Q4 2020 Omnicom Group Inc Earnings Call
Okay.
To the Omnicom fourth quarter 2020 earnings release conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session to participate. Please press one net zero and if you need assistance during the call. Please press Star then zero as a reminder, this conference call.
Is being recorded at this time I'd like to introduce your host for today's conference call Senior Vice President of Investor Relations Shoe brokerage Inc. Please go ahead.
Good morning, Thank you for taking the time to listen to our fourth quarter and full year 2020 earnings call on the call with me today is John Wren, Chairman and Chief Executive Officer, and Phil Angela Cho, our Chief Financial Officer.
We hope everyone has had a chance to review our earnings release.
We have boosted to W. W. W don't Omnicom group don't come on this mornings press release, along with the presentation covering the information. We will review. This morning. This call is also being simulcast and will be archived on our website before nice John I have been asked you 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 that these statements are all present expectations and that actual events or.
Results may differ materially.
I would also like to remind you the during the course of the call. We will discuss some non-GAAP measures in talking about omnicom's performance.
You can find the reconciliation of those measures to the nearest comparable GAAP measures in the presentation material.
We are now going to begin this morning's call with an overview of on our business from John Wren, then Phil and you lost Joe Who's Your view on financial results for the quarter and then be even open the line for your questions. Thank you Sue good morning, I'm pleased to speak to you. This morning about our fourth quarter results.
I'll first discuss our financial results then ill cover our performance with respect to our strategic priorities and operations.
And with our expectations for 2021, we finished 2020 with organic growth continuing to improve sequentially for the fourth quarter organic growth was a negative nine 6% as compared to a negative 11, 7% in the third quarter, the fourth quarter organic grow.
With decline of $398 million included a decrease in third party service costs of approximately $150 million.
The U S decline was nine 4% an improvement of about 200 basis points from third quarter.
In the U S. P. R helped by election year spend and healthcare performed better than average, while CRM consumer experience underperformed as continuing headwinds in events and shopper marketing.
Offset relatively better performance and precision marschner.
Third party service costs represented more than half of the total decline in organic growth in the United States.
Europe continued to face significant challenges due to COVID-19 in the fourth quarter. The UK was down 12, 4% in the euro and non euro markets were down nine 2% similar to the level of performance that we experience in the third quarter.
Asia had organic growth of negative three 9% down from negative 12, 8% in Q3, Australia and New Zealand. So on mid single digit growth in the quarter as those countries have manage the pandemic relatively well.
Japan also saw a strong improvement sequentially. Although was negative overall were also pleased to see positive growth in our events operations in China during the quarter.
Latin America experience negative nine 2% growth in Q4, a significant improvement due primarily to better performance in Brazil, our largest market in the region.
As we have experience since early in the year the hardest hit of client sectors in the quarter were travel and entertainment and oil and gas, while food and beverage pharma and healthcare and tech knowledge performed relatively better.
On a positive note.
EBIT margin in the fourth quarter was 16, 4% as compared to 15, 6% in the fourth quarter of 2019. The performance can be attributed to a number of factors, including savings, resulting from our repositioning actions taken in the second quarter.
And our agencies ongoing management of costs in line with revenue significant reductions in addressable spend.
And reimbursements and tax credits under government programs in several countries.
These improvements were offset by asset impairment charges for certain underperforming businesses, which we plan to dispose of in 2021 two.
So we will cover this in more detail during his remarks.
Net income for the quarter was approximately 398 million a decline of four 1% from 2019 and EPS for the quarter was $1 84 per share a year over year decline of two 6%.
Finally for the full year organic growth was negative 11, 1% or $1 7 billion included in this is a decline of approximately $750 million in third party service costs.
Turning to our liquidity the refinancing steps we took early in 2020 combined with our enhanced working capital processes and the group chairman of our share repurchase program have positioned us extremely well.
For the year, we generated $1 7 billion and free cash flow and ended the year with $5 6 billion in cash.
Our primary use of cash in 2020 was the payment of dividends of 563 million given the continuing improvements in our operations strong liquidity position and credit profile yesterday, our board of directors approved an increase in our quarterly dividend of five <unk>.
<unk> per share or seven 7%.
At this point I'm optimistic about the company's returned to growth and as our performance improves during the course of 2021, we expect to resume our traditional uses of cash paying dividends pursuing accretive acquisitions and resuming share repurchases.
Turning now to our strategy and operations in the midst of the pandemic our key strategic objectives served as well.
These strategies are centered around hiring and retaining the best talent.
Driving organic growth by evolving and expanding our service offerings.
Best thing in the areas of growth with a particular focus on CRM and precision marketing.
<unk> media Commerce.
Or it analytics digital transformation consulting in house.
And remaining vigilant on managing our costs and improving operational efficiencies in areas such as real estate back office accounting purchasing and I T.
While remaining very disciplined with respect to our cost structure. It's important to emphasize that we continue to invest in our businesses during a very difficult year in order to service our clients needs.
We are all aware that as a result of the pandemic the velocity of digital transformation picked up this year.
When the world went into Lockdowns consumers increasingly turn to online services to interact with brands and businesses as we emerge on the other side of this pandemic is clear this trend is here to stay.
As a result, we now have a greater opportunity to help our clients accelerate their digital transformation initiatives and connecting more directly with their customers.
As an example, we are seeing significant growth in our Martech and <unk> consulting business Cordero affirmed when we acquired in 2018 since joining omnicom they've expanded beyond their Dallas routes to the UK, Chicago, New York and more recently to Los Angeles. This is just one high.
Delighted on many of the investments we've made to support our clients' needs as they look to accelerate growth by adopting new tools and capabilities that get them closer to their consumers.
Omnicom as a long term strategy has always been to develop our people and embed digital a new skill sets across our portfolio, whether it's PR creative shopper marketing media.
Vince or any of our disciplines. So that we can quickly and continually adapt to changing technologies and media.
The pandemic has compressed years of digital adoption into a few months and people are racing to keep up. So it is important to continue to train our people in a remote working environment.
This reason all of our agencies expanded debt training programs as a priority in 2020.
For example, during the ear Bvd out became the first global network to achieve blueprint certification from Facebook and partnered with Google to develop virtual training sessions on using insights and analytics throughout the creative planning process.
So far over 3000 people across a D offices have completed this training.
And a similar effort Omnicom health group provided over 300, all virtual offerings.
96% of Omnicom Health Care's employees engaged in these training programs as did many of our clients, resulting in 11000 combined hours of course has taken in 2020.
The increase in virtual training sessions and employee participation reinforces our view that remote learning will have a permanent place in our feature learning and development efforts by evolving our talent strategy and developing the digital offerings needed right. Now we have secured a number of recent new business wins.
Including Omd's win of home Depot's media business the.
The marketing on one all brand and product advertising for state farm as well as Pernod Ricard U S brand promotion and shopper advertising.
On a fee awarded its global media account to Omnicom Media group.
TB debut a world House, one one of the largest vaccine brands. However, an hour from Pfizer and our agency won mandates on several COVID-19 campaigns, including CPW Asia days, when a Mcdonald's first ever consumer AD campaign.
Gilead assign the launch of Ram Desert appear to Harrison Star and Marina Maher continued its work with J&J is road to a vaccine project.
This year, our practice areas and <unk> have increasingly utilized on these flexible and open architecture to develop more relevant insights for their specific disciplines and clients.
Omni integrates clients first party data with privacy compliant datasets to map consumer journeys. It allows our agencies to optimize audiences guide creative content development target messages and planned media without compromising consumer safety.
And data privacy.
A recent example of this was the launch of Omni earned I D by Omnicom's Public Relations group.
On the earned I D allows our clients to evaluate the outcomes of earned media with the same precision as paid media.
The first of its current patent pending solution was built on the power of the omni platform. It connects on me to the PR discipline through earned media lenses and a curated list of privacy compliant data partners.
These solutions are a result of the investments we've made in hanmi for more than a decade I'm very pleased that the platform is now deployed across most of our top clients and is used in more than 60 markets around the world to serve local regional and global accounts.
Our focus on innovation and development of Omni also provides us a clear path to operate in an environment, where digital media now dominate and where more stringent consumer privacy requirements such as the phasing out of third party cookies will take effect, it's worth noting that we've been on it.
Dissipating privacy developments from the start that's why omni is an open source platform created on the basis of data neutrality, using an unbiased and ethically focused procurement process to create the most diverse compilation of datasets. It is also why we have a comprehensive privacy.
Compliance and data risk management process for regulatory compliance and to anticipate datasets suitability for evolving technical standards.
While data and analytics remain a top investment and priority for us we understand that data can only take us so far.
It is the creativity and innovation skills of our people supported by data and analytics that truly set us apart and drive the best results for our clients. It's.
It's for this reason that we remain steadfast in investing in our leading brands and businesses and have strategically organized ourselves across practice areas and clients to maximize collaboration and expertise in doing so we can align our talent and tools and in an optimal manner to deliver comprehensive.
Solutions addressing the marketing and business needs of our clients.
While our organization allows our companies and their clients to easily connect and access deep specialist expertise from across the group.
Success also requires that people have diverse backgrounds and experiences with recent social justice issues and the disproportionate impact of the pandemic on diverse populations. This has become even more of a priority for us.
We took the time to evaluate our efforts, thus far recognizing our shortcomings and committed to progress ahead.
Open coupon I know our strategy for achieving systemic equity across omnicom put us on a clear path forward. One that is defined not just by goals, but by actions.
One of the first actions within open two point no cause for us to expand and empower those who are responsible for leading the plan's implementation. This is an important step because we recognize that our plan will only be successful. If we have a strong base of D E ni specialists executing it.
Throughout our agencies.
Since last summer, we've more than doubled the number of D. Eni leaders throughout Omnicom in fact, all of our networks and practice areas now have a dedicated D E N I leader reporting to their CEO.
And Omnicom corporate we hired chief equity and impact Officer, Emily Graham to lead and guide our group of dedicated leaders.
This new team is an important first step.
Additional progress will be made in 2021 and more action items will be executed measured and considered in our compensation decisions.
In the year ahead, our focus remains the same protecting the safety and wellbeing of our people continuing to effectively serve the business needs of our clients and preserving the strength of our businesses on.
Although we see hope as the vaccine rolls out we know there are still significant challenges that will impact 2021.
In evaluating 2021, the first quarter has difficult comps COVID-19 lockdowns did not meaningfully impact our operations until mid March 2020.
Looking beyond the first quarter, our current expectations for the balance of the year is that we will achieve positive organic growth.
Well, we hope the end is in sight. The virus has surprised us so we must remain vigilant and adaptable and planning and managing our operations.
And that is exactly what were you doing our agency leaders have done an excellent job of managing our cost base to be aligned with revenues and that the work continues into 2021.
At the same time, we remain laser focused on driving our strategic priorities to expand our client services and win new business.
Before I turn it over to Phil for a deeper dive into our results I want to take a moment to thank all of our people.
2020 challenge everybody, both personally and professionally and our performance in 2020 is directly tied to your perseverance every day.
One in our company can relate when I say the pandemic was and is all consuming we dealt with the effects at home with our families and friends and then it works, we yet again had to deal with its effects on our businesses and our clients. So I want to sincerely. Thank everybody for their hard work because I know.
It was more than difficult.
Hi, and all the leaders across the group appreciate what you did and are continuing to do to help us get through this.
I'll now turn the call over to Phil for a closer look at the results Phil.
Thanks, John and good morning.
As John said.
During the fourth quarter, we continued to see a moderation on the decline in business conditions, when compared to the peak of the pandemic in Q2 of 2020.
As a result, we saw less of a decline in organic revenue performance when compared to the previous two quarters.
Our operating margins improved compared to Q4 of 2019.
Benefiting primarily from the active management of our discretionary addressable spend costs the.
The repositioning actions taken in Q2 of this year and the alignment of our cost structure with the current realities of the economic environment.
Turning to slide four for a summary of our revenue performance for the quarter organic revenue performance was negative 398 million or nine 6% for the quarter.
The decrease again represented a sequential improvement from the unprecedented decrease on organic revenue of 23% in the second quarter and 11, 7% in the third quarter.
And while we continue to experience declines across all regions and disciplines.
Most showed sequential improvement when compared to what we experienced over the previous two quarters.
The impact of foreign exchange rates increased our revenue by eight tenths of a per cent in the quarter.
Slightly above the 50 basis point increase we anticipated entering the quarter as the dollar weakened against some of our larger currencies compared to the prior year.
On the impact on revenue from acquisitions net of dispositions decreased revenue by five tenths of a percent in line with our previous projections.
As a result on a reported revenue in the fourth quarter decreased nine 3% to $3 seven 6 billion when compared to Q4 of 2019 I'll return to discuss the details of the changes in revenue on a few minutes.
Turning back to slide one on a reported operating profit for the quarter was $615 million down approximately 5% when compared to Q4 of last year.
Operating margin for the quarter increased 80 basis points to 16.4 per cent compared to 15.6% in Q4 of last year.
Our operating profit and the 80 basis point improvement on margins. This quarter was again positively impacted from our actions to reduce payroll and real estate costs on the second quarter.
As well as the larger than expected cost savings from our discretionary addressable spend costs <unk>.
Including Teeny.
General office expenses professional fees personnel fees and other items, including cost savings, resulting from the remote working environment.
Operating profit for the quarter also included a $44 $7 million reduction in.
On salary and related costs, resulting from reimbursements and tax credits on the government programs on several countries.
Including the U S Canada.
The UK.
Germany, and France, as well as other markets.
These benefits were offset by an asset impairment charge of $55.8 million related to certain underperforming assets.
Our reported EBITDA for the quarter was $635 million and EBITDA margin was 16, 9% also up 80 basis points when compared to Q4 of last year.
On slide three of our Investor presentation, we presented the details of our operating expenses.
As we've discussed previously we have and will continue to actively manage our costs to ensure they are aligned with our revenues.
In addition to the overarching structural changes we made during the second quarter we continue.
To evaluate ways to improve efficiency throughout the organization.
Focusing on our real estate portfolio management.
Back office services per.
<unk> and it services.
As for the details our salary and service costs are variable and fluctuate with revenue.
Salary and related costs declined by $162 million on the quarter.
Reflecting the net impact of staffing actions, we undertook in the second quarter.
As well as the impact of the benefits from government reimbursements on tax credit programs.
Which were offset by the impairment charge.
Third party service costs, which are directly linked to changes in our revenue include expenses incurred with third party vendors. When we act as a principle on performing our services for our clients. These costs decreased by $152 million in the quarter or 12, 7%.
In comparison the.
The year over year decrease in third party service cost was nearly 40% and 20 per cent and the second quarter and third quarter respectively.
Occupancy and other costs, which are less linked to changes in revenue declined by approximately $41 million again, reflecting the ongoing efforts to reduce our infrastructure costs as well as reductions in general office expenses related to the majority of our staff continuing to work remotely during the pandemic.
Net interest expense for the quarter was $48 million up nine 4 million compared to Q4 of last year and down $500000 versus Q3 of 2020.
When compared to the fourth quarter of 2019, our gross interest expense was up $3.3 million, primarily resulting from additional interest on the incremental $600 million of debt. We issued in early April at the onset of the pandemic.
Partially offset by the reduction in interest expense from having no commercial paper borrowings in Q4, when compared to 2019.
Net interest expense was also negatively impacted by a decrease in interest income of $6 $1 million versus Q4 of 2019 due to lower interest rates on our cash balances.
When compared to the third quarter of 2020 interest expense increased by $900000. While interest income increased by 1.4 million on higher cash on hand, when compared to the previous quarter.
Our effective tax rate for the quarter was $25 one per cent, which was slightly lower than Q4 of 2019, primarily due to the lower effective tax rate on our foreign earnings resulting from a change in legislation.
For the full year, our effective tax rate was 27, 1%.
An increase from 26 per cent for the 20th 19 full year rate.
Fact of rate for 'twenty 'twenty reflects an increase from the non deductibility in certain jurisdictions of a portion of the repositioning costs recorded in Q2.
Which was offset by the lower effective rate on our foreign earnings as described previously.
In addition, our effective tax rate in 2019 reflected a benefit of $10 8 million primarily related to the net favorable settlement of uncertain tax positions and certain jurisdictions, excluding the impact of these items from each period.
In fact, the rate for 2020 would approximate the 2019 rate.
We anticipate that our effective tax rate for 'twenty 'twenty, one will remain between approximately 26, 5% to 27% excluding the impact of share based compensation items, which we cannot predict because they are subject to changes in our share price.
Earnings from our affiliates totaled $3 3 million for the quarter up versus Q4 of last year and the allocation of earnings to the minority shareholders in certain of our agencies was $30 4 million during the quarter down when compared to last year.
As a result on a reported net income for the fourth quarter was $398 1 million down four 1% or $16 9 million when compared to Q4 of 2019.
Our diluted share count for the quarter decreased one 5% versus Q4 of last year to 216.1 million shares.
<unk> from share repurchases prior to the suspension of our program in mid March.
As a result, our diluted EPS for the fourth quarter was $1 84 versus $1 89 per share when compared to our Q4 EPS for last year.
On slide two we provide the summary, P&L E P S and other information for the year to date period, primarily due to the negative effects on our revenue arising from the pandemic worldwide revenue for the 12 months ended December 31, 2020 decreased 11, 9% to 13 point too.
Yeah.
Negative organic growth decreased revenue 11, 1% for the year, while FX reduced revenue, 0.4% and acquisitions net of dispositions decreased revenue by 0.4% as well.
As a reminder, in response to the pandemic.
During the second quarter, we took repositioning actions, including 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 anticipated changes and the need for space based on our head count as.
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.
The full year results also include the impact on an asset impairment charge of $56 million, we recorded in the fourth quarter.
Lastly, our full year results include the benefit of reductions in salary and related costs of $163 million.
Related to reimbursements and tax credits on the various government programs.
Additional details regarding the impact of these items on our operating expenses are presented in the supplemental slides that accompany the presentation.
And our full year reported diluted EPS for 2020 was $4 37 per share.
Returning to the details of our revenue performance on slide four.
While the decrease this quarter was an improvement from the reductions in client spending we experienced during the last two quarters.
We continued to see marketers across a widespread among geographies and industries.
<unk> spending levels versus prior years as they continue to assess the continuing impact of the pandemic on their businesses.
Our reported revenue for the fourth quarter was $3 seven 6 billion down 384 million or nine 3% from Q4 2019.
In summary, as we've discussed on our last two calls regarding our performance by client sector, we see certain industries, particularly teeny continue to be more negatively affected than others.
Regarding our performance by discipline CRM execution and support continues to be negatively impacted from reductions in client activity in certain areas, including field marketing and research and CRM consumer experience was also negative.
But performance within this discipline was more mixed.
The events businesses continue to face significant declines, while our commerce and branding disciplines continue to lag.
These declines were somewhat offset by relatively strong performance on our precision marketing businesses.
Our healthcare discipline also performed well however, it faced a difficult comparison back to Q4 of last year when it delivered organic growth of 12, 9%.
It was down slightly for the quarter N. P. R had marginally positive organic growth due in part to election year spending in the U S.
Turning to the FX impact on a year over year basis, the impact of foreign exchange rates was next when translating our foreign revenue into U S dollars.
The net impact of changes in exchange rates increased reported revenue by eight tenths of a percent or $32 million on revenue for the quarter.
While the dollar weakened against some of our largest major foreign currencies. We also saw some strengthening against others.
In the quarter the dollar weakened against the Euro the British pound the Chinese one and the Australian dollar on.
On the dollar strengthened against the Brazilian real.
Russian ruble and the Turkish lira.
Projecting the FX impact for the upcoming year is challenging.
But in light of the recent strengthening of our basket of foreign currencies against the U S dollar and where rates. Currently are our current estimate is that FX could increase our reported revenues by over two five per cent in the first quarter by over 4% in the second quarter and then moderate in the second half of 2021, resulting in a full.
Year projection of approximately two 5% positive.
These estimates are subject to significant adjustment as we move forward in 2021.
The impact of our disposition activities over the past 12 months reduced somewhat by a relatively recent acquisition in the UK decreased revenue by just over $19 million on the quarter or five tenths of 1%, which is consistent with our estimates Inc.
Closer to the disposition activity through the end of 'twenty 'twenty.
We estimate the projected net impact of our acquisition and disposition activity.
Will reduce reported revenue by approximately 40 basis points in the first quarter of 2021.
25 basis points in Q2 with more general reductions in the second half of 2021.
However.
We continue to evaluate our portfolio for both potential disposition opportunities and acquisition targets.
During Q4, we recorded asset impairment charges of approximately $56 million.
Related to businesses that we expect to dispose of in the first half of 2021.
Organic revenue decreased just under $400 million or nine 6% in the third quarter when compared to the prior year as mentioned earlier our revenue once again was down across all major geographic markets, but overall the percentage decreases in organic revenue continue to improve when compared to those we experienced over the.
Previous two quarters.
Turning to our mix of business by discipline on page five for the second quarter. The split was 58 per cent for advertising and 42 per cent for marketing services.
So the organic change by discipline.
Advertising was down 9.7%.
Within the discipline, our media businesses have continued to see sequential organic improvement over the past two quarters.
And our global and National advertising agencies also showed improvement this quarter, although that was certainly mixed by agency.
CRM consumer experience was down 15, 8% for the quarter.
As previously discussed this was primarily due to a large year over year decline at our events businesses, which continue to face significant obstacles due to many restrictions resulting from the pandemic.
CRM execution <unk> support was down 13.7%.
Our field marketing and research businesses lagged for the quarter.
P. R. Buoyed by increased activity in the quarter related to the U S elections was marginally positive in Q4, and our healthcare agencies facing a very difficult comparison back to Q4 of 2019, when they generated double digit organic growth were down 2%, but the performance of the underlying businesses remained solid across.
All geographies.
Now turning to the details of our regional mix by business on page six.
You can see the quarterly split was 52% in the U S.
Three per cent for the rest of North America, and 9% in the UK 20 per cent for the rest of Europe 12 per cent for Asia Pacific.
And two percentage for Latin America, and the Middle East and Africa.
In reviewing the details of our performance by region on slide seven organic revenue in the fourth quarter in the U S was down $202 million or nine 4%.
For the quarter, our domestic events businesses once again experienced our largest organic decline and while we again saw year over year decreases in our advertising and media activity.
They continued their sequential improvement when compared to the previous two quarters.
Our precision marketing businesses continued to perform well on our domestic PR businesses were positive in the quarter again, resulting primarily from election related activities in the U S outs.
Outside the U S. Our other north American agencies were down three 2%.
Our UK agencies were down $12 four per cent continuing solid performance from our precision marketing and healthcare agencies was offset by reductions from our advertising and field marketing businesses.
The rest of Europe was down nine 2% organically.
In the Eurozone I'm on.
On our major markets, Germany, Belgium, Ireland, and Italy were down single digits.
Spain, and France experience double digit reductions.
Outside the eurozone organic growth was down around 3% during the quarter with decreased activity in Russia, and Sweden offsetting improved performance elsewhere in Continental Europe.
Organic revenue performance in Asia Pacific for the quarter was negative 3.9% per.
Positive performance from our agencies on Australia, and New Zealand were more than offset by decreases in greater China, and Singapore, while our Indian agencies were effectively flat.
Latin America was down nine 2% organically in the quarter, although our agencies in Brazil continue to feel the effects of reduced activity. The single digit reduction in organic growth was an improvement.
And lastly.
On the Middle East on Africa was negative for the quarter due to a significant reduction in project revenue.
As you can see on the revenue by industry information that we presented on slides eight to 10 certain client sectors continue to be more negatively affected than others.
In particular, our travel and entertainment and energy clients are continuing to could tell them marketing expenditures to match the significant decline in business activity in those sectors.
While spending by clients on the technology industry was up versus Q4 of 2019.
Client spend in other industries, such as autos food and beverage and consumer products continued to be lower when compared to the prior year, but improved from the lowest levels. We saw back in the second quarter.
Turning to our cash flow performance on slide 11, you can see that in 'twenty 'twenty, we generated nearly $1 7 billion of free cash flow excluding changes in working capital.
Down when compared to 2019, but less than the year over year decrease on our net income.
$558 million generated in the fourth quarter was up $35 million versus the 523 million generated during the fourth quarter of 2019.
As for our primary uses of cash on slide 12 dividends paid to our common shareholders of $563 million effectively unchanged when compared to last year.
Dividends paid to our Noncontrolling interest shareholders was down slightly year over year to $96 million.
Capital expenditures for the year was $75 million down when compared to last year. As we previously discussed we have reduced our capital spending in the near term to only those projects that are essential or previously committed.
Acquisitions, including earn out payments totaled $117 million on stock repurchases net.
Net of the proceeds received from stock issuances under our employee share plans.
Totaled $218 million.
Down compared to last year due to 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 $625 million on free cash flow during 'twenty 'twenty one.
With approximately $340 million generated in the fourth quarter.
Turning to our capital structure as of year end. Our total debt was just over $5 8 billion up around $670 million since last year.
The major components of the change or the issuance of $600 million of 10 year senior notes due in 2030.
Which were issued in early April at the outset of the pandemic.
Along with the increase in debt of approximately $100 million, resulting from the FX impact of converting our $1 billion of euro denominated borrowings into dollars at the balance sheet day.
Our net debt position as of December 31 was $211 million down $624 million from last year end.
Year on year improvement in net debt is primarily due to our positive free cash flow of $625 million and positive changes in operating capital of $31 million.
That's where our debt ratios, our total debt to EBITDA ratio was 3.2 times.
And our net debt to EBITDA ratio was 0.1 times.
And finally moving to our historical returns on page 14 of the last 12 months on return on invested capital ratio was 23%, while our return on equity was 31 eight per cent.
Both reflecting the decline in operating results driven.
Driven by the economic effects of the pandemic.
As well as the impact of the repositioning charges, we took back in the second quarter.
And that concludes our prepared remarks please.
Please note that we've included several other supplemental slides on the presentation materials for your review.
But at this point, we're going to ask the operator to open the call for questions.
<unk>.
Thank you, ladies and gentlemen, if you'd 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 youre 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 QUADRA Ani from J P. Morgan. Please go ahead.
Thank you and thanks for your comments on on the outlook, but I just wanted to clarify on a couple of plants.
And for Q1, you know understanding of likely still be negative but are you are you seeing ongoing improvement I mean, Ken the declines continue to moderate and just to clarify Q2 should return to positive growth on any color. I guess you can provide us on the full year you know our clients how are clients pension spending are you.
Pent up demand if there's a range you can give us for how we should think about potential inorganic growth. The total year. Thank you sure.
I'll take a stab at it and until will.
Add to whatever I leave out.
The first quarter, we still see a child.
On June but sequentially probably better than.
What we saw in 2020.
We fully expect based upon the plan reviews that we've done even though they're not final with our operating companies.
That will return to positive organic growth in the second quarter and for the balance of the year.
I.
I saw this morning that there were some.
Possibly some confusion out there in some of the writings that were there, but but that.
That's what's really going to happen in terms of specific industries and.
Specific responses.
We.
We see them improving positive attitude, but COVID-19 is still here.
Progress is getting made.
With the vaccine as it rolls out, but it's going to take a little bit of time.
And.
Hum.
Mhm.
I don't think anybody's baked in the stimulus payments into.
Their spending habits.
If that occurs it I'm sure it'll only be a positive have a positive effect on what happens you know as we get into the second quarter and beyond.
I don't know John.
But I don't have too much to add but I think that clarifies things certainly in the first quarter, given COVID-19 didn't really hit.
Our our business till kind of mid March in any meaningful way the comps in the first quarter or challenging so while there's still some uncertainty in the first quarter regarding COVID-19 first quarter on particular.
Yes, we do expect some improvement relative to Q4's performance in terms of.
Ganic decline, but at some point in the second quarter, we do expect a rebound, especially given the comps in the second quarter on much easier.
As well as the third quarter so.
I think we definitely expect AR.
To return back to growth mode in Q2, and you'll likely for the first six months.
Based on that Q2 performance.
On the back in growth mode, and more optimistic about the rest of the year. Although there are some things that are still out of our certainly out of our control with COVID-19 and the vaccination take rate et cetera.
That's all right and I feel like it's a bit too early given all that's going on to give us a range for debt for the full year and then just also following up on maybe on margins on Bell you know you've done a great job in terms of you know cutting costs and keeps surprising us on the upside on on the profitability.
I'm wondering if there the benefits the restructuring actions you took in 2020 are enough to kind of offset maybe more costs coming on line as business picks up or how should we think about margin study here.
I think the way we're looking at it internally is is 29 teens margins are the best proxy for what we expect in 2021, we continue to try and be more efficient all throughout the organization.
So we're certainly striving to do better, but we think that's a good proxy in terms of the underlying operations of the business. We believe some of what we did back in Q2, especially as it related to our real estate portfolio will be will generate meaningful sustainable.
Cost savings.
But yeah as we get back into growth mode.
We're gonna welcome back the variable costs that come with it because we're gonna be growing so yeah. There may be increases on people costs, maybe some travel and related costs that go up.
We don't think we're gonna be back to traveling like we did in 19 as a proxy but.
Some costs are going to come back because we're growing.
And and that'll be fine.
I mean, just crossing the line into Kohl's cash area here a little bit.
And if you look a little longer term we're.
We're in the process of planning and looking at our staff, but how do we how are we how does our staff in support of our staff.
<unk>.
It's not going to be Earth changing.
But.
Some of the experiences that have occurred during the last 11 months will continue well into the future and should provide some benefit on the cost side.
Thank you.
Your next question comes from the line of Craig Huber from Huber Research. Please go ahead.
Oh, great. Thank you John I guess.
Your judgment as you think out beyond COVID-19, and once we.
Stayed more than a year has gone by wants to be in the storm pandemic.
In your judgment, what do you think is a reasonable expectation frito revenue growth long term on all this is a lot of debate out there is it is it positive three four percentage at negative I'm trying to get to in your mind.
Do you think theres any permanent damage to your business going through this pandemic here that was that's putting you on a worst position on the back end of this.
Or the opposite the first question on thank you sure.
I certainly don't see anything that's.
Yeah.
Specifically, you're gonna make anything more difficult than then.
Anytime in the past.
Uh huh.
I still firmly believe current debt.
The company.
We'll return to on an annual basis.
On a GDP plus.
A percent or whatever that's the objective.
I know that that is.
Not only an objective of mine, but that of my entire management team.
In terms of the way, we view, our business and where it is.
View, our responsibilities so oh.
Debt.
That's L a.
That's the only goal I focus on.
Anything less is.
It's something that we.
Yeah.
Take action against.
No its debt.
That's what I'm sorry.
John when you say G. D. P. Just to be clear you told her real GDP or nominal GDP on a global basis.
I think if you carve out FX, that's that's what we're focused on.
So nominal excluding FX global basis.
Feed that okay, just sort of get back to your historical growth rates and stuff. Okay. And then the only thing I want to ask you John if I could please with all the movement out there on the marketplace to more and more E commerce and some moving away from brick and mortar of course are you viewing that as a net positive neutral or the opposite.
For your business. Thank you.
Sure.
We see it as a real positive.
The execution on all parts of our business.
We are getting smaller.
Over the last several years prior to Covid that trend certainly continued into COVID-19 and that'll probably the slowest part of returning.
Everybody almost every single one of our clients.
Sped up.
Invested more in on.
Their digital transformation I just did we.
And.
In that environment, we're deploying more strategic.
More talented people to resolve issues and create opportunities and insights for our clients.
No.
This change, which I do believe is permanent.
It'll be very positive for the organization.
Yeah.
Great. Thanks, John.
Thank you.
Your next question comes from the line of Julien Roch from Barclays. Please go ahead.
Yes, good morning, John Good morning, So good morning, Shoob apologies on probably.
That makes him the only one who created confusion, but reading your statement. When you said negative that was versus 'twenty and it's clearly versus 2019. So.
Blame on pull mastery of the flurry English language or my first question. My first question will be how much of your 2019 revenue needs an open economy to function. So you'll see like sales marketing event, so any business impacted by volume from a logged on and we'd use mobility.
So we can have an idea because because I would think that your percentage is higher than other agencies and therefore when things recover you should grow faster than the others. That's my first question.
The second one is you generated a GAAP.
Cash flow in 'twenty, but and you end up with not a lot of debt or net debt 0.2 billion, but you do have a 5.8 billion net of debt and $5 6 billion of cash and the debt Kelly costs more than the cash yields.
Yields so anything you can do to reduce gross debt on gross cash and benefit our the P&L through lower interest.
That's my second question and then the last one is anything you can tell us about media performance in 2020 on.
Humans better than the average of the group, but that's some color would be appreciated. Thank you.
Cause you on I'm sure I'll I'll start.
So.
Specifically with respect to events and field marketing.
They've certainly been challenged and events for certain.
Even more so in 2020 and I you know I think we saw slow slow pickup in China.
China, which got hit first which is when we saw it first in the first quarter of 2020.
We saw a little bit of a pick up in the fourth quarter of 'twenty.
<unk> 'twenty as well, but you know our vans business is somewhere around.
Three and a half of four per cent of the business and feel marketing might be a 2% to 3%. So.
Those certainly are two of the most the fact that I think.
Many of our businesses, though even the creative agencies and throughout the portfolio branding businesses et cetera.
Rely on project work.
Yeah, we think that'll pick up more as a the economies come back.
But but I think the most sensitive to on open economy, no travel restrictions those kinds of things on and being able to.
Go to live sports and things.
Yeah events is going to be on the top of that list field marketing.
Because much of it happens in in.
You know day to day life grocery stores et cetera.
We expect that it'll come back sooner.
Sooner.
And as far as debt and cash in and reducing interest I think our performance certainly has been very good from a cash flow perspective, or a cash management perspective.
During the pandemic, we took out the additional 600.
On a million dollars of debt in early April as kind of a liquidity insurance policy.
Yeah, we will be evaluating our internally and with our board our approaches as we get past the first quarter and things stabilize more as to what alternatives, we're going to pursue.
From a cash perspective.
Right now we're comfortable where we are but it is on our list to address what what the alternatives might be it's.
It's more efficiently and effectively use that cash.
And then in terms of media.
As far as 2020 goes I think.
Yeah on the media business, certainly sequentially improved throughout the year Q4 versus Q3 and and versus Q2.
We do expect improved.
Improvements as we head into 2021.
But I you know I think I think I'm, we're optimistic about the business in 2021 and certainly.
Yeah.
We've won more than our fair share of pitches and we're in more.
As we head into the early part of the year here.
So our expectations are.
Certainly positive.
Just one thing on my dad on the media answer as well.
We clearly think 'twenty, one is going to be better.
Some of our clients and this is quite understandable.
We are committing for shorter durations.
Because of the experiences they've had in the last 14 or 15 months.
But.
As things improve there is a vaccine there are positive things occurring.
Some slower than not.
We think that day.
We think that unless something drastically changes everything will be.
More positive.
Yeah.
Okay very clear thank you.
Thank you.
Your next question comes from the line of Steven Cahall from Wells Fargo. Please go ahead.
Thank you maybe first just a follow up on margin. So if 20.
2019 is a good proxy for 'twenty 'twenty, one I guess that assumes that margins are a little higher so as we think forward to next year. When youll have revenue that might look more like 2019 does that higher margin hold through or do you expect to be investing some of that savings as you roll on.
Into higher growth mode, and then maybe just a follow up on on the cash question. You are sitting on a lot of cash does the board think about something like an accelerated buyback you know your shares have underperformed some of your peers. This year I know you look at return on equity and the total share price performance. So maybe just help us think about them.
On a return to share repurchases than any potential uses there. Thanks.
Yeah sure.
Let me take the cash.
Buyback question from your first.
As you saw last evening, we our board increased our dividend seven seven per cent.
That's part of an ongoing process. Our traditional uses of cash have been two <unk>.
Increased protect and defend and pay our dividends.
Second is using our funds for acquisitions, which will add to our growth in an accretive fashion and last but not least.
He's been.
The repurchase of our shares.
Those are the debt capital structure and approach has served us very very well over the last 30 years. So at this point.
I don't see us tempted by short term moves to accelerate or disproportionately.
Look at <unk>.
<unk>.
In advance of looking at the other two priorities the company has.
And in all manners.
Always looking to protect and defend our investment grade rating. So that that's the context in which these conversations occur.
So I don't see any.
At this point acceleration.
What would have been a normal program film and as far as far as your margin question I think.
Yeah, we will we expect and it did frankly in 2020 as well to continue to invest.
In the business and invest in our data analytics capabilities in particular, our omni platform.
On the components of that platform.
So that will continue I think.
To the extent that our performance exceeds our 2019 from a margin perspective, you know hopefully that will be the case and if that's the case, we'll deliver more.
But at this point.
We think 19 is the best proxy as the business comes back into growth mode.
We're going to continue to invest most of our investments have run through our P&L over the years.
But I think if the performance there at the performances there.
Yeah, well, we may have some opportunity for margin improvement, but certainly right now our goal on our targets are on using 19 as a proxy.
Yeah.
I mean, just kind of pile on there is a proxy or if we were at the beginning of 19, we'd be endeavoring to improve.
The prior margins we experience so.
We're just simply looking at proxies insane.
When the business is fully restores.
That would be a good.
North star to start from.
Yeah.
Great. Thank you.
Okay.
It's done on 31, we can probably do one more yeah I think we have time for one more call.
Operator, Okay that question comes from the line of John <unk> from Wolfe Research. Please go ahead.
Great. Thanks, John just maybe to wrap up you talked about digital adoption being compressed and the martech growth.
As that continues or accelerates all of a sudden impact organic growth over the long term and is that an area, where you're seeing competition from non traditional players.
That does contribute to growth over the long term because the more complex the problem. The smart other people and solutions are that we are able.
Well to offer to our clients.
And we've prepared.
The foundation.
For <unk>.
On tool set.
That we've been at for a long time, we will probably talk about it on every call, but that's because it's legitimate.
And for an organization the size to be functioning.
Based on the same tool set.
Quite an accomplishment and.
And it will.
To add to our abilities as we move forward, we'll competition come from.
Current areas, absolutely I think.
One great differentiation, we have from.
The normal big players who.
Are out there.
Is that we don't own the analyze and tell you. The solution you should go away and implement we have the creative of horsepower and the people they climb into the trenches with our clients along the journey and we feel responsible for not only his design.
On an intelligence.
But for its execution so.
We're adapting and weighted that very very quickly or in.
And increasingly quickly because of Covid.
Yeah, I mean on our approach has always been about generating ideas our people on our business.
Generating ideas for our clients on our focus has always been on.
Insights and outcomes.
As it relates and that that applies as it relates to technology and data are not data management on a compilation.
I think our idea generation and insights and outcomes is what adds the value and.
That applies to what whatever the level of complexity of the solution. So.
We think we're in we're in a good path a good place competitively.
As a result.
Thank you.
The market share already open so thank you all for taking the time to join us today.
Okay.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
Yeah.
Yeah.
We're sorry your conferences ending now please hang up.