Q2 2021 Omnicom Group Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Omnicom second quarter 2020.
1 earnings release conference call.
At this time all participants.
Are in listen only mode.
Later, we will conduct a question and answer session.
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As a reminder, this conference call is being recorded.
And at this time I'd like to introduce you to your host for today's conference Chief Communications Officer Joanne trout.
Please go ahead.
Good morning, Thank you for taking the time to listen to our second quarter 2021 earnings call on the call with me today is John Wren, Our chairman and Chief Executive Officer, and Phil Angela Ostrow, Our Chief Financial Officer.
We hope everyone has had a chance to review our earnings release we.
We have posted to www Dot Omnicom group Dot Com. This morning's press release, along with the presentation covering the information that we will review this morning.
This call is also being simulcast and will be archived on our website.
Before we 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 that these statements are our present expectations and that actual events or results may differ materially I would.
I'd like to remind you that during the course of the call. We will discuss some non-GAAP measures in talking about omnicom's performance.
You can find the reconciliation of those measures to the nearest comparable GAAP measures in the presentation materials.
We are going to begin this morning's call with an overview of our business from John Wren.
And Phil Angela will review, our financial results for the quarter and then we will open the line for your questions. Thank.
Thank you Joanne and good morning to everyone on the call today I.
I hope, you're staying safe and healthy.
We were pleased to kick off today's call by reporting that we've rounded the corner to positive growth.
Had extremely strong results top and bottom line and continue to make very good progress on several of our strategic initiatives.
Organic growth for the second quarter was a positive 24, 4%. This growth was broad based across our agencies geographies disciplines and client sectors, we experienced a significant increase in spend from existing clients as the effects of the pandemic subsided and.
We benefited from strong new business wins.
EBIT was 568 million in the quarter, an increase of 67% versus the second quarter of 2020.
Q2, 2021 included a gain of $50.5 million.
From the sale of icon International in early June.
In Q2, 2020, EBIT, including 278 million of charges related to the repositioning actions.
Excluding gains and charges EBIT margin was 14, 5% in the quarter compared to a 12, 2% from Q2.2020.
So we will provide further details on unexpected impact of the sale of icon on our results from the balance of the year.
As we stated on our last call, we view 2019, as a reasonable proxy for ongoing margin expectations.
Excluding the sale of icon, our 6 months 2021, EBIT margin was 14%, which is in line with our EBIT margin of 13, 9% for the first 6 months of 2019.
Net income was $348 million in the second quarter, an increase of 75% from the second quarter of 2020, and EPS was $1.60 per share an increase of 74%.
The net impact on the gain on the sale of icon, which was offset by interest expense charge related to the early retirement of debt.
Increased EPS in Q2, 2021 by 14 cents per share.
Before I provide more comments on our financial performance and progress on our strategic initiatives I wanted to acknowledge the work of our leadership teams and all of our people, but these financial results.
Our leaders too difficult and effective actions over the past year and a half at the same time. They remained laser focused on the health of their teams servicing our clients, winning new business and managing their cost structures.
Our ability to navigate in this environment and come out the other side with such strong results is a testament to their commitment as well as the dedication and tireless effort of our people around the world.
I want to thank them for their outstanding contributions.
Turning now to our performance by geography every region had double digit growth in the quarter.
The U S was up just shy of 20% in the quarter.
All U S disciplines had double digit growth, except for healthcare, which was up in the low single digits. It was the 1 discipline that grew in Q2 of 2020.
Other than North America was up 37, 1%.
U K was up 23, 8% with all disciplines in double digits.
Overall growth in the Euro and non Euro region was 34.5%.
In Asia Pacific, We had 27, 9% increase with all major countries experienced double digit growth.
Our events business in China had another quarter of strong performance.
Latin America was up 28%.
In the Middle East and Africa increased 42, 8%.
By discipline, all areas were up year over year as follows.
Advertising and media 29, 8%.
CRM precision marketing 25%.
CRM Commerce and brand consultancy 15, 2%.
CRM experiential 53%.
CRM execution <unk> support.
22.7% PR, 15.1% in health care for 5%.
Looking forward, we expect to continue to see positive organic growth as client spend increases on.
Albeit at a slower pace than we experienced in Q2 on.
Our management teams are continuing to align costs with our revenues as markets reopen around the world.
Many of our companies are hiring staff.
The service and increasing client spend and the new business wins.
And we are seeing some pressure on our staff costs, particularly in the U S. As the labor markets remain tight.
We're also beginning to see a return of travel and certain other addressable spend as government restrictions have eased base.
Based on our use of technology during the pandemic, we are developing practices, particularly with respect to travel it should allow us to continue to retain some of the benefits. We achieved an addressable spend we expect that the increase in addressable spend in the second half of the year will be mitigated in part by the bench.
<unk>, we will achieve from a hybrid and agile workforce.
Turning to our cash flow, we again performed very strongly through the first half of the year, we generated approximately $800 million and free cash flow.
As we indicated last quarter.
In addition to our dividend increase in May our board approved the reinstatement of our share repurchase program.
In the second quarter, we repurchased $102 million and shares.
We took further actions to reduce our debt during the quarter in late April we issued $800 million of senior notes due in 2031 the.
The proceeds from this issuance together with cash on hand, we used to repay 1.25 billion of senior notes due in 2022.
As a result of these actions our balance sheet and credit ratings remain very strong.
While we are very optimistic about our future prospects, we remain vigilant and are maintaining flexibility in our planning as conditions can quickly change as we recently experienced in markets like Brazil, India, and Japan, the pandemic remains a significant health risk.
Overall, we're extremely pleased with our performance this quarter I'm proud of how we've navigated through the pandemic our results reflect omnicom's ability to adapt and respond to changes in the market and deliver it through down economic cycles.
Now I'll turn to the progress on our strategic and operational initiatives.
As I mentioned in early June we completed the sale of icon International.
Specialty media business.
The divestiture was part of our continuing realignment of portfolio of businesses and is consistent with our plan to dispose of companies that are no longer aligned with our long term strategies and investment priorities with the closing of this transaction we are substantially complete with disposals.
We expect our primary focus moving forward will be on pursuing accretive acquisitions in the areas of precision marketing Martech and digital transformation commerce.
Media and health care.
We have ramped up our M&A efforts in these areas and we're pleased with the opportunities we are seeing.
We remain disciplined with respect to our strategic approach and valuation parameters.
Operationally Omnicom continues to successfully delivered to our clients Inc.
Comprehensive suite of marketing and communication services supported by technology and analytic capabilities around the world.
The leaders of our practice area agencies and global clients have used this fall on the order to strengthen our relationships and grow with existing clients as well as pursue new business Importantly, our organization allows our leadership teams to quickly mobilize our assets to deliver strategic.
<unk> solutions for our clients from across the group.
Whether they're in need is for integrated services across regions or more bespoke individualized solutions in specific countries, we can simplify and organize our services in a manner that meets our clients' needs.
For example, we have a long history of providing integrated services to some of the world's largest brands such as Apple AT&T, Nissan and state farm.
And we continue to be successful in winning new business.
A good example of this is our win with Phillips, who named Omnicom has their global integrated service partner for creative media and communications over months long and highly competitive pitch, we were able to demonstrate the strength of our agencies and the delivery model that can ex Creek.
<unk> culture and technology to position fill ups as a leader in the changing health industry.
Another example of our integrated creative media and communications offerings is our recent win of the baby Wipes brand waterworks.
We also serve clients and consistently win new business across dedicated service areas and geographies. For example, some of the wins. This quarter. In addition to the ones mentioned above were P. B D L being named global lead strategic and creative agency partner for the Facebook App.
Discover naming T V. W. Ay its brand creative agency of record Jetblue hiring Adam and Eve as its new global creative partner.
Red Bull awarding ph D and its media business in North America P. B D M being awarded Audi creative duties, and social media communications in Singapore, and ph D, winning Audi media business in China.
In Virginia Atlantic selecting Lucky generals as its lead creative agency.
Our comprehensive suite of services and our ability to simplify how we bring them to our clients will continue to drive our success.
Congratulations and thank you to our people for these wins and many more.
In the second half, we expect to see an increase in new business activity across industry sectors, including C. P. G luxury health care retail and automotive.
I'm confident that our exceptional talent range of services and our ability to organize our offerings to meet the needs of potential clients will allow us to capture more than our fair share of new business.
Our constant innovation and service delivery has also resulted in highly regarded industry awards at Cannes Lion line 2021, our agencies were recognized for their excellence in both the creative and media disciplines on.
Becomes global creative networks P. B D O D D B and T. B W. A placed in the top 10, a day network of the festival competition.
Taking a highly coveted title a M D. B B D. L was named agency of the fast alone on.
On the Comm media agencies, Phd and OMD earned first and second place, respectively, and the media network of the festivals competition.
And overall more than 160 omnicom agencies from 45 countries, 1 more than 180 lines.
This impressive showing that Ken's line is just 1 example of how our agencies excelled they received a number of other industry Awards, which include Fleishman Hillard being named campaign Global PR agency of the year and T. B W. A APAC winning digital network of the year.
B Silverstein and partners, making AD Age's, a list on T V. W. A being named as an agency stand out.
DDB worldwide, winning 2021 network of the year at the hundreds anniversary of the ADC Awards hosted by the 1 club and E D B, Germany being named agency of the year.
These awards are a direct reflection of our relentless pursuit of creative excellence.
Our best in class talent is what defines omnicom and makes US an award winning company.
With this in mind, we are constantly looking to invest in on our people and create opportunities across the enterprise, including at the C suite level and throughout our senior leadership.
A recent addition to our practice area leadership as Chris Foster, who was appointed CEO of Omnicom Public Relations group.
Chris will oversee our entire P. Our portfolio focusing on talent innovation and cross agency collaboration to drive growth I'm confident that his track record of leading global growth initiatives counseling executive level clients and driving business to.
Element will lead to the continued success of O P. R. G.
John Doolittle has been elevated as Hu chairman of O P. R. G.
Another key leadership position. We recently created is focused on our environmental sustainability initiatives.
Last week, we appointed Karen Van Bergen, as Chief Environmental Sustainability Officer, Karen who will be responsible for overseeing our climate change initiatives and processes, which include setting measurable goals policies and partnerships that will reduce our carbon footprint.
This new position will be in addition to Karen its current role as EVP and Dean of Omnicom University.
Environmental sustainability is an area, where we are doubling down on our efforts we established goals 5 years ago to lessen the impact of our operations on the environment and we are now looking to drive even more progress.
We are currently establishing new goals and commitments to reduce the carbon emissions produced by our operations.
And increased the amount of electricity, we derived from renewable sources.
In addition to these internal goals Omnicom has joined numerous industry initiatives that will serve as a catalyst for change.
For example.
Several of our U K agencies have joined add net zero the industry's initiative to achieve real net zero carbon emissions from the development production and media placement of advertising by the end of 2030.
And we are a founding member of change the brief alliance, which calls for the agencies and marketers to harness the power of their advertising.
Promote sustainable consumer choices and behaviors caring is just the right leader for driving our initiatives in this critical area given her long tenure with omnicom and excellent previous experience working on environmental initiatives.
At multinational corporations.
I have no doubt, we will continue to raise the bar on our global operations and I'll work with organizations and clients to reduce.
Our impact on the environment.
Another critical area, we have intensified our efforts over the past 12 months is D E N I.
We have doubled the number of D. Eni leaders throughout Omnicom over this time and we have established specific kpis to measure our progress.
The Kpis are focused on hiring advancement promotion retention training and employee resource groups. This is a key step to ensuring D. E. Ni is embedded across the leadership agenda with a full commitment and accountability of our network and practice areas Ceos.
For Omnicom Eni starts at the top with our board of Directors currently our board is the most diverse in the S&P 500 with.
With 6 women and for African American members, including our lead independent director we're on.
Also pleased that 3 of our 12 network and practice area Ceos are people of color or a female.
Well it is still too early to measure our progress I'm pleased to report that the preliminary view.
All of our employee diversity in the United States shows a meaningful increase in the number of diverse employees as of June 32021, compared to the end of 2020.
I look forward to a lot more progress being made in the months ahead.
Continuing to focus on our people. We are pleased many of them have returned to the office as government restrictions are reduced or eliminated.
We're encouraging our people to begin to make plans to return to offices as conditions improve in their local markets.
Overall, we believe a return to in office centric culture will enable us to invent collaborate and learn together.
Most effectively in turn it will allow us to best serve our clients.
The return to office will be grounded in safety and flexibility and local leaders will determine what combination of office and remote work is most effective for their teams.
I personally look forward to re engaging in person with our people and our clients over the coming weeks and months.
I will now turn the call over to Phil for a closer look at the second quarter results fell.
Thanks, John and good morning, it's John.
John discussed in his remarks, while the impact of the pandemic continues to be felt across the globe that impact has moderated significantly as evidenced by a return to growth in Q2.
We expect a return to growth will continue in the second half however, as long as COVID-19 remains a public health threat some uncertainty regarding economic conditions will continue.
Could impact our clients' spending plans and the performance of our businesses may vary by geography and discipline.
Organic growth for the quarter was 24, 4% or $682 million, which represents a significant increase compared to Q2 of 'twenty 'twenty.
Which reflected the onset of the pandemic when revenue declined by 23% or $855 million.
In addition in early June we completed the disposition of icon, our specialty media business, which resulted on a pretax gain of $50.5 million.
The sale of icon was consistent with our strategic plan and investment priorities and the disposition is not expected to have a material impact on our ongoing operating income for 2021.
Flipping to slide 4 for a summary of our revenue performance for the second quarter and.
In addition to our organic revenue growth of 24, 4% for the quarter.
The impact of foreign exchange rates increased our revenue by 5.4% in the quarter.
Higher than we anticipated entering the quarter as a day.
Dollar continued to weaken against most of our larger currencies compared to the prior year.
The impact on revenue from acquisitions net of dispositions decreased revenue by 2.2% primarily related to the sale of icon.
As a result on reported revenue in the second quarter increased 27, 5% to 357 billion from the $2.8 billion, we reported for Q2 of 2020.
I'll return to discuss the details of the changes in revenue in a few minutes.
Turning back to slide 1 on a reported operating profit for the quarter increased to $568 million, including the $55 million gain on the salad line card.
As you remember our Q2 'twenty 'twenty results included a $278 million COVID-19, repositioning charge, which included severance actions real estate lease impairments and terminations and related fixed asset charges.
As well as a loss on the disposition of several small non core underperforming agencies.
Our operating margin for the quarter was 15, 9%.
Up significantly from Q2.2020, even after excluding the gain on the sale of icon in the current period.
Adding back the repositioning charge recorded in Q2 of 2020.
We also continued to see operating margin improvement year over year, resulting from the proactive management of our discretionary addressable spend cost categories.
Including a reduction in travel and related costs as well as reductions in certain costs of operating our offices given the continued remote work environment as.
As well as benefits from some of the repositioning actions taken back in the second quarter of 2020.
Our reported EBITDA for the quarter was 590 million and EBITDA margin was 16, 5%.
Excluding the $55 million gain on the icon disposition EBITDA margin for Q2, 'twenty 'twenty, 1 was 15, 1%.
EBITDA margin in Q2 of 2020, after adding back the $278 million repositioning charge was 12, 9%.
On slide 3 of our Investor presentation, we presented the details of our operating expenses.
We've also included a supplemental slide on page 15 that shows the 'twenty 'twenty 1 amounts presented in constant dollars to exclude the effects of year on year FX changes.
As we've discussed previously we have and will continue to actively manage our costs to ensure they are aligned with our current revenues.
We also continue to evaluate ways to improve efficiency throughout the organization.
Focusing on real estate portfolio management.
Back office services procurement and it services.
That's what the details are salary and service costs are variable and fluctuate with revenue the.
They increased by about 300 million versus Q2 of 2020 or $220 million on a constant dollar basis, driven by the increase on our overall business activity.
We would also note that.
The Q2, 'twenty 'twenty salary and service cost amounts were reduced by reimbursements received from government programs of $49.2 million.
Third party service costs increased by $275 million.
$242 million on a constant dollar basis.
These costs include expenses incurred with third party vendors when we act as a principle when performing services for our clients.
Occupancy and other costs, which are not directly linked to changes in revenue increased by $4 million.
Excluding the impact of FX. These costs declined by $10 million on the quarter as we continued our efforts to reduce infrastructure costs and we benefited from a decrease in general office expenses.
Majority of our staff continue to work remotely in Q2.
SG&A expenses increased by $21 million or $18 million on a constant dollar basis again related to the return to more normal activities in the quarter.
And finally, depreciation and amortization declined by $3.6 million.
Net interest expense on the second quarter of 'twenty, 'twenty, 1 and increased $26.3 million period over period to $73.5 million.
Because of our solid working capital and cash flow performance during the pandemic period.
In Q2, we determined we no longer needed the liquidity insurance, we added in early April 2020.
When we issued $600 million of debt and added a 400 million dollar 364 day revolving credit facility.
In April 'twenty 'twenty 1.
Credit facility expired unused in May we issued $800 million of 2.6% senior notes due 2031.
In June the <unk>.
Proceeds from the issuance of the 2.6% notes plus cash on hand, we used to redeem early all of our outstanding 1.25 billion, 3.625% notes that were due in may of 2022.
Gross interest expense on the second quarter of 2021 increased $26.6 million.
Resulting from the loss we recognized on the early redemption of all the outstanding $1.2 billion, a 3.625% 2022 senior notes.
Additionally, the impact of this refinancing activity reduced our leverage ratio of 2.2 times at June 30th 'twenty 'twenty, 1 and is expected to result in lower interest expense on our debt in the second half of approximately $6 million as compared to the prior year.
Interest income in the second quarter of 2021 was relatively flat.
Our effective tax rate for the second quarter was 24, 9%.
Down a bit from the effective tax rate, we estimated for 2021.
Between 26.5% to 27%.
Primarily due to nominal taxes recorded on a book gain on sale.
Earnings from our affiliates was marginally negative for the quarter.
The allocation of earnings to minority shareholders on certain of our agencies increased to $23.4 million.
As a result on a reported net income for the second quarter was $348.2 million.
While we restarted our share repurchase program during the second quarter our.
Our diluted share count for the quarter increased slightly versus Q2 of last year.
$217.1 million shares, resulting from the year over year increase on our share price.
And the increase in common stock equivalents included in our diluted share count.
As a result, our diluted EPS for the second quarter was $1.60.
Versus the loss on 11 cents per share we reported in Q2.2020.
The gain on the sale of icon and loss on the early redemption of the 'twenty 'twenty 2 senior notes.
Resulted in a net increase of $31 million to net income or 14th to EPS.
As we've previously discussed.
The prior year period included the net impact of the repositioning charges.
Which reduced last year's second quarter, net income and EPS by $223.1 million.
On a dollar 3 respectively.
On slide 2 for your reference we provide the summary, P&L E T S and other information for the year to day period.
Now returning to the details of the changes on our revenue performance on slide 4 on reported revenue for the second quarter was 3.57 billion up $771 million or 27, 5% from Q2 of 2020.
Turning to the FX impact on a year over year basis, the impact of foreign exchange rates increased our reported U S dollar revenue.
5.4% or $158 million.
Which was above the 3.5% to 4% increase that we estimated entering the quarter.
The strengthening of foreign currencies against the dollar was widespread and included most of our largest major foreign currencies in the quarter.
The largest FX increases were driven by the strengthening of the euro the British pound the Chinese 1 and the Australian dollar.
In the quarter the U S dollar only strengthened against the Japanese yen and the Russian ruble.
In light of the weakening of the U S dollar compared to 2020.
FX rates continue where they currently stand.
Our estimate is that FX could increase our reported revenues by approximately 1.5% from the third quarter.
And 1% for the fourth quarter.
<unk> and our full year projected increase from approximately 2.5%.
The impact of our acquisition and disposition activities over the past 12 months prior.
Primarily reflecting the icon disposition as well as the recent acquisitions of arch Boe on our regions.
The second quarter of 'twenty 'twenty, 1, resulting in a net decrease in revenue of $62 million in the quarter or 2.2%.
Based on transactions that have been completed through June 30th from 'twenty 'twenty..1 our estimate is the net impact of our acquisition and disposition activity for the balance of the year will decrease revenue by between 6% to 7% from.
The third and fourth quarters.
All thing and a full year reduction of approximately 4%.
While we will continue our process of evaluating our portfolio of businesses as part of our strategic planning.
As John has said with regard to dispositions we are substantially complete.
Organic growth of $682 million or 24, 4% in the second quarter reflects strong performance across all of our major geographic markets and across all of our service disciplines.
Turning to our mix of business by discipline on page 5 for.
For the second quarter, the split was 56% for advertising and 44% from marketing services.
As for the organic change by discipline advertising was up nearly 30% primarily on the growth of our media businesses, reflecting a strong recovery of activity within the media space.
Our global on National advertising agencies achieve strong growth this quarter.
Although the pace of growth by agency remains somewhat mixed.
CRM precision marketing increased 25%.
The strength of their service offerings the agencies within this discipline have delivered solid revenue performance throughout the pandemic and they continue to perform well.
C O M Commerce on brand consulting was up 15, 2%.
But the performance within this discipline was mixed as our shopper marketing agencies cycled through the effects of recent client losses.
Organic revenue for CRM experiential was up over 50%.
It should be noted that events from virtually shut down of Lockdowns took effect in March and April of 'twenty 'twenty.
While government restrictions on events have been eased recently in certain markets. These businesses still face challenges regarding when they will return to pre pandemic levels.
CRM execution and support was up 22.7%.
Reflecting on recovering client spend compared to Q2 of 2020, and our field marketing and merchandising point of sale businesses, while our non for profit businesses continue to lag.
PR was up 15.1% coming off pandemic close in 2020.
And finally, our health care discipline was up 4.5% organically.
Health care was the only 1 of our service disciplines that had positive organic growth in Q2 of 2020.
The performance of these agencies remains solid across the group.
Now turning to the details of our regional mix of businesses on page 6.
You can see the quarterly split was 51, 5% in the U S..3.
3.3%, so the rest from North America.
10.6% on the U K.
18, 6% for the rest of Europe.
12 on a half for Asia Pacific.
2% for Latin America, and 1% for the Middle East and Africa.
In reviewing the details of our performance by region on Taser 7 organic revenue in the second quarter in the U S was up nearly 20% or $316 million.
Our advertising discipline was positive for the quarter.
Our media agencies excelled in the quarter is that our CRM precision marketing agencies on our.
PR agencies.
But on Commerce on brand consulting category rebounded to growth on the quarter.
While our health care agencies are flat versus last year, when organic growth was 3.7% in the quarter on.
Our other CRM domestic disciplines, experiential and execution and support also perform well organically versus Q2 of 2020.
We expect it will take a bit longer for them to return to 2019 revenue levels.
The social distancing restrictions and pandemic concerns subside.
Outside the U S. Our other north American agencies were up 37% driven.
Driven by the strength of our media and precision marketing agencies in Canada.
Our U K agencies were up 23, 8% organically led by the performance of our CRM precision marketing advertising and health care agencies.
The rest of Europe was up 34.5% organically.
In the eurozone, among our major markets, France, Germany, Italy, and the Netherlands were up greater than 30% organically.
Spain was up in the mid single digits.
Outside the Euro zone organic growth was up around 35% during the quarter.
Organic revenue performance in Asia Pacific for the quarter was up 27, 9%.
With our performance from our agencies in Australia, Greater China, India, and New Zealand, leading the way.
Latin America was up 28% organically in the quarter.
Our agencies in Mexico, and Colombia, growing more than 20% and.
In Brazil was up almost 17%.
And lastly, the middle East and Africa was up over 40% for the quarter.
On slide 8 we present, our revenue by industry information on a year to day basis.
We've seen an improvement in performance across most industries, but the overall mix of revenue by industry remaining relatively stable.
The travel and entertainment sector was boosted in Q2 of 'twenty 'twenty, 1 by increased activity related spend by clients on the entertainment category.
Which mitigated continued reduced spend levels for many of our travel and lodging clients.
Turning to our cash flow performance on slide 9 you can see that the first 6 months of the year.
We generated nearly $800 million of free cash flow.
Clothing changes in working capital.
Up over $70 million versus the first half of last year.
As for our primary uses of cash on slide 10.
Dividends paid to our common shareholders were $292 million up about $10 million when compared to last year.
Due to the 5 cent per share increase in the quarterly payment.
Effective with the dividend payment we made in April.
Dividends paid to our Noncontrolling interest shareholders totaled $39 million.
Capital expenditures in the first half of 'twenty 'twenty, 1 with $23 million.
Acquisitions, which include our recently completed transactions as well as earn out payments totaled $36 million.
Stock repurchases were $95 million net of the proceeds from our stock plans, reflecting the resumption of our share repurchases during the second quarter of this year.
As a result of our continuing efforts to prudently manage the use of our cash we were able to generate $311 million of free cash flow during the first half of the year.
Regarding our capital structure at the end of the quarter as detailed on slide 11, our total debt is 5.31 billion.
On about 410 million since this time last year and down just over 500 million compare to year end 2020.
Both changes reflect the early retirement in Q2 of 2021.
Of 1.25 billion.
365% senior notes, which were due in 2022, partially replaced with the issuance of 800 million of 2.6% 10 year notes due in 'twenty 31.
In addition to the net reduction in debt of 450 million from the refinancing.
The only other meaningful change that balance for the LTM period.
It was an increase of approximately $65 million, resulting from the FX impact.
Converting our 1 billion euro denominated borrowings into U S dollars off the balance sheet date.
Our net debt position as of June 30th was $922 million up about $710 million from last year end, but down 1.5 billion when compared to where we stood at 12 months ago.
The increase in net debt since year end was a result of the typical uses of working capital that curve over the first half of the year totaling just under 1.1 billion.
Which was partially offset by the 311 million we generated on the free cash flow on the first half of the year.
Over the past 12 months the improvement in net debt is primarily due to our positive free cash flow of $790 million.
Positive changes in operating capital of $525 million.
And the impact of FX on our cash and debt balances, which decreased our net debt position by $154 million.
As for our debt ratios as a result of our overall operating improvement versus Q2 of 2020 on our recent refinancing activity.
We've reduced our total debt to EBITDA ratio 2.2 times on our net debt to EBITDA ratio to 0.4 times.
As a result of our overall operating improvement versus Q2 of 'twenty 'twenty on our recent refinancing activity.
We've reduced our total debt to EBITDA ratio to 2.2 times on our net debt to EBITDA ratio to 0.4 times.
And finally moving to our historical returns on page 12.
For the last 12 months on return on invested capital ratio was 25, 9%.
While our return on equity was 46, 8%.
Both significantly better than our returns from 12 months ago.
And that concludes our prepared remarks please.
Please note that we have included several on the supplemental slides on our presentation materials for your review.
But at this point.
Moving to ask the operator to open the call for questions.
Yeah.
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1 moment please for our first question.
Yeah.
Yeah.
Our first question comes from the line of Alexia <unk> with J P. Morgan. Please go ahead.
Thank you very much on just a couple of questions. If I may on the first 1 really I guess on an icon on the disposition that I think you mentioned it won't have too much of an impact on the business going forward, but it sounds like it's a pretty sizable revenue contributor given the fact that you know it is impacting that.
You know going forward John I'm wondering it must be a is it a much more of a low margin business. So maybe a positive from a profitability longer term now that you're no longer involved.
Involved in that business and then maybe just if you can comment on on margins in general how we should think about the longer term on them. You know I think he mentioned that he had them on a day fine. Okay. My 2019, but given the efficiencies you know that.
There might be permanent on the real estate side should we think of maybe slightly higher margins longer term.
Yeah.
Sure on.
Oh go ahead Sheila.
Let me first talk about icon.
On icon was very low margin business for sure.
And it was a very large business we've purchased icon in 2000.
And it grew rather nicely for the first 10 or 15 years.
And then to the last several years, it's actually.
It hasn't declined but it hasn't grown and you take a large number with no growth.
Growth it mutes the growth of the rest of the organization.
And the margins are such that we more than make it up for it.
Our pursuit of more profit and EBIT and we took on all of that into consideration.
So quite a long time to take the decision, but we finally did.
And.
The most important aspect because we can.
Cover the profits.
It was a low margin business.
Is that we're substantially complete with the exercise that we started 3 or 4 years ago.
Uh huh.
Scrutinizing.
The portfolio and ridding ourselves of legacy companies.
We aren't going to contribute to our long term growth.
So we're very happy with the decision.
That's where that stands on.
I'll do a great day on margins and sales to both from my comments.
With respect to margins, we've said all along that we think 2019 is really the benchmark.
That we're going to look at it and then start to plan some growth from.
Last year.
You had the disruption of Covid COVID-19.
In every single office of Omnicom.
You had the restructuring charges, we had to take.
And you had government subsidies in certain instances.
But they certainly didnt cover the cost that we incurred.
We will get efficiencies for certain.
Out of.
The real estate actions that we took and the agile workforce and hybrid workforce.
That will be.
Be impacted as we come back to work.
But against that what you have.
As you have you know.
Some inflation in terms of wages.
And.
You know and.
And net them.
And B.
Resurgence.
Oh some of the addressable spend.
That 1 people werent permitted to get on airplanes and visit offices.
They will be in the hopefully in the near term.
I've been able to travel, but principally because it goes to my position on being able to go wherever I want.
But most people can't do that.
So Phil you might want to add on both points.
I.
I would echo what John said, I think as far as margins certainly.
Going forward, we think 19 is the right baseline.
We do expect on where did expect that that the first half certainly of 'twenty.
Would be a little easier given their remote workforce.
<unk> impact on.
Both the addressable spend that John just touched on and.
Not having as many people back in the office reduces some of the operating costs associated with it.
Running those offices when people are back.
On some of that is going to come back.
Moving on to welcome a bunch of cost back.
1 we're in growth mode. Like we are now the challenge is going to be continuing to be disciplined about controlling those costs. So.
You know I think I think the goal is is certainly to do a bit better than 19, but you know 19 is really the baseline on a you know for the business going forward and then striving to do better than it.
And my final comment on on this is.
Yeah.
Obviously, there are challenges as you reopen but theres a renew at renewed energy.
Which I think is going to contribute to both the top line.
And consistently to the bottom line.
And then John just a follow up if I may on the overall environment I think he's been I think most people couldn't characterize it you know well on even in volatile it's been a robust advertising recovery on.
Are you getting the sense, you've got such a great perspective on your relationship with advertisers are you getting the sense that there is some beginning of hesitancy on the on the recovery of the spread and given the delta variant or not at all it's still well on EBITDA and it still seems to be pretty robust.
I think the Delta variant is.
Because of the headlines it somewhat.
Unknown.
And we can't predict illness.
1 of the 1 of the things that gives me some comfort.
Is that.
When you get past the headlines and you read the people that have been impacted.
It's people who haven't been vaccinated.
Received only 1 shot of a 2 shot.
Yeah protocol.
And already have an existing health.
1 form or another.
And have put themselves in a risky situation.
We're starting to bring back the vaccine and people that we have in earnest.
After labor day, and I think people are encouraged to come back to the office.
So yes, there's hesitancy on the part of everyone, but it's we don't know we can't predict the future.
But we do know that we've lived through a hell of a past and we've done it successfully so that gives us confidence.
And the other thing, which will be temporary I think is gonna be certain industries, we're already seeing.
Yeah.
Some.
Some concerned about the adjustments that have had to be made to certain clients.
Supply.
Lines and.
Certain components that they mean and delay.
On receiving them.
But we see that as a temporary issue.
Do most of our clients so at least the ones that I've been speaking to.
Great. Thank you very much thank you.
Yeah.
Okay.
Okay.
And we do have a question from the line of Tim Nolan with Macquarie. Please go ahead.
Oh, great. Thanks, even coming into Covid before Covid you guys were talking about returning to GDP.
GDP type of growth levels, which typically was your norm.
Up until a few years ago I Wonder if you could give us an update now given the divestitures given the state of the market I know, it's very much in flux right now, but just where do you see your longer term growth rate on settling out once we move through these these COVID-19 impacts.
And on the acquisition side, maybe a tack on question.
You mentioned kind of getting back on the acquisition trail.
We've seen in the technology space and very high valuations.
Wondering if you could comment on pricing in the market and also noting here your leverage is quite low right now.
Yes, there might be any appetite to raise leverage to do more acquisitions. Thanks.
There's a couple of questions that right.
Yeah in terms on the first 1.
I'm not changing my 225 years later.
GDP plus.
Alright, and without the burden of a non growth why I joined today it makes it more achievable.
Then it was the last time I said that.
It doesn't mean, it's going to happen next week, but.
We do know the quality of our businesses and the quality of our portfolio we have the benefit.
Having always protecting the creative product, which is R. I S P.
And whilst we have the technology and all the other systems.
We can.
Service.
Our clients like in the case of Philips as if we're 1 company omnicom.
Or if a client has individual needs our brands are more than happy and.
Excellent and excel at taking care of them.
So that's all going to benefit that.
In terms of on our acquisition pricing, you're absolutely right. There's an insane amount of money chasing things that are out there.
We've always looked for people, who want them to be partners on a longer term.
And we've always.
To do accretive acquisitions.
And when we haven't been able to find accretive acquisitions, we bought on the expense of taking of starting up companies and in doing things ourselves.
On <unk>.
I think as we Oh I know I don't think as we go forward, there's 1 or 2.
Areas, which I'm not going to tell you.
On the phone.
That I'm probably.
I'd be willing.
To break even on if I had to pay the price to get the reputation.
Hmm to use as a basis from which to spend to grow organically.
But none of that at this point.
He is going to result in the increase in our leverage.
And our capital.
Program, which I.
Typically have on my script I didn't bother to mention this time is exactly the same it's.
As far as the payout of dividends second to do accretive acquisitions and last but not least.
The share buybacks.
Again fell on us.
Yeah on I don't think there's much to add but I think I'm certainly from a capital allocation.
Allocation strategy perspective, we don't expect to change anything other than our goal is to spend more of our free cash flow on acquisitions in the areas that we think.
On the opportunities for growth are the highest in and we're gonna be a little more.
On active is as we've indicated in the last few calls and pursuing those potential deals.
I'm, just having said that kind of on the humira. So prior to getting on the call. This morning, where you saw the treasuries today were 1.16, and Phil and I were just ruminating damage, we didn't need any more money.
Because it's so cheap.
Yeah.
Okay.
Yeah.
And we do have a question from the line of Craig Huber with Huber Research partners. Please go ahead.
Yes, good morning, a few questions on it.
Your revenue by industry Shri.
Chart here.
What areas, maybe the 2 areas John do you the most optimistic about.
As you think out here over the next year.
Yeah.
Well on this.
A couple of areas that I'm very optimistic about hum.
I'm optimistic about our precision marketing group.
I'm very optimistic about.
Our media operations and some of the changes that we've made there.
I am optimistic.
That.
Our experiential business.
Which has suffered dearly during COVID-19.
But it has returned in places like China.
We'll come back and when it does it will contribute to our growth significantly.
And health care.
Continues and I think.
Especially coming out of things like Covid.
And especially people who have.
Issues.
Being more exposed.
Than otherwise healthy people I think is.
Our commitment that every person on the planet.
Is it going to be over.
It's going to be really focused on so I think we're in some great places and.
And with all the confusion and noise and various media is that you can.
Or.
Reach out to.
I cannot understate.
Yeah, our creativity.
I can't understate, how it's in every component.
Our business.
And it's always been since the foundation by 2 creative leaders of Omnicom.
30 years ago.
And it's not something that.
That you can add to a technology based company or add to that.
On the account service type of company.
Creative is a philosophy it's not.
On the individual.
So I I think.
Yeah, I'm very bullish across the board about the things that we were able to do it.
And then Phil.
If I could ask John on share buyback ex I mean, obviously your balance sheet is very strong here 0.4 net debt.
Our ratio so it's good to just have to spend on many many years.
When should we start to expect share buybacks to really kick in in a meaningful way. So we can see the fully diluted share count number actually start going down. Thank you.
I don't I don't think you should expect much much much different in the second half of 'twenty 'twenty 1 relative to.
What we've done in prior second half Q3, Q4, a lot on things that we expect anything to dramatically change.
But I you know I think I think if things progress as we expect and and the business continues to grow in and we don't have any setbacks from from the outside that we can't control in terms of these COVID-19 variance, which we don't expect currently.
Certainly 2022, I would expect that we will be back to more normalized levels from a buyback perspective and again.
And if we can do.
Do more find more and close more acquisitions, we will adjust.
The share buyback number.
Accordingly net.
And this last part I can't overstate enough.
In the month of July.
Since I was the 1 from.
Who could travel internationally most freely.
I completed 2 transactions myself, which haven't yet closed but it will close.
In the coming weeks or months.
On our M&A group should really beefed up.
And we're looking at quite a number.
It's almost back to the early 2 thousands in terms of the number of companies who are actually looking at.
So.
Share buybacks will come back with certain about.
I have some immediate needs in the next 90 days for Philip to fulfill.
Yeah.
Great. Thank you guys.
Thank you.
I think I think we have time for 1 more call on prior to giving the market open.
Of course as you go guys.
Trusted.
We have a question coming from the line of Julianna Roche with Barclays. Please go ahead.
Yes, good morning, John Good morning, Phil I'm coming back on Alex's question on on icon that looks like.
Disposition up 6.7 percentage points from failed previous guidance. So icon should have been 900 million of revenues in 2020 and.
And if you assume being media I felt a bit more than the overall business in 2020 say, 25%. It looks like it was about $1.2 billion in 2019 net all of those are in the right ballpark.
And then John when you said icon with low margin, what do you mean less than 5% or even less than that.
And then last question is on on media, what can you tell us about media performance from Q2 is okay. You didn't want to give us a number but not dense who gives me every quarter for international WP every quarter for the group and could be every quarter for the U S. So anything any color on media, which you say it was a was very good.
Would be appreciated.
Sure in terms of.
Terms of icon on I think I think your ballpark for.
2020 is as.
Yeah, certainly within the range in terms of size.
I don't have a 19 number and I didn't get that high on a 90 day window.
Yeah.
It's 19 is really kind of irrelevant at this point.
And as far as you know as far as margins go I think.
Yeah, that's probably somewhat in the same neighborhood.
As well on when it comes to.
Media, we we we've been through this before we don't we don't break out media because it's integrated within all our businesses and all our disciplines. So yeah, we don't intend to break out the specific number because that's not how we look at it.
Okay, Yeah on.
I know, we've done that before but on stubhub.
Okay. Thank you very much.
Thank you all for joining the call.
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