Omnicom Group Inc (OMC) — Q1 2018 Earnings Call Transcript

Good morning. Thank you for taking the time to listen to our first quarter 2018 earnings call. On the call with me today is John Wren, President and Chief Executive Officer; and Phil Angelastro, Chief Financial Officer. We hope everyone has had a chance to review our earnings release we have posted to www.omnicomgroup.com this morning's press release along with the presentation covering the information that we will review this morning. This call is also being simulcast and will be archived on our website. Before we start, I've been asked to remind everyone to read the forward-looking statements and other information that we have included at the end of our investor presentation, and to point out that certain of the statements made today may constitute forward-looking statements, and that these statements are our present expectations and that actual events or results may differ materially. I would also like to remind you that during the course of the call, we will discuss some non-GAAP measures in talking about Omnicom's performance. You can find the reconciliation of those measures to the nearest comparable GAAP measures in the presentation materials. We are going to begin this morning's call with an overview of our business from John Wren. Then, Phil Angelastro will review our financial results for the quarter and then we will open up the line for your questions.

Thank you, Shub. Good morning. I’m pleased to speak to you this morning about our first quarter 2018 results. It’s been about 60 days since our last earnings call and I’m pleased to report a lot has happened in that time, including some big wins for Omnicom. Before I get into the results, I should note that on January 1, 2018, we adopted a new accounting standard ASC 606. The impact of the required changes was not significant to our results. Phil will cover this change in more detail during his remarks. Financially, the year has started off in the range we expected with organic growth in the first quarter of 2.4%. First quarter EBITA margin was 12.4%, flat versus the prior year period, and EPS for the quarter was up 11.8% to $1.14 per share. These results serve as a continued commitment to the consistency and diversity of our operations, our strong competitive position across advertising and marketing disciplines in key geographic markets, our market-leading digital data and analytical expertise, and our ability to provide customer-centric solutions for our clients. Looking now at our first quarter organic growth across geographies and disciplines, overall, North America revenue was flat. Growth in the U.S. was offset by weak performance in Canada due primarily to the loss of a significant client in that market and due to the shift of some client work from Toronto to New York. To a lesser extent, North America was also impacted by the revenue decline in Puerto Rico. CRM in North America was up middle single digits across both CRM consumer experience and CRM execution and support services. Healthcare was positive in the low single digits and PR was flat in the quarter. These increases were offset by declines in North America advertising and media for the quarter. Several of our U.S. ad agencies experienced client losses early in 2017, and we are still cycling through. In addition, while PHD and Hearts & Science continued their strong performance in both the U.S. and globally, OMD continues to cycle through client losses in 2017 and Annalect continues to see the transition of some clients from our performance-based bundled solution to a more traditional agency pass-through offering. Globally, all of our disciplines had positive growth in Q1 including advertising and media as the international markets performed well across all major regions. After experiencing a decline in Q4, the UK bounced back nicely and was up 3.1% in the first quarter. Advertising and media, PR, and healthcare all performed well in the UK. This growth was offset by declines in CRM execution and support services due to weaknesses in field marketing and research. Overall, growth in Euro and non-Euro regions was very strong at 9.7%. Euro markets were up middle single digits driven by France, the Netherlands, Belgium, Ireland, Italy, and Spain. Germany was the only significant exception to positive growth. Non-Euro markets overall were up double digits led by Russia, the Czech Republic, and Sweden. Asia Pacific first quarter organic growth was also solid at 7.3% as Australia, China, India, Japan, New Zealand, and Singapore performed well in the quarter. Latin America increased 3.1% for the quarter as Colombia and Mexico offset the continued negative performance in Brazil. We did see significant sequential improvement in Brazil compared to Q4. However, it’s too early to tell if this trend will continue for the remainder of 2018. Our smallest region, the Middle East and Africa, had very weak performance for the quarter with a decline of 8.5%. Most of the decline was the result of reductions in media spend in our operations in the UAE. In the first quarter of 2018, we generated $375 million in free cash flow and returned $368 million to shareholders through dividends and share repurchases. Looking forward, our practice of using free cash flow, dividends, acquisitions, and share repurchases remains unchanged as does our commitment to having a strong balance sheet and maintaining our investment-grade rating. Before I cover some of the changes occurring in our industry and business, I’d like to address a few corporate governance changes we recently made and which were disclosed in our proxy. In 2015, we undertook a Board refreshment initiative that led to a number of meaningful steps including expanding the responsibilities of our lead Independent Director, adopting a mandatory retirement age for Board members, and bringing greater diversity into the Board and committee leadership. Most recently, we welcomed Ronnie Hawkins, our newest Independent Director. He is currently Managing Director and Head of International Investments at EIG Global Energy Group. Throughout his career, Ronnie has had broad experiences spanning positions at GE, Citigroup, and Credit Suisse. We are delighted he has agreed to join our Board. Following our May shareholder meeting, Bruce Crawford will step down as Chairman. Bruce has been a remarkable leader within Omnicom starting his long career at BBDO in 1977 taking over as President and CEO of Omnicom in 1989 and then transitioning to the role of Chairman in 1997. I would like to extend my deep gratitude to Bruce for his wisdom, guidance, and numerous contributions to the Board of Directors and to me personally over the past two decades. In addition, long-serving Board members Jack Purcell and Reg Murphy will also be stepping down from the Board in May. We would like to recognize both Jack and Reg and extend our thanks for their outstanding leadership and dedication to Omnicom over the years. Following these changes and the anticipated approval of our shareholders at our annual shareholders’ meeting on May 22nd, Omnicom’s Board will have 10 independent members including six women and four African-Americans. In addition, female directors chair both the audit and compensation committees, and the majority of our audit, compensation, and governance committees are comprised of female directors. These changes strengthen Omnicom’s governance structure and demonstrate our commitment to onboarding exceptional candidates who bring a wealth of experience and diverse points of view. Let me now discuss what we’ve been seeing in the industry and how our strategy has enabled us to achieve consistent financial results. In terms of market trends, we continue to see markets rapidly adjusting their businesses, keeping pace with technological disruption, new competitors, and evolving consumer behaviors. Today our clients more than ever before need a valued partner to help solve business problems and grow through the lens of marketing. As markets tackle these challenges, they are transforming their companies with an ever-increasing focus on placing their customers at the center of their strategies to drive growth. In this environment of the empowered consumer, the root of all transformation is about helping clients build individual relationships with their customers and exceeding customer expectations through compelling experiences. This means that communications need to be designed around how individuals seek out products and information and experiences need to be tailored in a highly personalized targeted way that can be executed at scale. For this reason, Omnicom has been increasing our internal investments in data, analytics, and precision marketing. Today, our clients expect us to have engaging creative supported by precision media buying fueled by data and technology. Quite frankly, being able to deliver the right message to the right person in the right context on the right platform is becoming table stakes in our industry. Unlike consulting firms or even our peers, Omnicom’s intellectual property or IP is our ability to bring deep consumer insights to our clients in lockstep with bringing creative ideas. As the world of media gets more fragmented, the premium on big creative ideas has never been greater. We believe it is not enough to target individuals with more precision in the right time and the right place; to us it is equally important to have effective creative content in those messages. This is why Omnicom has always stayed true to its roots of developing the best creative minds in our industry. While some of our competitors are pursuing data and analytical solutions to compete with consultants and tech firms, we are taking data and analytics and marrying it to the expanse of capabilities we have in our creative, PR, shopper, CRM, healthcare, and experiential agencies to deliver one-to-one consumer marketing at scale. These investments are paying dividends for us and we are continuing to expand our capabilities to meet the changes in the marketplace. The focus of our investments is simple: to help our clients achieve their strategies to transform their businesses to be more consumer-centric and deliver faster growth. In the past few weeks, we have further invested in several key new hires with experience in transformation and ecommerce and you’ll be hearing more from us on these investments and strategies over the coming weeks and months. We are investing in people because clients want access to top talent no matter what agency they sit in or where they are located. We have simplified our organizational structure and service offerings to ensure that our client teams consist of the very best talent in a nimble and flexible fashion. With strong leadership from each of our practice areas, we can better collaborate and execute growth strategies across our key client matrix organization, strengthen our new business development efforts, share experience and knowledge, target our internal investments, and create more career opportunities for our people. We started the formation of specialized groups in 2016 offering our clients a single point of access to our network of thousands of industry specialists in specific marketing disciplines. We now have practice areas in precision marketing and CRM, healthcare, PR, national brand advertising agencies, and our global advertising agency networks. Data and analytics and media platforms like Annalect are being used to inform creative insights across almost all of our businesses. Recently, we announced the Specialty Marketing Group practice area under the leadership of Stacey Hightower. This new practice area combines our portfolio of industry-leading companies in field marketing, sales support, merchandising and point of sale, and consulting for not-for-profit organizations as well as other custom communication services. The new group addresses both the growing demand for highly specialized marketing services and the need to integrate those services seamlessly into clients' marketing efforts across disciplines and around the world. And we’re happy to have Stacey who has led many of these initiatives for Omnicom at the helm. I’m pleased to report we’re seeing clear benefits from these established practice areas. As an example, in the first quarter, Omnicom Health Group agencies Entrée Health and Adelphi collaborated on a new offering around health economics and outcomes research. This is a rising area of investment for clients whose patient outcomes become more closely tied to our products and services are reimbursed. In looking at other practice areas, the precision marketing group continues to aggressively evolve its precision platform and is closely integrating with both Annalect and Omnicom media group services and systems. This is a unique integrated model at the heart of the new contract awarded by the BBC in the UK. We are also in the process of following two other practice areas for brand consulting as well as experiential and events. And we will be enhancing our capabilities of our shopper marketing services by establishing a joint technology investment strategy that can provide best-in-class data and analytic platforms and solutions focused on how to better connect shoppers to brands. Turning now to new business, Amgen selected Hearts & Science as its new consumer media agency after a competitive review. It’s important to note that two Omnicom Health Group agencies played an integral role in the win. Our agency BioPharm Communications worked closely with SSCG that retained media duties for Amgen brands marketed to healthcare professionals throughout the pitch. This is an example of growing our business with an existing client by collaborating across the group. In terms of other recent wins, we are exceptionally pleased that BMW chose Goodby Silverstein & Partners as its lead creative agency in the U.S. following a competitive review. In announcing the win, BMW recognized Goodby’s outstanding creative and their ability to reach millions of consumers with the feeling of speaking only to you. This is a sentiment that reinforces the importance of one-to-one consumer marketing at scale. Long-time client Johnson & Johnson recently asked our agencies to provide integrated solutions that will help them grow their market share. We formed a dedicated agency called Velocity OMC which consists of talent from BBDO, DDB, Roberts & Langer, CDM, and our public relations group. We are very proud of this winning team and happy to be supporting numerous consumer brands for J&J across multiple and highly coordinated disciplines. In addition to these wins, we continue to expand our global footprint and service offerings. On the acquisition front, Omnicom Health Group reached an agreement to acquire the Pharma Communications business in Japan of Elsevier. The newly named agency will be called EMC. With EMC, Omnicom Health Group expands its unmatched capabilities and depth and breadth of dedicated healthcare communication services in Japan which is the second-largest pharmaceutical market in the world. In Germany, Omnicom Media Group acquired Brain Group, a digitally-focused agency for media planning, marketing, transformation consulting, and content creation. On the topic of winning, let me just mention a few of the recent highlights of our agencies being recognized around the globe. Margaret Johnson, Chief Creative Officer and Partner of Goodby Silverstein was named Ad Age Executive of the Year. Last year, Wendy Clark of DDB won. So it’s nice to have two senior women from Omnicom win this honor back-to-back. BBDO topped the Gunn Report as the world’s most creative agency network for the 12th year in a row. Omnicom was ranked the top holding company. In the WARC 100 rankings, BBDO was named the most effective and strategic agency network in the world for the fifth consecutive year. TBWA was named Dubai’s Lynx Network of the Year. Our investment in talent, technology, and partnerships are making the difference for Omnicom and our agencies. They are critical to our success. We will continue to strategically invest in these areas as the marketing environment increases in complexity. In closing, we’re pleased with our financial performance in the first quarter. While it’s early in the year, we’re on track, and we are cautiously optimistic that the back half of the year will be stronger than the first half. I will now turn the call over to Phil for a closer look at first quarter results.

Thank you, John, and good morning. As John said, our results for the first quarter of 2018 were in line with our expectations. Our agencies continue to meet our clients’ needs while operating in an ever-changing marketing landscape. As summarized on Slide 3, our reported revenue for Q1 grew by 1.2% to $3.6 billion. The components of that growth included organic revenue growth which was 2.4% in the quarter which fell within the range of our expectations for organic growth of 2% to 3% for the full year. With regard to FX, due to the general weakening of the U.S. dollar over the past year, the impact of changes in currency rates increased reported revenue by $151 million or 4.2%. Dispositions continued to exceed revenue from acquisitions in the quarter as we come close to cycling through the disposal of Novus, our print media business which we sold early in the second quarter of 2017. Acquisition revenue partially offset the disposition impact, including revenue from recent additions of Snow Companies in the U.S. and Brain Group in Germany. The net impact reduced our first quarter revenue by $153 million or about 4.2%. And lastly, as you are aware, we’re required to adopt FASB new revenue recognition standard known as ASC 606 effective at the beginning of this year. The impact of applying the revenue recognition standard reduced our reported revenue by approximately $42.5 million or 1.2% for the quarter. Later in my remarks, I will discuss in more detail the drivers of the changes in revenue, including the expected impact of the new accounting standard going forward. Turning to Slide 1 on the income statement items below revenue, operating income or EBIT for the quarter increased to $422 million or 1.4% with an operating margin of 11.6% unchanged versus Q1 of last year. Our Q1 EBITDA increased to $449 million or about 1% and the resulting EBITDA margin of 12.4% also was level with Q1 of last year. There are a few items to note regarding margins. ASC 606 did have a minor impact on our operating profit due to a change in the timing of recognition of some of our incentive compensation from our clients. Had we followed the same revenue recognition rules as last year, our EBIT would have been approximately $6.5 million higher in Q1. However, because this change is principally timing related, we expect the net impact for the year to also be minor and less than the Q1 impact overall. In addition to the adoption of the new revenue recognition standard, on January 1st, we adopted ASU 2017-07 which requires that we reclassify a portion of our pension and post-employment expense primarily the interest-related components from salary and service costs to the lower operating income as part of interest expense. A new accounting presentation requires us to restate the prior periods so they are comparable. The amount re-classed for both Q1 of 2018 and Q1 of 2017 was approximately $6 million. The new standard does not have an impact on pre-tax profit or net income. We’ll continue to pursue our ongoing companywide internal initiatives to increase efficiencies, particularly in our back office operations while balancing the need for continued investments in our businesses to pursue sustained growth in the future. Additionally, given the vast majority of our expenses were denominated in the same local currencies as our revenues, the impact of changes in FX rates on our Q1 operating margin was negligible. Net interest expense for the quarter was $46.9 million, down $3.1 million versus the $50 million for the fourth quarter of 2017 and up $1.5 million versus Q1 of 2017. As previously discussed, in 2018 we adopted ASU 2017-07 and as a result, a portion of our pension and post-employment expense has been included in net interest expense and the prior year has been restated to be consistent with the current year’s presentation. Run rate for these expenses in 2017 and 2018 was approximately $6 million per quarter. Gross interest expense in the first quarter was up about $0.5 million compared to the fourth quarter and interest income was up about $3.5 million also when compared to Q4. Gross interest expense increased by approximately $3 million compared to Q1 of 2017 primarily due to a reduction in the benefits from our interest rate swaps. And interest income increased by approximately $1.5 million. Turning to taxes, our effective tax rate for the first quarter was 24.3% down from 29.2% last year. The primary driver of the lower effective rate was the lower U.S. tax rate as a result of the 2017 Tax Act which reduced the federal statutory tax rate to 21%. The Tax Act also imposes a minimum tax on foreign earnings, partially offsetting the benefit to our effective tax rate from the lowest statutory rate. For the full year 2018, we’re anticipating an effective tax rate of 28.1% excluding any potential tax benefit from our share-based compensation which is difficult to estimate because it is subject to changes in our stock price and the impact of any future stock option exercises. This would be a reduction of over 4% versus our normalized rate of approximately 32.4% in 2017, which excludes the incremental tax charge that was incurred in Q4 of 2017 in connection with the Tax Act and also excludes the impact of the tax benefits realized in 2017 related to share-based compensation. The Q1 rate is lower than our anticipated rate of 28.1% by approximately $13 million primarily as a result of the successful resolution of foreign tax claims in the quarter. Earnings from our affiliates totaled $800,000 for the quarter, up versus $100,000 last year and the allocation of earnings to the minority shareholders in our less than fully owned subsidiaries was flat with last year at $20.6 million. As a result, net income for the first quarter increased 9.2% to $264 million. Now turning to Slide 2. Income available for common shareholders for the quarter was $264 million and our diluted share count for the quarter decreased 2.1% versus Q1 of last year to 231.5 million. As a result, our diluted EPS for the first quarter was $1.14, up $0.12 a share or 11.8%. Turning back to Slide 3 which details our revenue performance, let me start the discussion by reviewing the impact of ASC 606, the new revenue recognition standard. In summary, after a detailed review of the impact of standard on our businesses including detailed reviews of our client compensation agreements, we determined that, as we expected, the new standard does not have a material impact on our revenue or operating results. Consistent with the disclosure in our 2017 annual report, the new standard does not materially impact the method or the timing of when we will recognize revenue under the majority of our client arrangements, including our fixed fee retainer-based or commission-based client arrangements. The new standard impacted the timing of the recognition of certain performance incentive provisions that are included in our client agreements. The achievement of certain qualitative or quantitative objectives can result in incremental compensation or revenue for the services we deliver. Previously, performance incentives were recognized as revenue when our performance against qualitative goals was acknowledged by the client or when specific quantitative goals were achieved. This often occurred on a lag resulting in recognition of these incentives late in the year or early in the subsequent year. The new standard requires these items to be estimated and included in the total consideration in the year the services are performed and to be evaluated throughout the contract period. Additionally, a new standard resulted in a reduction of revenue and operating expense in Q1 of '18 of approximately $30 million in one of our CRM consumer experience agencies. Because the impact of 606 was not material to our results, we adopted a new standard by the modified retrospective method of adoption. Under this method, 2017 results were not restated. Accordingly, for comparability purposes, on Slide 17 we present revenue for Q1 2018 as if we followed the previous standard, ASC 605 and we applied our previous revenue recognition policy. As I mentioned, we estimate the impact of applying the new revenue recognition standard reduced our reported revenue in the first quarter of 2018 by approximately $42.5 million or 1.2%, and the impact on EBIT and our results from operations as well as the balance sheet and cash flow were not material. This reduction in revenue is roughly in line with the anticipated impact we expect to see for the remainder of the quarters in 2018 or a reduction in revenue of approximately $150 million for the full year. And as previously discussed, had we followed the same revenue recognition rules as last year, our EBIT in Q1 2018 would have been approximately $6.5 million higher. However, because the impact on EBIT is principally timing related, we expect the net impact for the year to be minor. As we go forward, the impact on our quarterly reported numbers will ultimately be based on the specific mix of business in that particular quarter. Turning to FX, during the first quarter, the U.S. dollar continued to weaken year-over-year against almost all of the foreign currencies we operate in. As a result, the impact of changes in currency rates increased reported revenue by 4.2% or $151 million in revenue for the quarter. A major driver of our FX movement continues to be the euro, which accounted for nearly half of the increase in revenue due to changes in FX during the quarter. Additionally, the dollar weakened against the UK pound, the Australian dollar, the Chinese renminbi, and the Canadian dollar. Also in the first quarter, the dollar strengthened against the Brazilian real only slightly offsetting the increase in revenue due to FX. Obviously, making an assumption on how foreign currency rates will move over the next few months, let alone the balance of 2018, is speculative. But looking forward, if currencies stay where they currently are, FX could have a positive impact on our revenues of approximately 3% during the second quarter and approximately 2.5% for the full year. The impact of our recent acquisitions net of dispositions decreased revenue by $153 million in the quarter or 4.2%. Dispositions continued to exceed revenue from acquisitions in the quarter as we come close to cycling through the disposal of Novus, our print media business which we sold early in the second quarter of 2017. So while there will be a modest effect in the second quarter, Q1 represents the last quarter that our revenue will be significantly impacted by that divestiture. Based on transactions we’ve completed to date, and since we will cycle through the Novus disposition early in Q2, our current expectations are that the impact of our acquisition activity net of dispositions will reduce revenue by about 1% in the second quarter of 2018, and then range between flat and positive 1% for the remainder of 2018. As we’ve done in the past, we will continue to pursue strategic acquisitions that enhance our service offerings and make internal investments in our agencies that are consistent with our strategic plan. We will also continue to evaluate our current portfolio of businesses in the context of our strategic priority. Finally, organic growth was positive on a global basis for the quarter, up $87 million or 2.4% for the first quarter. Each of our five disciplines was up organically for the quarter in total. The performance within disciplines remains mixed by agency. Geographically, our European and Asian regions led the way. The UK returned to positive organic growth and the U.S. was marginally positive. However, weakness in Canada resulted in North America being slightly negative for the quarter. Slide 4 shows our mix of business by discipline. For the first quarter, the split was 52% for advertising and 48% for marketing and services. As for their organic growth by discipline, our advertising discipline was up 1.6%. Advertising organic growth continued to be led by our media businesses with the strong performance by Hearts & Science and PHD offsetting challenges still faced by OMD, while our global and national advertising agencies saw mixed results this quarter. CRM consumer experience was up 6.9% for the quarter, primarily on the strength of our events business domestically and in Asia. A portion of the increased activity in events can be attributed to the Winter Olympics in February. Results for the rest of the discipline were mixed. Shopper marketing was up while direct digital marketing and branding were marginally negative. CRM execution and support was up 1.2% in the quarter. Our field marketing, not-for-profit and merchandising and point of sale businesses were all positive for the quarter, which were offset by declines in research and specialty production. PR was up seven-tenths of a point. Performance in the discipline was mixed by geographic region. The UK led the way while North America and Continental Europe were both essentially flat with Asia and Latin America both slightly down in the quarter. Healthcare was up 2.7%, a nice recovery after a negative performance in the fourth quarter. Performance was balanced with positive growth across all regions. As a reminder, in Q4 2017, we revised the detail we provided regarding our marketing services agencies to reflect the realignment of our disciplines to better capture the expanded scope of our services. As a result of this realignment, our CRM discipline has been disaggregated into two separate categories. CRM consumer experience which includes direct and digital marketing agencies and Omnicom precision marketing group as well as our consulting and branding agencies, shopper marketing agencies, and our experiential marketing agencies; and CRM execution and support which includes our field marketing, sales support, merchandising and point of sale as well as other specialized marketing and custom communication agencies. We also realigned and renamed our specialty communications discipline so that it now exclusively includes agencies offering healthcare marketing and communication services. On Slide 24, we have provided the 2017 quarterly historical data that reflects the realignment of the discipline. On Slide 5 which details the regional mix of business, you can see during the quarter the split was 55% for North America, 10% for the UK, 20% for the rest of Europe, 11% for Asia Pacific, 3% for Latin America, and the remainder in the Middle East and Africa markets. Turning to the details of our performance by region, organic revenue growth in North America was down marginally at one-tenth of a percent. Marginally positive performance from our U.S. business was offset by a decrease in Canada. While in the region, we saw positive performance from our events businesses as well as PR and healthcare agencies. The advertising and media agencies in the region continued their softness. The UK was up 3% after a down fourth quarter. Results for this quarter were solid across most of our disciplines with advertising, media, healthcare, and PR more than offsetting decreases in our field marketing and research businesses. The rest of Europe was up 9.7% organically in the quarter. Within the Eurozone, we had growth in all of our disciplines. By country, Spain once again led the way, but we also saw strong performance in the Netherlands and France. Additionally, Belgium and Italy performed well while Germany lagged behind. Growth in Europe outside the Eurozone continued to be positive as well. The Asia Pacific region was up 7.3%, and we continue to see organic growth across our major markets in the region, including Australia, India, Japan, New Zealand, and Singapore as well as Greater China. Latin America had organic growth of 3% in the first quarter. Brazil was negative but at a lower level than we saw in the past few quarters. While there are some preliminary positive signs regarding the local economy, the ongoing political climate in Brazil makes it difficult to be confident that they are entering a sustained period of stability. Elsewhere in the region, Colombia had a strong quarter while our agencies in Mexico continued to perform well. In the Middle East and Africa, which is our smallest region, was down due to decreased media activity by our clients in the region and nonrecurring projects, primarily in the UAE. Turning to Slide 6. We present our mix of business by industry sector. Comparing the first quarter revenue for 2018 to 2017, the mix is fairly steady. Now turning to our cash flow performance. On Slide 7, you can see that in the first quarter we generated $375 million of free cash flow, excluding changes in working capital, which represents an increase of about $20 million over the first three months of 2017. As for our primary uses of cash on Slide 8, dividends paid to our common shareholders were $139 million, reflective of the 5% per share increase in the quarterly dividend that was approved last October, which was partially offset by the reduction in our outstanding common shares due to repurchase activity over the past year. Dividends paid to our non-controlling interest shareholders totaled $16 million while capital expenditures were $36 million. Acquisitions, including earn-out payments, totaled just under $200 million and stock repurchases, net of the proceeds received from stock issuances under our employee share plans, totaled $229 million and was similar to what we repurchased during the first three months of the last year. All-in, we have spent our free cash flow by about $245 million in the first quarter. Turning to Slide 9. Regarding our capital structure at the end of the quarter, our total debt is $4.9 billion. Our net debt position at the end of the quarter was $2.3 billion, up nearly $1.2 billion compared to year-end December 31, 2017. The increase in net debt was a result of the typical uses of working capital that historically occur in our first quarter and the use of cash in excess of our free cash flow of approximately $245 million. These increases in net debt were partially offset by the effect of exchange rates on cash during Q1 but increased our cash balance by about $30 million. Compared to this time last year, our net debt is down $133 million. The decrease is primarily the result of generating approximately $80 million in net free cash flow over the past 12 months and the effect of exchange rates on cash that increased our cash balance by about $190 million. These reductions are partially offset by the changes in operating capital which negatively impacted our cash by approximately $100 million over the past 12 months. Our working capital was also negatively impacted this quarter as a result of the acceleration of the payment of certain bonuses in the U.S. to take advantage of the change in tax rates. Comparable bonus payments were made in Q2 of last year, so this was a timing item between Q1 and Q2. The net effect of these items was a reduction in working capital of approximately $275 million compared to Q1 of 2017. As for our debt ratios, they remain solid. Our total debt to EBITDA ratio was 2.1x and our net debt to EBITDA ratio was 1x. And due to the year-over-year increase in our interest expense, our interest coverage ratio decreased to 10.4x but remains quite strong. Turning to Slide 10. We continue to manage and build the company through a combination of well-focused internal development initiatives and prudently priced acquisitions. For the last 12 months, our return on invested capital ratio is 21.3% while our return on equity is 46.7%. Both are down year-over-year due to the additional tax charge we took in Q4 in connection with the passage of the Tax Act. That impact should be more than offset by the positive impact the lower tax rate will have on our results going forward. Finally, on Slide 11, we track our cumulative return of cash to shareholders over the past 10 years. The line on the top of the chart shows our cumulative net income from 2018 to March 31, 2018, which totaled $10.3 billion. The bar shows the cumulative return of cash to shareholders including both dividends and net share repurchases, the sum of which during the same period was $10.9 billion, resulting in a cumulative payout ratio of 106% over the last decade. And that concludes our prepared remarks. Please note that we’ve included a number of other supplemental slides in the presentation materials for your review. But at this point, we’re going to ask the operator to open the call for questions. Thank you.

Thank you very much. And thanks for the color on growth by region. But I was hoping if you can kind of take a step back and sort of maybe more broadly generalize. You’ve seen kind of underperformance or relative to underperformance in the U.S. now for quite some time and this outperformance globally, internationally. I guess if you were to say there were a few reasons or a reason that really is sort of responsible for that disconnect in growth I guess how would you generalize that? And then I just have a follow-up question really on account losses. It sounds like you’re still seeing some headwinds from OMD impact in 2018 from losses there. I guess any more color we can circle those, we might see more favorable comparisons? Thank you.

Sure. This is John. Alexia, good morning. When you look at our geography, $8.5 billion to $8.8 billion of our revenue comes from the United States, which is a significant amount. Before considering any divisions or adjustments, we faced losses with some of our larger accounts, specifically those in the $10 million to $20 million range, as we mentioned in our earlier comments last year. This is one of the reasons our overall growth has been constrained for three quarters last year and likely will be for the first and potentially the second quarter of this year until we fully cycle through those losses and offset them with gains. There's a lot of activity in the marketplace, and we’ve secured several pieces of that business, a substantial portion of which is in the United States. However, due to the 60 to 90-day clauses that our competitors have in those contracts, we won't see the added revenue until later this year. That’s the main reason for our current performance. We are not underperforming; we clearly understand our performance level and the reasons behind it. We've made management changes where necessary due to not achieving the activity level we wanted, but it takes time for those individuals to contribute. There's considerable activity behind the numbers, but it's essential to consider the vast size of the United States in relation to our portfolio to grasp why growth isn't as pronounced in smaller markets, especially with smaller account wins that would contribute a larger percentage growth.

That’s very helpful. I would like to follow up on the account movement you mentioned. When you compare the current state of the industry to how it was 10, 15, or 20 years ago, do you think client conflict issues are less of a constraint now? There seem to be many accounts under review currently, and as you pointed out, you've won a significant share of them. Is there more flexibility to pitch or win business because client conflict is less of a concern, or is that not the case?

If I had to make a generalization, I’d say client conflict is less of an issue, far less of an issue. Quite a number of our clients are prospective clients and RFPs that come in really wanting Omnicom solutions. They’re no longer simply looking for a particular brand or particular aspect of our business. And that allows us to create different types of business models and ring-fence them in such a way that conflicts are not what they once were when we were smaller.

All right. Thank you very much. I appreciate it.

Hi. Thank you. Every quarter, you generally give us the net new billing wins or losses. You generally target about $1 billion each quarter. What was it for the first quarter please?

It was probably in the neighborhood of $1 billion to $1.25 billion.

Okay. Thank you for that. Can you give us a little more detail on your expectations when you think the OMD agency may start to see some better numbers? Are you hopeful for the second half of the year or we should be thinking more like 2019?

Assuming everything remains stable regarding wins, losses, and opportunities, we anticipate seeing improvements in the latter part of the year and certainly in 2019. We made a complete change in top management both globally and in the United States about two quarters ago. It takes time and opportunities from clients to achieve success. However, we expect to have moved past any losses we've experienced, leading to positive growth. Another factor that becomes less problematic each quarter is that this situation isn't limited to OMD; it's part of a broader media group trend where our clients, particularly in the United States, have shifted from bundled to unbundled purchasing methods. This change does not affect our profitability, the number of accounts, or the number of clients we serve, as we are experiencing growth in this area. However, it does impact reported revenue, which can cause concern for those focused solely on top-line figures. For those looking at the overall substance and profitability of the business, it indicates a growing sector.

And then John, my other big picture question here is when you’re talking about 2% to 3% organic growth for this year, historically the economic environment like this you and your peers might be growing solid mid-single digits in line with global nominal GDP if not 100 basis points faster. In your mind – I don’t want to take a lot of your time, but can you just give us like four or five bullets of the reasons in your mind of why your growth and your peers in the worst slower growth I’m saying – four or five bullets of reasons of why you think your growth is not middle single digits right now versus historically – normally would be in this sort of economic environment?

Well, one of the reasons for our guidance is there’s – you won’t see it as much in numbers simply because we reported but I suspect you’re going to start to see some weird aberrations as competitors report. There was a significant change in accounting and it could affect our numbers very much. But based on some of the signals that our competitors have laid out, I do believe that you’re going to see a great deal of confusion out there for the next couple of quarters. You won’t see that confusion in Omnicom, but you’ll see it in other places. Clients are under different amounts of pressure. You see it in what they report. The world is changing and changing rapidly, and what we’re doing is we’re trying to grow our base, we’re trying to make investments, and oftentimes those are internal investments. We set up as we always have for consistent growth going forward. That means there’s a change in the way that we service clients and everybody in the world is trying in a 2% growth, 3% growth world is focusing on efficiency among first and foremost. And so things that were done in the past which were nice to have are no longer done. Things are being done differently because of changes in technology and the impact that that has. There is no one big single item that’s occurring. But we’re rebuilding the airplane that’s flying at 560 miles an hour at 39,000 feet as we speak. I think we’ve done a pretty successful job at it and will continue to do that. But there’s an awful lot of changes to the component parts of how we’re servicing our clients.

And our agencies are certainly focused on our clients’ customer and the consumer primarily, and there’s an awful lot of change that’s been occurring especially rather rapidly in terms of consumer behavior. Our clients work with us on a daily basis on trying to come up with new ways and strategies for how to reach that consumer in this rapidly changing technological environment and rapidly changing media landscape. So there’s an awful lot more opportunity for our clients to change their approach to how to reach the consumer in the most efficient and effective way and I think some of that change certainly offers opportunities, but it also causes clients to think a little bit about where they’re going to invest and how much they’re going to invest in addition to some of the cost pressures they’re facing.

One thing I might add to that – I’m sorry, I didn’t mean to cut your question – is the last several years your ability to gather information and create platforms which will allow you to more closely target whoever your consumer is, that has moved very, very rapidly. It’s no longer simply just targeting people of being able to reach them; the devices that they use, now you have to reach that consumer, engage them in something – a type of creative that is of interest to them and you have to be able to do that at scale. I think as I said in my prepared remarks, the IP that Omnicom has because being able to do those targeting exercises and everything else really becomes table stakes as we go into the future. But to be able to have a creative engagement that you can do at scale to individuals is what is going to make the difference as the next level of communications.

My last quick question is if you just thought of your top 25 clients let’s say the last five quarters, is the revenue growth on average with the top 25 clients in line with your corporate average better or worse please? Thank you.

I do have those stacked someplace. But on average, and I haven’t looked at it – I didn’t look at it in particular this quarter. But I’d say that if you looked at just the top 25, we’ve been expanding those relationships and on average that growth exceeds the overall growth of the report as a company.

Hi. Thanks. John, maybe two follow-ups of sorts. First, you talked about the leadership and investment in talent. Are there any examples of traction you’re seeing at the precision marketing group now that they’re about six or seven months into that leadership change? And then separately, can you give a little bit more color around your comment around the shape of organic this year, meaning the better second half potentially? Are clients suggesting a pickup in spend? Is the benefit from leadership changes or account wins and losses or a combination of things? Thanks.

We’ve been rebuilding the team at our precision marketing group and we’ve hired quite a number of very talented people. We’re integrating the platforms that we’re utilizing to deliver our products into the Annalect platforms and expanding that. Quite a bit of work has already been accomplished but I’d have to say we still have a little bit more to do before we’ll be fully satisfied with what we have. I have rather extensive meetings at the backend of next week to get a complete up-to-date status on exactly where we are, but I’m very comfortable with the progress we have made. Like everything else, I wish we were done. We’re not but we’re very, very close. And then it’s just a process of selling that into the marketplace. So that’s an area of expected growth not maybe for the next quarter but certainly as I look out into the backend of the year and in 2019. But there’s a lot of upside there for us that we haven’t yet taken advantage of. And I took so long to answer that question; I forgot the other part of your question.

Just a little more color maybe on the shape of organic this year, meaning the back half improvement. Is it client suggesting a pickup in spend, is it leadership change, account wins, losses, or a combination?

I think it’s a combination to be perfectly honest with you. My confidence comes from specifics that have happened within Omnicom, wins that I know we have coming onboard, and what’s happening to our individual businesses. So that’s where my confidence is coming from. I also expect that consumers probably see increasingly get comfortable with the additional cash that they have in their pockets which they probably didn’t see in January and February but started to see after a couple of months of the new tax bill. So I think it’s a combination of events, but my comments were more specifically focused on what’s occurred within the various accounting – the various groups within Omnicom.

I think just to be clear, though, John, we at this point are not changing our view for the year in terms of 2% to 3% as an expectation but we’re certainly optimistic.

Cautiously optimistic is a phrase I’ve been using for the last several years and I’ll stick with that.

Thanks very much. A couple for Phil on 606. I realize this is a pretty small amount of money in the big picture but wondering if you could give us a bit of detail. We understand under 605 this would have been classified as organic growth. Can you give us a sense of is this North America primarily this $42 million? Would it have fallen there? And then by discipline roughly where would that have been? And then any sort of forward look on whether you think that impact is going to grow, maintain, or moderate going forward? Thank you.

So the majority of the change certainly happened in North America and will roll out for the remainder of the year in North America. The piece of the change that relates to our incentive compensation provisions and our client arrangements, that’s pretty much spread globally and it’s spread consistently throughout the disciplines, more or less. So there’s not a concentration in one place or another. And as far as disciplines, it’s in the CRM consumer experience discipline is where the large part of the change occurred and can be expected to kind of continue to roll out throughout the rest of the year. And in terms of scale, do you expect significantly different scale? No. In terms of numbers, two things. As far as the change in the revenue number, the numbers by quarter we expect them to be relatively consistent plus or minus a few million here or there. And in total, about $150 million for the year is our estimate. And then as far as the impact on EBIT, ultimately we expect that to just be a timing difference. So by the time you finish the year, you’re only talking about a difference of a couple million bucks probably.