Omnicom Group Inc. (OMC) Earnings Call Transcript & Summary

Okay. We're going to get started. Very happy to have back at the conference from Omnicom, Chairman and CEO, John Wren; and EVP and Chief Financial Officer, Phil Angelastro. Guys, thanks so much for being here.

Thanks for having us. Our pleasure.

John, maybe we'll just start it off high level, tremendous amount going on right now in the marketing and advertising world, both cyclical and structurally, how are you kind of thinking about setting key priorities for Omnicom at the moment?

The environment, you're right, is challenging. It's challenging in different ways than prior times. Omnicom we're very happy with our portfolio and our ability to service clients through this process. As you probably -- many of you who follow us probably remember that pre-pandemic, for the most part, we went through a period of about 4 or 5 years where we divested ourselves, parts of our portfolio, which we didn't think were forward-looking. We completed that 18 months ago. And towards the end of that, again, pre-pandemic, we started focusing on acquisitions of companies we thought and believed were going to be appropriate moving forward. And it's proven to be true that with the changes in the marketplace and the acquisitions that we've made, we've seen quite a bit of growth and we're going to continue to see quite a bit of growth in the portfolio based upon our monthly review of every one of our forecasts. Our forecasts and I've been CEO of Omnicom, I think, for close to 27 years, I think the first quarter of this year was the very first time that we ever gave a revenue estimate for what we would do this year because I just got away with not having to do it with that. And then we were able to increase that in our first quarter call. And the confidence comes from the portfolio, the client list that we have in a bottoms up approach of what's coming on. Having said that, there's no doubt that being in an inflationary period, I'm probably the only one in the room old enough to have been working at least at a managerial level, the last time we started an inflationary type of period, remotely similar to this. And even though I learned a lot, then do not necessarily think it's going to be a complete repeat. It's tough on the consumer out there. But brands having been through what they've been through in the digital transformation that is actually going on in many large enterprise companies that make up our client list are still on that journey, know better than to walk away from those brands. So we haven't seen, and again, this is a bottoms up type of conclusion. We have not seen clients walk away from their marketing spend in total. And our objective is share of the wallet. Our objective is not any particular area. And our objective and our philosophy, our strategy all along has been to be as agile as one can be being a large company.

And let's dive a little bit more into the macro since it's the top of mind for investors right now. You said you haven't seen clients kind of change their outlays or budget. Would that kind of commentary apply to subsequent months since you reported? Have you seen any kind of indication of softness either by region or vertical that you would call out?

The answers is no. I mean, FX, the strength of the dollar until yesterday was going in the wrong direction. It's changed, how long that stays, who knows. We fully expect, even though we haven't seen reports of it, that Europe certainly will weaken in many ways. Even though Germany hasn't called a recession, we think it's most challenged because of the current situation that's going on in Europe. We think the U.S. is still going to get through this, and we haven't seen any pullback from our clients. Going into the year, I would have thought an important segment of ours is auto. I would have thought with supply chain problems, we would have seen a pullback in auto and auto spending. Oddly enough we haven't. Principal reason we haven't is when the market was flooded with cars, every car company was deeply discounting their product in order to move it off the lines. When supply tightened, those discounts went away, clients found those profits falling to the bottom line and have been able to shift from promotional advertising to protecting their brand. So within, I guess, every cloud, every storm, if you're properly prepared and you have the people that can identify these things early enough, you can pivot and shift with agility to protect that spend. And also since the last time we went through a significant recession, and up with COVID crisis, that was unusual at every level, and it was supported by a lot of government and flooding the market with financing. But if you go back even to 2007, 2008, 2009, people were panicking, what to do, but the measurement systems weren't there to prove that if you invested $1, you would get X back in return. Things have moved along, systems have improved. We're able to increasingly, with certainty, prove that if you invest money, what you're going to get back in exchange for it. And that makes -- that brings confidence.

And that dynamic that you just mentioned for auto. Are you kind of seeing that broadly across categories and that even if there's some softness on performance media, a lot of that gets allocated back to brands? So from your standpoint, it's just moving kind of that spend from one area to another?

Yes. I mean, the reality is inflation is good for no one, right? And you take the average American, CPG is not a large part of our portfolio, and that's where I'd expect to see maybe some of the greater impact. But people need their vehicles to drive to work and they're paying $6 a gallon to get there and their incomes have not increased. Inflation really is harming and so you're going to see a negative impact and a more capital impact in the way that they spend their money. CPG companies, I think, would probably see or get wrapped harder initially. You see it in the Walmarts, the Targets and others that are reported, they're high on margin business, which is clothing, not necessarily food. You see lower ticket prices because people are making better choices. You see the streaming wars that are going on, which will be good for us -- which are actually good for us because those platforms, which are subscription-based are increasingly becoming advertising base. And Hulu, even though people dismissed it in the past, proves that it can be done. Now creative won't come back in the same way as it serviced linear TV, but creative will be an important element because ads are going to be an important element in order to lower the cost to the consumer, so they can be more sensible in how they spend their money.

And John, since you mentioned FX before, I feel like I have to ask still, pretty substantial move since you reported any kind of update on FX impact revenue for the year.

Yes. So the first thing to keep in mind is we're certainly a global company. We collect our revenue overall in the same currencies that we pay our people. So we're naturally hedged. But from a financial reporting perspective and the translation difference that will be reflected in our results. Yes, we've seen a change. It's hard to say what's going to happen with rates for the rest of the year. But our expectation is for the quarter, the second quarter, we're more likely going to be in the range of a negative 4% to 5% as opposed to around 3%, which is what our expectation was in mid-April into the year, probably closer to 3% to 4% instead of 2.5% to 3%.

And John, we did hear some caution on revenue yesterday from a digital advertising platform that presented at the conference. Kind of wondering what you think drives the disconnect between what they're seeing relative to you? How much of that is explained by your exposure to multinationals versus digital platform exposure to S&Ps? But is there also some market share shifts going on if you're in a position to kind of talk about that?

Well, I know that I have people who absolutely know the answer to that question. But I'm not one of them. We did do a little bit of an inquiry this morning on some of them to find out was what -- I think the first thing you all have to put into perspective is that the company you're referring to is a small company. It's $4 billion. And if you do the math and you get percentages over your head, you're talking about $50 million to $60 million, right? I know that from our media spending and this is indicative in 1 or 2 months, doesn't mean a damn thing. We've seen a much greater spend level would pick up then with the other company you're referring to. We've seen a migration from YouTube as well to other digital platforms. So I'm fascinated, as I said, this morning's reaction. But I guess, it's coming on the back of the past 3 or 4 weeks of hard terrible markets that it had such a tremendous impact in the way that people are panicking or -- and hopefully, it leads to capitulation which allows you to get to the other side. But no, there has not been -- there's been a shift in the medium. And that becomes important for Omnicom because the one thing that you need to understand and God knows we try to explain it and don't do a perfect job at it because not everybody gets it, is agility. We're not agnostic to how we spend our client's money. We're looking always for the most efficient ROI we can get for spending in the client, and it's not limited to any specific company and or media platform. So that's important, we intentionally built the company. So we have that agility, and that's what the preliminary reports this morning are demonstrating is going on. Now the other criticism and again, I've been the CEO for a very, very, very long time. I think it's the fantasy of the reward system that was in place free the last couple of weeks that somebody makes fantastic predictions about what the revenue growth is going to be without really understanding its own core and what the hell is talking about because nothing goes in half overnight unless you've had some executional structural problem, and we've not seen any indication of that. So -- but I can talk more as an authority of Omnicom I can anybody else, I mean any other company and anybody else.

Maybe kind of sticking with something you just said about outlaying the different platforms. I mean one of the things you've heard from this conference and more recently is just more and more companies trying to sell advertising act as an ad network. And then that comes on what you were talking about, right? Just money moving from linear TV to connected to people rolling out more ad gears. So how does this landscape play into your favor on the media side of your business relative to just a few years ago where it almost looked like everything was just converging to a few places.

Sure. Well, one is we've changed the portfolio quite a bit. Again, it happened systematically, it was done pre-pandemic and pandemic, you know confused everybody about everything. We are more focused, I mean, the areas of growth in the company and where they're coming from are in digital transformation of not companies that are starting with a clean sheet of paper, but enterprise companies is your largest clients, which are still on the journey. And then having the smart people that wants that architecture built to assist the clients in getting to the next level, not dissimilar to some of the things that an Accenture would do, we're doing them deeper because we're there actually performing the tests after the fact. Our health care practices stood up incredibly well. We have the largest ethical pharmaceutical practice in the world as the population ages. We in innovation occurs, that's continued to progress. We've seen public relations changes product and maybe social media and other things. It certainly has grown consistently over the past 3 years, much lower than in the last 20. And there's also a change in leadership during that period of time. They probably contributed to its forward-looking ability to gain new clients. And our growth really is based upon a couple of different things. When we use the word organic growth, it's our clients spending more or are they spending less that impacts it. Are we winning business and taking share or are we losing business, right? And our tracker is, we've been adding much better than 500 million. So that's adding to growth. And our clients, as they make this transition have been constantly protecting their brands and not spending less in the areas that we can best serve.

As clients go through that business transformation journey, what opportunity do you see to not only kind of expand the scope of services that you're providing, but to consolidate a lot of that work at the holding company level?

Yes. Well, one of the -- it would be remembered by the way as a strategy, even though when it initially started, it was just an idea. But a good decade ago, we started creating analytics, which was our ability to, in a very agile fashion, governing the best sources from information from a data point of view. And then glean and hire people that could glean insights from the manipulation of that data. That led to the creation of a platform, which we've talked about on our conference calls quite a bit called Omni, which is in constant change in 2 ways. We're constantly adding to services to that system and we're constantly making it more user-friendly. At this point, there's over 40,000 employees within Omnicom that on and using Omni and by making it more customer friendly, more usable, more and more clients using it too and there's a stickiness that's associated with that. But what I might say is before we started the divestiture process and as you got through COVID, our employee base is 70,000 to 80,000 people. Today it's approaching that again. And I'd say 5, 6, 7 years ago, we probably had less than 1,000 engineers in the company. Today we're going to have, this year we'll have in excess of 10,000. So the population has changed. We've kind of divested and gotten rid of the people that are purely executional, which generated a good profit, but not much growth to the more intelligent people that are making real strategic adds to our clients' needs. And I think that's benefiting us quite a bit in terms of our growth.

And what role does this creative continue to play in this process, right? Is it a differentiator to win or retain relationships? And I'm not just talking relative to your holding company peers, but as you compete against kind of consultant sort of MarTech around the edges?

Sure. First of all, creative is kind of our IP. It's how we were founded. Now it's changed in how you would define it because your engineers is going to be creative and the manipulation of data as you once create admin or in creating advertising with media and the social media with all the digital platforms out there, creative content becomes more disposable because you can measure very quickly whether or not you're having the right impact in selling and reaching the consumer and creating a dialogue. And if that creative doesn't work, you dispose of it, and you try something different. But the philosophy of creativity and how it touches CRM as well as Precision Marketing versus General Media Advertising is our IP. It's not something that you can go out, acquire and add to otherwise functioning consulting company. It has to be part of the philosophy of the company. And it's not good enough for the buy-in to be just at a high level or at the corporate level, that the view buy in throughout the group in order first to survive for decades like it survived within Omnicom.

Yes, certainly, a key part of our culture. And when you think about technology, you can find the consumer in more and more sophisticated ways to help your clients on the consumers they're trying to reach. But you still have to have a compelling idea to get them to buy something or interact with the brands. So if you don't have creativity as part of that equation integrated, you're kind of missing a key component.

Got it. And as you noted, you made substantial changes to the portfolio over the last few years on the disposition side. This has shifted to acquisitions more recently, you've [indiscernible] as I've seen you in many years. Can you kind of discuss your current appetite for M&A? Can we expect this pace to maybe continue? Is it kind of mostly the smaller stuff? Would you ever do larger-scale M&A?

Sure. Well, I think first you have to always look at the portfolio. We're always looking at it. The good news is our divestiture period, for the most part as far as I can see, it's finished. There's a couple of things that a small very relevant in the picture. So then you look at the portfolio and is it servicing our clients in all the areas it needs to be. The answer is, we're in the best shape, I think we've ever been. The answer also has never been satisfied and never will be satisfied. We kind of particularly in our calls, the areas that we're more focused on. And we have an M&A process. This is constantly looking at what's new and what's existing. And I'd say, if I was reading myself into, I've 90% of what I believe I wish I had today. And if the other 10% comes up, we can act on it. We've been very conservative and always have been in the financial disciplines we use to capital. I think some of the tumult and stuff that's going on in the current marketplace is going to create even greater opportunities for us to take advantage of it and to increase maybe some of the acquisitions that we've made in areas that we've identified that we think are going to be appropriate to complete the customer journey, just to follow. And now we wouldn't do anything to ever hurt our credit rating. So I don't know what you define as large and small, but we have a very defined point of view as to what we want to acquire. What we do to even if 3, 4 weeks ago when prices were insane and before the Fed started that. All we could do is be friendly with those people. The good news is they know who we are. We know who they are. We're in constant dialogue with them. And at the right moment, presents itself and we will act, but we will act in the same responsible way we've acted for the last several decades. Phil, am I right?

No, I think that's right. I think if the market tightens up a bit, we think there might be more opportunities out there for us. We're always careful about finding the right strategic fit and the right cultural fit and certainly, we'll look at all the small, big, medium and consider what's best for the shareholders in the end. But certainly we've been more active looking at acquisition opportunities, both with an M&A team we have as well as the operating companies in the businesses that we see as future growth opportunities, including precision marketing, performance media, the health care space, et cetera. So we'll continue to do more of the same.

And just one final point on that. One of the major benefits of having the client list, the leading companies in just about every sector in the world is as you're developing new strategies of where you want to go, what you can do is you can test those strategies by looking at how those clients are viewing the marketplace and how they intend to spend their money going forward. And it becomes confirming in a way, there's always a possibility of executional mistakes. But we're very careful in what we're looking at and how we're going about it.

If we have any questions from the room, I think there's a mic, just raise your hand. So you're guiding to 15.4% margins for 2022. I think that's a 40 basis point increase over '21 once you strip out the ICON sale. Can you maybe walk through some of the drivers of that margin gain, has a lot of normalized costs come back and you kind of deal with inflationary pressure?

Sure. So there's certainly some costs coming back into the business from being in a more normal business environment. Travel, for example, probably the easiest one to see and understand, conferences like this one, exactly. So there's certainly that to manage. But at the same time, we've achieved and expect to continue to maintain some cost efficiencies from new ways of working that have evolved coming out of pandemic. And at the same time, we're going to continue to push and push pretty hard. Certainly, John is a big proponent of this, continuing to find ways to outsource offshore and in particular, automate and some of those benefits we expect to achieve in the near term. All this, we expect to take a little bit longer, but those are initiatives that we expect to continue to pursue to make sure that we're as efficient and effective as possible. And all those things when you bring them together are going to help offset some of the challenges we have in the post-pandemic world as some costs come back into the infrastructure.

With some of the higher increases or layoffs that we're seeing with tech firms where you compete with digital talent, would that sort of ease things up for you somewhat?

Yes, I mean, in certain segments of our business, our only limitation isn't client need, it's how do you get the talent in order to service it. I think what we learned during COVID is how different people can function remotely. We are looking and recruiting in areas, in parts of the country, parts of the world that we've never entertained in the past. But there's -- there are talent bases and folks who were the managers that we depend upon who had to see their staff every day in the office in the past have learned that that's not the case anymore. And the book is still to be written, but there's a great deal of flexibility that can occur with the right people. So yes, as others suffer and since we've got a very defined view of what our clients are spending on, what they need and the complexity of the marketplace. We'll be hiring those people. The other thing that benefits not only Omnicom, but the industry itself is the great recession and the great resignation. Our clients have suffered that too. And many of them have become aware of the skills that they don't have and how they can complement them by hiring the correct vendor or supplier.

You recently raised guidance to 6% and 6.5% from 5% to 6% on organic. You'd acknowledge a fair amount of conservatism in that. I know in any given year, you always have to be cautious about year-end project work. Just kind of how tightened is that cautiousness just kind of given all the uncertainty that we are having in this environment?

[indiscernible] I've been the CEO for close to 3 decades. This was the first 2 quarters, I've done over 100 of them, where I gave you guidance at all. So don't expect anything other than conservative guidance from me, number 1, and then I'll let Phil properly answer that question.

As John said earlier, I think that our forecast is certainly bottoms up. We go through that process on a monthly basis. Certainly we're comfortable with the numbers that we've provided and the adjusted numbers that we've provided. We didn't put the forecast together with no view of what the second half might hold. Certainly, we don't have as great a visibility looking at our third and fourth quarter, in particular at this time of the year. But we're pretty comfortable and confident with the guidance we've given for the year. And we've seen nothing from our clients and heard nothing from our clients that would cause us to change those expectations.

How do you think about, okay, John?

The only thing I'd say is working for me is probably not the easiest thing in the world, especially if you have a great quarter. I congratulated [indiscernible] in the lavatory, look in the mirror, pat yourself on the back and tell me how are you going to do this again when this quarter recycles next year? So it's like, okay, celebration's over, let's move on. Let's adjust the business, so it's properly attuned.

Watching film for his reaction.

I know it. I've seen it. Got time for maybe one more. Just wondering how you're thinking about kind of your events or field marketing businesses in this environment? Saw really strong growth in Q1. It does seem like we're living in a world now in sort of periodic COVID waves. Obviously that's more pounce in a place like China. How does that kind of impact your view on the business -- these businesses kind of long-term?

Long-term, I mean, we're coming from a very low base. So growth isn't that hard. The shutdown in China is a problem. I hope many of you don't go home with monkeypox because I got an alert last night that Boston was the city to be careful about. But I think events will continue and the segments that we're in and the areas that we serve, you can see conferences like this, you see every sporting event. I mean, it's within human nature. Going back to the Roman Colosseum that people instinctually want to get together and communicate and do things. The pace at which that happen, whether or not there's governmental interruptions to that since we're coming off a such low base, we're confident that we're in the right place.

Yes. The people who manage those businesses have done a great job through the pandemic, very challenging times. But clients are very interested in getting back into that kind of an environment and we've seen that in the results. But we do expect it to be a little more choppy going forward. But longer term, certainly great businesses that, you know, we're happy to have.

All right. We're just about out of time. Thank you so much.

Thank you.

Thank you.