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

John, I think...

Having said that, I get pissed off is we didn't win right it was on the -- I was on, I'm sorry.

That's okay. We talked -- you mentioned before, digital transformation. I think we've seen that growth come through in your Precision Marketing segment. What I'm wondering is kind of as we come out of the pandemic, is there any risk that we've cycled past some period where marketers were sort of moving with urgency on that topic? Or do you see digital transformation as sort of a truly secular change that you're going to get paid a long time for.

I see it as a secular change that we're going to get paid more and more for. Again, I don't want to come back to it and make it seem like I'm only talking about AI. But you look at the implications of AI and digital transformation. The architecture of what companies have to do, the ethics associated with how you use it. It's -- it will be unlimited in what it's capable of doing if you organize and architect your organization the proper way to utilize it. But also associated with that is you have privacy rights and other things. So you can't open it up to our 70,000 employees and let them run wild with it because you'll be sued until you go out of business. So there's an awful lot of questions that have to be answered. There's a very careful architecture just to be put in place. And all that complexity requires people that are expert in each 1 of those aspects in each one of those fields. So I see this as a practice that will continue to grow as it has grown. When we get past the current, what kind of hold back moment that we're -- people are facing the uncertainty in your own organizations. It's something people will have to address, we'll have to invest a lot of money in or they won't be relevant 10 years later out.

John, why don't we just lean into the AI conversation there. It sounds like you're saying 2 things, right? There's a client-facing side of this, but then there's an internal. Absolutely, you can do more efficiently. So maybe we could unpack each of those of it.

So I'll do the internal one. I said, I want to do this. I'm not going to. We have 71 active projects going on, right? Most of which are client-facing, some are internal facing. Let me first talk about internal facing ones. Right now, if I wanted to know my real estate landscape, -- so I know I have 318 buildings on the lease globally to house 70,000 people. I know when those leases expire, I know all the terms and conditions of those leases. It's in the database. In a separate database, I have a payroll system that's connected to a human resource system, where it's, among other things, identifies what building you're assigned to in order to be paid. Alongside that, there's another database, which was all the assets that I have invested in a particular building, which I may release, I may not release. Right now, if I ask people for that information. It will probably take them at least if they work hard at it, 7 days to compile it into a database to hand it to me, to me, to hand it back them and say, you forgot this, right? If I type tucked it into OpenAI, I can get the answer by myself in 5 minutes. The control factor is the -- especially the HR part of it and there's all sorts of personal information associated with it. So I can't give that to a low-level person and let them have access to it. So in addition to defining and cleaning up databases and making them available to utilize to make better decisions, there has to be a whole governance structure associated with the digital transformation or input of that because you can't just have anybody walking around saying, gee, how much is for me, where does it go, who to still bank with. You go to Europe and try to do that. Go to Germany and try to do that, and you'll be sued for before you wake up the next morning. So that's an internal example of how I can cut out hundreds of man hours, right? So that's an internal one. I'll give you an external one, an external one, and we've told people we are bettering commercials and work that we're doing and doing it similarly in an AI fashion with our bots and all the rest. But because clarity hasn't been defined as well as it needs to be in terms of privacy rules and in terms of copyright rules. I've informed my people, and they're doing it internally, so we can see how well it works and how fast and where this eliminates and where it doesn't eliminate, but we're not deploying it to clients because you get too far away from the people who worry about everything and you give it to people who have specific assignments, they may think it's a cool saying, well, let's run with it, and they're going to end up putting a lot of trouble. So it's power from what I've seen of it. I've seen in Chat 5 and been able to play with it personally. It's not released yet, is enormous. The implications and the ethics and how to utilize it are also enormous. And so there's going to have to be a reconciliation of that.

Once you get past...

I mean I give you a example. If you would do the research sitting in Belgium, Brussels, the EU has come up with a pyramid of defining risk and opportunity for AI and try to fashion some proposed legislation for this. You could drive 10 tracks side-by-side right through the middle of this legislation beating it because it's going to be hard to legislate. It's going to be based upon FX. So I was just saying to somebody else right say all the time. Everything you ever learned, you learned by the time you're 6 years old, whether you're going to be honest, transparent or whatever. So all those building blocks are in Omnicom in terms of respect for privacy, the due diligence, we go through with respect to copyright and laws. So all the foundational blocks that are there, now we just have to apply it in such a way that it's going to benefit the client, getting greater ROI. And then we also have to realize that we have to change the way we contract with clients, right? Because some of them are -- if you just put your hours in materials, and you depend upon that way of getting paid infinitem, you're going to wind up on the losing into this, is that just because AI will reduce the hours...

Right, or...

Yes, or what it will do is it driving margins to a point where your client comes in and said, you can't make that much money. So you have to figure out, can you turn some of these efforts into platforms, charged price for the platforms because the platforms are going to enable the people that I call knowledge workers internally and Omnicom. It's going to make them do their job better, faster, smarter. Another practical example. If you had $10 million and you want to spend it in certain KPIs and you want to spend it in the New York metropolitan area. AI could give you a plan. What I can give you is information that we have about every individual that lives in the New York metropolitan area, their habits and where that should direct you. That's a private database that is not going to be available to the public. They don't know what kind of deals we have with the various medias, which might redirect you to spend the money in a different way than general AI project will help. So there is a place for us, and we have to figure out how to be paid properly for it, not necessarily historically for it. We've gone through these changes before. I was still -- I was already as an executive when we run the commission system. So I mean, I've seen these changes over a long period of time. So we're starting to adjust, and we will start to test different ways of getting paid as we gain these efficiencies. What we also have seen in most clients, and we can do this on every client now prove the ROI of a marketing dollar as we can make it more efficient for the client, they don't cut budgets or if they cut them, they cut some in a very small way, they reinvest them. If we can handle the complexity and help them through it. The other question, which is just a natural question which comes is, gee, if it gets so good, you can in-house things Yes, you can. You've been able to in-house things for a long time. We've turned that into a practice where we assist clients in-housing things. And we stay partners with them because we're doing it at scale. They're doing it for their limited company. So we get paid for helping them improve what they've already in-house because we're not frightened by. And in the case of AI this time around, as we transform our own company internally, we're going to create or further our consulting practice with the mistakes and the intelligent things that we do so we can quantify those and go sell it to companies that haven't -- don't have those skills. They don't need help in order to do it. So we'll change the portfolio again by creating other new businesses. So I'm excited about it. I'm not afraid of it, and we're embracing it.

Got it. We have about 7 minutes left. If there's questions in the room, can raise your hand. It's not. I can go on battling by day out. Maybe I can get you the battle a little on the upfront. You mentioned them before can hop at but ask about it. The process always looks a little less like the upfronts when I first started looking at the advertising space, maybe to strike kind of a role on that this year. How is that -- how is the changing nature of that process, more streaming, less linear play out for Omnicom Media Group.

It's a complex question. I'm not expert in it, but I'll give you what I know. Video is the king. Everybody can see and agree with that -- there is a battle, which will continue to go on between linear and streaming. Streaming will ultimately be advertising supported this -- the public can pay for it in or the other way. I think if you looked at the total amount of money spent, linear still has more than there's a greater share I think that will erode over time, probably over the next 3 to 4 years, where we'll see the waterfall go more towards the streaming side of the equation. So -- what does all that mean? That means it's complex. And what's good for me is complexity, right? So that's what's good. The only place though that you see commitments for those clients. It's not an election year. So they're going to maintain as much flexibility as they possibly can in the upfronts because they think they'll have more certainty as the year goes on. So that will impact it as much as anything we've just discussed, except for in the case of sports...

Sports will maintain it's place.

Yes, it will maintain it's place. And we're probably the leader because of the client base we have in securing those.

So I wanted to ask you on costs. You recently announced plans to exit about 1 million -- sorry, 1.5 million square feet of real estate that comes on other significant reductions. Maybe you could talk about what's changed that you can pursue this level of consolidation? And then I know there's a lot of puts and takes to the margin on that, some offsets in year 1 with return to office. Maybe you could speak to that.

Sure. As a result coming out of COVID, certainly, the way we work, the way our agencies work has changed. And I think you see that reflected in the actions we've taken during COVID and coming out of COVID in trying to shrink our real estate footprint. So we've done quite a bit of that over the last really the last 5 or 6 years, but certainly accelerated that during COVID and coming out of COVID. We've set out a policy of people need to be in the office at least 3 days a week globally, but it's really 3 to 5 because many of the markets around the world, especially outside the U.S., people are back to being in the office 5 days a week. In the U.S., it's a little different, especially in the major cities we operate in, having people back in our business, we're better together, especially the creative aspects of the business. So when those people come back, they're going to come back to a more open environment. We've made some investments in the portfolio in terms of making some of our facilities easier to use, more collaborative space, et cetera, that's added a little bit of cost and offset some of the savings, but we're going to continue to use those savings to reinvest in the business, and many of the things John was talking about, but we do expect it to put us in position to be near the higher end of our margin guidance, which was operating margin of 15% to 15.4%.

One other aspect that I'll add to that is retaining our approach in other ways. If you take the New York Metropolitan area, where people are afraid to get on subways and trains. What we've done and where people got used to going to their kid's softball game or swimming or walking their our kids to school. We've opened up satellite offices in West [indiscernible] and Greenwich under [ Nelson ] County line and in Jersey City, trying to reduce the commute and the cost of the commute for our employees and give them more flexibility. So not rent, consistently when they come to the office because they need to be in an office environment, but not trying to mitigate wherever we can the disruption that you total flexibility before, now you have to go back into a structured environment, but we're not making you commute 2 hours and pay [indiscernible] dollars -- it's going to go up congestion.

Phil, I'm curious, you updated your financial disclosures on the cost side. You broke out third-party incidental costs like travel from third-party costs where you act as a principal. I'm just curious for the latter, can you say in what business lines you are acting as a principal how much of that is sort of your media operations?

Sure. So we have a few different businesses that have those types of costs, including our principal media operations our events business, certainly in our field marketing business. Those are the 3 principal pieces of the business that operate in that way. But there are some, some of those costs that come through virtually all of our disciplines, but at a much, much smaller level. And media business probably is about half of that.

Got it. John, maybe just 1 last 1 for me, going back to the real estate. I think you're going to be kind of co-locating agencies at single offices. And you've always been really careful to maintain separate identities, cultures for your agencies, right? Any risk of now kind of bringing everyone under 1 roof? Or is that...

The risk of [indiscernible] and the difference in Omnicom over the past, I've been around, as I said, for many decades in that. People used to buy just brands and just activities. Increasingly, people are buying Omnicom. And our people have learned how to collaborate a lot better the major cultures and differences and approaches are -- there's a lot more similarities than differences. And I allow those positive of people to live in with other positive people, they've always known what the differences are in approach. You can see it in how we prepare which we never have done before until recently, when an RFP comes in, it comes in to Omnicom more often than that now than to a particular agency, especially when you're talking about larger opportunities. So that's where you'll really see the impact. And that's primarily in the U.S. To give you a perfect example, the next biggest market after the U.S. is London. In London, there's over 5,000 people. They are located in 1 location, it's 2 buildings. We're joining bridge between the 2 different floors. If you went into any 1 of them and ask them if they have -- do they work for, they say Omnicom. We ask them if they have a different culture than the agency on the other floor, they say yes. right? So we're getting the best of both worlds. We're not trying to do it at the exclusion of losing that culture, losing that ability to attract people. but we're also -- we also know that clients aren't interested in hearing about us. We're there to solve a client's problem and solve it as Omnicom.

All right. I think that's a good way to wrap. Thanks, John.

Thank you.

Thanks everybody for coming.