Omnicom Group Inc (OMC) — Q4 2020 Earnings Call Transcript

Good morning. Thank you for taking the time to listen to our fourth quarter and full year 2020 earnings call. On the call with me today is John Wren, our Chairman and Chief Executive Officer; and Phil Angelastro, our Chief Financial Officer. We hope everyone has had a chance to review our earnings release. We have posted to our website this morning's press release along with the presentation covering the information 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've included at the end of our investor presentation, and to point out that certain of the statements made today may constitute forward-looking statements and that these statements are our present expectations and that actual events or results may differ materially. I would also like to remind you that during the course of the call, we will discuss some non-GAAP measures in talking about Omnicom's performance. You can find the reconciliation of those measures to the nearest comparable GAAP measures in the presentation 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 fourth quarter results. I'll first discuss our financial results, then we'll cover our performance with respect to our strategic priorities and operations, and we'll end with our expectations for 2021. We finished 2020 with organic growth continuing to improve sequentially. For the fourth quarter, organic growth was a negative 9.6% as compared to a negative 11.7% in the third quarter. The fourth quarter organic growth decline of $398 million included a decrease in third-party service costs of approximately $150 million. The U.S. decline was 9.4%, an improvement of about 200 basis points from third quarter. In the U.S., public relations helped by election year spending and healthcare performed better than average, while CRM consumer experience underperformed as continuing headwinds in events and shopper marketing offset relatively better performance in precision marketing. Third-party service costs represented more than half of the total decline in organic growth in the United States. Europe continued to face significant challenges due to COVID in the fourth quarter. The UK was down 12.4% and the euro and non-euro markets were down 9.2%, similar to the level of performance that we experienced in the third quarter. Asia had an organic growth of negative 3.9%, down from negative 12.8% in Q3. Australia and New Zealand saw mid single-digit growth in the quarter as those countries have managed the pandemic relatively well. Japan also saw a strong improvement sequentially, although was negative overall. We're also pleased to see positive growth in our events operations in China during the quarter. Latin America experienced negative 9.2% growth in Q4, a significant improvement due primarily to better performance in Brazil, our largest market in the region. As we have experienced since early in the year, the hardest-hit client sectors in the quarter were travel and entertainment and oil and gas, while food and beverage, pharma and healthcare and technology performed relatively better. On a positive note, EBIT margin in the fourth quarter was 16.4% as compared to 15.6% in the fourth quarter of 2019. The performance can be attributed to a number of factors including savings resulting from our repositioning actions taken in the second quarter and our agency's ongoing management of costs in line with revenue, significant reductions in addressable spend and reimbursements and tax credits under government programs in several countries. These improvements were offset by asset impairment charges for certain underperforming businesses, which we plan to dispose of in 2021. Phil will cover this in more detail during his remarks. Net income for the quarter was approximately $398 million, a decline of 4.1% from 2019, and EPS for the quarter was $1.84 per share, a year-over-year decline of 2.6%. Finally, for the full year, organic growth was negative 11.1% or $1.7 billion, included in this is a decline of approximately $750 million in third-party service costs. Turning to our liquidity, the refinancing steps we took early in 2020 combined with our enhanced working capital processes and the curtailment of our share repurchase program have positioned us extremely well. For the year, we generated $1.7 billion in free cash flow and ended the year with $5.6 billion in cash. Our primary use of cash in 2020 was the payment of dividends of $563 million. Given the continuing improvements in our operations, strong liquidity position and credit profile, yesterday, our board of directors approved an increase in our quarterly dividend of $0.05 per share, or 7.7%. At this point, I'm optimistic about the company's return to growth. And as our performance improves during the course of 2021, we expect to resume our traditional uses of cash, paying dividends, pursuing accretive acquisitions and resuming share repurchases. Turning now to our strategy and operations. In the midst of the pandemic, our key strategic objectives served us well. These strategies are centered around hiring and retaining the best talent, driving organic growth by evolving and expanding our service offerings, investing in areas of growth with a particular focus on CRM and precision marketing, performance media, commerce, data analytics, digital transformation consulting, and health, and remaining vigilant on managing our costs and improving operational efficiencies in areas such as real estate, back office accounting, purchasing, and IT.

Thanks, John, and good morning. As John said, during the fourth quarter, we continued to see a moderation in the decline in business conditions when compared to the peak of the pandemic in Q2 of 2020. As a result, we saw less of a decline in our organic revenue performance when compared to the previous two quarters. Our operating margins improved compared to Q4 of 2019 benefiting primarily from the active management of our discretionary addressable spend costs, the repositioning actions taken in Q2 of this year and the alignment of our cost structure with the current realities of the economic environment. Turning to Slide 4 for a summary of our revenue performance for the quarter, organic revenue performance was negative $398 million, or 9.6% for the quarter. The decrease again represented a sequential improvement from the unprecedented decrease in organic revenue of 23% in the second quarter and 11.7% in the third quarter. And while we continue to experience declines across all regions and disciplines, most showed sequential improvement when compared to what we experienced over the previous two quarters. The impact of foreign exchange rates increased our revenue by 0.8% in the quarter, slightly above the 50 basis point increase we anticipated entering the quarter as the dollar weakened against some of our larger currencies compared to the prior year. Our reported revenue in the fourth quarter decreased 9.3% to $3.76 billion when compared to Q4 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 $615 million, down approximately 5% when compared to Q4 of last year. Operating margin for the quarter increased 80 basis points to 16.4% compared to 15.6% in Q4 of last year. Our operating profit and the 80 basis point improvement in our margins this quarter was again positively impacted by our actions to reduce payroll and real estate costs in the second quarter as well as the larger than expected cost savings from our discretionary addressable spend cost, including general office expenses, professional fees, personnel fees, and other items including cost savings resulting from the remote working environment.

Hi. Thank you. And thanks for your comments on the outlook. But I just wanted to clarify a couple of points. And for Q1, understanding it will likely still be negative, but are you seeing ongoing improvement? Can the declines continue to moderate? And just to clarify, Q2 should return to positive growth? Any color you can provide on the full year regarding how clients approach spending? Are you seeing the pent-up demand? If there's a range you can give us for potential organic growth for the full year? Thank you.

Sure. I'll take a stab at it and then Phil will add to whatever is needed. The first quarter we still see as challenging, but sequentially probably better than what we saw in 2020. We fully expect based upon the plan reviews that we've done, even though they're not final with our operating companies, that we will return to positive organic growth in the second quarter and for the balance of the year. I saw this morning that there was possibly some confusion out there in some of the writings, but that's what will really happen. In terms of specific industries and specific responses, we see an improving positive attitude, but COVID is still here. Progress is being made with the vaccine rollout, but it's going to take a little bit of time and I don't think anybody's baked in the stimulus payments into their spending habits, but if that occurred, I'm sure they will only have a positive effect on what happens as we get into the second quarter and beyond.

I don't have too much to add. I think that clarifies things. Certainly in the first quarter, given COVID didn't really hit our business until mid-March in any meaningful way, the comps in the first quarter were challenging. So while there's still some uncertainty in the first quarter regarding COVID, we do expect some improvement relative to Q4's performance in terms of organic decline. But at some point in the second quarter, we do expect to rebound, especially given the comps in the second quarter are much easier as well as the third quarter. I think we definitely expect to return back to growth mode in Q2 and likely for the first six months based on that Q2 performance. We'd be back in growth mode and more optimistic about the rest of the year, although some factors still remain out of our control with COVID and the vaccination take rate, etc.

Great. Thank you. John, as you think out beyond COVID-19, what do you think is a reasonable expectation for your revenue growth long-term? Is it positive 3%, 4%? Is it negative? Do you think there's any permanent damage to your business going through this pandemic?

Sure. I don't see anything specifically that will make anything more difficult than in any time in the past. I still firmly believe Craig that the company will return to an annual basis of GDP plus 1%. That's the objective. I know that it is not only an objective of mine, but that of my entire management team in terms of the way we view our business and our responsibilities. So that's how I focus on it. Anything less is something that we take action against.

Yes. Good morning, John, and Phil. My first question will be how much of your 2019 revenue needs an open economy to function, especially field marketing and events impacted by the virus? The second question is about your cash flow in 2020, but with a lot of cash and high debt, anything you can do to reduce this gross debt and benefit the P&L through lower interest?

So, specifically with respect to events and field marketing, they've certainly been challenged in events, more so in 2020. Events are about 3.5% or 4% of the business, while field marketing might be 2% to 3%. Many of our businesses, even the creative agencies, rely on project work. The most sensitive to an open economy and no travel restrictions would be events. Regarding reducing gross debt, we will evaluate that internally and with our board as we get past the first quarter and things stabilize more.

The market is already open.

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