Omnicom Group Inc (OMC) — Q3 2020 Earnings Call Transcript

Good morning. Thank you for taking the time to listen to our third-quarter 2020 earnings call. On the call with me today is John Wren, our Chairman 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 I 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 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 material. We are now 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 line for your questions.

Thank you, Shub. Good morning. I’m pleased to speak to you this morning about our third-quarter results. I would like first to thank our people for their performance in a complex and volatile environment. We recognize the challenges you are facing personally and professionally. We will continue to support you and to maintain our unwavering commitment to keeping you safe, as we continue to effectively service our clients and preserve the strength of our business. As we expected, the negative impact of COVID-19 on our business peaked in the second quarter, and we experienced significant improvements in the third quarter. Organic growth declined by 11.7% or $424 million, which includes a decline in our third-party service costs of $194 million. Sequentially, we saw improvements across all geographic regions, and most of our large countries with only a few exceptions including Brazil, India, Japan, and Singapore. Similarly, our largest industry sectors had significant sequential growth, with pharma and health as well as technology growing in the third quarter versus the prior year. As anticipated, some of our clients’ industries that have been hit the hardest, such as travel and entertainment, as well as our events businesses continue to be challenged. Our EBIT margin in the third quarter was 15.6% as compared to 13.1% in the third quarter of 2019, driving year-over-year growth in operating profit and net income. The performance can be attributed to a number of factors including repositioning actions taken in the second quarter, significant reductions in addressable spend, voluntary pay cuts across the group, which will be phased out by the end of the year, and reimbursements in tax credits and government programs in several countries. As you know, earlier in the year, we took measures to provide additional liquidity during the COVID crisis, and we further enhanced our working capital processes. We also stopped the share repurchase program. We don’t expect to restart share repurchases this year, and we’ll be reviewing the policy with our Board in December. I’m pleased to report that our efforts continue to pay off. Year-to-date we generated $1.1 billion in free cash flow and paid dividends of $423 million. Phil will discuss our liquidity and balance sheet in more detail, which remain very strong. Let me now turn to our strategies and business performance. It goes without saying this year has been a period of significant change with COVID-19 causing shifts in consumer behavior, which in turn have augmented the services we provide to our clients. Across almost every sector our clients pivoted their operations to accelerate their digital transformation, e-commerce, direct-to-consumer initiatives, further leverage data analytics and insights to drive their marketing and communication programs and seek ways to reinvent and differentiate their brands in an always-on environment. These initiatives were already well underway before COVID, but they’ve taken on a new urgency for our clients with the main purpose of achieving the best outcomes in reaching their customers. I’m pleased with how our agencies have responded. They’ve had to re-imagine marketing strategies, move quickly to provide our clients with relevant insights into how consumers were thinking, feeling, and behaving, and provide counsel on where, when, and how brands should show up differently. In fact, this COVID-19 and these changes in consumer behavior are profound and will have a lasting impact. With the exponential shift to virtual and online activities and its effect on almost every routine, consumers more than ever expect effortless interconnected brand experiences that need to be delivered through increasingly dynamic and nonlinear paths to purchase. Fortunately, we are well-positioned to excel in this environment, as a result of our long-term growth strategies. For more than a decade, we’ve invested a substantial amount of time and money in the areas of analytics, insights, precision marketing, and digital transformation services. These investments enable our companies to put the consumer at the center with data-driven digital and personalized offerings. Omni, our world-class people-based data and analytics service platform is being leveraged by our creative, media, precision marketing, CRM, healthcare, PR, and e-commerce agencies across the group. The power of the platform is providing our clients a unique understanding of their audiences as people, not just as consumers, enabling us to develop targeted and coordinating marketing programs across multiple mediums. Omni is being deployed by our client service teams using process-driven frameworks that can be applied to their specific client situations and for new business opportunities. This combination of our platforms, processes and people allows us to offer flexible programs and solutions that can be customized to meet the rapidly changing demands of today’s market. We also continue to invest heavily in growing our precision marketing, mark-tech and digital transformation business through a series of strategic investments and acquisitions. We’ve realigned several agencies into the Omnicom Precision Marketing Group, a practice area we formed several years ago, and we expanded its capabilities through the acquisitions of Credera, Smart Digital and in third quarter DMW. These investments have been instrumental in the relative performance we have achieved in these disciplines over the past few quarters. We expect them to continue to be a key driver for our growth as digital transformation and precision marketing initiatives accelerate. As I mentioned earlier, the demand for our transformation services spans multiple industries. Whether it's automotive, retail, fast-moving consumer goods, or healthcare, we assist our clients in designing and implementing new technology platforms, formulating online strategies, and personalizing digital experiences, as well as optimizing content creation and automating content delivery. These consumer-focused engagements yield measurable results that enhance market responsiveness and return on investment for marketing expenditures. Another area significantly accelerated by COVID is e-commerce. For a considerable period this year, e-commerce became the sole transaction method for many of our clients across various sectors, including consumer packaged goods, retail, automotive, and education. This rapid adoption of e-commerce occurred in a matter of days and weeks, a process that would normally have taken years. During the quarter, we enhanced our practice area in a unified space, led by Sophie Daranyi. Our newly established Omnicom Commerce Group serves as a center of excellence for commerce and conversion marketing. This group integrates top-notch creativity and consulting skills from several agencies and will collaborate closely with our media and precision marketing practices to help clients narrow the gap between brand awareness and sales, utilize our e-commerce offerings, and improve our responsiveness and capabilities for our clients. Whether in-store or online, the brands that are most recognized and trusted have been those that customers turned to during the pandemic, and this trend will persist as consumer behaviors evolve in the long term. Building that sense of familiarity, affection, and trust in a brand has been at the heart of what our creative agencies have done for decades. We possess the creativity to devise and deliver relevant experiences that resonate and, more importantly, offer rewards. We understand that this is what drives long-term growth for our clients. While 2020 has been marked by disruption and reinvention, the resilience of our people has remained constant. In spite of the challenges that arose, our agencies and team members have consistently demonstrated world-class creativity, innovation, and ideas. Their success is reflected in our recent new business achievements. Peugeot selected Omnicom's O.P.EN as its new agency of record, a decision made possible by creative precision marketing strategy teams from 17 different markets who crafted the winning proposal. BBDO was chosen by AARP to serve as its brand agency of record. Cox Automotive appointed Hearts & Science as the U.S. media agency for its Autotrader and Kelley Blue Book brands. Dieste was awarded the multicultural advertising account for Frito Lay brands, Cheetos and Doritos. In the pharmaceutical and healthcare sectors, our companies have continued to excel with significant wins across our practice areas, including advertising and creative services for key products for Gilead, CSL Plasma, and AbbVie, as well as digital innovation services for Novartis in their pharmaceutical and oncology divisions. Additionally, we achieved public relations wins with J&J Pharma, New Penn Medical Center, and KKI Pharma. A common theme in these successes is that they largely occurred while our teams were working remotely. Looking ahead, we recognize that the work environment will evolve as we transition to the post-COVID era. To prepare for this, we have established a committee dedicated to advising our agency leaders on optimizing our business operations beyond COVID. The group's goal is to rethink our work structure to best accommodate each agency’s unique services, personnel, client demands, space, and culture. We have also expedited our use of technology and information sharing beyond just video meetings. For instance, we are leveraging technology platforms to offer additional training programs, onboard new talent and clients, collaborate on creative projects, and facilitate production shoots. In fact, the accelerated integration of technology has enhanced nearly every aspect of our operations, from client services to back-office functions. I am confident that we will learn many valuable lessons from our current circumstances that will enable us to operate more efficiently and effectively moving forward. Let me now provide an update on our DE&I initiatives and some key changes. Over a decade ago, we hired one of the industry’s first Chief Diversity Officers, Tiffany R. Warren, who was instrumental in developing our DE&I strategy and framework. Since then, she has helped us build the core of our DE&I programs. As announced earlier this month, Tiffany has decided to join Sony Music, and we’re in the process of finding a new diversity leader who will lead us in the next phase of our efforts. I want to thank Tiffany for her many contributions and wish her success in her new role. As mentioned last quarter, our DE&I strategy aims to create supportive environment and is led by the Omnicom people engagement network or OPEN. OPEN provides structure and counsel and visibility to DE&I initiatives and policies throughout our organization. Our OPEN 2.0 actions focus on four key tenets: culture, collaboration, clients, and community, and is organized into eight action items. These include the development and retention of our diverse talent, client and community involvement, mandatory training and accountability of our leaders. One of our first action items is the expansion and empowerment of our OPEN leadership team, which is responsible for leading the implementation of our framework. To date, through a combination of new hires and promotions, we’ve expanded the OPEN leadership team from 15 to 25 diversity champions, and we’re making good progress on our initiatives. I look forward to sharing more with you on this front in the future. Before turning it over to Phil, let me provide an update on our expectations for the fourth quarter. While the third quarter trend was positive and we expect to see continuing improvement in several industries and markets, there are a number of challenges and uncertainties as we look to the fourth quarter. First is the trajectory of the virus globally, which will impact the pace of economic recovery in each country we operate in. Next is the outcome of the U.S. election and potential delays in its results. Third is the timing and effect of government stimulus programs in the U.S. and around the world. And last, our labor market conditions, especially as stimulus programs end and their effect on the overall rate of economic recovery. All of these factors create greater uncertainty in our financial forecast and a much lower level of visibility than we’ve experienced in the past across our businesses. This is especially so in our project-based services as well as in the year-end project spend that we normally expect to see from our clients. As a result, we continue to focus on the things we can control. Our agencies are dedicated to ensuring the safety of their staff, servicing their clients, pursuing new business opportunities, aligning their staffing levels with revenue, and aggressively managing their costs. Each of them is being asked to plan for alternative scenarios for accelerated growth as well as potential declines in client spending. I want to thank our people for their outstanding work and ask everyone to stay safe. While 2020 has been a difficult year in many ways, I’m incredibly pleased with how we’ve operated and the progress we’ve made in executing our strategies. I will now turn the call over to Phil for a closer look at the third-quarter results.

Thanks, John, and good morning. As John said, the negative impact on our business caused by COVID-19 peaked in Q2. And as business conditions improved, our results improved considerably in Q3. Our performance reflects the benefits from the actions we took to align our cost structure with the current operating environment. And while the decline in revenue was in line with our expectations, our margin improvement exceeded our expectations. I will cover that in more detail later. Turning to slide 4 for a summary of our revenue performance for the third quarter. Our organic revenue performance was negative $424 million or 11.7% for the quarter. The decrease was an improvement from the unprecedented decrease of 23% in the second quarter and was in line with our internal expectations throughout the quarter. And while we still experienced declines across all regions and disciplines, except for the continued growth of our specialty healthcare businesses, those reductions were about half the levels we saw in Q2. The impact of foreign exchange rates increased our revenue by 0.5% in the quarter versus the slightly negative impact we anticipated. This was due to the moderation of the strengthening of the dollar compared to the prior period. And the impact on revenue from acquisitions, net of dispositions, was relatively flat or a decrease of 0.3%. As a result, our reported revenue for the third quarter decreased 11.5% to $3.2 billion when compared to Q3 of 2019. I’ll return to discuss the details of the changes in revenue in a few minutes. Turning back to slide 1. Our reported operating profit for the quarter was $501 million, up from $473.3 million in Q3 of last year. Our operating profit in the quarter was positively impacted from the cost reductions resulting from the repositioning actions we undertook in the second quarter and good management of our addressable spend and cost categories by the leaders of our agencies. The results for the quarter included the benefit of reductions in salary and related costs, which increased operating profit by $68.7 million related to reimbursements and tax credits on the government programs in several countries, including the U.S., Canada, the UK, Germany, France, and others. Operating margin for the quarter increased 250 basis points to 15.6% compared to 13.1% in Q3 of last year. Excluding the benefit of the reductions in salary and related costs from the government reimbursements and tax credits, operating margin for the quarter increased 40 basis points to 13.5%. EBITDA for the quarter was $522 million, and EBITDA margin was 16.3% compared to 13.6% in Q3 of last year. Excluding the benefit of the reductions in selling and related costs previously referred to, EBITDA margin for the quarter increased 50 basis points to 14.1%. You will recall, we estimated that the severance and real estate actions taken in the second quarter would generate approximately $230 million in savings over the second half of 2020. We also expected to generate additional saving in excess of $75 million in the second half from reductions in discretionary costs. Through the end of Q3, the reductions in our payroll and real estate costs were in line with those estimates, and we experienced greater cost savings resulting from the active management of our discretionary addressable spend cost categories, including travel and entertainment, general office expenses, professional fees, personnel fees, and other. On slide 3 of our investor presentation, we presented the details of our operating expenses. As we previously discussed, we have and will continue to actively manage our cost to ensure they align with our revenue structure. In addition to the overarching structural changes we made during the second quarter, we continue to evaluate ways to improve efficiency throughout the organization, focusing on our real estate portfolio management, back-office services, procurement, and IT services. As for the details, our salary and service costs are variable and fluctuate with revenue. Salary and related service costs declined by $223 million in the quarter, reflecting both the impact of our staffing reductions during the second quarter and the impact of the benefits from government reimbursements and tax credits discussed previously. Third-party service costs, which include expenses incurred with third-party vendors when we act as a principal when we’re performing services for our clients, primarily related to our events, field marketing, merchandising, and media businesses, decreased by $194 million in the quarter or 20%. In comparison, the decrease in third-party service costs in the second quarter year-over-year was nearly $400 million or 40%. Occupancy and other costs, which are less linked to changes in revenue, declined by approximately $18 million, again, reflecting the decrease in the cost structure from the actions taken in the second quarter and from our people not being in our offices during the quarter for the most part, and SG&A expenses declined by $7 million in the quarter. Net interest expense for the quarter was $48.5 million, down $800,000 versus Q3 last year and up $1.3 million compared to Q2 of 2020. When compared to the third quarter of 2019, our gross interest expense was down $8.4 million, resulting from debt refinancing actions over the last 12 months. This includes the impact of the additional $600 million of 10-year 4.2% senior notes that we issued as liquidity insurance in early April of this year. As we’ve discussed on our previous calls this year, these actions reduced the effective interest rate on our senior debt by 60 basis points when compared to Q3 of 2019. This reduction was offset by a decrease in interest income of $7.6 million versus Q3 of 2019, primarily due to lower interest rates. When compared to the second quarter of 2020, interest expense increased slightly by $700,000, while interest income was down $600,000. As we enter the final quarter of the year, we expect that our refinancing activity over the past year plus will continue to more than offset the increase in interest expense resulting from the issuance of the 4.2% notes this past April. We believe adding this additional liquidity while maintaining our interest expense levels was a prudent step to take. We expect net interest expense to increase in Q4 of 2020 by approximately $10 million compared to Q4 of 2019, largely driven by an estimated reduction in interest income. Our effective tax rate for the quarter was 26.7%, in line with our expectations. For the nine months ended September 30, 2020, the rate was 28.5%, an increase from 26% for the comparable period in 2019. The increase in the nine-month rate for 2020 was primarily attributable to activity from Q2 related to the non-deductibility of certain repositioning costs in certain jurisdictions and the loss on dispositions. Excluding the impact of these items, the year-to-date effective rate was 26.3%, which was in line with our expectations. We anticipate that our effective tax rate for the fourth quarter will approximate 27%, excluding the impact of share-based compensation items, which we cannot predict because it is subject to changes in our share price. Earnings from our affiliates totaled $2.9 million for the quarter, up a bit versus Q3 of last year, and the allocation of earnings to the minority shareholders was $21.6 million during the quarter, relatively flat with the prior year. As a result, net income for the third quarter was $313.3 million, up 8% or $23.1 million when compared to Q3 of 2019. Our diluted share count for the quarter decreased 1.6% versus Q3 of last year to 215.8 million shares, resulting from share repurchases prior to the suspension of our share repurchase program, which we announced towards the end of March. As a result, our diluted EPS for the third quarter was $1.45, which is an increase of $0.13 or 9.8% when compared to our Q3 EPS for last year. On slide 2, we provide the summary P&L, EPS, and other information for the year-to-date period. As a reminder, in response to the pandemic, during the second quarter, we undertook a comprehensive review of our operational structure to reflect the current and expected economic realities of the COVID landscape. Repositioning actions included severance actions to reduce employee headcount, real estate lease impairments, terminations and related fixed asset charges that will allow us additional flexibility to match our additional changes in the need for space based on our headcount, as well as the disposition of several small agencies. These repositioning charges totaled $278 million, which reduced our year-to-date net income by $223 million and diluted earnings per share by $1.03. We’ve detailed the components of these charges in the supplemental slides that accompany the presentation. Additionally, our results for the nine months ended September 30th include the benefit of reductions in salary-related costs, which increased operating profit by $117.8 million related to reimbursements and tax credits under the government programs we previously discussed. Returning to the details of our revenue performance on slide 4. While the decrease was significantly better than the reductions in client spending we experienced during the second quarter, demand for our services continued to decline compared to last year’s levels, as marketers continue to manage expenditures due to the economic impact of the pandemic on their businesses. Our reported revenue for the third quarter was $3.2 billion, down $417 million or 11.5% from Q3 of 2019. As you can see on slide 8 and 9, and as you’d expect, certain client industry sectors continue to be more negatively affected than others. Our clients and industries such as travel and entertainment and energy, as well as nonessential retail are continuing to reduce their marketing communication expenditures to match the declines in those business sectors. However, during the quarter, we continue to see clients in the pharma and healthcare industries as well as the technology and telecommunications industries fare better. The disciplines that were most negatively impacted were CRM consumer experience, primarily from our events businesses; and CRM execution and support, primarily due to our field marketing and non-profit agency businesses. And our advertising discipline, including media, experienced decline similar to our overall organic decline. A considerable amount of the revenue decline in these businesses resulted from reductions in third-party service costs incurred when providing services for our clients when we act as a principal. These third-party service costs, which fluctuate directly with changes in revenue, declined across all of our disciplines by just under $200 million in Q3 of 2020 versus Q3 of 2019. Turning to the FX impact. On a year-over-year basis, the strength of the U.S. dollar moderated against our foreign currencies. For the first time since Q2 of 2018, the FX impact increased our reported revenue. The impact of changes in exchange rates increased reported revenue by 0.5% or $18 million in the quarter. On a reported basis, the dollar’s performance was mixed this quarter, weakening against some of our major foreign currencies while strengthening against others. In the quarter, the dollar weakened against the euro, the UK pound, and the Australian dollar. While the dollar strengthened against the Brazilian reais, Russian ruble, and the Mexican peso. Looking forward, if currencies stay where they currently are, we anticipate that the FX impact would slightly increase our reported revenue by approximately 50 basis points in Q4. And for the full year, the FX impact would be negative by about 50 basis points. The impact of our recent acquisition of DMW in the UK, that we completed at the beginning of the third quarter, net of our disposition activity, decreased revenue by $11.3 million in the quarter or 0.3%, which was in line with the estimate we made entering the quarter. Inclusive of the disposition activity through September 30th and not including any acquisitions or dispositions we may complete before the end of the year, we estimate the projected net impact of our acquisition and disposition activity will reduce reported revenue by approximately 50 basis points in the fourth quarter of 2020. Our organic revenue decreased approximately $424 million, or 11.7% in the third quarter when compared to the prior year. As mentioned earlier, our revenue was down in Q2 across all major geographic markets, but the percentage decreases in organic revenue were significantly lower than those we experienced in the second quarter. Within our service disciplines, our health care agencies saw increased activity across all regions, resulting in organic revenue growth for that discipline. While both of our CRM disciplines, particularly our events and field marketing businesses continue to face significant disruptions to their businesses due to the impact of COVID-19. Turning to our mix of business by discipline on page 5. For the second quarter, the split was 56% for advertising and 44% for marketing services. As for the organic change by discipline, advertising was down 11.7%, with our media businesses seeing a significant improvement organically compared to the second quarter when media activity slowed considerably. Our global and national advertising agencies also improved their organic performance this quarter compared to the second quarter, although performance by agency was mixed. CRM consumer experience was down 19.3% for the quarter. The strongest performance in the discipline came from our precision marketing agencies, which were down globally around 5%. Our events businesses and the discipline continue to face significant challenges as they adapt their business models to the new operational realities due to COVID. And our shopper and brand consulting agencies continue to experience COVID-19 headwinds. CRM Execution & Support was down 19.4% as our field marketing and nonprofit consulting businesses lagged for the quarter. PR, while mixed by market, was down 3.4%, and our health care agencies continued to turn in strong performances across the portfolio, this quarter, up organically 3.8% with growth across all geographic regions. Now, turning to the details of our regional mix of business on page 6. You can see the quarterly split was 55% in the U.S., 3% for the rest of North America, 10% in the UK, 17% for the rest of Europe, 12% for Asia Pacific, 2% in Latin America and 1% for the Middle East and Africa. The mix in Q3 is fairly consistent with what we saw by region in the first and second quarters of the year. In reviewing the details of our performance by region on slide 7, organic revenue in the second quarter in the U.S. was down $227 million or 11.4%, which is an improvement over the Q2 results when organic revenue fell by over 20% domestically. For the quarter, our events business has again experienced our largest organic decline in the U.S. Our domestic specialty healthcare agencies were positive organically, while we again saw decreases in our advertising and media businesses, but at decreased levels from Q2. And our domestic PR and precision marketing agencies were just about flat compared to Q3 of 2019, solid performance considering the overall environment. Outside the U.S., our other North American agencies were down just under 8% or $8 million. Our UK agencies were down $43 million or 12.5%. Positive performance from our precision marketing and health care agencies was offset by reductions from our other businesses. Rest of Europe was down 9.6% organically, a significant improvement over Q2 when organic revenue fell nearly 30%. In the eurozone, among our major markets, Germany and Italy were down single digits; Ireland, the Netherlands, and Spain were down between 10% and 20%, while France continued to lag behind the other markets. Outside the eurozone, our organic growth was flat during the quarter. Organic revenue growth in Asia Pacific for the quarter was negative 12.8%. Our agencies in Greater China and Australia were down single digits, while in Japan and India we saw similar decreases in Q3 as we did in Q2. Latin America was down 22.3% or $22 million organically in the quarter, driven by the continuing weakness from our agencies in Brazil. And lastly, the Middle East and Africa was negative again for the quarter. Turning to slides 8, 9, and 10, we present our mix of revenue by our clients’ industry sector. When comparing the year-to-date revenue for 2020 to 2019, we continue to see a small shift in our mix with increased contribution from our pharma and technology clients, while travel and entertainment, and financial services decreased. Turning to our cash flow performance on slide 11. You can see that in the first nine months of 2020, we generated $1.14 billion in free cash flow, excluding changes in working capital, down when compared to the same period in 2019. But the $412 million generated in the third quarter was up a bit versus the $394 million generated during Q3 of 2019. As for our primary uses of cash, on slide 12, dividends paid to our common shareholders were $423 million, effectively unchanged when compared to last year. Dividends paid to our non-controlling interest shareholders decreased to $58 million. Capital expenditures in the first nine months of the year were $50 million, down when compared to last year. As we’ve talked about on our prior calls, we have limited our capital spending in the near term to only those deemed essential. Acquisitions, including earnout payments, totaled just under $105 million. And stock repurchases, net of the proceeds received from stock issuances under our employee share plans, totaled just over $216 million, a decrease compared to last year, reflecting the suspension of our share repurchase program in mid-March. As a result of our continuing efforts to prudently manage the use of our cash, we were able to generate $284 million of free cash flow during the first nine months of 2020, $141 million of which was generated in the third quarter alone. Turning to our capital structure as of September 30th. Our total debt was a little under $5.8 billion, up $670 million since this time last year. Major components of the change was a retirement of $600 million of dollar-denominated senior notes, which were due earlier this year, replacing those borrowings with $1.2 billion of 10-year senior notes due in 2030, along with the FX impact of converting the €1 billion of euro-denominated borrowings into dollars at the balance sheet date. Versus December 31, 2019, gross debt at the end of the quarter was up $641 million, primarily as a result of the $600 million issuance of U.S. denominated senior notes early April. Our net debt position at the end of the quarter was just over $2.5 billion, up about $1.7 billion compared to year-end December 31, 2019, an improvement of $166 million from the comparative prior year last 12-month period, reflecting the results of our improved cash management. The increase in net debt since December 31, 2019 was a result of the use of working capital of about $1.8 billion, plus the impact of FX on our cash and debt balances, which increased net debt by $120 million. Partially offsetting those increases was the free cash flow we generated during the first nine months of the year of $284 million. Over the past 12 months, our net debt is down $166 million, primarily driven by our excess free cash flow of approximately $500 million. Offsetting this was the reduction in operating capital during the past 12 months of approximately $230 million and the negative impact of FX, which totaled around $55 million. As for our debt ratios, our total debt-to-EBITDA ratio was 3.1 times, and our net debt-to-EBITDA ratio was 1.4 times. And finally, moving to our historical returns on page 14. For the last 12 months, our return on invested capital ratio was 17.7%, while our return on equity was 37.7%, both reflecting the decline in operating results driven by the economic effects of the pandemic as well as the impact of repositioning charges we took back in the second quarter. And that concludes our prepared remarks. Please note that we’ve included several 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. Understanding your earlier comments, John, about how this unprecedented lack of visibility in Q4, I’m curious if you can share with us I guess what color you do have, meaning how maybe the third quarter progressed in terms of the improvements that you saw, did you see stronger improvements in September versus the start of the quarter? And maybe any color you have in just what you’re seeing now in October, just to give us a little bit of idea how we can position ourselves or take a look for Q4?

Sure. Well, Lexi, as you know, if this was a normal year, we’d be talking about the project spend that normally occurs in the fourth quarter, which we generally estimate to be $200 million to $250 million. So, COVID or no COVID, that still exists in terms of whether the companies will come up with projects to promote their brands. More specifically, we don’t have October numbers yet, but I expect October to be probably the strongest month in the quarter, unless we do see that project business flow in, in the last six weeks of the year, and that will have a lot to do with things that are out of our control. I don’t have any clues to how Christmas is going to work out. There are closures that you’re starting to see in Western Europe, these partial closures. And at least the United States that stayed state open for the most part. But cases are going up. So, there are a lot of unknowns far more than we have in typical periods. You can rest assured that we won’t need $1 on the table, and all of our people are out there trying to help their clients because comments that I made earlier in my prepared remarks, brands are even more important than they ever were. I think, the one other change that we’ve seen during this entire period is people are using shopping lists for the first time. They’re not just browsing around and buying things randomly. They typically know what they want to buy before they go out and buy it. So, we’re in that kind of period. I can assure you that every one of our agency leaders is looking at their business every single day. And we have alternative plans, both for growth and for some bumps in the road that we may hit. But we think the second quarter was the worst quarter. We saw improvement in the third, and we’re hoping for a similar improvement in the fourth. I don’t know, Phil, do you want to add?

In terms of the third quarter and any potential trends over the months, we didn’t observe a significant trend. Typically, we don’t notice them due to the differences between monthly results and our quarterly processes. Therefore, I don’t believe there’s anything we can infer from the trend in the third quarter that would apply to the fourth quarter.

Okay. Thank you. And just one follow-up question. John, in your opening comments, you talked about the accelerated shift to e-commerce and digital in general and the crisis and how you guys reacted to that change in spending behavior. I’m curious if you take a step back, is this shift, this accelerated shift, a positive for your business versus the more traditional way?

We believe it is. Digital spending has likely surpassed 50% for media or is very close to that mark. Complexity actually benefits us; when transactions are more complex, it enhances our business and aligns with our positioning.

Thanks. I have one question for Phil and another for John. Phil, could you elaborate on the improvement in third-party service costs, which was about $200 million compared to the second quarter? Can you explain what activities contributed to enhancing the revenues that offset third-party service costs? I assume events are relatively absent. And John, regarding Alexia’s second question, I know you’ve been repositioning the Company for several years to take advantage of these changes. Given the acceleration you’re experiencing now, does this prompt you to consider disposing of more assets or pursuing more acquisitions to prepare, or do you believe your current assets are sufficient and the foundation is as you envisioned?

Phil, do you want to go first?

I’ll go first. So, as far as the third-party service costs and improvements versus Q2, one thing to keep in mind, Q2 is a much bigger quarter than Q3. So, on top of the impacts of the pandemic here, we’re dealing with a much bigger base as well. So, we did see some improvements. I think, certainly, the numbers would be consistent with your assumption that there wasn’t a heck of a lot of improvement in the event space. Certainly, there was a similar reduction in third-party service costs in our events businesses. And I think, the rest of the businesses feel forced. Certainly, they were down quite a bit, but there was an improvement Q3 versus Q2. The principal media activity that we have, certainly, there was an improvement versus Q2. And then, general out-of-pocket costs, which are required by GAAP to put in our revenue, those are down in a consistent way, travel and entertainment, those types of costs, which are reimbursed, those trends were consistent. So, a little bit of improvement just because of the size of the quarter is smaller in Q3 versus Q2. But, I think, the trends in some of those businesses continue to be negative, like events and the trends in others. They did show some improvement as clients and activity and spend improved.

I want to be clear that I'm always seeking improvement in our operations, and while we're satisfied with our portfolio, we are actively investing in key areas and exploring acquisitions. This isn’t about addressing gaps, but about enhancing our product continually. We're concentrating our efforts in specific media sectors and precision marketing for our acquisition strategies. I don’t see any major issues in our portfolio—our event businesses will rebound when circumstances allow, as they are strong and well-managed. The current challenges are temporary. As Phil and I, along with the management team, begin our planning process, we don't just focus on the next year's performance, but also on what we expect those businesses to contribute in the next three to five years. Those are the areas we consider for significant changes, but nothing urgent is on the horizon right now. Phil?

Yes, considering the uncertainty we've faced recently, we've received inquiries about whether we should delay pursuing certain acquisitions. However, we are not holding back from exploring strong candidates and businesses that align with our strategy and could enhance our growth. We are actively looking for opportunities, and there are definitely options available. As John mentioned, this is an ongoing aspect of our strategy as we enter the 2021 planning phase. We will reassess our portfolio assets, as we routinely do, and if necessary, we will make strategic adjustments or capitalize on potential dispositions in a careful manner.

I’ll attempt four, but they’re all with quick answers for Phil on numbers. You said that media did improve. A lot of other agencies are now giving us media. IPG said media was positive in Q3. So, can you give us more color on media? Maybe a multiple choice question. Was it down 10-15, 5 to 10, 0 to 5 or positive in Q3? That’s the first question. The second one is on cost, down 9.7% or $907 million year-to-date. Guidance for the full year, should we think about an absolute number, so an extra 300, 400 in Q4, or shall we think about Q4 as margin and then call on margin? That’s number two. And number three, how much of your annual savings will be permanent, both IPG, and you gave us a number already. And the last one is percentage of your revenue coming from consumer experience in e-commerce, preferably two separate numbers. But, I’d take one run a number because John said that was good growth future, but it’s hidden in the Company. Thank you.

Sure. If I miss anything, please let me know. Regarding improvements in the media business, it’s evident that we saw an improvement compared to Q2, without a doubt. The performance was better than the overall average, though not significantly so; it was clearly better than Q2. For our cost base, the actions we took during Q3 and what that suggests for Q4 leads me to expect similar results as I mentioned in our Q2 call. I anticipate we can return to margins similar to those of 2019, which serves as a reasonable target for Q4. We will continue to manage EBIT dollars and operating income as we did in Q3. If we exceed expectations, that would be fantastic; however, our outlook is to aim for 2019 margins as a good benchmark for Q4. Our agencies have effectively realigned the cost base to reflect the current revenue situation. As John noted, the visibility for Q4 is not particularly strong at this time, and there are uncertainties around project work and year-end spending. This year, our optimism regarding these aspects is not as high as it was last year at this time. Concerning permanent savings, we take a somewhat different perspective than others. We've implemented significant measures to realign our cost base, some of which we believe will be permanent. We’ve let go of over a million square feet of real estate, which we think will be a lasting change. However, it’s challenging to quantify how much of the remaining costs will be permanent because, when we eventually return to a growth phase, we will likely restore most variable costs back to the P&L. Salary and service expenses will rise again as we bring back our workforce, and some addressable spend categories will also return. We will manage these closely. From our Q3 results, it’s evident we are keeping a tight rein on EBITDAs. A portion of those costs will indeed be permanent. We are not committing to a specific figure for permanent savings, whether it be $50 million, $100 million, or $150 million, because various factors may impact our situation before we normalize or return to growth, potentially altering our cost management approach based on the changing facts and circumstances. Regarding consumer experience and e-commerce, precision marketing remains an essential component of our portfolio, and we are still investing in it. It accounts for about 7.5% to 10% of our business and has performed well, although it is dealing with a few client losses. Overall, most of that portfolio is growing in the current environment, and we are satisfied with its performance.

John, just maybe going back to your answer to Alexia’s question, it sounded like you think or hope that fourth quarter improvement versus Q3 would be similar to Q3 to Q2, maybe excluding projects. I just wanted to make sure we heard you right. And could you guys remind us how big the project business typically is or just a range for Q4? And should we be seeing that decline, whatever it is, show up in those third-party service costs? I just wanted to better understand the kind of puts and takes around projects for Q4.

Typically, I don’t expect the sequential improvement from the second quarter to the third quarter to continue at the same pace in the fourth quarter due to new uncertainties. Our concerns stem from the situation we faced. Businesses began reopening in most markets by the end of June and have remained open through mid-October. However, I can’t predict what will happen or the impact of the recent surge in cases we’ve experienced in the last week or two. While I don’t believe governments will implement full lockdowns again, I do expect some new restrictions. That said, I’ve consistently mentioned in previous fourth quarter discussions that project spending typically ranges between $200 million and $250 million. In my 25 years as CEO, the only time we didn’t meet this expectation was during the Great Recession. So, there’s uncertainty ahead. Many of our pass-through costs in the fourth quarter are related to events and promotions happening between now and the end of the year. Therefore, while I cannot clearly predict the impact, it will certainly be felt.

One clarifying point, though, Ben, when we talk about year-end project spend or project work that we’ve historically seen, it’s project work across the board. It’s across all of our disciplines. All of our agencies are out there working with their clients to ensure that they get what they need from a service perspective through the end of the year, through the end of the holiday season. It isn’t simply project work in the context of events and the event business or field marketing and people out in the stores. It’s all disciplines and all agencies.

Got it. Makes sense. And John, can I just follow up on an unrelated topic. I’m sure you’ve been impressed with the Company’s performance during this period, everyone’s got to work remote. When you think longer term, what do you think the Company gains from the flexibility that comes from a remote workforce? And are there any things you think you lose or there’s risk around this working in this way in a business that obviously culture is really important to your success? I’m just wondering how you’re thinking about that now that we’re six, seven months into this.

I believe that we will eventually return to the office, and we are continuously communicating with our employees about when and where it will be safe to do so. In regions like China, we are already fully back, while other parts of Asia are ahead of Western Europe, which is experiencing a slowdown after some improvement, as well as the United States. Additionally, I think that post-COVID, we have discovered that many tasks we previously believed could only be done in person can actually be managed remotely. As we plan for the future, we are evaluating our workforce and considering that not every role needs to be based in New York City; some functions could potentially be relocated to more cost-effective areas, although we have no immediate plans for this. I am also concerned about the mental health of our employees during this time away from the office, as it affects everyone differently and presents various stressors. We are actively encouraging our HR team to develop programs to support our employees through this experience. I don’t think we have lost much of our culture yet, and even when we return to the office, it may not require a full five-day workweek. We might see a more agile and flexible workforce moving forward. I hope that addresses your questions.

No. That’s helpful. Thank you, John.

I had a quick follow-up and a housekeeping. Just going back to M&A, is this the type of environment where assets are more available, actually, or do you think sellers are looking to wait for the recovery? And then, on the cost side, Phil, as we think out to next year, can you call out the size of the wages being restored at the end of this year? And can you also remind us on the size of the field marketing business? Thank you.

In terms of acquisitions, there will be opportunities, because people find themselves in different positions in terms of liquidity and therefore, have to take different actions. So, we’re constantly looking in the areas that we remain focused in. We’re also willing to make investments as we have in the past in terms of starting things to support platforms that we care the most about. The good news for us is, and I think Phil mentioned it earlier, we’ve focused very early on in terms of our liquidity and our ability to conduct our business in a way that we want to uninterrupted as possible. So, if a good acquisition comes up, we’re ready to execute on it.

Yes. In terms of your other questions, I’ll start with the last one first. So, field marketing for us is probably averages around 2% to less than 3% of our revenue in terms of the size of that business or those businesses. And if you could just repeat the kind of the middle question?

Yes. I remember you mentioned that the voluntary wage reductions would be restored at the end of the year. As I look ahead to next year, could you please provide an estimate of the total wages that will be reinstated?

There are a few voluntary salary reductions that you’re asking about. The potential benefit from these in the fourth quarter is minimal based on our current forecasts. Most of the reductions have been restored as of September 30th, but a few will continue through the end of the year, including a small amount of senior management at Omnicom. In terms of impact on the numbers, it won’t be significant and is unlikely to contribute meaningfully in Q4. I hope this answers your question.

I think we might have time for one more question, operator, as the market is about to open.

Thanks. Maybe first, Phil, I was wondering if you could quantify the value of the 1 million square foot of real estate savings that you’ve got. And then, John, you talked about the Board maybe taking up the buyback issue at its next meeting in December. You’re a Chairman of the Board. So, I was just wondering kind of what you’re thinking in terms of the health of the balance sheet and what you need to see in the marketplace before you might return to the market. Thank you.

Do you want to go first, Phil?

Sure. In terms of the real estate, the actions we took covered various markets. A reasonable estimate would be $40 to $50 a foot. We don't have a more precise number, but that's a meaningful guideline. Regarding the balance sheet and buybacks, John...

Yes. Our number one focus when looking at all of this is maintaining our investment-grade rating. So, that will govern a lot of the conversation in terms of when we restart our share repurchase program. Also, dividends are our main focus; acquisitions, where they’re possible is the second place we allocate capital; and finally, we use excess cash, if we determine to have excess cash, to start repurchasing shares again. So, it’s a complex conversation. But, as I said, dividends are number one, acquisitions will be two, and share repurchases will be the last. So, the good news is, we’re putting it on the agenda to at least start the conversation.

Yes, with the Board meeting having coming up in December.

Thank you all for taking the time to join us today. Thank you, operator.