Q3 2020 Omnicom Group Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Omnicom third.
<unk> earnings release conference call at this time, all participants are in a listen only mode. They do we will conduct a question and answer session to participate. Please press one zero and if you need assistance during the call. Please press Star then zero as a reminder, this conference is being recorded.
At this time I'd like to introduce you to your host for today's conference Senior Vice President of Investor Relations Shub Mukherjee. Please go ahead good.
Good morning, Thank you for taking the time to listen to a third quarter 2020 earnings call on the call with me today is John drain, 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 boosted two www dot Omnicom group Dot Com. This mornings press release, along with the presentation covering the information we live with you. This morning. This call is also being simulcast and will be archived on our website before.
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 of the statements made today may constitute forward looking statements and these statements are our present.
Dictation and that actual events or results may differ materially I would also like to remind you did during the course of the call. We will discuss some non-GAAP measures in talking about omnicom's performance.
You can find a reconciliation of those measures to the nearest comparable GAAP measures in the presentation material.
I'm now going to begin this morning's call with an overview of our business from Johnson, then Phil Angelastro Who'll review, our financial results for the quarter and then be open the line for your questions.
Thank you Shirley 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'll continue to support you enter maintain I'm, leaving 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 third quarter organic growth declined by 11.7% or 424 million.
<unk> includes a decline in our third party service costs were 194 million.
Sequentially, we saw improvements across all geographic regions and most of our large countries. The only a few exceptions, including Brazil, India, Japan, Singapore.
Similarly, our largest industry sectors had significant sequential growth.
Following health as well as technology growing <unk> third quarter versus the prior year.
I was anticipated some of our clients industries that have been hit the hardest. So she is travelling entering treatment as well as our bench businesses continued to be challenged.
Our EBIT margins third quarter was 15.6%.
Compared to 13.1% in 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 addressable spend.
Voluntary pay cuts across the group, which will be phased out by the end of the year.
And reimbursements from tax credits under government programs in several countries.
As you know earlier in the year, we took measures to provide additional liquidity during the current crisis and we further enhanced our working capital process.
We also stopped a share repurchase program.
We don't expect to restart share repurchases this year and we'll be reviewing their 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.
Pay dividends of 423 million.
Bill will discuss our liquidity and balance sheet in more detail, which remain very strong.
Let me now turn to our strategies and business performance.
Goes without saying this year has been a period of significant change with COVID-19, causing shifts in consumer behavior, which in turn have all granted the services we provide our clients.
Across almost every sector our clients pivoted your operations to accelerate their digital transformation E commerce and 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 and an always on environment.
These initiatives are already well underway before cogan, but they've taken on a new urgency for our clients.
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 Reimagine marketing strategies move quickly to provide our clients with relevant insights into how consumers would thinking feeling and behaving and provide counsel on where when and how brand should show up differently.
In fact, these COVID-19 induced changes in consumer behavior are profound and we 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 into connected brand experiences that need to be delivered through increasingly dynamic and non linear path 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 a world class people based data and analytics service platform would be.
Being leveraged by our creative media precision marketing CRM health care.
PR and ecommerce 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 coordinated 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 continued to invest heavily in growing our precision marketing Mark Tech and digital transformation businesses.
A series of strategic investments and acquisitions.
We've realigned several agencies into omnicom precision marketing group a practice area, we form several years ago, we've expanded its capabilities through the acquisitions of crude they are smart digital and third quarter. The MW. This.
These investments have been instrumental in a relative performance we have achieved in these disciplines over the past few quarters react.
We expect them to continue to be a key driver of our growth has digital transformation in precision marketing initiatives accelerate.
As I said earlier demand for our transformation or cuts across industries, whether it's auto retail FMCG or health care, we are helping our clients design and deploy new technology platforms developed online strategies in personalized digital experiences.
Optimize content creation and automate content delivery.
Consumer centric engagements deliver measurable outcomes that improve time to market and ROI associated with marketing investments.
Another area of fueled exponentially by covered <unk> E Commerce.
For a period of time this year for many of our clients E. Commerce was the only way to transact with their customers from CPG to reach out to autos to education and virtually every other industry E commerce adoption accelerated in a period of days and weeks where in normal times, they would have otherwise taken years.
During the quarter, we strengthened our practice area grounded in a collar space led by Sophie Durrani, our newly formed Omnicom Commerce Group is a center of excellence for Commerce and conversion in marketing group brings together best in class creativity and consulting capabilities from several agencies.
No partner closely with our media and precision marketing practices to help clients achieve reductions in the gap between awareness and sales leverage our E. Commerce offers across the group and accelerate our speed and agility and connecting our expertise and capabilities for clients.
Well the in store or online brands that are best known and trusted other ones that people have turned to during the pandemic.
And we will continue to turn to as these shifts in behavior take hold and for the long term.
Helping to build that familiar arity affection and trust in our brand is at the core of what our creative agencies have done for decades, we.
We had the creativity to think differently to design and create relevant experiences that are resident more importantly rewarding.
We know it is what will drive long term growth for our clients.
While 2020 has been a time of disruption and reinvention a constant through it all has been the resiliency of our people. Despite the challenges thrown our way our agencies and our people have continue to step up and display world class creativity innovation and ideas.
Their performance is demonstrated by our recent new business success <unk>.
Joe chose Omnicom's open which is an acronym for omnicom for Pergo engine as its new agency of record.
Creative precision marketing and strategy teams from across 17 different markets put together the winning proposal.
BBD I was selected by a ARPI as his brand agency of record.
Cox automotive appointed Hartson Science U.S. media agency of record for auto trader and Kelley Blue book brands do yesterday was awarded the multicultural advertising for Frito lay brands cheetos injury those.
And in pharma and health care, our Companys continued to outperform with significant wins across our practice areas, including.
Advertising creative services for key products forgive me Ed.
She SL plasma and Abbvie.
Digital innovation serves as a friend novartis across their pharma and oncology business units <unk>.
NPR, we had wins with JNJ pharma, you can medical center and KKR pharma.
The common denominator across these business wins and our work during the quarter as it happened with most of our people working remotely.
Looking ahead, we know and we enter the post covered phase the way we work will be different.
With that in mind, we have formed a committee dedicated to helping our agency leaders evaluate how our business should operate post kogan there.
The objective of the group is to rethink the way we work to best serve each agency specific services people clients space in culture.
We've also accelerated how we use technology and share information well beyond video calls and virtual meetings for example.
We are using technology platforms to deliver more training programs onboard new talent and clients collaborate on creative ideas and produce shoots info.
In fact, the accelerated adoption of technology has improved almost every aspect of our operations both in servicing our clients and in our back office.
I'm certain that we will take away many learnings from the current environment that have allowed us to work more efficiently and effectively let me now provide an update on our D E and I initiatives and some key changes.
Over a decade ago, we hired one of the industry's first chief diversity offices, Tiffany our Warren who was instrumental in developing our D E and I strategy and framework since.
Since then she has helped us build the core of our D N I programs as.
As announced earlier this month Tiffany's decided to join Sony music and we're in the process of finding a new diversity leisure who will lead us in the next phase of our efforts I want to thank Tiffany for her many contributions and wish him success in her new role.
As mentioned last quarter, our D E and I strategy aims to create supportive environments and is led by the Omnicom people engagement network or open.
Open provides structuring council and visibility to GE in our initiatives and policies throughout our organization.
Opened 2.0 actions focused on four key tenants 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 my 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 opening leadership team from 15 to 25 diversity champions and we're making good progress on our initiatives.
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.
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 at 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 the 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 and and their effect on the overall rate of economic recovery.
All 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 projects span that we normally expect to see from a client.
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.
Each of them as being asked to plan for alternative scenarios for accelerated growth as well as potential declines in client spend.
I want to thank our people for their outstanding work and ask everyone to stay safe.
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 Phil. Thanks.
Thanks, John and good morning.
As John said, the negative impact on our business caused by COVID-19.
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 four for a summary of our revenue performance for the third quarter.
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 access.
Except for the continued growth of our specialty health care businesses.
Those reductions were about half the levels, we saw in Q2.
The impact of foreign exchange rates increased our revenue by five tenths of a percent in the quarter versus.
Versus a 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 three tenths of a percent.
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 one 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 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 well.
Related to reimbursements and tax credits under 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.
Compared to 13.1% in Q3 of last year.
Excluding the benefit of the reductions in salary related cost 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 salary 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 will generate approximately $230 million in savings over the second half of 2020.
We also expected to generate additional savings 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 experience 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 three 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 costs 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.
Back office services.
A key element and I T services.
As for the details our salary and service cost are valuable and fluctuate with revenue.
Salary 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 more performing services for our clients primarily related to our events field marketing and merchandising and media businesses.
Decreased by 194 million in the quarter or 20%.
In comparison the decrease in third party service cost 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 as gene a expenses declined by $7 million in the quarter.
Net interest expense for the quarter was $48.5 million down $800000 versus Q3 last year and up $1.3 million compared to Q2 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 $700000, while interest income was down $600000.
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.
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 2025.
By approximately $10 million compared to Q4 2019 largely.
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 Thirtyth 2020 the.
The rate was 28.5%.
An increase from 26% for the comparable period in 2019.
The increase in nine month rate for 2020 was.
It was primarily attributable to activity from Q2 related to the non deductibility of certain repositioning costs in certain jurisdictions and a loss on dispositions.
Excluding the impact of these items the year to date effective rate was 26.3%.
He 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 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.
The allocation of earnings to the minority shareholders was $21.6 million during the quarter relative.
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% from 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 13 cents or 9.8% when compared to our Q3 EPS for last year.
On slide two we provide the summary, PL S 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 covert landscape.
The repositioning actions included severance actions to reduce employee head count.
Real estate lease impairments terminations and related fixed asset charges that will allow us additional flexibility to match, our additional changes and the need for space based 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 dilutive earnings per share by a dollar three.
We've detailed the components of these charges and the supplemental slides that accompany the presentation.
Additionally, our results for the nine months ended September Thirtyth.
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've previously discussed.
Returning to the details of our revenue performance on slide four.
While the decrease was significantly better than the reduction 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 business.
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 slides eight and nine 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 non essential retail.
Continuing to reduce their marketing communication expenditures to match the declines in those business sectors.
However, during the quarter, we continued to see clients in the pharma and health care industries, as well as the technology and telecommunications industries fare better.
The disciplines that are most negatively impacted were CRM consumer experience.
Primarily from our events businesses.
And CRM execution and support permit.
Primarily due to our field marketing and nonprofit agency businesses.
And our advertising discipline, including media experience declines 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 principle.
These third party service costs.
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 moderates 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 increase reported revenue by half a percent or $18 million in revenue for the quarter.
On a reported basis. The dollars 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 Reigh.
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 the MW 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 three tenths of 1%.
Which was in line with the estimate we made entering the quarter.
Inclusive of the disposition activity through September Thirtyth.
And not including any acquisitions or dispositions, we may complete before the end of the year we.
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 inorganic revenue were significantly lower than those we experienced in the second quarter with.
Within our service disciplines, our health care agencies saw increased activity across all regions.
Resulting in organic revenue growth for that discipline.
Well 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 five for the second quarter. The split was 56% for advertising and 44% from 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 improve 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. This.
The strongest performance and the disciplined came far precision marketing agencies, which were down globally around 5%.
Our events business isn't the discipline continue to face significant challenges as they adapt their business models to the new operational realities due to Kelvin.
And our shopper and brand consulting agencies continue to experience COVID-19 headwinds.
CRM execution and support was down 19.4% as our field marketing and nonprofit consulting businesses lags for the quarter.
PR, while mix by market was down 3.4%.
And our health care agencies continued turned 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 six.
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 seven.
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 businesses again experienced our largest organic decline in the U.S.
Our domestic specialty health care agencies will positive organically, while we again saw decreases in our advertising and media businesses, but a decrease levels from Q2.
And our domestic PR in 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.
The rest of Europe was down 9.6% organically.
A significant improvement over Q2, one 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 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.
Driven by the continuing weakness from our agencies in Brazil.
And lastly, the middle Eastern Africa was negative again for the quarter.
Turning to slides eight nine 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 will travel and entertainment and financial services decreased.
Turning to our cash flow performance on slide 11, you.
You can see that in the first nine months of 2020, we generated $1.14 billion and free cash flow excluding changes in working capital.
Down when compared to the same period in 2019.
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 dividend.
Dividends paid to our common shareholders were $423 million effectively unchanged when compared to last year dividends.
Dividends paid to our non controlling interest shareholders decreased to $58 million.
Capital expenditures in the first nine months of the year or $50 million.
Down when compared to last year.
As we've talked about on our prior calls we have limited or capital spending in the near term to only those deemed essential.
Acquisitions, including earn out payments totaled just under $105 million.
And stock repurchases net of the proceeds received from stock issuances under our employee share plans.
Total just over $216 million.
The 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 or free cash flow. During the first nine months of 2020.
Hundred 41 million of which was generated in the third quarter alone.
Turning to our capital structure as of September Thirtyth, our total debt was a little under 5.8 billion up 670 million since this time last year.
The major components of the change.
Well the retirement of 600 million of dollar denominated senior notes, which were due earlier this year.
Replacing those borrowings was $1.2 billion of 10 year senior notes due in 2030.
Along with the FX impact.
Of converting the 1 billion euro of Euro denominated borrowings into dollars at the balance sheet date.
Versus December 31, 2019 gross.
Gross debt at the end of the quarter was up $641 million.
Primarily as a result of the 600 million dollar issuance of U.S. denominated senior notes in 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 30, Onest 2019.
An improvement of $166 million for 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.
It 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 with 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 off.
Offsetting this was the reduction in operating capital during the past 12 months.
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 is 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 charge that 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.
Thank you.
Thank you, ladies and gentlemen, if youd like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command. If you are using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question. Please press one then zero at this time and one moment. Please for your first question.
Your first question comes from the line of Alexia Quadrani from Jpmorgan. Please go ahead.
Hi, Thank you very much.
Understanding your earlier comments John about how this unprecedented visits in a lack of visibility in the end of Q4.
Curious if you can share with us I guess, what color you do have meaning you know how maybe the third quarter progress you now in terms of the improvements that you saw did you see you know stronger improvement since September versus the start of the quarter and maybe any color you have and just what you're seeing now in October could you give us a little bit of of idea you know how we can.
Hi.
Positioned ourselves to take a look for for Q4.
Sure.
Well, let's see.
No.
If this was a normal year, we'd be talking about.
The project spend that normally occurs in the fourth quarter.
Which generally estimated to be $250 million.
Covered a no covert that still exists in terms of what is the companys lumping projects to promote their brands.
More specifically, we don't have activated numbers, yet, but I expect October.
To be prone to 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 outside our control I don't have any clues to how Christmas is going to work out.
His clothes shoes that you're starting to see in Western Europe was partially closures.
And at least the United States is stayed open.
For the most part but cases are going up so.
Theres a lot of unknowns far more than we have in typical periods.
You can rest assured that.
We won't leave a dollar on the table.
In all of our people.
Are out there trying to help their clients.
Oh.
Because comments that I made.
Earlier in the in my prepared remarks.
Brands are even more important than they ever were.
I think the one other change that weve seen during this entire period.
His people people using shopping list for the first time, not just browsing around buying things randomly.
Typically know what they want to buy before they go out and buy.
So anyway so.
So we're we're in the current period I can assure you that.
Every one of our agency reviews.
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.
We think this second quarter.
Was the worst quarter, we saw improvement.
In the third and we're hoping for a similar improvement.
In the fourth.
Oh yeah.
In terms of the the third quarter or the reference perhaps to a trend as far as months ago.
We we didnt, yeah, I would just say, we didnt really see.
Trend necessarily that wouldn't be meaningful we typically don't find them because of the way.
Monthly results are.
Different then and the quarterly process.
So I don't think there's anything we can interpret from that trend in the third quarter that we would project of fourth quarter.
Okay. Thank you and just one that one follow up question John in your opening comments, you talked about the accelerated shift ecommerce.
And digital in general in the crisis, and how how you guys reacted to that change in spending behavior.
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.
At the core digital spending.
Prospecting, 50% at this point for media or very close to it.
And.
Complexities actually our friend.
The more complex that transaction is are executing transaction better it is for our businesses and the way Weve physician.
Thank you very much.
Your next question comes from the line of Michael Nathanson from Moffettnathanson. Please go ahead.
Thanks, I have one for Phil and I looked at John as Phil can you just you know on the improvement in third party service costs, you know that we the improvement was about $40 million versus two if you can give us a sense of Oh, I guess what activities helped.
I guess, including wherever revenues were tires third party service cost because I assume events.
Let me now exist and then John back to Alexia second question I know you've been repositioned the company for.
For several years now to take advantage of these shifts, but given the acceleration you're seeing right now because its speed up your need to maybe dispose of more assets and maybe go on that more of Oh in acquiring square to kind of get ready or do you think you have the assets you have in place now and the houses built the way you thought would be.
Well you want to go so I'll go I'll go first.
Sure so so as far as.
As far as the third party service costs and improvements versus Q2.
One thing to keep in mind Q2.
It's a much bigger quarter then.
In Q3, so on top of the the impacts of the pandemic you were dealing with a much bigger base.
As well so we did see some improvements I think certainly the numbers would.
Would be consistent with your assumption that there wasn't a heck of a lot of improvement.
The event space certainly there was a.
A similar reduction.
And in third Party service call center in our events businesses.
You know I think I think the rest of the businesses feel force certainly they were down quite a bit but there was an improvement.
Q3 versus Q2.
The principal medium activity that we have certainly.
Certainly there was an improvement versus Q2.
And then general out of pocket costs, which are required by GAAP.
Yeah to put in our revenue that those are down in a consistent way travel and entertainment those types of costs.
Which are reimbursed you know those trends were consistent so yes, a little bit of improvement just because of the size of the quarter is is smaller in Q3 versus Q2.
But you know I think the trends in some of those businesses.
Continue to be negative like events and trends and others.
They did show some improvement as as clients and activity and spend improved.
And I'm not trying to be cute, but for those of you know me.
You know that had never been satisfied.
That we're always constantly reviewing our operations and seeing how we can improve them.
On a serious note.
We're very happy with our portfolio, we continue to make investments in key areas. We continue to search for acquisitions in key areas not because we think there are gaps. We just think there are things that we have to do to constantly improve our product.
I mean as you.
You've seen it spend focus our attention really.
In.
Certain media areas also in precision marketing those.
Those are the main focus is at the moment in terms of our outside acquisition type.
Type of activities in searches.
No gaping holes.
From my perspective in the portfolio.
The event business is that we have.
When events are allowed again, we'll come back to a very strong business is very well led so that's just pain that we have to incur for the moment, but.
Nothing terribly.
Difficult there the other thing I should is setting.
I think we've been very consistent over the years.
Is filled and myself and the management team.
Whenever we go through the planning process, which is about to really start in earnest.
Constantly looking not only at the immediate or next 12 month performance of particular business, but what we anticipate that business will be contributing three four or five years out.
From from when we're looking at it and those are the businesses that we consider.
For the most serious change, but there's nothing pressing or on the horizon at the moment.
You know I think I think given some of the uncertainty over the last few months, we've gotten some questions about whether we.
We need to continue to weigh before we pursue certain acquisitions et cetera, but.
We are.
I'd say, we aren't constrained in terms of holding back from looking at good candidates businesses that fit our strategy and we think.
You know I would add to the growth profile. So we're actively pursuing opportunities and there's certainly some opportunities that are out there.
And as John said.
It's a continual part of our process as we head into the 2021 planning process.
We're going to re evaluate the the assets in the portfolio as we always do.
And if we need to.
You know make some changes or or take advantage of some opportunities as it relates to dispositions.
We're going to we're going to do that in a prudent way.
Thank you guys.
Sure.
Your next question comes from the line of Julian Roche from Barclays Capital. Please go ahead.
Yes. Good morning. Thank you for taking my question now all that then pull but they all weve quick answers fulfill on numbers you said that media did improve a lot of other agencies are now, giving us media I PG said media was because it didnt in Q3 so.
Can you give us more color on media, maybe a multiple choice question was it down 10 15.
Five to 10 zero to five O. positive in Q3 that's.
That's the first question. The second one is on cost down 9.7% on $907 million year to date.
Guidance for the full year should we think about an absolute number so an extra three 400 in Q4 or should we think about a Q4 <unk> margin and then call on margin that's number two.
Number three how much of your annual saving will be permanent Bush IP into <unk>, you give us a number already and the last one is percentage of your revenue coming from consumer expense and E. Commerce, preferably two separate numbers, but I take one run a number because Ah John said that was a good gross future, but it's hidden in the company.
Thank you.
Sure.
[music].
If I leave anything out just a feel free to remind me but.
As far as improvement in the media business.
Yeah, clearly clearly improvement versus Q2 no question.
You know that.
I think I would tell you that that the the performance was better than the overall average.
I would say you know not substantially better but better than the overall average and significantly better than the performance in Q2.
In terms of the cost base.
The actions we took a the results that we saw in Q3 and what that means for Q4 I.
I think I would I would I would describe our expectations for Q4 similar to where we were.
On our Q2 call, which is we expect.
To get back to 2019 margins as I'm kind of a good proxy.
For Q4.
Yeah, we're going to continue to focus on managing the.
<unk> EBIT dollars on the operating income, which is what we did in Q3.
To the extent, we do better we do better that'd be great but.
You know I think our expectations are that.
That we will be able to get back to margins in Q4 of 2019 as as a good proxy I think our agencies have done a very good job in realigning the cost base with the current revenues revenue position.
As John mentioned, Yeah. The Q4 visibility is not exactly I'm very good at the moment.
And.
There is always some uncertainty regarding project work in year end spend that's certainly the case.
Yeah this year.
We're not we're probably not as optimistic that that will come through as we were at this time last year.
So that's how we're thinking about that.
The cost base in terms of permanent savings.
Well, we probably look at a little bit different than others, we've taken.
Quite a bit of action. We believe you know we've done the right thing to realign the cost base. We think some of that is going to be permanent yeah. We took out a thousand we took out a million over a million square feet in real estate, we think that's going to be permanent.
But it's hard to say how much of the other costs are going to be permanent because in reality, when we get back into growth mode, hopefully sooner rather than later.
Got a welcome most of the costs that have come out of the back because most of those costs are valuable to sell and service costs are going to come back because the people who are going to come back.
Some of the some of the actionable addressable spend categories are going to come back as well, we've got to manage them very closely.
So you know.
I think we're managing the EBIT dollars very closely as you saw based on our Q3 results yeah.
Yeah, there's definitely going to be some portion of those costs that are going to be permanent.
But we're not we're not kind of thrown out a bogey of 15 million or 100 million or $50 million and saying, yes, you know that the permanent number because there's too many things are going to happen between now and when the business is back to normal or back to growth mode that could change.
And we're going to change our approach to how we manage those costs are based on the facts and circumstances as far as.
Consumer experience and or.
E Commerce yeah.
I think what we call precision marketing certainly as a key part of yeah. The portfolio has been and and we continue to invest in it.
You know it's in a range of.
Say.
Say, 7.5% to 10% of the business.
Its performance has been very good at cycling couple of client losses.
But otherwise.
Mass majority of that portfolio has been growing in this environment.
And while we're pleased with their performance.
Okay perfect that was great. Thank you very much help sure.
Your next question comes from the line of Ben Swinburne from Morgan Stanley. Please go ahead.
Ben Swinburne. Please go ahead.
Okay, we'll move on we'll go to the line of Tim Nollen from Macquarie. Please go ahead.
Oh, Thanks very much my question is on account moves John you named several.
I guess normally during a slow down or a downturn you don't typically see a whole lot, but it sounds like there's quite a bit going I just wonder if you could comment a bit more on account activity.
Your position Oh, any notable accounts to be aware of that have moved or that could most either to or from you and also sort of a scope of work that you're offering to them. If the demands are are are rising I would assume to more of this precision marketing that you've been talking about quite a bit thanks sure.
Our that.
You are absolutely correct normally in periods like this we would expect new business activity to be relatively slow, but what we've found since the second quarter. There has been quite a bit of activity.
And most of its been pitched.
Remotely which is.
Again, if you'd asked me in January if this is possible.
I, probably say no.
They're always going to be accounts that move.
That's just the nature of our business each one of our competitors.
Is keenly aware that as we are.
At the moment.
I'm not aware of any sizable moves or.
Accounts.
Better either.
Opportunity, which will change our course or a risk that will change our core.
And in terms of the type of activities that that clients are looking for is it is it more broadly based or more the precision marketing I think focused many other areas. Yeah. I think Phil made that point you know, we're seeing activity throughout the whole marketing funnel, but.
For certain precision marketing and [noise].
Moving product off shelves or farther through the online distributions that it exists.
Thats, where there has been a great deal of focus.
During this period of time, and that's where we're seeing the growth.
We've also seen some.
Significant growth in new business activity in the healthcare sector.
Which which is good and positive.
[noise], especially when you take out the pass through costs.
[music].
You know since since the beginning of Covance and our technology clients are spending more money and.
Offering new products to the marketplace.
Very supportive of their products.
So.
Trends are really consistent with what we talked about industry by industry.
Good Thanks a lot.
Sure.
Your next question comes from the line of Ben Swinburne from Morgan Stanley. Please go ahead.
Is this phone on can you hear me yeah, we can easily.
Yeah.
Have you guys been a problem so okay.
Right.
Right.
John just maybe going back to your answer to Alex's question. It sounded like you think or hope that fourth quarter improvement versus Q3.
Would be similar to Q3 to Q2, maybe excluding project I just wanted to make sure. We heard you right and could you guys remind us how big the project business typically is <unk> or at least a range for Q4 and should we be seeing that that decline whatever it is show up in those third party service costs I just wanted to better understand.
That kind of puts and takes around projects for Q4.
Well typically.
And I think when you check the transcript.
I.
I don't expect the improvement sequential improvement that we saw from the second quarter to third quarter I don't see it.
Continuing at that pace in the fourth quarter.
Because of all the new uncertainties that are out there <unk> and our concern is really a base with really what happened you got hit with this in March.
Businesses are starting to open it back up pretty.
Pretty much in most markets by the end of June beginning of July and they've stayed open.
Through the third week of October.
Don't know and I can't predict what's going to happen or the impact of this sudden.
Explosion of cases that were seeing just in the last week or two yeah. I don't think governments are going to close down fully but I do think there'll be an impact.
Having said that I'll go.
Go back to what I've always said and this is probably in every fourth quarter.
Transcript for the last decade.
Typically the project spend that we've seen in the past is between.
200 $250 million, that's a rough estimate.
In the 25 years that I've been.
See the only time that I didn't see it come through is after the great recession.
So.
So we don't know I don't think anybody can predict what's going to happen.
Just back to that.
And a lot of our pass through costs, especially when you get into this period.
In the fourth quarter had to do with events and promotions that people are spending between now and the into the year.
So I don't have a.
Clear prediction of what the impact is going to be but.
But there is going to be an impact a one one clarifying point, though Ben when we talk about you know year end project spend or project work.
That we've historically seen.
It 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 you know they 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 in the event business or feel.
Field marketing and people out in.
In the stores got it it's all it's all disciplines and all agencies makes sense and John can just follow up on an unrelated topic I'm sure you've been impressed with the company's performance. During this period of everyone's got to work remote but when you think longer term what do you think the company gains for.
From the flexibility that comes from.
Our 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 Im just wondering how you're thinking about that now that were six seven months into this sure Oh I fundamentally believe that.
We will come back to the office.
And.
In constant communications with our employees as to when it's safe to do that where it's safe to do that places like China or are already 100% back other markets in Asia.
More so than western Europe, which was on the rise for the slowing down again and that United States.
So that's number one number two.
What.
I believe is going to occur post code.
As we've learned that things that we didn't think we could do remotely we actually can so.
So as you look forward and we're studying it right now at the workforce.
You don't know I don't believe they need every single function that I have say in New York City in New York City. Some of those can be moved to.
Lower cost areas as we move forward, but there's no immediate plans to accomplish that.
The other thing that I am afraid of.
And we take a lot of times talking about that is.
People's mental health.
Yeah, you know as you had to stay out of the office.
Because it hasn't been safe.
Really to come back.
It puts different people in different.
Physicians have deal with stress differently.
And so we're constantly asking or human resource people too.
To come up with programs in ways that we can help and assist their employee base.
To guide them through.
You know.
The situation that we're currently in.
Culture, I think because we will come back to the office I think will.
We haven't really lost much there as of yet.
And finally, I'm circling back a little bit here.
Even those that come back to the office is that they were formally and may not have to come back five days a week.
You may have a far more agile and flexible workforce.
As we go forward into the future.
I don't think covers all the points that you're doing.
No. That's helpful. Thank you Jeff.
Sure.
Your next question.
Your next question comes from the line of John Janedis from Wolfe Research. Please go ahead.
Hi, Thanks, guys had a quick follow up and the housekeeping.
Going back to M&A is this the type of environment, where assets are more valuable more available actually or do you think sellers are looking to wait for the recovery and then on the cost side Bill 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 but.
Thank you.
In terms of acquisitions.
There will be opportunities because people find themselves in different positions in terms of liquidity and therefore take different actions.
So we're constantly looking in the areas that we remain focused and we're also willing to make investments as we have in the past in terms of starting things through sport <unk> platforms that we care most about.
<unk> the.
The good news for US is nothing Phil mentioned earlier.
We focus very early on in terms of our liquidity and our ability to conduct our business.
In a way that we want to <unk> and.
Uninterrupted as possible. So if a good acquisition comes up we're ready to it.
Execute on it.
Oh, Yeah in terms of your other other questions I'll start with the.
The last one first a field marketing for us as well.
Probably averages around two two.
To to less than 3% of our revenue in terms of the size of that business.
Well those businesses.
And if you could just repeat the.
The middle question.
Yeah, Okay. I think I think you had said that the the wage for the voluntary weight reductions we're gonna be restored at the end of the year and pleasant putting out next year I was hoping you could size that limit the amount of that.
No the way does that come back.
Sure.
So so there there's a there's a few.
Yeah Wayne.
Wage reductions in terms of voluntary salary reductions I assume is is what you're focused on the size of of any potential benefit.
Of that in the fourth quarter is is minimal in terms of what's in the forecast for now most.
Most have been most of those reductions have been restored.
As of September Thirtyth.
There are still some.
That will go through the end of the year as it as of now, including a small number of senior management Omnicom.
And you.
No I think I think in terms of numbers, it's just not very meaningful and won't have a meaningful contribution on Q4.
But that hopefully is is a responsive to your EPS.
Yeah. That's helpful. Thank you sure.
So I think we might have time for one more question operator, the mark to market is about to open.
Okay that question comes from the line of Steven Cahall from Wells Fargo. Please go ahead.
Thanks, maybe first stuff Phil I was wondering if you could quantify the value of the 1 million square feet 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 your chairman of the board. So I was just wondering kind of what you're thinking in terms of the health of the balance sheet.
Eat and what do you need to see in the market place before you might return to the market. Thank you.
Sure Yeah, I mean in terms of the real estate I think the way we thinking about the way we think about it is it's it's you know the actions. We took were in a number of places.
Covered a number of different markets.
If you want to estimate 40 to 50 feet or 40 or $50 a foot that that's probably a decent estimate.
I don't think we've got a we've got a more precise number than that but I think that's that's a meaningful and and.
Yeah. Good guide.
And then in terms of.
Balance sheet and buybacks John Yeah, you know.
Our number one focus when looking at all of it all 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 are possible.
The second place, we allocate capital and finally, we'd use excess cash if we determine to have excess cash to start repurchasing shares again, so it's a complex conversation but.
He said dividends are number one acquisitions would be too and share repurchases will be to life.
So what we <unk> the good news is.
We're putting it on the agenda to at least start the conversation.
Yeah with the board meeting, we have coming up in December.
Thank you.
Okay. Thank you all for taking the time to join us today.
Thank you operator.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using ATM T. teleconference. You may now disconnect.
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