Omnicom Group Inc (OMC) — Q1 2024 Earnings Call Transcript

Thank you for joining our first quarter 2024 earnings call. With me today are John Wren, Chairman and Chief Executive Officer, and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omnicomgroup.com, you'll find a press release and a presentation covering the information we'll review today. An archived webcast will be available when today's call concludes. Before we start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we've included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements, and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2023 Form 10-K. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John, then Phil will review our financial results for the quarter. And after our prepared remarks, we will open up the line for your questions. And I'll now hand the call over to John.

Thank you, Greg. Good afternoon, and thank you for joining us today on our first quarter 2024 results. I'm pleased to report that we're off to a solid start to the year. Organic growth in the first quarter was 4%, with strong growth in our advertising and media, and precision marketing disciplines. EBITA margin, which excludes amortization of acquired and strategic platform intangibles, was 13.8% for the quarter, and operating margin was 13.2%. Non-GAAP adjusted earnings per share, which excludes after-tax amortization of acquired and strategic platform intangibles, was $1.67, up 3.7% versus the comparable number in Q1 2023. As a result of our strong performance in the first quarter, we are increasing our full year organic growth range to between 4% and 5%. As discussed, during the quarter, we raised EUR600 million through a senior note offering to partially finance the acquisition of Flywheel. Our cash flow and balance sheet remain very strong and support our primary uses of cash flow: dividends, acquisitions, and share repurchases. The Flywheel acquisition is off to a great start. Flywheel's Commerce Cloud is fully integrated into Omni. Omni audience and behavioral data, combined with Flywheel's digital marketplace point of purchase transaction data, provide us with the most comprehensive data set in the industry. Across several significant Omnicom clients, Flywheel teams are now fully engaged to deliver the enhanced value of our combined capabilities and insights to them, including new ways to plan and build audiences using Omni audience data and Flywheel's performance benchmarks, full funnel investment management built on Omni and enhanced with Flywheel's data specific to performance across commerce platforms. Using Omni influencer capabilities and connecting them to commerce and retail outcomes from Flywheel and holistic video measurement and optimization based upon integrating Omni's video viewership data with Flywheel's Commerce outcomes. These products and services are helping our clients sell more goods more efficiently across hundreds of digital marketplaces and optimizing their investment across media platforms. In addition to integrating Flywheel Commerce Cloud, we made important updates to Omni's generative AI functionality during the quarter. This includes completing a first mover partnership with Shutterstock that allows us to integrate its text-to-image model into Omni. As part of our first mover partnership established with Google and their Vertex AI platform last year, we became the first holding company to receive access to the Gemini 1.5 next-generation model. We remain committed to Omni's open architecture and flexibility, leveraging these valuable partnerships. We've seen notable traction with Omni Assist, the generative AI tool we launched in 2023. Employees for more than 40 markets globally have access to Omni Assist and are using it to produce audience intelligence, summarize cultural trends, recommend influencers, and much more. Some of our agency teams are also creating client-specific Omni Assist agents. For example, a dedicated marketing consultant, media consultant, and briefing agent to streamline global, multi-brand client agency planning. As we work alongside our clients to explore how these new technologies can transform their businesses, two areas are critical to how we can drive transformation and growth: our digital transformation consulting business and our content production capabilities. This past month, our highly successful consulting firm, Credera, announced the simplification of its organization to offer clients a more streamlined experience. Its services will now be delivered under a single global brand through two primary business units: Digital, with capabilities in MarTech, e-commerce, and digital platforms, and Consulting, with capabilities in management and technology consulting, data, AI, and business transformation. Since joining Omnicom in 2018, Credera has grown from 300 employees in three U.S. offices to over 4,000 people across 17 locations worldwide. This growth is a testament to our track record and success in acquiring and integrating businesses in new high-growth market segments. Today, our clients demand more high-quality, personalized creative content delivered across more media channels and at faster speeds. We have developed standardized platforms and processes to automate the development of content and deliver it at the right time and place to consumers by combining Credera's expertise in designing and implementing intelligent content platforms, leveraging our Adobe partnership, our product, our content orchestration engine, and Omni's audience and data insights. Our solution provides unmatched outcomes through an open operating system, fueled by customer centricity to some of our most important brands, such as AT&T and Nike. I'm pleased that our strategy resulted in industry recognition in the first quarter, including Omnicom being named WARC's number one holding company for effectiveness and PHD being recognized as Adweek's Global Media Agency of the Year. Omnicom Media Group was recognized as Leading Global Media Agency for 2023, with nearly $3 billion in net new business. Although risks and uncertainty continue to exist in the global economic and geopolitical environment, we remain optimistic about our position in the industry, our strategies, and our financial performance. I remain confident that our management teams are well prepared to drive operational excellence even as they monitor and adapt to the changes in the macro environment. I'll now turn the call over to Phil for a closer look at our financial results. Phil?

Thanks, John. We began the year with solid results, and we're optimistic about the year ahead. Let's review the first quarter performance in detail, beginning with revenue on Slide 4. Organic growth in the quarter was 4%. The impact from foreign currency was relatively flat, decreasing reported revenue by 0.1%. If rates stay where they are currently, we estimate the impact of foreign currency translation will be negative 1% for Q2 '24 and flat for the full year 2024. The net impact of acquisition and disposition revenue on reported revenue was positive 1.5%, due primarily to the acquisition of Flywheel this January. Based on transactions completed to date, we expect a positive contribution of approximately 2.5% for Q2 and 2% for the year. Now let's turn to Slide 5 to review our organic revenue growth by discipline. During the quarter, advertising and media growth was very strong at 7%, driven by excellent performance at our Global Media businesses. Precision Marketing, which now includes Flywheel, grew 4.3%. We expect this to continue to be one of our fastest-growing disciplines in the future. Public Relations declined by 1.1% in the quarter. We expect this discipline will improve for the rest of the year and benefit from the 2024 U.S. elections. Healthcare grew 2.1% during the quarter as we continue to cycle through some client losses from 2023, which we expect to lap after Q2. Branding and retail commerce declined by 3.8%, driven by a challenging environment for our branding agencies that are more aligned on project-based engagements and faced a difficult comparison to Q1 of 2023 when they grew by 9%. You'll note that we've updated the name for this discipline, which was formerly called Commerce and Branding. Experiential grew a strong 9.5%, led by the U.S., which offset a small reduction in revenue internationally. We expect this discipline to benefit later in the year from the Summer Olympic Games in Paris. And Execution and Support declined by 4.3%, with mixed results that overshadowed continued strength in field marketing. Turning to geographic growth on Slide 6, we saw growth in six of our seven regions, led by the U.S. and Europe and strong growth in Latin America, driven by advertising and media. Slide 7 shows our revenue by industry sector. First quarter results were very similar to last year. Now let's turn to Slide 8 for a look at our expenses. In the first quarter, salary-related service costs grew as a result of increased staffing levels, primarily due to our acquisition of Flywheel Digital, but they were down as a percentage of revenue year-over-year, driven by our repositioning actions last year and through ongoing changes in our global employee mix. Third-party service costs increased in connection with the growth in our revenue. The third-party incidental costs increased somewhat, primarily as a result of increases in reimbursed travel and incidental out-of-pocket costs. Occupancy and other costs increased primarily due to our acquisition activity during the period but were essentially flat as a percentage of revenue due to lower rents as a result of our prior year real estate rationalization. SG&A expense was down both in dollar amount and as a percentage of revenue. Now let's turn to Slide 9 and look at our income statement in more detail. Our operating income increased 2.8%, and the related margin was 13.2%, down slightly from the prior year adjusted margin of 13.5%, arising primarily from our acquisition activity, including Flywheel. As you may recall, our margin estimate this year is based on EBITDA, which we have and continue to use as a measure of operating performance. Similar to our peers and in response to requests from investors, this reflects an adjustment for the amortization of intangible assets. The adjustment now reflects amortization expense related to both acquired intangible assets and internally developed strategic platform intangible assets. Strategic platform intangible assets relate to the costs we are required to capitalize and amortize over future periods in connection with the ongoing development of the Omni platform and the future ongoing development of the Flywheel Commerce Cloud platform. The amortization expense added back to calculate EBITDA does not include amortization expense for internally developed software related to administrative and back-office operations tools, such as ERP or workflow platforms. For the first quarter of 2024, this amortization was $21.5 million, and we expect the remaining quarters of 2024 to approximate this amount. For comparability purposes, we've included a slide in the appendix of this presentation, and it reflects the prior year amortization related to acquired intangible assets and internally developed strategic platform intangible assets for the four prior year calendar quarters of 2023 and the full year for 2023 and 2022. The EBITDA in Q1 2024 was $500.4 million, increased 4.1% year-over-year, and the related margin was 13.8%. We continue to expect our fiscal year 2024 EBITDA margin to be close to flat with our 2023 adjusted EBITDA margin of 15.6% for the full year. Moving down the income statement, our income tax rate of 26% was similar to the rate for the first quarter of 2023. For the full year 2024, we continue to expect our income tax rate to approximate 27%. Changes in income from equity investments and income attributed to minority interest investments were not significant. As you can see at the bottom of this slide, we have also provided a new line item, non-GAAP adjusted net income per diluted share. Similar to EBITDA, this also excludes the amortization on an after-tax basis that I just discussed related to acquired intangibles and internally developed strategic platform intangibles. This new reporting more closely measures the performance of our operating businesses year-on-year and is similar to our peer group's approach of adding back after-tax amortization expense when calculating non-GAAP diluted earnings per share. For the first quarter of 2024, this metric increased to $1.67, or 3.7% compared to the non-GAAP adjusted diluted earnings per share of $1.61 for Q1 2023. Now let's turn to cash flow on Slide 10. We define free cash flow as net cash provided by operating activities, excluding changes in operating capital. Free cash flow for 2024 was $415.1 million, a slight decrease of 3.2%. Regarding our uses of cash, we used $139 million of cash to pay dividends to common shareholders and another $13 million for dividends to non-controlling interest shareholders. Our capital expenditures were $23 million, similar to last year, although we still expect fiscal year 2024 levels to be higher due to growth in capital investment at the newly acquired Flywheel. Total acquisition payments were $812 million, which reflects the $845 million acquisition of Flywheel net of cash required. Finally, our stock repurchase activity, net of proceeds from stock plans, was $178 million in the quarter, which is in line with our estimate of total repurchases for the year of approximately half of our historical average, given our Flywheel acquisition. Slide 11 is a summary of our credit, liquidity, and debt maturities. At the end of the first quarter of 2024, the book value of our outstanding debt was $6.3 billion, up over $600 million from funding a portion of the Flywheel purchase price. As previously disclosed, we issued EUR600 million senior notes due March 2032 with a coupon of 3.7%. Net proceeds in U.S. dollars were approximately $643 million. Our cash equivalents and short-term investments were roughly flat at $3.2 billion. We also have an undrawn $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program. We continue to monitor the credit markets with regard to our $750 million of 3.65% senior notes due November 1, 2024. At this point, given where interest rates are and our financing activity early in 2024, we expect that net interest expense for the full year 2024 could increase by approximately $45 million relative to full year 2023. Slide 12 presents our historical returns on two important performance metrics for the 12 months ended March 31, 2024. Omnicom's return on invested capital was 22%, and our return on equity was 44%, both reflecting very strong performance. I will now ask the operator to please open up the lines for questions and answers. Thank you.

Thank you and congrats on the numbers and closing Flywheel. Maybe if you could talk more about the Flywheel acquisition, the potential value that unlocks both from a short-term and a long-term perspective, and then the expected margin impact this year over the long term? Thanks.

I will address part of this, and Phil can add his insights. The Flywheel acquisition is significant in several ways. Primarily, it represents the only fully integrated retail commerce cloud platform currently available. Other companies might manage certain aspects, but the one we acquired, which Duncan developed over six years, brought together numerous components seamlessly at the time of our announcement. Flywheel possesses extensive knowledge about online transactions and commerce, not just within the U.S. through platforms like Amazon, Walmart, and Target, but also in China with Alibaba and others, indicating a solid global reach. This positions us at the forefront of online purchasing and e-commerce, which is projected to experience rapid growth in the coming years. Furthermore, this acquisition has allowed us to merge our Commerce Cloud, which focuses on retail sales and marketing, with Omni Assist. This integration enables us to manage the entire process from brand building and audience development to actual sales in a local e-commerce context, which is unique in the industry. Based on our research prior to the acquisition, we believe no other competitor matches Flywheel's information and platform capabilities, creating significant growth opportunities as the market expands. We are also shifting our focus to how we can leverage this information for our clients' benefits, which is why we have recently begun to identify ourselves as a marketing and sales company, rather than just an advertising and marketing firm, for the first time. Concerning growth, e-commerce in North America traditionally peaks in the third and fourth quarters, with the fourth quarter typically being the weakest and accelerating towards the end of the year.

Sure.

Flywheel is crucial in several respects. Primarily, it is the only fully integrated retail commerce cloud platform available. While others can handle certain elements, the company we acquired, which Duncan orchestrated over a six-year period, successfully combined numerous component companies just before we announced it. This merger has brought together a vast amount of knowledge and data regarding online transactions and e-commerce operations. This expertise extends beyond the United States, encompassing platforms like Amazon, Walmart, and Target, as well as in China with Alibaba and others. They have a strong global presence and are at the forefront of online purchasing and e-commerce activities. According to forecasts, this sector is projected to experience significant growth in the coming years.

Just on, Cameron, on margins short-term and long-term, the integration process continues. It's going very well, integrating Flywheel into all of Omnicom's operations. And as we've said back in the call in February, we expect Flywheel's margins will be approximately Omnicom's average margins by Q4 of this year, and we expect overall results to be accretive, excluding the amortization that was added as part of the deal, also by Q4. Longer term, we expect the deal or the business to be accretive to Omnicom's overall average margins over the long run, for sure.

Got it. Thanks, John, and Phil. And if I could ask one other. Curious, if there are any other specific types of strategic acquisitions you're focused on in the near term? Thanks.

There are areas we're focused on, but I don't think I'll discuss targets. So I'm done negotiating for them. But, yeah, as I said in the call, there are a few areas that are showing exceptional growth. It's in MarTech and transformation and also in content production, automation of content production and opportunities that geographically fill out our services in that area and also from a point of view. In terms of specific big Flywheel-type acquisitions, we’re not looking at anything of that magnitude at this moment. So we’re focusing in on growing and also transforming much of our own business for the opportunities that we see the new technology and the marketplace offers.

Hi. Good evening, everyone. It's Adam Berlin from UBS. I've got three questions, if I can. The first question is on Precision Marketing. Now that Flywheel has been integrated into that segment, can you give us any guidance on what you think the medium-term growth potential of that? Do you see that as a mid-single digit, high-single digit, double-digit business? And obviously, it might take a few quarters to get that, but just what do you think is possible for that business segment once that the integration is fully done? So that's the first question. And maybe you can tell us just kind of part B, what the organic growth of Flywheel was in Q1? Just to help us figure out what's the original business did in Q1? Second question is, would the group adjusted EBITA margin have been up without Flywheel? And my third question is on Advertising and Media. Advertising and Media delivered good growth in Q1 of 7%, but it was a little bit slower than in Q4. Can you just tell a little bit about the moving parts there? What moved faster or slower and then what happened in Q4? Thank you.

There's a lot to unpack, so I'm going to ask – re-ask some of you – to find some of your questions. In terms of Precision Marketing, at this moment, included in our forecast is probably low double-digit growth for that area, but that's subject to opportunities. Specifically with Flywheel, it stands alone. It's a component part of that and the marketplace itself, client online activity, e-commerce is all growing. So we look further than this quarter, next quarter this year into the future and what it can do for us, and we're very bullish about its contribution to the whole process.

The Flywheel growth number, Adam, we're not breaking it out. We don’t individually. I think the underlying Precision Marketing discipline prior to Flywheel being added to it certainly grew this quarter. Flywheel also had very good growth this quarter. But in terms of breaking out the business itself, where we haven't and aren't going to break out individual businesses going forward either.

No. That’s helpful. Thank you very much.

Sure. Regarding the margin question without Flywheel, I believe there are numerous factors that influence operating profit, operating margin, and EBITDA margin. Flywheel's margins are indeed lower than the average Omnicom margin, and there were integration costs in the first quarter. We haven't done the specific calculation on how Flywheel negatively affected our EBITDA margins, so it’s difficult to determine if they would have remained flat. I estimate they are down about 30 basis points, which isn't a significant amount. So likely, yes, they would have been flat, but there are definitely several costs linked to the integration.

Hold on. And on that, Adam, we're not focused at all on what the margin impact is in the first quarter that they joined our company. We're incredibly pleased at speed in which and the progress we've made in integrating because we're looking at the benefit that it is going to bring to the Omnicom moving forward. So we don't do that kind of waste time really on that type of activity. And the third question, if you could repeat it for me. I think I know what it is, but...

Yeah. Just what was the difference between the 9% growth in Q4 and the 7% in Q1 for Advertising and Media?

I'm just going to make a general statement and Phil can fill it in. We're very happy with the growth that we've seen for sure. And that group has been growing very strongly for the last two years every quarter. So in any particular quarter, it's up against very difficult comps and we expect it to continue to grow throughout the balance of this year.

We’re not too concerned when one of the areas shifts from 9% growth to 7% growth, especially since 9% was a strong performance, and 7% is also solid. We haven’t focused much on the differences caused by that 2 percentage point change between Q4 and Q1. Often, Q4 can be unpredictable due to significant project spending in the media sector and across all areas. It's not surprising for Q1 to show a slight decline compared to Q4 based on our historical trends.

Okay. Thank you very much.

Hey. Thanks for taking the question. John, just on the decision to raise guidance, your result in the quarter was near the midpoint of the prior outlook. So I just wanted to understand better the increase. Have you assumed a more cautious view for Q1 or are you just seeing better indicators for the rest of the year? And then on Precision Marketing, I know you stated previously, you may be expected an improvement in 2024. We had heard some cautious commentary recently from some of your peers or IT services firms. Just wanted to see if you could update a bit on what you're seeing here in terms of moving projects forward? Thank you.

Sure. Regarding the forecast, we indicated in the fourth quarter that we expect a range of 3.5% to 5%. In the first quarter, we were navigating some client changes from the previous year. However, as we move into the second quarter and beyond, we are much more confident that we won't encounter any significant challenges as we continue to grow the business. The fourth quarter performance came in at 4%, which makes it sensible for us to remove the initial caution at the lower end of our forecast. While we acknowledge the macroeconomic changes happening recently, we believe we have the right product and approach to our clients, and our management teams are strong and focused. Therefore, we are more confident, which is why we have raised the lower end of our guidance at this time.

The other question was about the outlook for Precision in 2024 as you move from quarter to quarter.

Well, I wouldn't forecast it quarter-to-quarter. And I think I said in the previous answer that we expect it to be low double-digits at this point, and that was included in coming up to our overall guidance of 4% to 5%.

Yeah. We certainly see – especially, as John had referenced earlier in the call, Flywheel is kind of weighted towards the end of the year in terms of its performance relative to the retail cycle. Certainly, we see it improving as the year goes on in terms of the growth rate.

Got it. Yeah. I was really asking about sort of the non-Flywheel part of the business, right digital business transformation and whether you had started to see more movement on some of the projects there?

That business is healthy at this point. I think we haven't seen any headwinds at all. If others are referencing to, it probably has more to do with their specific clients' plans and impact economies having on those clients than an industry or a segment type of answer.

Hi. Great. Thanks very much. I feel like I'm going back many, many years with this. But could you please remind us what your organic growth calculation is, i.e., your organic growth in the quarter obviously, does that include Flywheel's organic growth as well? And then when does it become part of your reported growth? Is it 12 months after? I think that's right, or do you actually go a full year after it has been already integrated? Hope you understand that question. Secondly, also, I'd like to just to ask another Flywheel-related question. Your branding and retail commerce number was down, I think, 3.8% organic in the quarter. I think you pointed to particular items on the branding side. I'm just wondering if there is any Flywheel business in that retail commerce portion? And then tying back to the first question, if there was organic growth there. Thanks.

Sure. I'll start with the organic growth, Tim. So we've always done the calculation consistently. So when we do an acquisition and in this case, Flywheel, we spent over $800 million of capital to acquire the company. We're responsible for the results, and we're measured on the results post-acquisition. So included in the results is Flywheel's organic growth. The acquisition revenue number reflects their prior or in the calculation, the acquisition revenue from the prior year is used as a measure to determine what the growth is based on the current year's revenue. So you take the current year revenue and compare it to the prior year revenue; if it grew, it's part of the organic growth. If it's negative, it's part of the organic growth. We've never excluded acquisitions from that calculation. And we don't see why you would exclude them for the first year in any way; I think we're responsible for the growth as part of the calculation. So we haven't changed the calculation and how we go about doing it.

So Tim, to explain it – just another way to look at it is that if Flywheel hypothetically did 102 this first quarter and last year before we owned it, it did 100, the 2 would be an organic calculation, not the 2, just the 2.

Yeah. It was 104, they'd be negative 2 of organic growth.

All right. It's been a long time since you've done an acquisition of this size, so I'm forgetting how you do the accounting for it. So thanks for the explanation.

Yeah. I know. The one thing you count on, Tim, is I've been here longer than you, and we've always done it the same way.

Consistency. Thanks. And then remind us again relatedly then, when does Flywheel become part of reported growth, not acquisition growth as an organic reported growth, not acquired growth?

So it's in the reported growth and the incremental growth over the prior year, the 2 in John's example; that's what's on the organic growth line.

Right. And then...

The balance is on the acquisition line. If you look at the chart in the presentation, the acquisition revenue is 100 and the organic growth number is 2.

All right. And then is it 12 months after acquisition that there's no more acquired revenue from the company? It's just all organic?

Yeah. That's correct. Yeah.

12 months after acquisition close, okay.

Yeah. It’s one year. Yes.

Okay. Great. And then lastly, on the retail commerce proportion of the branding number, is there a Flywheel in that or is that all in Precision Marketing?

Yeah. All the Flywheels in Precision Marketing. We are trying to split up an operating company between disciplines is certainly very challenging, especially for Flywheel's business.

Got it. Okay. Perfect. Thanks so much.

Thank you.

Thank you. So John, with the removal of the lower end of the guidance, the way you talked about it, moving to the 4% to 5%, is it fair to say that the year is off to a stronger start in terms of what you're seeing in client activity or is it just that it's off to the start you kind of expected and that has removed some risk and so that gives you that confidence to move up the range a little bit? And maybe within that question, I think in the prepared remarks, Phil, you mentioned that Advertising and Media was solid and media buying was called out as the piece of that. Creative is obviously still a big business, and I think it was a little choppy across the industry in 2023. So it also just look to understand if there's any inflection points or trends in the creative part of that business? Thank you.

Well, things are in line for certain. And things that we expected to grow are growing. And so the confidence is every week passes just gets more reassured as we go through the year. And at this point, looking at the new business activity that's in front of us for the next several months, we're defending very little at this point, and we have opportunities on quite a number of big brand names. And if our batting average holds up, as we go into the future, we'll take our fair share of that, which won't have too much of an impact as we get later in the year in terms of '24 numbers. But overall, it helps the health of the business, our confidence. And it will certainly give us a wind at our backs for next year as we move into the end of the year and into next. So all the signs at the moment are very constructive, and we're making a lot of progress on a lot of different fronts.

Your question about creative versus media creative this quarter was about the same. We anticipate improvement for the remainder of the year in the advertising agencies, which remain central to our business and are part of Omnicom's foundation. However, creative extends beyond just advertising. Agencies have evolved significantly over the past few years, embracing new operational methods and utilizing current technology, which John mentioned in his prepared remarks regarding the content supply chain, among other topics. We are hopeful that they will experience growth as we progress through the rest of the year.

Phil, could you explain if that roughly flat situation is related to an industry trend connected to macro factors or technology, or if it's influenced by account wins or losses?

I think it's probably a combination of each of those; just even though it's a lot of different things, but there's certainly been a lot of change in those businesses recently. And I think we're probably not that much different than anyone else.

Thank you. Following up on Steve's question about creative. Can you talk a bit about Gen AI and what you're doing on the creative side? What have you learned? And is there a risk that as these tools get more sophisticated, it could be cannibalistic to your creative service businesses? And maybe it becomes more efficient for other people to do it or new entrants form? That's one. And then two, Phil, can you talk a bit about the capital intensity of Flywheel, you mentioned a little bit of higher CapEx down the road. How much more capital intensive is that business than the rest of Omnicom? Thanks.

Sure. I'll start your answer. Now with respect to technology and the advertising sector, and then I might ask Paulo, who is working most closely on AI, if he wants to add anything before Phil gets to answer. The single largest benefit of generative AI, as we're using it, is it makes it simpler for highly creative people to come up with different executions, different applications of their ideas across many different mediums and using the specific Omni data that we have and Flywheel commerce data to help understand where the consumer is and the messaging that we have to create in order to reach that consumer. So as this goes forward, automation affects every single part of the business; AI will affect every single part of the business, and the programs and the things that we're doing are to take that on board to evaluate and shift up as a market leader and even in advance of testing things that are available or hopefully will become commercially available at some point in the future. I guess if there's a downside to it, it's a lot of the things that in the past might have been done manually, and somebody got paid to do that execution work, which was typically pretty boring and repetitive, that gets eliminated. So you're not seeking to hire those level people to do that level of job and therefore get reimbursed at a profit for them. But what you are doing is you're able to come up with better, cleaner, sharper ideas, which can either succeed fast or fail fast. And all that at the end of the day benefits the client and makes the ROI on a marketing dollar spent greater. And that's where I think the contribution of generative AI is going to come in. And it’s been my experience over my career, the more clarity I can bring to a client and explaining what the ROI is on the next dollar of marketing he's going to spend or she's going to spend means that we probably are going to benefit from that in servicing in some fashion. So philosophically, there are a lot of moving pieces that are going on all the time and have been for quite a while now. But pretty intensely, adjusting to and exploiting where we can those the things that generative AI does. But Paolo, who we've met before in previous calls, I think is really the guy that I depend upon, among others on this, and he works very closely with all of our suppliers and vendors. Paolo?

Yeah. Sure. Hi, Michael. So look, I think you've heard us talk about this in the past that we really believe that generative AI strictly is going to empower our people and really give them superpowers for the skills that they already have. I think we look at it through the lens of a maturity model with respect to how they are executing their tasks. In the recent past, generative AI has really just been a tool. Today, it's more of an assistant or co-pilot, if you will. And really, tomorrow, it becomes a true partner, whether it be a creative partner, strategic partner, or planning partner for every one of our employees. So that is effectively how we're approaching it and how we're building it into Omni to provide that partner for everyone.

And it's a much longer conversation. But if you think through the technology, if you're in a competitive industry and the tech is way further than it is today, the competitors simply ask the same questions to reach the same consumers. They're all going to get the same answers. So it's not going to differentiate anybody. What brings the difference to this is the creative minds that we're able to attract in Omnicom and apply to those client challenges and objectives.

Regarding your second question, Michael, the CapEx commitment for the Flywheel Commerce Cloud platform will be similar to that of the Omni platform. We plan to continue developing the Flywheel platform, and while we do expect an increase in CapEx spending, we don't anticipate it to be dramatic. It will be a manageable increase since Flywheel underwent a significant integration process over the past 12 to 18 months, consolidating its backend platforms, many of which were part of previous acquisitions, into one cohesive platform. Most of that integration work was completed before we announced the deal in October 2023. Moving forward, similar to Omni, our focus will primarily be on enhancements, incorporating new technology, and maintaining the platform's competitive edge. Therefore, while the increase in spending is expected, it is an investment that we believe is worthwhile.

Phil, can I ask a quick question about the add back of amortization? I understand the intangible amortization, but what was the reasoning behind including the amortization of the internally developed strategic platform asset in the EBITA definition instead of just the amortization from goodwill?

Sure. So as we've done for well over 10 years, we built out the Omni platform, we built it out through internal investments. And some of our competitors actually went out and did acquisitions, bought somewhat similar assets in terms of data analytics and other technologies similar to the Omni platform. And in terms of comparing what amortization gets added back or not, we think the reality is whether we acquire it or we build it ourselves, you'd want to look at that amortization of the investments that you've made, and that would be the appropriate amount to add back. In terms of rough order of magnitude, if you look at the total, if you look at the total of the add back related to acquired intangibles and internally developed strategic platform amortization, that's about 75% of the total. And the non-acquisition amortization is about 10% or 15% of that. So it's not a large proportion of the number. But about 25% of the total relates to administrative amortization expense related to administrative intangibles, things like ERP systems and workflow systems, etc. So we think that's an appropriate and probably most comparable way to look at the numbers compared to some others in the marketplace.

Thank you, Phil.