebody is focused on substance and the profitability of the business, it's actually a growing area.

And then John, my other big picture question here is, when you talk about 2% to 3% organic growth for this year in historically economic environment like this, you and your peers might be growing in the solid mid-single digits in line with the global nominal GDP, if not 100 basis points faster. In your mind -- I don't want to take a lot of your time here, but can you just give us likely 4, 5 bullets of the reasons in your mind of why your growth and your peers logging in even worse slower growth. I'm saying -- what is like 4, 5 bullets of reasons of why you think your growth is not mid-single digits right now versus historically normally would be in this sort of economic environment?

Well, one of the reasons for our guidance is there's -- and you'll see -- you won't see it as much in numbers simply we reported, but I suspect you're going to start to see some weird aberrations as the competitors report. There was a significant change in accounting. It didn't affect our numbers very much. But based upon some of the signals that our competitors have laid out, I do believe that you're going to see a great deal of confusion out there for the next couple quarters. You won't see that confusion in Omnicom, but you'll see it in other places. Clients are under different amounts of pressure. You'll see it in what they report. The world is changing and changing rapidly. And what we're doing is we're trying to grow our base, we're trying to make investments and often times those are internal investments to set up, as we always have, for consistent growth going forward. That means there's a change in the way that we service clients, and everybody in the world is trying in the 2% growth, 3% growth world is focusing on efficiency among first and foremost. And so things that we have done in the past, which were nice to have, are no longer done. Things are being done differently because of changes in technology and the impact that, that has. It all -- there's no one big single item that's occurring, but we're rebuilding the airplane that's flying at 560 miles an hour at 39,000 feet as we speak. I think we've done a pretty successful job at it and continue to do that. But there's an awful lot of changes to the component parts of how we're servicing our clients and are...

And our agencies are certainly focused on our clients' customer and the consumer, primarily. And there's an awful lot of change that's been occurring, especially rather rapidly in terms of consumer behavior. And our clients work with us on a daily basis on trying to come up with new ways and strategies for how to reach that consumer in this rapid -- rapidly changing technological environment and rapidly changing media landscape. So there's an awful lot more opportunity for our clients to change their approach to how to reach the consumer in the most efficient and effective way. And I think some of that change certainly offers opportunities, but it also causes clients to think a little bit about where they're going to invest and how much they're going to invest in addition to some of the cost pressures they're faced with.

The one thing I might add is that just -- I'm sorry, I didn't mean to cut off your question is, the last several years, it's your ability to gather information, create platforms, which will allow you to more closely target whoever your consumer is, that has moved very, very rapidly. It's no longer simply just targeting people or being able to reach them through the devices that they use. Now you have to reach that consumer, engage them in something type of creative that is of interest to them, and you have to be able to do that at scale. I think, as I said in my prepared remarks, the IP that Omnicom has because being able to do those targeting exercises and everything else really becomes table stakes as we go into the future. But to be able to have a creative engagement that you can do at scale to individuals is what is going to make difference as we move to the next level of communications.

My last quick question is, if you just thought of your top 25 clients, let's say over the last 5 quarters, is the revenue growth at Omnicom, for instance say, on average the top 25 clients, in line with your corporate average, better or worse, please?

I do have those stats someplace. But on average -- I haven't looked at it, I didn't look at it particularly this quarter. But I'd say that if you looked at just the top 25, we've been expanding those relationships, and on average that growth exceeds the overall growth that we report as a company.

Our next question is going to come from the line of John Janedis from Jefferies.

John, maybe 2 follow-ups of sorts. First, you talked about the leadership and investment in talent. Are there any examples of traction you're seeing at the Precision Marketing Group now that you're about 6 to 7 months into that leadership change? And then separately, can you give a little more color on your comment around the shape of organic this year, meaning that the better second half potentially, are clients suggesting a pickup in spend, is the benefit from leadership changes or account wins and losses or a combination of things?

Well, we've been rebuilding the team at our Precision Marketing Group, and we've hired quite a number of very talented people. We are integrating the platforms that we're utilizing to deliver our products into the Annalect program -- platforms and expanding that, and then quite a bit of work has already been accomplished. But we -- I'd have to say, we still have a little bit more to do before we would be fully satisfied with what we have. I have rather extensive meetings back end of the next week to get a complete up-to-date status of exactly where we are, but I'm very comfortable with the progress we've made. Like everything else, I wish we were done, we're not, but we're very, very close. And then it's just -- it's a process of selling that into the marketplace. So that's an area of expected growth, not maybe for the next quarter, but certainly, as I look out into the back end of the year and into 2019 because there's a lot of upside there for us that we haven't yet taken advantage of. And I took so long to answer that question, I forgot the other part of your question, so the second one?

Just a little more color maybe on the shape of organic this year, meaning the back half improvement? You know is it client suggesting a pickup in spend, is it leadership change, account wins, losses or a combination?

I think it's a combination, to be perfectly honest with you. My confidence comes from specifics that have happened within Omnicom, wins that I know we have coming on board and what's happening to our individual business. So that's where my confidence is coming from. I also expect that consumer probably see increasingly get comfortable with the additional cash that they have in their pockets, which they probably didn't see in January and February, but started to see after a couple of months with the new tax bill. So I think it's a combination of events. But my comments will be more specifically focused on what's occurred within the various accounting -- with the various groups within Omnicom and...

From the losses we're currently cycling on. I think just to be clear though, John, we, at this point, are not changing our view for the year in terms of 2% to 3% as an expectation, but we're certainly optimistic.

Or cautiously optimistic is the phrase I've been using for the last several years. I'll stick with that.

Our next question is going to come from the line of Peter Stabler from Wells Fargo Securities.

A couple for Phil on 606. I realize this is a pretty small amount of money in the big picture, but wondering if you could give us a bit of detail. We understand under 505, this would have been classified as organic growth. Can you give us a sense of is this North America, primarily the $42 million would have fallen there, and then by discipline roughly where would that have been? And then any sort of forward look on whether you think that impact is going to grow or maintain or moderate going forward?

The majority of the change certainly happened in North America and will roll out for the remainder of the year in North America. The piece of the change that relates to our incentive compensation provisions and our client arrangements, that's pretty much spread globally and it's spread consistently throughout the disciplines more or less. So there's not a concentration in one place or another. And as far as disciplines, it's in the consumer -- CRM Consumer Experience discipline is where the large part of the change occurred and can be expected to kind of continue to rollout throughout the rest of the year.

And in terms of scale, I mean it's -- do you expect significantly different scale?

No.

No.

In terms of numbers -- well, 2 things as far as the change in the revenue number, the numbers by quarter, we expect them to be relatively consistent plus or minus a few million here or there, and in total, about $150 million for the year is our estimate. And then as far as the impact on EBIT, ultimately, we expect that to just be a timing difference. So by the time you finish the year, you're only talking about a difference of a couple million dollars probably.

We have time -- now that the market is open, I think, we have time for one more call, operator.

And our final question will come from the line of Ben Swinburne from Morgan Stanley.

John, I wanted to ask you about the situation over WPP. There's been a lot of speculation that assets may be -- may come to market for sale. I know that's probably -- it's probably very early days there on what they may do next. But just interested in what you think the impact either to your business is from an account review, competition perspective or if there are assets in research or other analytics that you might be interested in? And then if I could ask Phil, too, you mentioned events and, I think, Olympics specifically is helping the CRM segment, which was your leading segment this quarter, I don't know if you want to quantify sort of the benefit to organic growth from either events or Olympics that you mentioned in your prepared remarks?

In terms of what's occurring with our competitor, I don't know a great deal more than any of you because most of my intelligence is coming from the newspaper reports and the rest of it. In many ways, I have a great deal of respect for Martin. I have competed against him for the last 25 years very honorably. I know that he was in the process of evaluating his own portfolio. I don't know what conclusion the new leadership will reach. In terms of Kantar and the other names that are being bantered about, that's not a key focus for our acquisition dollars. So I would imagine if that's what they decide to sell there will be any one of a number of other buyers, including probably private equity. So I can't -- I'm not much help when it comes to answering that question directly for you, I'm sorry.

And then in terms of the events business that -- I think, I don't have an Olympics number separately, but probably the majority or more than half anyway of the growth in CRM Consumer Experience was from our events businesses and a variety of things, not -- certainly, not Olympics.

And Phil, can I just ask -- I know we're running out of time, but just I think you mentioned 606 had an expense impact in the quarter, otherwise, maybe you would have had a higher OI that's quite -- I think, that's how you explained it, OI would have been higher, but you also talked about moving, I think, a similar amount of money in pension expense out of OpEx below the line. So is it sort of a push, is that the conclusion from those comments?

No, there's 2 separate things. So the pension adjustment we're required to restate the prior year to show the presentation consistently. So it's about $6 million in '18 and $6 million in '17. They got reclassed out of our operating expenses below operating income. So that had no -- really no impact other than -- if you're calculating margin percentage on operating income, it went up a little bit each year. So year-on-year, no change. And then as far as 606, had we applied the prior year's revenue recognition accounting, so 605, we would have recorded about $6 million, $6.5 million more of EBIT just because of the timing of the incentive -- the incentives that we booked consistently over the years. That change requires us to book those incentives differently and that's the timing difference, that ultimately will lead to maybe $1 million or $2 million difference for the full year. It resulted in less EBIT in the first quarter of about $6.5 million, the new way.

Thank you, everybody, for joining the call.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thanks for your participation and for using AT&T Executive Teleconference. You may now disconnect.