Omnicom Group Inc. (NYSE:OMC) Q1 2024 Earnings Call Transcript

Omnicom Group Inc. (NYSE:OMC) Q1 2024 Earnings Call Transcript April 16, 2024

Omnicom Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the Omnicom First Quarter 2024 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I’d like to introduce you your host for today’s conference, Senior Vice President of Investor Relations, Gregory Lundberg. Please go ahead.

Gregory Lundberg: Thank you for joining our first quarter 2024 earnings call. With me today are John Wren, Chairman and Chief Executive Officer, and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omnicomgroup.com, you’ll find a press release and a presentation covering the information we’ll review today. An archived webcast will be available when today’s call concludes. Before we start, I’d like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we’ve included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements, and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2023 Form 10-K.

During the course of today’s call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John, then Phil will review our financial results for the quarter. And after our prepared remarks, we will open up the line for your questions. And I’ll now hand the call over to John.

John Wren: Thank you, Greg. Good afternoon, and thank you for joining us today on our first quarter 2024 results. I’m pleased to report that we’re off to a solid start to the year. Organic growth in the first quarter was 4% with strong growth in our advertising and media, and precision marketing disciplines. EBITA margin, which excludes amortization of acquired and strategic platform intangibles, was 13.8% for the quarter, and operating margin was 13.2%. Non-GAAP adjusted earnings per share, which excludes after-tax amortization of acquired and strategic platform intangibles was a $1.67, up 3.7% versus the comparable number in Q1 2023. As a result of our strong performance in the first quarter, we are increasing our full year organic growth range to between 4% and 5%.

As discussed, during the quarter, we raised EUR600 million through a senior note offering to partially finance the acquisition of Flywheel. Our cash flow and balance sheet remained very strong and support our primary uses of cash flow, dividends, acquisitions and share repurchases. The Flywheel acquisition is off to a great start. Flywheel’s Commerce Cloud is fully integrated into Omni. Omni audience and behavioral data combined with Flywheel’s digital marketplace point of purchase transaction data provide us with the most comprehensive data set in the industry. Across several significant Omnicom clients, Flywheel teams are now fully engaged to deliver the enhanced value of our combined capabilities and insights to them, including new ways to plan and build audiences using Omni audience data and Flywheel’s performance benchmarks, full funnel investment management built on Omni and enhanced with Flywheel’s data specific to performance across commerce platforms.

Using Omni influencer capabilities and connecting them to commerce and retail outcomes from Flywheel and holistic video measurement and optimization based upon integrating Omni’s video viewership data with Flywheel’s Commerce outcomes. These products and services are helping our clients sell more goods more efficiently across hundreds of digital marketplaces and optimizing their investment across media platforms. In addition to integrating Flywheel Commerce Cloud, we made important updates to Omni’s generative AI functionality during the quarter. This includes completing a first mover partnership with Shutterstock that allows us to integrate its text to image model into Omni. As part of our first mover partnership established with Google and their Vertex AI platform last year, we became the first holding company to receive access to the Gemini 1.5 next-generation model.

We remain committed to Omni’s open architecture and flexibility, leveraging these valuable partnerships. We’ve seen notable traction with Omni Assist, the generative AI tool we launched in 2023. Employees for more than 40 markets globally have access to Omni Assist and using it to produce audience intelligence, summarize cultural trends, recommend influences and much more. Some of our agency teams are also creating client-specific Omni Assist agents. For example, a client dedicated marketing consultant, media consultant and briefing agent to streamline global, multi-brand client agency planning. As we work alongside our clients to explore how these new technologies can transform their businesses, two areas are critical to how we can drive transformation and growth.

Our digital transformation consulting business and our content production capabilities. This past month, our highly successful consulting firm, Credera, announced the simplification of its organization to offer clients a more streamlined experience. Its services will now be delivered under a single global brand through two primary business units. Digital with capabilities in MarTech, e-commerce and digital platforms and consulting with capabilities in management and technology consulting, data, AI and business transformation. Since joining Omnicom in 2018, Credera has grown from 300 employees in three U.S. offices to over 4,000 people across 17 locations worldwide. This growth is a testament to our track record and success in acquiring and integrating businesses in new high growth market segments.

Today, our clients demand more high quality, personalized creative content delivered across more media channels and at faster speeds. We have developed standardized platforms and processes to automate the development of content and deliver it at the right time and place to consumers by combining Credera’s expertise in designing and implementing intelligent content platforms, leveraging our Adobe partnership, our product, our content orchestration engine, and Omni’s Audience and Data insights. Our solution provides unmatched outcomes through an open operating system, fueled by customer centricity to some of our most important brands, such as AT&T and Nike. I’m pleased that our strategy resulted in industry recognition in the first quarter, including Omnicom being named WARC’s number one holding company for effectiveness, PHD being recognized as Adweek’s Global Media Agency of the Year.

Omnicom Media Group being recognized Leading Global Media Agency for 2023 with nearly $3 billion in net new business. Although, risks and uncertainty continue to exist in the global economic and geopolitical environment, we remain optimistic about our position in the industry, our strategies and our financial performance. I remain confident that our management teams are well prepared to drive operational excellence even as they monitor and adapt to the changes in the macro environment. I’ll now turn the call over to Phil for a closer look at our financial results. Phil?

Philip Angelastro: Thanks, John. We began the year with solid results, and we’re optimistic about the year ahead. Let’s review the first quarter performance in detail, beginning with revenue on Slide 4. Organic growth in the quarter was 4%. The impact from foreign currency was relatively flat, decreasing reported revenue by 0.1%. If rates stay where they are currently, we estimate the impact of foreign currency translation will be negative 1% for Q2 ’24 and flat for the full year 2024. The net impact of acquisition and disposition revenue on reported revenue was positive 1.5% due primarily to the acquisition of Flywheel this January. Based on transactions completed to date, we expect a positive contribution of approximately 2.5% for Q2 and 2% for the year.

Now let’s turn to Slide 5 to review our organic revenue growth by discipline. During the quarter, advertising and media growth was very strong at 7%, driven by excellent performance at our Global Media businesses. Precision Marketing, which now includes Flywheel grew 4.3%. We expect this to continue to be one of our fastest growing disciplines in the future. Public Relations declined by 1.1% in the quarter. We expect this discipline will improve the rest of the year and benefit from the 2024 U.S. elections. Healthcare grew 2.1% during the quarter, as we continue to cycle through some client losses from 2023, which we expect to lap after Q2. Branding and retail commerce declined by 3.8%, driven by a challenging environment for our branding agencies that are more aligned on project based engagements and faced a difficult comparison to Q1 of 2023 when they grew by 9%.

You’ll note that we’ve updated the name for this discipline, which was formerly called Commerce and Branding. Experiential grew a strong 9.5% led by the U.S. which offset a small reduction in revenue internationally. We expect this discipline to benefit later in the year from the Summer Olympic Games in Paris. And Execution and Support declined by 4.3% with mixed results that overshadowed continued strength in field marketing. Turning to geographic growth on Slide 6. We saw growth in six of our seven regions, led by the U.S. and Europe and a strong growth in Latin America, driven by advertising and media. Slide 7 shows our revenue by industry sector. First quarter results were very similar to last year. Now let’s turn to Slide 8 for a look at our expenses.

In the first quarter, salary related service costs grew as a result of increased staffing levels, primarily as a result of our acquisition of Flywheel Digital, but they were down as a percentage of revenue year-over-year, driven by our repositioning actions last year and through ongoing changes in our global employee mix. Third-party service costs increased in connection with the growth in our revenue. The third-party incidental costs increased somewhat, primarily as a result of increases in reimbursed travel and incidental out-of-pocket costs. Occupancy and other costs increased primarily due to our acquisition activity during the period, but were essentially flat as a percentage of revenue due to lower rents as a result of our prior year real estate rationalization.

And SG&A expense was down both in dollar amount and as a percentage of revenue. Now let’s turn to Slide 9 and look at our income statement in more detail. Our operating income increased 2.8% and the related margin was 13.2%, down slightly from the prior year adjusted margin of 13.5% arising primarily from our acquisition activity, including Flywheel. As you may recall, our margin estimate this year is based on EBITDA, which we have and continue to use as a measure of operating performance. Similar to our peers and in response to requests from investors, this reflects an adjustment for the amortization of intangible assets. The adjustment now reflects amortization expense related to both acquired intangible assets and internally developed strategic platform intangible assets.

Strategic platform intangible assets relate to the costs we are required to capitalize and amortize over future periods in connection with the ongoing development of the Omni platform and the future ongoing development of the Flywheel Commerce Cloud platform. The amortization expense added back to calculate EBITDA does not include amortization expense for internally developed software related to administrative and back office operations tools, such as ERP or workflow platforms. For the first quarter of 2024, this amortization was $21.5 million, and we expect the remaining quarters of 2024 to approximate this amount. For comparability purposes, we’ve included a slide in the appendix of this presentation, and it reflects the prior year amortization related to acquired intangible assets and internally developed strategic platform intangible assets for the four prior year calendar quarters of 2023 and the full year for 2023 and 2022.

The EBITDA in Q1 2024 were $500.4 million, increased 4.1% year-over-year and the related margin was 13.8%. We continue to expect our fiscal year 2024 EBITDA margin to be close to flat with our 2023 adjusted EBITDA margin of 15.6% for the full year. Moving down the income statement. Our income tax rate of 26% was similar to the rate for the first quarter of 2023. For full year 2024, we continue to expect our income tax rate to approximate 27%. Changes in income from equity investments and income attributed to minority interest investments were not significant. As you can see at the bottom of this slide, we have also provided a new line item, non-GAAP adjusted net income per diluted share. Similar to EBITDA, this also excludes the amortization on an after-tax basis that I just discussed related to acquired intangibles and internally developed strategic platform intangibles.

This new reporting more closely measures the performance of our operating businesses year-on-year and is similar to our peer group’s approach of adding back after-tax amortization expense when calculating non-GAAP diluted earnings per share. For the first quarter of 2024, this metric increased to $1.67 or 3.7% compared to the non-GAAP adjusted diluted earnings per share of $1.61 to Q1 2023. Now let’s turn to cash flow on Slide 10. We define free cash flow as net cash provided by operating activities, excluding changes in operating capital. Free cash flow for 2024 was $415.1 million, a slight decrease of 3.2%. Regarding our uses of cash, we used $139 million of cash to pay dividends to common shareholders and another $13 million for dividends to non-controlling interest shareholders.

Our capital expenditures were $23 million, similar to last year, although, we still expect fiscal year 2024 levels to be higher due to growth in capital investment at the newly acquired Flywheel. Total acquisition payments were $812 million, which reflects the $845 million acquisition of Flywheel net of cash required. Finally, our stock repurchase activity, net of proceeds from stock plans was $178 million in the quarter, which is in line with our estimate of total repurchases for the year of approximately half of our historical average given our Flywheel acquisition. Slide 11 is a summary of our credit, liquidity and debt maturities. At the end of the first quarter of 2024, the book value of our outstanding debt was $6.3 billion, up over $600 million from funding a portion of the Flywheel purchase price.

As previously disclosed, we issued EUR600 million senior notes due March 2032 with a coupon of 3.7%. Net proceeds in U.S. dollars were approximately $643 million. Our cash equivalents and short-term investments were roughly flat at $3.2 billion. We also have an undrawn $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program. We continue to monitor the credit markets with regard to our $750 million of 3.65% senior notes due November 1, 2024. At this point, given where interest rates are and our financing activity early in 2024, we expect that net interest expense for the full year 2024 could increase by approximately $45 million relative to full year 2023. Slide 12 presents our historical returns on two important performance metrics for the 12 months ended March 31, 2024.

Omnicom’s return on invested capital was 22%, and our return on equity was 44%, both reflecting very strong performance. I will now ask the operator to please open up the lines for questions and answers. Thank you.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Cameron McVeigh with Morgan Stanley. Please go ahead.

Cameron McVeigh: Thank you and congrats on the numbers and closing Flywheel. Maybe if you could talk more to the Flywheel acquisition, potential value that unlocks both from a short-term and a long-term perspective, and then the expected margin impact this year over the long term? Thanks.

John Wren: Sure. I’ll cover part of it and Phil can chime in.

Philip Angelastro: Sure

John Wren: Flywheel is important in a number of areas. First and foremost, they’re the only fully integrated retail commerce cloud platform that’s out there. Everybody else can do a piece or two, but the company we acquired that Duncan put together, we did it over a six year period and integrated quite a number of component companies, and it came together shortly around the time that we announced it. What they have is an incredible amount of knowledge and information about how people transact and do business on online e-commerce basis. And not only here domestically in the United States with things you’re probably familiar with like Amazon, Walmart, Target, but also in China, in Alibaba and I forgot the other one, but — and they — so they have a global presence.

They’re right at the cutting edge of people buying online and using e-commerce. And that area is according to forecast scheduled to just grow exponentially over the next several years. What it allowed us to do as well is to combine the Commerce Cloud, which looked at the retail sales aspect of what happens when you’re are trying to market something to someone, it enables us to connect to Omni Assist. So we can go all the way from identification, brand building, audience building, all the way through to the actual sale that occurs in a local e-commerce environment and there’s no one else can do that. And I think based upon our study and our due diligence prior to the deal, we don’t think there is anyone out there who even competes with the information that Flywheel has and the platform that they’re operating in, that gives us tremendous opportunities to grow with the market as it grows.

It also has turned our attention to how do we optimize this information for the benefit of our clients and you’ll see occasionally, we now refer to ourselves as a marketing and sales company rather than simply an advertising and marketing company. And that’s because we can go end-to-end legitimately for the very first time. In terms of its growth, because e-commerce, we’re focused primarily here in North America tends to be a fourth quarter — third quarter, fourth quarter company. The fourth quarter is classically the weakest quarter for them, and it accelerates as we go through the balance of the year.

Philip Angelastro: First quarter is the weakest.

John Wren: I’m sorry, I said fourth, I’m sorry. Yeah.

Philip Angelastro: So just on, Cameron, on margins short-term and long-term, the integration process continues. It’s going very well, integrating Flywheel into all of Omnicom’s operations. And as we’ve said back in the call in February, we expect Flywheel’s margins will be approximate Omnicom’s average margins by Q4 of this year, and we expect overall results to be accretive, excluding the amortization that was added as part of the deal, also by Q4. Longer term, we expect the deal or the business to be accretive to Omnicom’s overall average margins over the long run, for sure.

Cameron McVeigh: Got it. Thanks, John, and Phil. And if I could ask one other. Curious, if there are any other specific types of strategic acquisitions you’re focused on in the near term? Thanks.

John Wren: There’s areas we’re focused on, I don’t think I’ll discuss Targets. So I’m done negotiating for them. But, yeah, as I said in the call, there are a few areas that are showing exceptional growth. It’s in MarTech and transformation and also in content production, automation of content production and opportunities which geographically fill out our services in that area and also from point of view. In terms of specific big Flywheel type of acquisitions, we’re not looking at anything of that magnitude at this moment. So we’re focusing in on growing and also transforming much of our own business for the opportunities that we see the new technology and the marketplace offers

Cameron McVeigh: Great. Thank you.

Operator: Your next question comes from Adam Berlin with UBS. Please go ahead.

Adam Berlin: Hi. Good evening, everyone. It’s Adam Berlin from UBS. I’ve got three questions, if I can. The first question is on Precision Marketing. Now that Flywheel has been integrated into that segment, can you give us any guidance on what you think the medium-term growth potential of that? Do you see that as a mid-single digit, high-single digit, double-digit business? And obviously, it might take a few quarters to get that, but just what do you think is possible for that business segment once that the integration is fully done? So that’s the first question. And maybe you can tell us just kind of part B, what the organic growth of Flywheel was in Q1? Just to help us figure out what’s the original business did in Q1? Second question is, would the group adjusted EBITA margin has been up without Flywheel?

And my third question is on Advertising and Media. Advertising and Media delivered good growth in Q1 of 7%, but it was a little bit slower than in Q4. Can you just tell a little bit about the moving parts there? What moved faster or slower and then what happened in Q4? Thank you.

John Wren: There’s a lot to unpack, so I’m going to ask – re-ask some of you – to find some of your questions. In terms of Precision Marketing, at this moment, included in our forecast is probably low double-digit growth for that area, but that’s subject to opportunities. Specifically with Flywheel, it’s, as I said, stands alone. It’s a component part of that and the marketplace itself, clients online activity, e-commerce is all growing. So we look further than this quarter, next quarter this year into the future and what it can do for us, and we’re very bullish about its contribution to the whole process. That was, I guess, the first question. The second one?

Philip Angelastro: The flywheel growth number, Adam, we’re not breaking it out. Yeah, we don’t individually. I think the underlying Precision Marketing discipline prior to Flywheel being added to it certainly grew this quarter. Flywheel also had very good growth this quarter. But in terms of breaking out the business itself, where we haven’t and aren’t going to break out individual businesses going forward either.

Adam Berlin: No. That’s helpful. Thank you very much.

Philip Angelastro: Sure. And then margin — you had a margin question without Flywheel, what would the first quarter margin have been or would it have been flat? I think, there’s a lot of moving parts to operating profit and operating margin and EBITDA margin, etc. Certainly, Flywheels margins are lower than the Omnicom average margin, and there’s certainly some integration costs in the first quarter. We didn’t go back and do the actual calculation, so of how much was the impact of Flywheel as a negative to Flywheel on our EBITDA margins. But I think it’s hard to say, would they have been flat, I think they’re down about 30 basis points. It’s not that big of a number. So the answer is probably, yes. Certainly, there are a bunch of costs associated with the integration. And I think the last….

John Wren: Hold on. And on that, Adam, we’re not focused at all on what the margin impact is in the first quarter that they joined our company. We’re incredibly pleased at speed in which and the progress we’ve made in integrating because we’re looking at the benefit that it is going to bring to the Omnicom moving forward. So we don’t do that kind of waste time really on that type of activity. And the third question, if you could repeat it for me. I think, I know what it is, but…

Adam Berlin: Yeah. Just what was the difference between the 9% growth in Q4 and the 7% in Q1 for Advertising and Media?

John Wren: I’m just going to make a general statement and Phil can fill it in. We’re very happy with the growth that we’ve seen for sure. And that group has been growing very strongly for the last two years every quarter. So in any particular quarter, it’s up against very difficult comps and we expect it to be — continue to grow throughout the balance of this year, so.

Philip Angelastro: Yeah. We tend — when one of the disciplines goes from 9% growth to 7% growth, it doesn’t bother us all that much, certainly because the 9% was quite a performance, excuse me, 7% is also very strong performance. We’re happy with that as well. So we haven’t spent a lot of time trying to pick out the differences between that 2 percentage point swing between Q4 and Q1. But a lot of times, Q4 is unpredictable. There’s lot of project spend in Q4 for the media business as well as all the disciplines. So it isn’t that surprising for Q1 to take a little bit of a step down from Q4 in our history.

Adam Berlin: Okay. Thank you very much.

Philip Angelastro: Thank you.

Operator: Your next question comes from David Karnovsky with JPMorgan. Please go ahead.

David Karnovsky: Hey. Thanks for taking the question. John, just on the decision to raise guidance, your result in the quarter was near the midpoint of the prior outlook. So I just wanted to understand better the increase. Have you assumed a more cautious view for Q1 or are you just seeing better indicators for the rest of the year? And then on Precision Marketing, I know you stated previously, you may be expected an improvement in 2024. We had heard some cautious commentary recently from some of your peers or IT services firms. Just wanted to see if you could update a bit on what you’re seeing here in terms of moving projects forward? Thank you.

John Wren: Sure. In terms of the forecast, I think what we said in the fourth quarter was that we’re giving you the range of 3.5% to 5%, saying that we’re — in the first quarter, we were still cycling through some client changes from the prior year. And that once we get into the second quarter and beyond, we were far more confident that we weren’t facing any significant headwinds as we continue to grow the business. And as it turned out, the fourth quarter came in at 4%. So it seems very logical for us to remove that bottom end caution, I guess, at this point, and still feel that subject to macroeconomic changes in the world, I’ve seen a lot of them in the last couple of weeks, we’re confident that we have the right product, right approach towards clients and our management teams are very strong and focused. So we have more confidence, and that’s why we lifted the bottom end of the guidance up at this point.

Philip Angelastro: The other question was the range — the outlook for Precision in 2024 as you go from quarter-to-quarter.

John Wren: Well, I wouldn’t forecast it quarter-to-quarter. And I think I said in the previous answer that we expect it to be low double-digits at this point, and that was included in coming up to our overall guidance of 4% to 5%.

Philip Angelastro: Yeah. We certainly see – especially, as John had referenced earlier in the call, Flywheel is kind of weighted towards the end of the year in terms of its performance relative to the retail cycle. Certainly, we see it improving as the year goes on in terms of the growth rate.

David Karnovsky: Got it. Yeah. I was really asking about sort of the non-Flywheel part of the business, right digital business transformation and whether you had started to see more movement on some of the projects there?

John Wren: That business is healthy at this point. I think we haven’t seen any headwinds at all. If [indiscernible] others are referencing to, it probably has more to do with their specific clients’ plans and impact economies having on those clients than an industry or a segment type of answer.