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

So do you report a revenue number for media in terms of -- so that's including the growth in the principal media buying that you do, which is a little different than some of the other agencies who give you kind of net number, particularly like WPP gives you a net media number. Does that make much of a difference? Like if you did report differently, would that media business still be growing that fast? Or how material is that in terms of what we're seeing?

I can't really comment on what other people report or don't report. We're the only U.S. public company in the group. But ultimately, we believe in measuring and managing all the costs in our P&L, not setting aside some of those costs and having people ignore them, if you will, and not manage them. We've always done it that way. We've been consistent in our reporting. And in fact, the revenue growth is revenue growth. I think the key from our perspective and how we manage the business is we don't overlook some very important items on the P&L that come with that revenue growth, and that's EBIT dollar growth and EPS growth and our returns, our capital returns. So I think -- if you look at those numbers, we've had quite a good year so far, and we expect to continue to have quite a good year so far. We don't obsess about this one number. And other people report it differently, but other people can certainly report revenue growth and do. And I think if you want true comparability, you should look at the revenue growth, not a number that is somewhat still defined as far as the net number.

Okay. Maybe we can talk a little bit about the advertising part of the business. That was the second largest component of the new segments. That actually got worse in the second quarter than the first quarter was a bit of surprise. Is there any -- do you think there's a structural problem with creative advertising agencies? Can they still grow structurally? Or does AI make that more difficult? How do you see that playing out?

They can certainly grow. We don't see it as a structural issue. We see it more as some of the challenges we faced with the integration. And if you look through the entire portfolio, the advertising business, we've got a number of agencies, a number of regional agencies. And we operate in about 30-plus markets around the world. Quite a few of those agencies, the independent ones and the agencies in markets outside the U.S. have been growing. So the formula is there. The execution probably needs to continue to improve, and we expect it to. So structurally, we think the business is sound. It's a key part of our DNA, creativity. It's not just the creative advertising agencies that creativity is important, it's something that's important throughout all of Omnicom, but the creative agencies certainly can grow. I think there may have been -- or there may be a little bit of a mix shift in terms of clients spending more in certain areas and us benefiting that -- from that and perhaps spending a little bit less than they traditionally had in advertising. But we definitely think the business can grow. It's certainly a smaller portion of the business now than it has been, when you brought the two companies together, given some of the disposition activity that's occurred as well. So we expect it to be about 16% or 15% to 16% of the business going forward, but we certainly think it can grow in the future, for sure.

One of the questions I get asked a lot when thinking about the agency space is that people assume that AI is going to enable some automation, which can allow you to do the same tasks with fewer people. But you charge revenues based on the number of people employed and you are reducing the number of people in the organization. So how do you grow revenues if you're not growing the number of employees when your clients pay you based on the time that's being spent?

So I think there's a couple of thoughts there. One is back to kind of the reduction in headcount that has occurred in our business. And I don't know if I said this before, but essentially, it's had very little impact on client-facing people. If there have been changes in terms of headcount with client-facing people in our business, it's because of some clients being lost and other clients being won in different agencies, the agencies are flexible cost structures. And there's some flex in that, and there might be some reductions in some agencies and increases in others. But ultimately, the client-facing people has not been the area that really has been reduced. Over time with AI, is that going to happen? And how soon will it happen? I can't really comment on the timing. But ultimately, it's likely that there's going to be some benefits that come from AI and that drive the headcount lower. It might get replaced by headcount needed to grow with other new business. But ultimately, there's going to be other costs that come with that business and with those reductions. You're going to have to invest in AI and AI agents and the token costs, et cetera, that come with it. So ultimately, what's going to happen is the model in terms of how we get remunerated from our clients is going to transition. That transition has been happening. It's going to happen over a period of time. It's not likely to happen overnight. But there is going to be likely more investment from clients because one of the changes or one of the meaningful changes that's been happening in the business and that will continue to happen with AI is, all of what we do and the results are going to be much more clearly and easily measured. Some of them it's going to be a challenge to measure but ultimately, measurement is going to improve. And the more measurement improves, the better it's going to be for us because we're going to be able to prove the return on investment that we deliver to clients. And when you can do that, clients are going to be more likely to invest more in what works. And that's a key part of what we're going to do and a key part of the continued technology changes that are going to impact our business. So ultimately, we see it as a positive. Might -- the headcount mix change a bit? It might. But ultimately, we think we can certainly continue to grow in that environment even if the headcount numbers might be coming down a bit.

Are you already starting to invoice clients for token costs?

I'd say it's early days there. There isn't much of that yet. There isn't actually much of a meaningful increase in token cost overall at the business. There's some. But it's something that we certainly are discussing in meetings on a regular basis to come up with a model that makes sense for us and for our clients and the process and controls that we need in place to manage those token costs and then to measure them and then to get reimbursed for the additional cost to deliver what we do. But again, there's a number of moving costs in that model. And ultimately, we're going to move towards a more output-driven model from a revenue perspective, and we think that will be a long-term positive in the end.

Can you talk a little bit about what that outcome pricing model might look like? Because I think the pushback I've heard is that sometimes CFOs like to have predictability about what they're going to pay their suppliers. And if they're uncertain what they going to have to pay because they don't know how the campaigns are going to go, it's quite challenging for them. So -- how do you get around that hurdle?

I think ultimately, it's about value. But we bought a business, Flywheel, several years ago. And probably 80% or 90% of that business is outcome-based. And the clients and the CFOs of those clients are very happy to participate in the model. It works that way because they know exactly what the return is and they know exactly what they're getting, what they paid for. So I think there might be some clients certainly in the portfolio, for sure, that have procurement organizations or are procurement-led, and they're not ready to make this transition just yet. They're happy with how the process works today. They're happy with how to evaluate what the cost is and what it's going to be, and that's fine. That transition will take a little bit longer. But there are other clients that are more ready to try and experiment with new models. I don't think there is an answer yet in terms of this is exactly how it's going to work, and there's going to be an experimentation phase on our part and on the clients' parts. And everybody is going to find out what works and what doesn't and what certain clients are comfortable with and what other clients are not comfortable with. But our industry has been through this evolution a couple of times over a long period of time in terms of transitioning from commissions to rate per hour and fee-type arrangements, fixed fee arrangements and now more output models as the business evolves. And I think it's an evolution that we're certainly looking forward to because we think it will be a long-term positive for us.

Maybe we can talk about margins now. I mean, before the acquisition, you would tend to give annual margin guidance, but you didn't do that this year, I suppose because there's a lot of moving parts. When do you think we get back to that? Because it's quite a modeling challenge with trying to figure out what the margins are going to be for this year and next year? And maybe just talk a little bit about how investors should think about where the margins of this business are likely to get to over time, and whatever help you can give us to think about that?

So I think we've been consistent on this point for quite some time. Our focus is primarily on growing EBIT dollars and EBITDA dollars, not obsessing about a margin percentage. We think if we can deliver growth in EBITDA dollars, absolute dollars, the margins will work out because if you set a target and the target is a percentage margin, you need to be careful because people will likely hit it. And when they hit it, they can hit it in a number of ways that isn't necessarily just grow the EBIT dollars, which ultimately make it to the bottom line and EPS. So we haven't managed the business that way. We don't manage the business that way. We're focused on growing the EBIT dollars. I think there have been -- there's been a challenge this year certainly, and we knew it was coming because you've got two very big organizations coming together. The historical data, it's certainly not on the IPG side, it was IPG data, not Omnicom data. And there have been a lot of moving parts with respect to the assets held for sale and the disposition. So it's been somewhat challenging. If we could run the business through a model, it'd be a lot easier for us. And then we have -- it'd be easier for certainly yourself and others. But on a day-to-day basis, we got to manage the business. It's not managing the bottle. I think once we get through this disposition phase, which we can't get through quick enough from our perspective. We certainly want to get through it as quickly as we can and have been working to do that because we want to get back to a more clear way of reporting. And we're trying to give investors as much information as we can give them in as clear a way as we can do that but there are a lot of moving parts. I think we also want to move beyond the disposition phase because we want to get back into acquisition mode and doing some tuck-in acquisitions that will benefit the growth platforms that we have and we're excited to do that. But the reality is whether it's a small disposition or a large disposition, it still takes quite a bit more time than we would hope to get them done, but we certainly expect to get them done by the end of the year so that we can have more clarity just in that asset held-for-sale area.

So by January 1, 2027, core revenue equals group revenue.

I think we'll see what happens between now and then, but that's certainly the goal that there will be more clarity on that, yes.

So of the $1.5 billion of gross synergies, you've talked about some reinvestment, 20%, 30% in the first year, you're not specified what that will be in the kind of next couple of years. But can you talk a little bit about what kind of investments you're making and what kind of returns you're expecting to get from that?

Sure. So some of them certainly are not -- they're not optional. The investments that we had been planning to make in the business pre-deal. Bringing the two organizations together certainly helps us get to the finish line or get to where we need to be quicker in a more scaled way. But the primary investment areas relate to the Omni platform. Agentic AI and building that out and then getting all of our people trained on using the platform and creating new beneficial use cases for clients using the platform and all the tools, et cetera. That's the primary investment area from the company's perspective. And I think if the world stood still and the marketplace and technology stop changing, it would be easier to not continue to invest in the business and need to have a stable platform, but that isn't the reality. So investing in the business is always going to continue to be a key part of what we do because the goal is to drive sustainable growth, not just periodic spotty growth here and there. So I think that's the primary area. Certainly, we've been investing in training and growing the skills of our people, et cetera. But the platform and related technologies is the primary area of the investments that we've made.

One thing I want to ask you about is cash and use of cash because if I look at my numbers, there's a lot of cash going to come out of the business over the next 3 or 4 years. Maybe start with specifically, like you kind of had the ability to buy back $5 billion of stock once the deal closed, and you're doing about $3.5 billion this year. And I suppose what's the reason you're not doing the whole $5 billion in 2026? Do we assume that '27 is just the $1.5 billion that's left over? Or could that be higher? Just how should we think about that?

Sure. So if you go back to when we were -- we had announced the deal and we were anticipating closing we were limited to buying back a certain amount of stock and IPG was limited to buying back a certain amount of stock during that period of time. We got a lot of investor questions at the time. Why aren't you buying the stock? The stock was down, you don't think it's attractive, et cetera. So when we closed the deal, management and the Board made a decision that we were going to send a signal to the market clearly that we had conviction in the business. We had conviction in the transaction. We had conviction in success, the future success of the business. Keeping in mind that when the two businesses came together was actually deleveraging. So IPG's relative portion of debt compared to Omnicom's was a little lower. So we delevered the business through the stock deal. And the goal ultimately and the guardrails, if there are any, is management and the Board chooses to manage the company in the context of maintaining our rating. And that's evidenced through what we view as the total debt-to-EBITDA ratio, and that ratio has been somewhat consistent with Omnicom pre-deal during '26, and we expect we'll close out the year in a very similar spot. As you said, we expect to spend about $3.5 billion this year. We expect to complete the balance of the $5 billion by the end of April in '27. And then I think we'll reevaluate what we're going to do next with the Board. I think it doesn't mean sitting here today, $1.5 billion is the number, and that's it for 2027. I'm not sure, and we certainly haven't made any commitments that we're going to be -- we're going to spend more in '27. But I think longer term, what should investors expect? I think they should expect a consistent approach to what we've done in the past going forward. If you look at the two businesses, we spent combined pre-deal for the last few years, pre-deal, about $1 billion in share repurchases. That's a pretty good estimate for now of what we'll do going forward. But the process will be the same and that number can vary. So we're going to continue to pay -- use our free cash flow to pay a competitive dividend. We're going to look to do acquisitions that add to our growth profile, and we're going to use the balance of the cash to buy back shares. We don't set a target for acquisition spend at the beginning of the year and then set our M&A team off to fill that and meet that target, because then we end up doing deals that we otherwise wouldn't necessarily do if they meet our criteria. And we also don't want to be prevented from doing deals that we think make sense where we might go a little bit over that target. I think you should expect a consistent approach going forward once we get beyond the $5 billion.

Thank you very much.

Okay. Great.

Thank you all for joining us.