Omnicom Group Inc (OMC) — Q2 2019 Earnings Call Transcript

Good morning. Thank you for taking the time to listen to our second quarter 2019 earnings call. On the call with me today is John Wren, Chairman and Chief Executive Officer, and Philo 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 statement and other information that we have included at the end of our presentation, and to point out that certain of the statements made today may constitute forward-looking statements and that these statements are our present expectation 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 a 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 the lines for your questions.

Thank you, Shub. Good morning. I’m pleased to speak to you this morning about our second quarter results. We had another good quarter with organic growth of 2.8%, which is in line with our internal targets. Total revenue was down 3.6% due to the negative impact of foreign exchange rates and acquisitions net of dispositions. EBIT margin was 15.4%, an increase of 30 basis points versus the prior year, and EPS for the quarter was up 5% to $1.68 per share. The results continue to demonstrate consistency and diversity of Omnicom’s operations, our ability to deliver consumer-centric strategic business solutions to our clients, and our best-in-industry creative talent combined with market-leading digital data and analytical expertise. Organic growth in the quarter was broad-based across our agencies, disciplines, and client sectors. Looking first across disciplines, advertising and media was up 4.4% with both advertising and media practices experiencing good growth in the quarter. CRM consumer experience was up 1.9%. Our precision marketing and digital agencies had double-digit growth in the quarter. This growth was offset by negative performance in our events business, which had difficult comparisons as compared to the prior year. As expected, CRM execution and support was down 2.6%. Healthcare continues to be one of our best performing practice areas with growth of 8.4%. Omnicom health group has the top agencies in the world serving the healthcare and pharmaceutical industries and the group is very well positioned for continued growth, and PR was down 1.3% in the quarter. Turning now to our performance by geography, the U.S. was up 3.2% in the quarter driven by strong results in advertising and media, healthcare, and our precision marketing group, offset by declines in our events business and in CRM execution and support. Beyond the U.S., the North American region primarily consisting of Canada was up 11.8% in the quarter. The U.K. was 5.7%. Our agencies in the U.K. had solid results across advertising and media, healthcare, precision marketing and PR, offset by declines in our CRM execution and support business. Overall growth in the euro and non-euro region was 1.5%. In the euro markets, Italy, the Netherlands, and Spain performed well. France had negative growth as it continued to be impacted by the loss of a specialty print production client. This impact will not cycle out until the first quarter of 2020. Our events businesses in France also had a negative performance due to difficult comparisons versus 2018. In the non-euro markets, the Czech Republic, Russia, and Switzerland had better than average growth. Asia Pacific organic growth was 1.9% led by New Zealand and Japan. China had negative growth. Latin America was down 2.4% primarily due to the continuing challenges we face in Brazil. While we took several actions in the first half of 2019 to rationalize our operations in Brazil, we expect 2019 will continue to be a difficult year. Our smallest region, the Middle East and Africa, was down 8.3%. Lastly, as Phil will discuss in more detail during his remarks, in early July we issued €1 billion in both eight and 12-year bonds at very attractive interest rates of 1.2%. Overall, we’re very pleased with our performance this quarter. Omnicom’s success is grounded in our steady focus on our growth strategies. We continue to hire and develop the best talent in the industry with a fundamental commitment to creativity and diversity. We remain focused on relentlessly pursuing organic growth by expanding our service offerings to our existing clients and winning new business, continuing to invest in high growth areas and opportunities through internal initiatives and acquisitions, and we remain vigilant on driving efficiencies throughout our organization, increasing EBIT and shareholder value. Let me now discuss what we’re seeing in the marketplace and how our strategies enable us to sustain our financial performance. Having recently returned from the Cannes Lions Festival of Creativity, a key takeaway was the return to celebrating creativity as the most sought after force in our industry. Before I speak about our creative IP, I’d like to spend a few minutes on the tools we’ve built to support our creators. In 2009 we launched Analect, our core data analytics and insights group with the responsibility for consolidating and developing our data and tech stacks. Analect was established to deliver more effective and targeted media for our clients. It has been instrumental in enhancing the services and capabilities of our media business over the years. Last year, we took another step forward when Analect launched our people-based precision marketing and insights platform, called Omni. Omni provides data and analytics, cultural insights, content inspiration, and tech tools to inform powerful and connected brand strategies orchestrated across every touch point, whether it’s marketing, sales or service, and through all media. These tools are developed to empower our people to derive better outcomes and results for their clients, and they are available across our media, creative, and CRM agencies. Importantly, our data and analytics strategy is focused on three areas. First is ensuring that the platforms remain open. We prefer to rent the right data and technology that can improve our agility and client integration at any point in time, rather than invest in legacy data assets and platforms that can easily become obsolete. Second, we are making selective, focused investments to develop and integrate differentiated tools in one place in support of the services our agencies offer, and last, we have prioritized these capabilities in our key markets. While we have been and remain keenly focused on the importance of data analytics and technology, we also realize they can only take us so far. Our investment in data and analytics has been made with the understanding that they are tools in service of creativity and content. As I’ve said before, our true source of differentiation, our IP, is our ability to bring deep consumer insights to our clients in lockstep with brilliant creative ideas driving business results. We are delivering on this promise by continuing to invest in our agency brands. Omnicom was founded by creators. Creativity, which is in our DNA, is bred through deep culture that must be nurtured over time, in our case, since our formation. It is not something that can be acquired or sold. We have also encouraged our agencies to maintain their unique positioning and go-to-market strategies. This differentiation attracts top talent and leads to breakthrough ideas and results for our clients. Our creativity supported by data and insights was a key reason for Omnicom’s success at the annual Cannes Lions Festival. For the second consecutive year, we were named Holding Company of the Year with approximately 123 of our agencies across 35 countries winning over 200 lions. Speaking to the strength of our individual brands, all three of our creative networks - DVB, BBDO, and TBWA, placed in the top five of Network of the Year category. In addition, we were extremely pleased to have Jeff Goodby and Rich Silverstein, founders of Goodby, Silverstein and Partners, receive this year’s Lion of St. Mark Award. As the Chairman of Cannes Lions said, this award was given to Jeff and Rich because of their profound influence not only in creating groundbreaking work but also inspiring others to create great work too. It was a proud moment to see their legacy recognized. One of TBWA’s longest standing clients, Apple, was also honored this year at Cannes as the 2019 Creative Marketer of the Year. This award recognizes an organization that demonstrates sustained creative excellence and distinguishes itself by embracing collaboration between partners and agencies to produce truly outstanding creative campaigns. Cannes Lions is just one example of how our agencies excelled this quarter. Let me just mention a few other recent highlights of how our agencies were recognized around the globe. At the 2019 One Show Awards, Omnicom was named Creative Holding Company of the Year and DVB was named Network of the Year. FleishmanHillard was named Large Agency of the Year at the 2019 Sabre Awards. At this year’s D&AD Pencil of the Year, DVB was ranked number one network of the year with BBDO coming in at number two. At the 2019 ADC Awards, TBWA was named Network of the Year, and for ad agency A-lists, both Goodby, Silverstein and Partners and TBWA were honored in the top five. These awards reflect our outstanding creativity and talent. People drive our business success whether they are pitching new business, helping our clients to create powerful brands, designing interactive web experiences, or planning multi-platform media campaigns. We support them with a diverse inclusive environment that nurtures their creative energy. This means diversity in backgrounds, race, gender, age, and experience. Omnicom’s commitment to diversity and inclusion starts at the top with our board of directors. I’m proud to report that Omnicom was recently recognized by Fortune Magazine as only one of six Fortune 500 companies that have more women than men on its board of directors. At a broader level, Omnicom was part of history last month as a platinum sponsor of the first ever World Pride Celebration in New York City, which also marked the 50th anniversary of the Stonewall uprising. Working closely with New York City Pride, several Omnicom agencies joined forces to provide branding and PR work for this year’s celebration, including Interbrand, RAP, Siegel+Gale, TBWA, World Health, Harrison and Star, FleishmanHillard, Ketchum, Porter Novelli, and Rx Mosaic. It was an incredible team effort with planning and execution taking place over the course of two years. We’re proud to celebrate our LGBTQ employees and show support for the greater community the best way we know how - through our work. In summary, we made significant strides in changing our services capability and organization to better serve our clients while always staying true to our commitment to creativity. We are pleased with our financial performance in the second quarter, which continued to reflect the benefits of our strategies. As we move into the second half of the year, we are well positioned to deliver on our internal targets for the full year 2019. I will now turn the call over to Phil for a closer look at the second quarter results.

Thank you John, and good morning. As John said, results for the second quarter of 2019 were in line with our expectations. Our operating results continue to be driven by outstanding client service provided by our agencies and net new business wins, along with the positive impact that our efficiency initiatives have had on our cost structure and the benefits from the change in mix resulting from our repositioning actions. For the second quarter, organic revenue growth totaled 2.8% or $108 million. The continued strength of the U.S. dollar over the past 12 months created an FX headwind, reducing our reported revenue by $100 million or 2.6%. The reduction in revenue from dispositions made during the last 12 months primarily in our CRM execution and support discipline exceeded revenue from acquisitions in the quarter. As a result, our second quarter revenue was reduced by $148 million or about 3.8%. In total, our reported revenue decreased 3.6% to $3.7 billion in the quarter. We will discuss the drivers of the changes in revenue in more detail in a few minutes. Turning to the income statement items below revenue, our Q2 operating profit, or EBIT, was $574 million with a resulting operating margin of 15.4%, which was up 30 basis points when compared to the second quarter of 2018, and our EBITDA for the quarter was $595 million, resulting in an EBITDA margin of 16%, up 20 basis points compared to last year’s Q2. We continue to see benefits from the change in business mix resulting from the disposition of several non-strategic or underperforming agencies over the past year. We also continue to seek out opportunities to increase operational efficiency throughout our organization focused on our real estate, back office services, procurement, and IT support services. These actions continue to positively impact our operating performance. Net interest expense for the quarter was $50.2 million, down $2.3 million compared to the second quarter of 2018 and up $4.2 million versus Q1 of this year. Interest expense on our debt increased $2.2 million in the second quarter of 2019 versus Q2 of 2018. This was driven by higher rates on our fixed to floating interest rate swaps which were partially offset by a decrease in interest expense due to a reduction in commercial paper activity compared to the prior year. As you may recall, this past February we issued €520 million of zero percent short term senior notes in a private placement to an investor outside the United States. Those notes will mature in August of 2019. As a result, we’ve been able to reduce our other short-term borrowing needs, including our commercial paper issuances, which lowered our interest expense year-over-year. The reduction in commercial paper activity relative to 2018 is expected to continue through the maturity of the notes next month. Interest income increased $2.5 million versus Q2 of 2018 as a result of an increase in our cash balances available for investment at our treasury centers. When compared to Q1 of 2019, interest expense increased $3.6 million primarily due to commercial paper borrowings during Q2 compared to no CP borrowings during Q1 of 2019. Additionally, interest income from our treasury center activities decreased versus Q1. As you are aware, in early July we took steps to refinance some of our debt. I will provide more details related to this later on in the presentation. Regarding income taxes, our reported effective tax rate for the second quarter was 24.9%, lower than our projected effective tax rate for the full year 2019. The reduction during the quarter was primarily related to the net favorable settlement of uncertain tax positions in various jurisdictions which resulted in the recognition of net deferred tax assets in the second quarter of 2019 of approximately $11 million. We expect our effective tax rate for the third and fourth quarters to be in line with our previously estimated tax rate of 27%. Earnings from our affiliates were $1.2 million in the second quarter of 2019, relatively flat compared to Q2 of 2018. The allocation of earnings to the minority shareholders in our less than fully owned subsidiaries decreased to $23.4 million primarily due to our disposition activity as well as the impact of FX. As a result, net income for the second quarter was $370.7 million, up 1.8% or $6.5 million when compared to the $364.2 million in Q2 of 2018. Now turning to Slide 2, our diluted share count for the quarter decreased 3.2% versus Q2 of last year to 220.9 million shares. As a result, our diluted EPS for the second quarter was $1.68, which is an increase of $0.08 or 5% when compared to our reported Q2 EPS for last year. On Slides 3 and 4, we provide the summary P&L, EPS, and other information year to date. I will give you just a few highlights. Organic revenue growth was 2.7% during the first six months of the year. FX translation decreased revenue by 3% and the net impact of acquisitions and dispositions reduced revenue by 3.7%, though for the year-to-date period revenue totaled $7.2 billion, a decrease of 4% compared to the first six months of 2018. EBIT totaled just over $1 billion and our year-to-date operating margin of 13.9% was up 50 basis points when compared to the first six months of 2018. Our six-month diluted EPS was $2.85 per share, which was up $0.12 or 4.4% versus the first six months of 2018. Turning to the components of our revenue change in the second quarter, which is detailed on Page 5, on a year-over-year basis the strengthening of the dollar continues to create a significant FX headwind in our reported revenue. The impact of changes in currency rates decreased reported revenue by $100 million or 2.6% for the quarter. As has been the case since the third quarter of 2018, the strengthening in the second quarter of 2019 was widespread. On a year-over-year basis, the dollar once again strengthened against every one of our major foreign currencies. The largest FX movements in the quarter were from the euro, the U.K. pound, the Australian dollar, Chinese Yuan, and the Brazilian real. Looking forward, if currencies stay where they currently are, the negative impact on our reported revenues is expected to be approximately 1% for the third quarter and 0.5% in the fourth quarter, resulting in a negative impact for the full year of between 1.75% and 2%. The impact of our recent acquisitions net of dispositions decreased revenue by $148 million in the quarter or 3.8%, in line with the impact we’d previously projected and primarily driven by the Sellbytel disposition and other actions we took from the second half of last year through the first quarter of 2019. We will cycle through the most significant of last year’s dispositions by the end of this coming September. Based on transactions we’ve completed to date, our current expectations are that the impact of our acquisition activity net of dispositions will continue to be negative by approximately 3% for the third quarter and 1.5% for the fourth quarter, resulting in an anticipated negative impact of 3% for the year. Turning to organic growth, it was up $108 million for the quarter or 2.8%. By discipline for the quarter, we again saw mixed performance. Advertising and healthcare led the way with solid organic growth. Our CRM consumer experience businesses also performed well this quarter, while PR and CRM execution and support continued to lag. Geographically, our U.S. and U.K. businesses had the strongest performance. Asia and continental Europe were also positive overall, although performance was mixed with several markets facing difficult comparisons to Q2 of last year, while our two smallest regions, Latin America and the Middle East and Africa, both were negative for the quarter. Slide 6 shows our mix of business by discipline. For the first quarter, the split was 56% for advertising and 44% for marketing services. As for our organic growth by discipline, our advertising discipline was up 4.4%. Advertising’s organic growth was led by our media businesses along with solid performances by most of our global and national advertising agencies. CRM consumer experience was up 1.9% for the quarter. Strong performance from our precision marketing group was partially offset by reductions at our events businesses, which faced difficult comparisons back to Q2 of 2018. Also within the discipline, branding saw good growth while our shopper and commerce businesses were slightly positive. CRM execution and support continued to underperform this quarter. Positive performance by our field marketing businesses in continental Europe was more than offset by the negative performance from our merchandising and point-of-sale businesses, as well as our specialty production businesses. PR was down 1.3%. Performance in the discipline continues to be mixed by geographic region. The U.K. and Asia were positive while our U.S., continental Europe and Latin America agencies were negative. Healthcare was up 8.4%. As has been the case for the past year, growth has been well balanced across the regions these agencies operate in. On Slide 7, which details the regional mix of business, you can see during the quarter the split was 54% in the U.S., a bit higher than typical because of the strength of the dollar relative to the other currencies we operate in; 3% for the rest of North America, 10% in the U.K., 18% for the rest of Europe, 11% for Asia Pacific, 3% for Latin America, and the balance from our Middle East and Africa markets. As for the details of our performance by region on Slide 8, organic revenue growth in the second quarter in the U.S. was 3.2%, led by our advertising and media, healthcare, and CRM consumer experience agencies. Our domestic PR agencies were down slightly while our CRM execution and support agencies had sluggish performance. Our other North American businesses were up year-on-year driven by the strength of our precision marketing and media offerings. The U.K. was positive again this quarter, up 5.7% with growth across most disciplines; however, the uncertainties regarding the U.K.’s departure from the EU, now scheduled for the fourth quarter of this year, continue. The rest of Europe was up 1.5% organically in the quarter, though the performance was decidedly mixed by market and discipline. In our euro markets, while Spain and Italy continued to turn in strong performances this quarter, we saw weakness in Germany and a negative performance in France. Our organic growth in Europe outside the euro zone continues to be positive. With many of our major markets in Asia Pacific facing difficult comps versus Q2 of 2018, organic growth was 1.9% with Japan and New Zealand having strong performances this quarter. Our greater China agencies were down organically for the quarter due to reductions in our media businesses and in our events businesses. China in particular was facing a difficult comparison to the prior period. Latin America was down 2.4% organically in the quarter due to weakness at our Brazilian agencies, which continue to face significant macroeconomic forces in the market, while Mexico was flat for the quarter. Lastly, the Middle East and Africa, which is our smallest region, was down for the quarter. On Slide 9, we present our revenue by industry sector. In comparing the year-to-date revenue for 2019 to 2018, we continue to see a slight shift in our mix of business with an increase in the contribution of our pharma clients offset by a decrease from our technology clients, primarily as a result of the Sellbytel disposition. Turning to our cash flow performance, which we detail starting on Slide 10, in the first half of the year we generated $814 million of free cash flow, including changes in working capital. As for our primary uses of cash on Slide 11, dividends paid to our common shareholders were $280 million, up slightly versus the first six months of last year. The $0.05 per share increase in the quarterly dividend that was effective with the quarterly payment in April was partially offset by a reduction in common shares over the past 12 months. Dividends paid to our non-controlling interest shareholders totaled $46 million. Capital expenditures were $49 million year-to-date, down compared to 2018 due to less leasehold improvement activity and an increase in our equipment leasing program. Acquisitions, including earn-out payments, totaled $34 million, a decrease when compared to this point last year, and stock repurchases net of the proceeds received from stock issuances under our employee share plans increased to $524 million. All in, we outspent our free cash flow by about $120 million in the first half of 2019. Before discussing the details of our capital structure at the end of the quarter on Slide 12, I want to review the steps we recently took related to refinancing some of our debt. On July 8, we issued €500 million of eight-year senior notes due in 2027 at an effective rate of 0.92% and we issued an additional €500 million of 12-year senior notes due in 2031 at 1.53%. Together, the euro note issuance after deducting the underwriting discount and offering expenses resulted in net proceeds of $1.1 billion at an average rate of 1.23%. Part of the proceeds were used to retire the $500 million 2019 senior notes which matured this past Monday, July 15. In addition, on July 2 we called $400 million of the 2020 senior notes for redemption on August 1. The balance of the proceeds will be used for general corporate purposes. Our expected ongoing long-term debt portfolio will be comprised of 4 billion in dollar-denominated debt and 1 billion in euro-denominated debt. We expect interest expense for the second half of 2019 to be reduced when compared to 2018 by approximately $3 million in Q3 after recording an expected book loss on the early extinguishment of part of our 2020 notes, and by $10 million in Q4. Our net debt position at the end of the quarter was $2.6 billion, up around $1.4 billion compared to year-end December 31, 2018. The increase in net debt was a result of the typical uses of working capital, which historically are highest the first half of the year and which totaled about $1.3 billion, as well as the use of cash in excess of our free cash flow of approximately $120 million. These increases in net debt were partially offset by the cash we received from our disposition activity of $75 million and the slightly positive effect of exchange rates on cash during the first six months of the year which increase our cash balance by about $10 million. Compared to June 30, 2018, our net debt is down approximately $340 million. The decrease was primarily driven by the positive change in operating capital during the past 12 months of approximately $205 million and the cash proceeds received from the sale of subsidiaries during the past year of $385 million. Partially offsetting these increases over the past 12 months was an overspend of our free cash flow of approximately $80 million and the negative impact of FX on our cash balances, which was also approximately $80 million. As for our debt ratios, they remain solid. Our total debt to EBITDA ratio was 2.3 times, reflecting the issuance of the euro-denominated zero coupon note in Q1, while our net debt to EBITDA ratio fell to 1.1 times. Due to the year-over-year increase in our interest expense, our interest coverage ratio decreased to 9.6 times but remains strong. Finally on Slide 13, you can see we continue to manage and build the company through a combination of well-focused internal development initiatives and prudently priced acquisitions. In the last 12 months, our return on invested capital ratio was 23.3% and our return on equity was 56.3%. That concludes our prepared remarks. Please note that we have included a number of other supplemental slides in the presentation materials for your review. At this point, we’re going to ask the operator to open the call for questions.

Thank you so much. Just two questions. I guess first off, just following up on the ongoing improvement in the U.S. organic growth, I know it’s kind of nitpicking, it’s not necessarily the way you guys look at it, but if you have some color you can give us on whether you think the improvement is really driven by the better influx or better mix of new business wins, less losses, or are you really seeing some underlying improvement at your agencies or in existing client spend?

You said you had a second question?

I do. You want me to ask it now?

Yes, go ahead.

It’s just on international. You gave great color - thank you, John - about the different regions in the quarter, and I think you mentioned that Brazil, for example, would be a challenge for the rest of the year. I’m curious if you have any other color you can add about the outlook of the other major regions, how we should look to the other major regions for the back half of the year.

In terms of U.S. organic growth, we do not analyze it on a quarterly basis. We consider it over the entire year and anticipate client spending, as money can transfer from one quarter to another. When growth is between 2 to 3%, these shifts significantly influence the percentages we report. We had a solid performance, largely influenced by client spending decisions and some new business wins from the previous year, but I can't identify a single reason for the growth we reported.

Yes, I think any one quarter doesn’t necessarily make a trend, but we were pleased with the results with respect to the U.S. performance. Our overall outlook for the company has always been on the consolidated growth profile. We don’t necessarily nitpick it by country or by region, but we were certainly pleased with the second quarter. John’s referenced that the percentages themselves within a quarter can vary, so we’re certainly cautiously optimistic about the second half.

In terms of international growth, Brazil we do point out because we’ve had to take actions and it is still a work in progress for us to get it to the level that we would like it to be. As you go across the rest of the world, the uncertainties that exist because of geopolitical decisions will have some impact on what goes on with our clients and spending. We cannot predict what’s going to happen with Brexit. The good news is we don’t have a lot of financial service clients in the U.K. We don’t know what’s going to happen with tariffs and what the reaction to that is going to be, so we remain cautiously optimistic but cautious, and trying to gain market share in all the places we operate in.

Just one follow-up on your U.S. commentary, some of the new business from the headline clients seemed a little slower to ramp up after they announced their accounts were shifted to Omnicom late last year. Do you perceive that there might be a greater tailwind of new business benefit in the second half of the year compared to the first half?

You’re correct in your comment that some of those headline accounts are slower to ramp up and will start to contribute more in the second half, but I don’t think meaningfully enough to affect our overall guidance of growth of 2 to 3%.

John, I wonder if you could elaborate a bit more please on your commentary on renting data and technology rather than buying. It is quite a difference from at least two of your peers, and yet your growth rate has been better than at least one of those. I just wonder if you could give us a bit more on the logic behind this and what difference it actually makes to work with third party data versus having access to first party data, and in terms of renting technology versus owning. Thanks.

Overall, we evaluated the acquisitions made by our competitors, and if we believed they would be beneficial, we would have pursued them as well. However, transactions like these come with significant integration risks. We've observed that some companies in our industry, after making substantial acquisitions relative to their size, struggled to integrate them effectively within a reasonable timeframe. Additionally, these are legacy businesses, and most of them are not actively operating in Europe due to GDPR regulations. We can't predict the risks associated with managing that data or the forthcoming regulations in the U.S., China, or elsewhere. When we weighed the risks against the data and our capability to obtain similar data in a more relevant and current manner, we found that there was no return on investment for us in those acquisitions. Our systems have always been open and unbiased, which we believe is essential for achieving the best results for our clients. We are dedicated to generating meaningful outcomes for them. I've always aimed to ensure that our clients are not forced to utilize outdated systems I’ve implemented without the flexibility to improve them based on market needs.

I’d just add, we’ve been building and investing in the Analect and Omni platform for the last 10 years. It’s something that we’ve done internally, spent an awful lot of time and energy in having one common platform that’s going to continue to evolve, and as John had said, in an open fashion. It’s also a global platform, not just a U.S. platform, and we’re going to continue to invest in it going forward and maintain the flexibility we have to work with various best-in-class partners and get the data that we need, when we need it from a variety of sources. It’s a much more flexible approach and one that we can scale.

Can I just add to what you mentioned, Phil, regarding first versus third party data? Do you have access to the first party data you need? We hear increasingly about its significance. Do you have that, or do you feel that third party data is sufficient for your needs?

Keep in mind the first party data is the client’s data. It’s not our data. I think to the extent we need it to help whichever client we’re working with, we can easily and effectively help clients integrate our third-party data with their first-party data in a very effective way. We do that for many clients today and we expect to continue to do that in the future. We don’t see a situation where in the short term or even in the long term, that clients are essentially going to give up the ownership of that first-party data, but they need a partner to help them to more meaningfully merge that data with relevant third-party data to come up with solutions to help them reach the consumers they’re trying to reach.

We don't need to own the data to connect to it on behalf of our clients, and we do that. The data that those companies need, which I think you're referring to, is insignificant compared to the quality of the data our clients possess.

Right, thanks very much for your explanations.

I’m not an economist per se, but I wanted to get a sense from you, when you look at the outlook in the U.S. and also globally, how you’re thinking about the macro backdrop, because we’re seeing a really strong ad market here in the U.S., you guys had nice U.S. and advertising results this quarter, you mentioned you were optimistic for the back half, but there are a lot of leading indicators on the macros that look like they’ve rolled over and people seem to be getting more cautious about factory orders or capital goods or business investment, obviously the Fed talking about slower growth. I’m just curious, I’d love to get your perspective on all that and how you reconcile the strong ad market with what seems to be a slowing broader macro. If you have thoughts on that, I’d love to hear them.

I'm not an economist, but based on discussions with our clients, different industries have unique concerns. Overall, most believe the U.S. economy is still doing well. However, there’s an understanding that it hasn't sustained this level of performance for so long before, so some fluctuations are expected at some point, though no one knows when that will occur. This uncertainty is affecting long-term planning for clients needing to invest in their businesses. The advertising sector feels less impact from this situation because, while nothing is completely flexible, we are attentive to our clients' actions and intentions, allowing us to be more adaptable than many other businesses that rely heavily on capital investment.

Right, that makes sense. Maybe just a separate follow-up. On the competitive front with the IT consulting firms that get a lot of press in the marketplace, one of the things I saw recently is, I’m sure as you know, a lot of these consultants audit agency buying for their clients while at the same time they are competing for business, and I think there have been some agencies or holding companies that have balked at allowing that and turning over media data to get audited by what is essentially a competitor. I was just curious if you thought this was a big issue, yes or no, and if it is, what are the options for you to navigate what seems to be a rising source of conflict on the competitive front?

Yes, there’s no absolute answer to your question, but this is not a new problem. Oftentimes, most times with clients, we mutually agree on who is going to audit and not audit our results. I don’t know of any of the major holding companies that have really easily agreed with having them come in and ask the type of questions you’re referring to. I applaud Mark Reid in making it a more public issue, but privately this issue has been dealt with on a client-by-client basis for a long time.

Yes, good morning. Thank you for taking the question. My first one is on CRM execution and support - that has been a problem for a while, so when can you turn this around, or is it structurally challenged for many years to come, and if the latter, for further disposition? Secondly, you mentioned several times in your opening remarks that some of your event businesses impacted revenue in certain geographies. In which division do you put events and what challenges this activity presents broadly? Lastly, can we have a sense of the total investment in Analect and Omni in the last 10 years so we can compare that to how much some of your competitors have spent externally? Thank you.

You go ahead, Phil.

As far as CRM execution and support goes, I think the businesses that remain in the portfolio, we continue to work with management and actually, management of the practice area to get them focused on improving their execution. I think we’ve done a lot in terms of what we intended to do as far as our disposition strategy as it relates to the businesses in that portfolio, but longer term we don’t expect them to grow as rapidly as the rest of our portfolio and we expect we’ll continue to evaluate the pieces of that portfolio as we go forward. We do have some good businesses that have been performing well in that portfolio. They tend to be the smaller pieces of the portfolio, so we’re going to continue business as usual in trying to help them execute better and turn themselves around, but we’ll also continue to re-evaluate the portfolio as we go down the road. Regarding the events businesses, could you repeat your question? I’m not sure I understood the last part.

First of all, in which division is it? I assume it’s in CRM, but which bit of CRM?

Yes, it’s in the consumer experience portion.

It’s in consumer experience? Okay. And then broadly, what percentage of the total Omnicom business is it? Are we talking about 1% of revenue, 5% of revenue?

It’s probably less than 5% of our revenue on a global basis.

Okay. Then the last question on Analect and Omni investment?

Yes, I think I have a general comment to make before handing it over to John. We have certainly made significant investments in Analect and Omni over the past decade, but it is likely not on par with the spending of our two main competitors on their recent acquisitions.

I would like to add that we have made substantial investments in technology, including Analect and various tools. These investments have been made internally, so we expense them as they occur and do not capitalize them, which means they won’t be reflected on our balance sheet or goodwill. While I'm not an accountant, this area receives considerable focus from the management of Omnicom and other creative companies due to the significance of the tools we are developing. If you were to revisit our previous conference calls or read past transcripts, you would find that we’ve been discussing this topic for about a decade.

Yes, the bulk of the investment has been in essentially people, as well as some software tools and technology tools, but it is something that certainly is run through the P&L. It hasn’t been trying to piece together and integrate a bunch of acquisitions, but we also recognize that it’s an investment we need to continue to make and expect to continue to make to continue to maintain and upgrade the platform as technology changes and as the media landscape changes.

But if you had to venture an amount for investment, are we talking a couple hundred million, $500 million, close to a billion over 10 years, or is too hard to do? Just to have a really broad sense.

It's not difficult; we only spend what is necessary without keeping track of it to feel good about our expenditures.

Yes, you can include or exclude various miscellaneous costs, including training, which is now a global investment in our people. We don’t focus on calculating every last dollar for reporting purposes; rather, we view it as an integral part of the business. Investing in this platform is something we will continue to prioritize, as it is fundamental to our operations.

Okay, very clear. Thank you very much.

Thank you, I have one for John and then one for John or Phil. John, a question for you is you started the call by saying there’s been a return to the celebration of creativity as a force, and I wonder in that return as that acknowledgement of creativity, are you seeing any change in maybe the pressures on fees or maybe a re-ranking of priorities for your clients? Is there anything that is a business outcome from what you acknowledge as maybe a different focus now on clients?

Before I respond to your question, I believe this should be the final question since the markets are about to open. This represents a recognition, the first of its kind in a long time, that clients have come to realize the importance of the quality of creative talent within our organization. Previously, there were many consultants in our space, but this year, they were noticeably absent. While they can implement enterprise systems and adopt sophisticated strategies, they lack the essential creative assets we possess. Establishing a global network of creative assets is not an easy task. I'm not the only one who sees this; Maurice Lévy mentioned in his interview at Sun Valley that amidst all the changes in our industry, the most crucial and unchanging aspect is creativity, which has always been our core focus. We have not only recognized and valued creativity since our inception, but I believe our competitors are also beginning to understand that it is the key differentiator and the true value we bring to the table.

Yes, the other one was just on acquisition patterns. Is the lack of spending this year acknowledgment of either a change of prioritization or just timing of deals, or maybe just the pricing of the deal? Usually you guys do enter the marketplace and buy some assets, but this year you’ve done very little, so I just want to know what’s driving that.

Phil can answer, but I would say mostly circumstance. We’ve recognized the same thing in the second quarter and we’ve since then put more resources in the area of looking for certain selective acquisitions. It’s going to take some time to identify them and then to bring them into the fold.

Yes, I think we certainly want to do more acquisitions than less in terms of how we use our free cash flow, if we can find the right ones. This particular quarter, there were two acquisitions in particular that we’d been working on for quite some time. One of them, we just couldn’t complete, we couldn’t come to terms. They weren’t economic terms that were the issue with other things. The other just didn’t happen this quarter from a timing perspective. I think we do have a pipeline in place that we’ve been working, but as John said, we are taking some actions to kind of redouble our efforts to find deals. I think from a pricing perspective, that really hasn’t been what has held us up or caused us to do less this year than last year. Last year, we had some excellent candidates and got some deals done that have been very successful. We expect that we’ll do more of those in the future.

Okay, thank you both.

Thank you. Thank you everybody for taking the time to join the call.

Thanks everybody, have a great day.