Omnicom Group Inc. (NYSE:OMC) Q4 2022 Earnings Call Transcript

Omnicom Group Inc. (NYSE:OMC) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Good afternoon, and welcome to the Omnicom Fourth Quarter and Full Year 2022 Earnings Release Conference Call. As a reminder, this conference call 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, Gregory Lundberg. Please go ahead.

Gregory Lundberg: Thank you for joining our fourth quarter and full year 2022 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., we’ve posted a press release along with the presentation covering the information we’ll review today as well as a webcast of this call. An archived version will be available when today’s call concludes. Before we start, I would like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we have 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 Form 10-K, which should be filed tomorrow. 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’ll 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’ll open up the lines for your questions. I’ll now hand the call over to John.

John Wren: Thank you, Greg. Good afternoon, everyone, and thank you for joining us today for our fourth quarter and full year 2022 results. I’m pleased to report our fourth quarter performance was very strong on both the top and bottom lines, and we finished an outstanding year in 2022. We entered 2023 with a high level of confidence in our strategic and financial position while remaining cautious and being prepared for possible changes in the geopolitical and macroeconomic environment. For the fourth quarter, organic growth of 7.2% exceeded our expectations. Growth was broad-based across our disciplines, geographic regions and client sectors. We again saw a double-digit growth in our Precision Marketing, Public Relations and Experiential disciplines.

Full year organic growth was 9.4%. Operating margin for the fourth quarter was 16.6%, an increase of 50 basis points compared to the prior year. For the full year, operating margin adjusted for certain non-GAAP items illustrated on Page 10 of our investor presentation was 15.4%, which is 40 basis points higher than our operating margin in 2021. Earnings per share for the quarter was $2.09, up 7.2% versus the fourth quarter of 2021. The negative currency impact on EPS of the strong U.S. dollar was approximately 6%. On a constant currency basis, EPS increased by approximately 13%. For the year, we generated over $1.7 billion in free cash flow and returned more than 65% to shareholders in dividends and share repurchases. Our liquidity and balance sheet remain very strong and continue to support our primary uses of cash, dividends, acquisitions and share repurchases.

Our strong performance validates the growing role we play as clients increasingly turn to us for advice in navigating through a complex marketing and communications environment. We’re also advising our clients on transforming their organizations by deploying new processes and marketing technology platforms that can provide more connected experiences for their consumers. During the quarter, we expanded and further strengthened our talent. At the time of our Q3 remarks, we had just appointed Andrea Lennon to the new role of Chief Client Officer. In the fourth quarter, we added two prominent leaders: Kathleen Saxton, previously of MediaLink, joined as Chief Marketing Officer; and Alex Hesz previously of adam&eve and DDB joined as Chief Strategy Officer.

Andrea, Kathleen and Alex will strengthen our position in the marketplace, identify and pursue new business opportunities and work with our global client leaders and agencies to deliver innovative and transformational ideas to our clients. We’re fortunate to be adding this team from a position of strength. We ended 2022 with significant new business wins and deepened our relationship with many of our enterprise-level clients. In the fourth quarter, L’Oréal named Omnicom Media Group, its U.S. media agency of record. This marked one of the biggest wins of 2022, with an estimated $1 billion in U.S. media billings as reported by COMvergence. L’Oréal selected OMG due to its steep specialization and integration of expertise, talent and technology to deliver modern marketing outcomes.

Our recently launched commerce agency, Transact, along with our best-in-class analytics and insights team at Annalect, which supports the Omni operating system played instrumental roles in winning the L’Oréal business. Also on the media front, OMD secured a major win as it was named media agency of record for Burberry. The win includes an innovative and bespoke agency model created specifically for Burberry. Our Healthcare Group, which had 6.4% growth in the fourth quarter, won a significant new business pitch with Merck capping off the year in which it won one of our largest healthcare pitches of 2022. A key component of our new business success was driven by our e-commerce capabilities, an area where we’ve made and continue to make significant investments.

We recently expanded our e-commerce capabilities through our partnership with Albertsons Media Collective, a retail media arm for the Albertsons Companies. This partnership will provide first-to-market solutions that will enable marketers to better target and measure ROI in the connected TV environments. Going forward, we plan to continue to invest in and expand our capabilities to solidify our position as best-in-class provider of retail, media and e-commerce services as well as in other high-growth areas such as Precision Marketing, Performance Media and Health. I want to thank our people around the world for helping us close out 2022 on such a positive note. It’s your dedication and commitment and outstanding work that allows our agencies, clients and Omnicom to succeed.

We entered 2023 in a very strong position, supported by our strong financial performance, new business wins and steady progress on our key strategic initiatives. We also continue to see strong demand for our services. Based on current market conditions, we’re targeting 2023 organic revenue growth of 3% to 5% and expect our operating margin to be between 15% and 15.4%. At the same time, we remain extremely cautious of macroeconomic and geopolitical factors, including the ongoing war in the Ukraine, the economic risk posed by rising interest rates and higher inflation around the world. To be prepared, we continue to actively develop plans to respond to the headwinds from macro factors, and I’m confident we can manage through this economic cycle.

And we have the leadership teams in place to minimize the impact on our top and bottom lines. I’ll now turn the call over to Phil for a closer look at our financial results. Phil?

Phil Angelastro: Thanks, John. We’re pleased to be closing 2022 with solid fourth quarter results, driven by strong organic revenue growth, operating profit growth and earnings per share growth. We finished the year with a healthy balance sheet and excellent liquidity. Our strong credit position and the operating flexibility of our business position us well for any macro uncertainty ahead. Please turn now to Slide 3, and we’ll begin our review with a summary of the fourth quarter income statement. Reported total revenue in the fourth quarter was flat year-over-year at $3.9 billion with organic growth of 7.2%, offset by the negative impact of foreign currency translations and net disposition revenue in excess of acquisition revenue.

Since most of our expenses are incurred in the local markets where our revenue is earned, foreign currency translation also reduced our operating expenses, which were flat versus last year. Reported operating profit for the fourth quarter increased 3.2%; and on a constant currency basis, it increased 8.4%. Moving down the income statement. Higher interest income again helped lower our net interest expense, which decreased by $18.5 million. Our tax rate of 26.5% was as expected. In 2023, despite the increasing interest rate environment, we currently expect interest expense to approximate 2022 levels and interest income to increase moderately in Q1 and Q2 of 2023 compared to the first half of 2022 and approximate 2022 levels in the second half of 2023.

We also currently expect our effective book income tax rate in 2023 to be approximately 27%. The increase relative to our 2022 rate is primarily due to the UK tax rate which is scheduled to increase in April of 2023. Overall, our Q4 ’22 net income rose 3.3% on a reported basis. Combined with the reduction in shares year-over-year, diluted EPS rose 7.2%. Without the headwind from negative foreign currency translation, diluted EPS for the quarter increased 13.3%. For a review of the full year, please turn to Slide 4, where we show certain non-GAAP adjustments to make the periods more comparable. None of these adjustments are new this quarter. They were discussed earlier this year and last year. For the year-to-date 2022 period, operating expenses and income taxes were impacted by charges in the first quarter arising from the effects of the war in Ukraine.

For the year-to-date 2021 period, operating expenses benefited from a gain on sale of a subsidiary and both interest expense and income tax expense reflect the impact from the early extinguishment of debt in 2021. Continuing on Slide 4, similar to the quarterly results we just discussed. The strength in the dollar this year also impacted our year-to-date results. Foreign currency translation reduced revenues by 4.8%. Operating profit on a non-GAAP adjusted basis of $2.2 billion was up 2.3%. And without the headwind from negative foreign currency translation, it increased 6.8%. Non-GAAP adjusted diluted EPS of $6.93 rose 8.5%; or without the headwind from negative foreign currency translation, it increased 13.6%. Let’s now go into some more detail on our results, beginning on Slide 5 with an analysis of the change in our revenue.

As discussed, our organic growth was 7.2% for the quarter, and 9.4% year-to-date. The quarterly impact from foreign currency translation was negative 5.5%. It’s worth noting that for financial reporting purposes, the U.S. dollar strengthened against the currencies of every country we operate in, except for Brazil when compared to Q4 of 2022. However, this impact was slightly less than it was in the third quarter. So it did move in the right direction. The impact of acquisition and disposition revenue was negative 1.4%, primarily reflecting the disposition of our businesses in Russia during the first quarter of 2022. Looking forward, foreign currency exchange rates stay where they were as of February 1, we estimate that the impact will reduce our revenue by approximately 3% in the first quarter and moderate for the remainder of 2023 to be approximately flat for the year.

Based on deals completed to date, we expect the impact from net acquisitions and dispositions will result in a reduction of our revenue by approximately 1.5% in the first quarter, primarily resulting in the disposition of our businesses in Russia in the first quarter of 2022. Turning to Slide 6. For the quarter, we once again showed organic growth across all of our disciplines with the exception of execution and support as we expected. As you can see, performance in each of our other disciplines remained solid with double-digit organic growth in three of them. Advertising & Media, our largest category, posted 6% organic growth in the quarter, led by strong performance in our Media businesses. Precision Marketing continued its strong performance, 11.6% organic growth as clients continue to turn to us for digital transformation, digital customer experience and data analytics services.

Although this growth rate moderated a bit relative to the third quarter, we’re excited about the outlook, and we’ll continue to invest in this space. Commerce & Brand Consulting was up 7.2% organically on the strength of our branding and design agencies. Experiential organic growth was a strong 17% where we saw more benefits than we expected from the FIFA World Cup and other year-end projects. Execution & Support, which we expected would be choppy in the second half, had a decline of 2.8% against the comp of 5.2% growth in last year’s fourth quarter. Public Relations grew a strong 12.7% organically in the quarter, keeping up a double-digit trend, reflecting continued client demand across many industries and geographies, and including increased revenue of approximately $10 million, resulting from increased election spending in the U.S. in the second half of the year.

And Healthcare delivered solid organic growth of 6.4%. Turning to Slide 7 for revenue by region. We’re pleased to see continued positive growth globally. In the U.S., our 5.6% quarterly organic growth was led by Advertising & Media, Precision Marketing and Public Relations. International growth of 8.7% was also led by Advertising & Media and Precision Marketing and also saw the strong contribution from Experiential that I mentioned earlier. Regionally, we saw some expected slowdown compared to the first half of the year in the UK and Europe, but their organic growth of 10% and 5%, respectively, is still quite healthy. Asia Pacific also improved, led by China and also driven by most of our other markets in the region. Looking at revenue by industry sector on Slide 8.

Relative to the fourth quarter of 2021, the mix of our client portfolio was broadly stable. Categories that moved year-over-year included an increase in exposure to pharma and health and a decrease in exposure to technology. Let’s now turn to Slide 9 and look at our operating expenses for the quarter. For your reference Slide 17 in the appendix presents this on a constant currency basis. Our total expenses were essentially flat at $3.2 billion due primarily to the weakening of almost all foreign currencies against the U.S. dollar. Salary and related service costs decreased as we saw an increase related to organic revenue growth and additional headcount, offset by the effects of foreign currency translation. Third-party service costs increased due to an increase in organic revenue.

Occupancy and other costs increased primarily due to some growth in general office expenses as our workforce returns to the office, partially offset by lower rents. On the topic of rent, you may have seen in January that we moved the Madison Avenue headquarters for TBWA to a location that houses other Omnicom agencies. It is an open, modern and collaborative space with an efficient design. This is another example of the rationalization of our rooftops, which we expect will continue in the future. SG&A expenses were down year-over-year due to lower professional fees, lower marketing-related costs and reductions from the effects of foreign currency translations. Turning to Slide 10. Our fourth quarter operating profit was $643 million, a 3.2% increase from last year, net of a reduction of $32.3 million of the impact of foreign currency translations.

Our operating profit margin reached 16.6% on total revenue compared to last year’s margin of 16.1%. Please turn now to Slide 11 for our cash flow performance on a full year basis. We define free cash flow as net cash provided by operating activities, excluding changes in operating capital. Free cash flow for the year was approximately $1.8 billion, flat compared to last year. Regarding our uses of cash, we used $581 million of cash to pay dividends to common shareholders and another $80 million for dividends to non-controlling interest shareholders. Capital expenditures of $78 million were at normal levels. Acquisition spend, net of dispositions and other items was $330 million. And lastly, our net stock repurchases for the year were $594 million, at the high end of our expectations of $500 million to $600 million.

In 2023, we expect that we will also repurchase shares within this historical range. Regarding the changes in our operating capital for the year, which resulted in a use of cash of approximately $840 million, the principal factors that caused this reduction included: a reduction in billings in 2022 resulting from certain client losses in 2021; disposition of our businesses in Russia, including cash for operations in Q1 of 2022; disposition of our specialty media business in 2021; impacts from increased client activity related to the reopening in China at the end of the fourth quarter; and timing differences compared to the prior year; and cash collections and cash payments at year-end. As we look forward, we expect change in operating capital to be a source of cash again for fiscal year 2023.

Slide 12 is an overview of our credit, liquidity and debt maturities. During the quarter, the impact of foreign exchange rates on our euro and sterling denominated debt caused the book value of our outstanding debt to decrease to $5.6 billion from $5.7 billion as of December 31, 2021. There were no changes in outstanding balances during the quarter and our $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program, remains undrawn. Our cash and cash equivalents were $4.3 billion at year-end. The reduction relative to year-end 2021 is due primarily to the changes in operating capital that I just discussed as well as the effect of foreign exchange rate changes, which reduced our cash balance by $219 million for the year.

Turning to Slide 13. Our operating capital discipline consistently drives above-average returns on both invested capital and equity. For 12 months ended December 31, 2022, we generated a solid return on invested capital of 28% and a strong return on equity of 40%. The strength of our business delivers attractive returns on a relative basis in both strong and weaker macroeconomic environments. In closing, as 2023 unfolds, we are prepared, as always, for an uncertain business environment. We have a strong track record of providing attractive returns through dividends and share repurchases while maintaining a strong balance sheet and managing our business through challenging market conditions and we will do so while continuing to invest in our strategic future growth.

Operator, please open the line questions and answers. Thank you.

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Q&A Session

Operator: And our first question comes from the line of Steven Cahall with Wells Fargo.

Steven Cahall : So John, maybe to start off with, you said you entered 2023 with a lot of confidence, and you’re also being cautious and that caution certainly served you well last year as the macro really got worse throughout the year. You all did an impressive job of setting achievable targets. So how should we think about the amount of kind of healthy caution that’s in this guidance? And maybe related to that, as you came through the fourth quarter and into January, did you see trends that were either improving or deteriorating on a sequential basis to kind of set you up for how you’re looking at the rest of the year?

John Wren : Okay. There’s a couple of questions in there. Let me start with first with the guidance. In the guidance that we gave you, I’m going to remind everybody, we’re five weeks into the year. 3-plus percent, I’m extremely comfortable about. There’s a lot of reasons for that. There are some puts and takes, depending upon the industry that clients are in. But on the whole, we feel very good, our client base and what their planned spending is for the forthcoming future as far as we can see it. And then in 2022, we entered the year challenged by facing some losses from ’21, which we’re not up against in the first quarter. And as well as Russia as to previously mentioned. But more importantly, if you look at media wins, for instance, using the only reliable outside source, which I believe is convergence, you’ll find that on a net billings basis, Omnicom won far more business in ’22 than any of our competitors.

So the combination of stability in our client base, those new business wins, which will start to contribute for the most part in and around April. But April and for the rest of the year, I’m extremely comfortable. We’ll know more, obviously, as we get a little bit further into the year and have — continue to have conversations about stretch plans with our operating divisions. But — so that’s that. Having spent so much time on that, I’ve forgotten your second question, sorry.

Phil Angelastro: In terms of the month — I think the second one was the month of January. So we don’t — we typically don’t place a lot of emphasis on one month in any quarter. But we didn’t see anything in terms of January’s results that would cause us to change the commentary John just laid out.

Steven Cahall : And Phil, maybe if I could just follow up on the margin guidance. Could you just confirm if that’s EBITDA or operating profit, and I know you had the $113 million adjustment in ’22. So what would be the comparable number for 2022 versus the 15% to 15.4%?

Phil Angelastro: Sure. So the number without the charge for Russia, which was about $113 million, is 15.4%. That’s an operating margin percentage. Operating profit divided by revenue. So that’s the guidance, 15% to 15.4% operating profit.

Operator: And the next question comes from the line of David Karnovsky with JPMorgan.

David Karnovsky : Phil, just to follow up on the margin guide. I think we’re generally conditioned to see organic growth at the level that you guided to kind of filtering down the margin expansion. So wondering if you could kind of speak to the puts and takes of the margin guide, any cost pressure that’s potentially offsetting any gains that you might get from the incremental growth.