Q3 2021 Omnicom Group Inc Earnings Call

October 19, 2021

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We'll begin.

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Welcome to the Omnicom third quarter 2021 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 then zero.

Quarter 2021 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 then zero.

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 you to your host for today's conference Senior Vice President of Investor Relations Gregory Lundberg. Please go ahead.

At this time I'd like to introduce you to your host for today's conference Senior Vice President of Investor Relations Gregory Lundberg. Please go ahead.

Thank you for joining our third quarter 2021 earnings call. With me today are John Wren, our chairman and Chief Executive Officer, and Phil Angelastro, Our Chief Financial Officer.

On our website Omnicomgroup.com, we posted a press release, along with the presentation covering the information we will review today. A webcast of this call is also available there and an archived version will be available when today's call concludes.

Com group Dot Com, we posted a press release, along with the presentation covering the information we will review today.

A webcast of this call is also available there and an archived version will be available on today's call concludes.

Before we start I would like to remind everyone to read the forward-looking statements non-GAAP financial and other information that we have included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements and.

Omni investor presentation certain of the statements made today may constitute forward looking statements and.

These statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2020 Form 10-K, and our June 2021 and Form 10-Q.

A live and factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2020 Form 10-K, and our June 2021 and Form 10-Q.

Also during the course of today's call, we will discuss certain non-GAAP measures in talking about Omnicom's performance you can find a reconciliation of these measures to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John then Phil will review our financial results for the quarter. After our prepared remarks, we will open the lineup for your questions.

We will begin the call with an overview of our business from John then Phil will review our financial results for the quarter after our prepared.

We will open the lineup for your questions.

Thank you Greg, good afternoon, everybody and thank you for joining today. We're very pleased to report that in the third quarter, we continued our year over year double-digit growth in our key financial performance metrics led by a very robust topline. As you can see on slide four of our presentation organic growth for the third quarter was 11.5%. The topline results were broad-based across our agencies geographies and disciplines. Our growth was especially strong in CRM precision at 24%.

Very pleased to report that in the third quarter, we continued our year over year double digit growth in our key financial performance metrics led by a very robust topline.

Remark as you can see on slide four of our presentation organic growth for the third quarter was 11, 5%.

The topline results were broad based across our agencies geographies and disciplines.

Growth was especially strong in CRM precision at 24%.

Our CRM precision group is helping clients on their Mar Tech transformation digital and ecommerce communications and direct to consumer marketing. The group has played a key role in many of our recent new business wins. Overall, we continued a very strong momentum in Q3.

The group has played a key role in many of our recent new business wins.

Overall, we continued a very strong momentum in Q.

And broadly across our group growth was driven by improved economic conditions. Omnicom suite of services and capabilities are positioning us to be extremely competitive in the marketplace to re-imagine and strengthen our clients' brands, seamlessly connect them with their customers across the marketing journey. Transform their marketing technology platforms, and innovate and e-commerce and new media channels.

Across the marketing journey.

Transform their marketing technology platforms, and innovate and e-commerce and new media channels.

Our revenue performance flowed through to our operating profit bottom line. Our EBIT margins for the third quarter were 15.8%. Which exceeded our 2020 margins and significantly outpaced the comparable period in 2019. Net income and EPS for the quarter grew by more than 13% versus 2020 and were also significantly above our 2019 results. As we head into the fourth quarter, we are well-positioned competitively and expect to benefit as economic growth continues to improve globally and from ongoing cost management.

Our EBIT margins for the third quarter were 15, 8%.

Which exceeded.

Exceeded our 2020 margins and significantly outpaced the comparable period in 2019.

Net income and EPS for the quarter grew by more than 13% versus 2020 and were also significantly above our 2019 results.

As we head into the fourth quarter, we are well positioned competitively and expect to benefit as economic growth continues to improve globally and from ongoing cost management.

Currently expect our full year organic growth to be approximately 9%. On a full year EBIT margin to exceed our year to date margin for the nine months ended September 30th 2021 of 15.1%. Going forward, we remain focused on our key strategic initiatives, which are centered around our talent dedication to creativity.

On a full year EBIT.

Margin to exceed our year to date margin for the nine months ended September 32021 of 15, 1%.

Going forward, we remain focused on our key strategic initiatives, which are centered around our talent dedication to creativity.

And building on our already strong capabilities and precision marketing and Martech consulting E-Commerce digital and performance media and predictive data-driven insights. In the third quarter, we made progress across these strategic initiatives as we announced three acquisitions. Omnicom Media Group acquired jumped 450 media, a performance marketing agency the company leverages algorithmic scaling strategies rapid creative testing and data analytics to optimize digital media spend and drive customer acquisition.

On our already strong capabilities and precision marketing and Martech consulting E Commerce digital and performance media and predictive data driven insights.

In the third quarter, we made progress across these strategic initiatives as we announced three acquisitions.

Omnicom Media group acquired jumped 450 media a performance marketing agency the company Leverages algorithmic scaling strategies rapid creative testing and data analytics to optimize digital media spend and drive customer acquisition.

[inaudible] will form the foundation for a dedicated performance media platform and business operation within OMG. Its focus on E-Commerce and pure performance marketing will strengthen and add a distinct set of capabilities to OMGs existing performance media offerings. Also in late September we announced the acquisition of two German based companies Anthony and OSK. Anthony is one of the most innovative and creative agencies in Europe and was born with data and digital capabilities at its core.

It.

Will form the foundation for a dedicated performance media platform and business operation within OMG. Its focus on E Commerce, and pure performance marketing will strengthen and add a distinct set of capabilities to omg's existing performance media offerings.

Fourth also in late September we announced the acquisition of two German based companies and Tony.

Oh SK.

And Tony.

He is one of the most innovative and creative agencies in Europe and was born with data and digital capabilities at its core.

Anthony's creative leadership and depths of talent will significantly strengthen our capabilities in Europe and around the globe. OSK has been in the top 10 of PR and comms agencies in Germany since 2008 and is the undisputed number one for automotive. It provides a broad portfolio of services. at the intersection of PR, and social media and excels in the convergence of technology mobility and communications.

And depths of talent will significantly strengthen our capabilities in Europe and around the globe.

Oh SK has been in the top 10 of PR and comms agencies in Germany. Since 2008 and is the undisputed number one for automotive.

Provides a broad portfolio of services.

at the intersection of PR, and social media and excels in the convergence of technology mobility and communications our.

Our ability to bring together the brightest talent and data-driven consumer insights from across our organization to deliver a holistic and integrated brand experiences is proving to be highly successful in our new business opportunities as well as in servicing our existing clients. Following on the heels of Philips naming Omnicom their global integrated service partner for creative and media communications. In the third quarter Mercedes Benz appointed Omnicom its global marketing communications partner.

So as is proving to be highly successful and our new business opportunities as well as in servicing our existing clients.

Following on the heels of Philips naming Omnicom Theyre Global integrated service partner for creative and media communications in the third quarter Mercedes Benz appointed.

Fearing suddenly come its global marketing communications partner.

One of the world's most iconic brands Mercedes Benz is today the leading luxury automotive experience company. [inaudible] a dedicated team from across our groups will bring together the best in class talent and capabilities across Mercedes Benz customer journey with expertise in media and CRM brand and performance creative, web personalization and content automation, public relations and events as well as paid and organic social. And just last week, we won the Chanel media business globally, adding another iconic global brand.

<unk> a dedicated team from across our groups will bring together the best in class talent and capabilities.

Wanted across Mercedes Benz customer journey with expertise in media and CRM brand and performance creative.

Web personalization and content automation public relations and events as well as paid and organic social.

And just last week, we won.

Chanel media business globally, adding another iconic global brand.

As in all of our significant wins as well as for our existing clients. Our teams are able to showcase our creativity, data analysis, and predictive insights and technology capabilities to deliver connected personalized and seamless brand experiences for their respective customers at all touchpoints of the consumer journey. One key differentiator for Omnicom and servicing our clients is our cohesive culture that binds us together. It's a culture of creativity, flexibility and carrying that are common values shared across our group.

Data analysis, and predictive insights and technology capabilities.

Does it deliver connected personalized and seamless brand experiences for their respective customers at all touch points of the consumer journey, one key differentiator for Omnicom and servicing our clients is our cohesive culture that binds us together.

It's a culture of creativity.

The flexibility and carrying that are common values shared across our group.

I often hear from clients that are deciding factor in their decision to hire Omnicom is that our people who bring distinct specialized skills to them, know and respect one another and generally collaborate. Our ability to integrate services from across our marketing disciplines is underpinned by Omni are open operating system that orchestrates better outcomes. Omni is built for collaboration, acting as the conductor between different specialists using a single process and workflow from insights to execution. It empowers our people and our clients to make better and faster decisions maximizing efficiency and all of them.

And respect one another.

Tivoli, namely collaborate.

Our ability to integrate services from across our marketing disciplines is underpinned by omni are open operating system that orchestrates better outcomes.

Omni is built for collaboration acting as the conductor between different specialists.

In January in a single process and workflow from insights to execution.

It empowers our people and our clients to make better and faster decisions maximizing efficiency and all of them.

Omni also provides better intelligence by orchestrating first, second, and third-party datasets to present a single comprehensive view of consumers. Our teams can then develop insights to create plan and deliver the most impactful messages, content and communications to them at each stage of the consumer journey. Omni is a unique and powerful tool for us. And we now have over 40000 Omnicom colleagues provisioned on the platform in over 60 countries. Hundreds of our clients, including all of our top 20 utilize Omni. Moreover, the open-source system enables our practice areas. Like Commerce, Health and PR to customize army with different data sources for their clients.

Second and third party datasets to present, a single comprehensive view of consumers. Our teams can then develop insights to create plan and deliver the most impactful messages content and communications to them at each stage of the consumer journey.

On the.

The unique and powerful tool for us.

And we now have over 40000 omnicom colleagues provisioned on the platform in over 60 countries hundreds of our clients, including all of our top 20 utilize omni.

Moreover, the open source system enables our practice areas.

Like Commerce Health N P. R to customize army with different data sources for their clients for.

For example, Omnicom Health group created a custom offering called Omni health since rolling it out in April of this year. H G has leveraged the platform to play a key. He is an expanding the group's omnichannel offering with new and existing clients, including AstraZeneca and Janssen is our alto to name a few. In summary, even during the pandemic, we accelerated the strength of our services, capabilities and organization to deliver better outcomes for our clients and win new business. Our offering is powerful and differentiated. We have best in class talent and creativity using best in class operating systems and technologies. It's a formula that we'll continue to win for us.

H G has leveraged the platform to play a key.

He is an expanding the group's omnichannel offering with new and existing clients, including Astrazeneca and Janssen is our alto to name a few.

In summary, even during the pandemic, we accelerated the strength of our services capabilities and organization to deliver better.

Roll comes for our clients and win new business.

Our offering is powerful and differentiated.

We have best in class talent and creativity using best in class operating systems and technologies. It's.

It's a formula that we'll continue to win for us.

Before I'll turn it over to Phil I wanted to spend a few moments on our relentless focus on talent. Throughout one of the most difficult times in recent history, our people have shown ingenuity resilience and strength. We continue to spend and invest in training and development programs for all of our people. From item basic skills training all the way through the advanced programs of Omnicom University.

I'll turn it over to Phil I wanted to spend a few moments on our relentless focus on talent.

Throw out one of the most difficult times in recent history, our people have shown ingenuity resilience and strength we.

We continue to spend and invest in training and development programs for all of our people.

For item basic skills training all the way through the advanced programs of Omnicom University.

We recently expanded the curriculum for our D E and opened 2.0 strategies.

As the pandemic continues to present, a substantial health risks the wellbeing of our colleagues remains our top priority, we are ensuring we have a safe work environment and are offering a variety of programs for managers and individuals to support the wellness resilience and health at work.

People are our top priority, we are ensuring we have a safe work environment and are offering a variety of programs for managers and individuals to support the wellness resilience and health at work.

I recently travelled to several of our US and European offices and have met with many colleagues and clients, who are happy to be back in my office. We are looking at many alternatives to provide our people a safe return back to the office. For example, this week, we're testing a private transportation service for New York City based colleagues. In the months ahead, we look forward to welcoming more of our staff back with a continuing priority on their safety and flexibility. It is truly our world class talent and our dedication to creativity and innovative solutions that drive real business outcomes for our clients. A key recent proof point, reflecting the quality of our account.

It remains of clients, who are happy to be back in my office. We are looking at many alternatives to provide our people a safe return back to the office. For example, this week, we're testing a private transportation service for New York City based colleagues.

In the months ahead, we look forward to welcoming more of our.

Back with a continuing priority on their safety and flexibility.

It is truly a world class talent and our dedication to creativity and innovative solutions that drive real business outcomes for our clients a COO.

Key recent proof point, reflecting the quality of our account.

Is Omnicom being named the most effective holding company in the US. By the 2021 Effie Awards.

Overall, we're extremely pleased with the third quarter and proud to see that our strategic focus and the decisions. We made throughout the pandemic are now leading to positive results.

As our results once again reflect Omnicom's ability to adapt and respond to changes in the market and deliver through economic cycles.

I will now turn the call over to Phil for a closer look at our financials.

Thanks, John and good afternoon. While the impact of the pandemic continues to be felt across the globe, that impact has continued to moderate significantly as evidenced by our continued growth in the third quarter. Slide three shows our third-quarter improvement across our income statement, where our revenue growth and expense control drove an 8% increase in operating profit. Our effective tax rate for the third quarter was 24.1%. Down from our estimated effective rate for 2021 of between 26.5% and 27%. This was primarily due to the favorable settlement of uncertain tax positions and certain jurisdictions the impact of which was approximately $10 million. These items positively impacted net income and diluted earnings per share, which was $1.65 up 20 cents or 13.8% versus Q3 of last year and up 33 cents versus the third quarter of 2019.

While the impact of the pandemic continues.

Felt across the globe that impact has continued to moderate significantly as evidenced by our continued growth in the third quarter.

Slide three shows our third quarter improvement across our income statement, where our revenue growth and expense control drove an 8% increase in operating profit.

Our effective.

The secs rate for the third quarter was 24, 1%.

And from our estimated effective rate for 2021 of between 26, 5% and 27%. This was primarily due to the favorable settlement of uncertain tax positions and certain jurisdictions the impact of which was approximately.

$10 million. These items positively impacted net income and diluted earnings per share, which was $1 65 up 20 cents or 13, 8% versus Q3 of last year and up 33 versus the third quarter of 2019.

So our growth continues on this important metric as well. And finally, our 70 cent quarterly dividend, which was raised back in February is 7.7% higher than last year. Let's now flip to slide four and look at the quarter in more detail beginning with revenues. Our total revenue growth was 7.1%. Organic growth for the quarter was 11.5% or $367 million, which represents a significant improvement compared to Q3 of 2020. When the pandemic drove an organic revenue decline of 11.7%.

As well.

And finally, our 70 cent quarterly dividend, which was raised back in February.

Seven 7% higher than last year.

Let's now flip to slide four and look at the quarter in more detail beginning with revenues. Our total revenue growth was seven 1%.

Organic growth for the quarter was 11, 5% or $367 million, which represents a significant improvement compared to Q3 of 2020.

When the pandemic drove an organic revenue decline of 11, 7%.

The impact of foreign exchange rates increased our revenue by 1.6% in the quarter. The dollar continued to weaken against most of our larger currencies compared to the prior year. If FX rates stay where they were on October 15th. We expect foreign exchange to decrease our reported revenue by approximately 1% for the fourth quarter. And increase our reported revenue by 2% the full year.

One 6% in the quarter the dollar.

Continued to weaken against most of our larger currencies compared to the prior year.

FX rates stay where they were on October 15th.

We expect foreign exchange to decrease our reported revenue by approximately 1% for the fourth quarter.

And increase our reported revenue by two.

<unk> the full year.

The impact on revenue from net acquisitions and dispositions decreased revenue by 5.9%. Based on transactions that have been completed through September 30th 2021. Our estimate is the net impact of our acquisition and disposition activity for the balance of the year will decrease reported revenue by approximately 7% in the fourth quarter and by approximately 4% for the full year. While we will continue our process of evaluating our portfolio of businesses as part of our strategic planning. As John has said regarding dispositions. We are substantially complete. So if you turn to slide five you can see our organic growth by discipline.

Based on transactions that have been completed through September 30th 2021.

Our estimate is the net impact of our acquisition and disposition activity for the balance.

Percent year will decrease reported revenue by approximately 7% in the fourth quarter and by approximately 4% for the full year.

While we will continue our process of evaluating our portfolio of businesses as part of our strategic planning.

As John has said regarding dispositions.

We are substantially complete.

So if you turn to slide five you can see our organic growth by discipline.

Advertising, our largest discipline at 53% of our total revenues posted 8.6% organic growth.

With very strong performance from both our creative agencies and our media agencies.

Please note that reported advertising growth is down 0.4% due primarily to the disposition of icon and Q2 of 2021. Our agency's focused on direct digital and marketing transformation consulting services in our precision marketing discipline also posted strong organic growth of 24.3%. With the exception of the second quarter of 2020.

<unk> growth is down 0.4% due primarily to the disposition of icon and Q2 of 2021.

Our agencies focused on direct digital and marketing transformation consulting services in our precision marketing discipline also posted strong organic growth of 24.

<unk>, 3%.

With the exception of the second quarter of 2020.

This discipline has been a consistent grower for some time.

And it's become a larger portion of our business each quarter.

CRM Commerce and brand consulting was up 18% with our branding agencies, leading the disciplines performance. CRM experiential was up 50%.

Four point Aram experiential was up 50%.

This business declined far more than our other disciplines in the third quarter of last year during the pandemic. And has not yet recovered to pre pandemic levels due to various global restrictions.

And has not yet recovered to pre pandemic levels due to various global restrictions.

However, this remains an important area for our clients and we look forward to further growth as global economies continue lifting social distancing restrictions. CRM execution and support was up 8.3%. Reflecting a recovery in client spend compared to the prior year and our field marketing businesses.

For further growth as global economies continue lifting social distancing restrictions.

CRM execution <unk> support was up eight 3%.

Selecting a recovery in client spend.

<unk> to the prior year and our field marketing businesses.

While our research businesses continued to lag.

PR was 10.5%, we have a positive outlook for the discipline, especially within our global agencies as clients adjust to the new post-pandemic realities.

1.5%, we have a positive outlook for the discipline, especially within our global agencies as clients adjust to the new post pandemic realities.

And finally, our health care discipline was up 6.6% organically.

Health care was the only one of our service disciplines that had positive organic growth during the depths of the pandemic and continue to perform well.

Was up during the depths of the pandemic and continue to perform well.

Flipping to slide six our revenue by region.

The key takeaway is that all of our geographies again posted solid organic growth.

This growth was driven by virtually every discipline within each region.

Outside the US where total organic growth was 16% double-digit growth in each region was led by Germany, the UK, Canada and Australia. Our advertising media and PR agencies performed well with double-digit growth. On our precision marketing agencies were sizable contributors and also posted strong double-digit growth.

Gross total organic growth was 16% double digit growth in each region was led by Germany.

The UK, Canada and Australia.

Our advertising media and PR agencies performed well with double digit growth.

On our precision marketing agencies were sizable contributors and also posted strong.

We're double digit growth.

In addition, experiential growth outside the US was over 100% in total.

In the US we generated 7.7% organic growth, which was boosted by strong double-digit growth in our precision marketing and PR disciplines as well as solid growth at our health care agencies.

From the advertising and experiential disciplines also grew in the US, but at a slower rate than the growth outside the US.

The last revenue view I'd like to share with you is by industry sector on slide seven.

By industry sector on slide seven.

The change in mix by sector and the portfolio was small on a year to date basis when compared to last year.

In summary, our revenue performance was very strong across the board on both a reported and organic basis, and when analyzed by discipline geography or industry sector.

Let's now turn to slide eight and look at our operating expenses.

To make the analysis more relevant we have also included a supplemental slide in the appendix that shows the 2021 amounts presented in constant dollars. Beginning with our largest category salary and service costs. These costs increased by seven 6% in total.

We have also included a supplemental slide in the appendix that shows the 2021 amounts presented in constant dollars.

Beginning with our largest category salary and service costs. These costs increased by seven 6% in total.

And they tend to fluctuate with the change in revenue.

We would also note that Q3, 2020 salary and service cost amounts were reduced by reimbursements received from government programs of $6.7 million. As we continue to look forward, we expect a healthy advertising and marketing spending outlook and strong demand from our clients will necessitate an increase in staffing. The tight labor market will create challenges in the near term that we are confident in our management teams will overcome. Moving down the P&L third-party service costs, which fluctuate with changes in revenue decreased 6.9% during the quarter due to our net disposition activity primarily related to the disposition of icon.

Year, Q3, 'twenty 'twenty salary and service cost amounts were reduced by reimbursements received from government programs of $68 $7 million.

As we continue to look forward, we expect a healthy advertising and marketing spending outlook and strong demand from our clients will necessitate an increase in staffing.

The tight labor market will create challenges in the near term that we are confident in our management teams will overcome.

Moving down the P&L third party service costs, which fluctuate with changes in revenue decreased six 9% during the quarter due to our net disposition activity primarily related to the disposition.

Icon.

And partially offset by the organic growth in revenue as well as the effects of foreign currency exchange rate changes.

Occupancy and other costs, which are not directly linked to changes in revenue were up 4.5% year on year.

Or 2.9% when excluding foreign exchange rate translation impacts. As expected, these good results continue to reflect our efforts to reduce infrastructure costs and also benefited from a decrease in general office expenses.

<unk> of foreign exchange rate translation impacts.

As expected. These good results continue to reflect our efforts to reduce infrastructure costs and also benefited from a decrease in general office expenses.

As thhe majority of our staff continue to work remotely in Q3.

SG&A expense levels were up 5.3% on a year over year basis were 4.2% when excluding foreign exchange rate translation impacts, we're beginning to see a return of travel and certain other addressable spend costs as pandemic related government restrictions ease however, based on our use of technology during the pandemic.

<unk>, 5.3% on a year over year basis were 4.2% when excluding foreign exchange rate translation impacts, we're beginning to see a return of travel and certain other addressable spend costs as pandemic related government restrictions ease however, based on our use of technology during the pandemic.

We're developing practices, particularly with respect to travel that we expect will allow us to continue to retain some of the benefits we achieved in reducing addressable spend during the pandemic.

Overall we expect that the increase in addressable spend for the balance of the year will be mitigated in part by the benefits we will continue to achieve from a hybrid and agile workforce. As we think about our future expense levels, we certainly expect that some areas will increase in line with our business as activity picks up and life returns to normal.

We expect that the increase in addressable spend for the balance of the year will be mitigated in part by the benefits we will continue.

To achieve from a hybrid and agile workforce.

As we think about our future expense levels, we certainly expect that some areas will increase in line with our business as activity picks up and life returns to normal.

But at the same time, we will also continue to evaluate ways to improve efficiency throughout the organization.

By continuing to focus on real estate portfolio management, back office services, procurement and IT services. With the strong revenue growth, we discussed earlier, coupled with good expense control.

Back office services procurement and.

It services.

With the strong revenue growth, we discussed earlier, coupled with good expense control.

You can see a notable improvement in our operating profit on a year over year basis, the bottom of the slide.

Up 8% for the quarter and 60.1% year to date.

Growing our operating profit dollars remains one of our most important areas of focus. This strong growth in operating profit was also accompanied by improved margins. Which you can see on slide nine. For the third quarter. Our operating profit margin was 15.8% as expressed in terms of our reported total revenues.

This strong growth in operating profit was also accompanied by improved margins.

Which you can see on slide nine.

For the third quarter.

Our operating profit margin was 15, 8% as expressed in terms of our reported total revenues.

We continue 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.

Reductions in certain costs of operating our offices given the continued remote work environment.

As well as benefits from some of the repositioning actions taken back in the second quarter of 2020.

Lastly on this slide our reported EBITDA for the quarter was $560.3 million. Up 7.4% for the quarter and 56.3% year to date. EBITDA margins also remained strong for the quarter. And have expanded nicely year to date compared to last year.

<unk> up 7.4% for the quarter and 56, 3% year to date.

EBITDA margins also remained strong for the quarter and.

And have expanded nicely year to date compared to last year and.

And we expect this strong performance to continue through the rest of this year.

Let's now turn to our cash flow performance on slide 10, where you can see that in the first nine months of 2021.

Turn to our cash flow performance on slide 10, where you can see that in the first nine months of 2021.

We generated 1.2 billion of free cash flow excluding changes in working capital.

$114 million or 10% increase versus the same period last year.

There were no material year over year changes for Capex or acquisitions, as we continue to conservatively manage our cash. While stock repurchases are down relative to pre pandemic periods due to a curtailment during the pandemic. We resumed our activity during the second third quarters of this year. And we expect to continue in Q4 and beyond. You should not expect a change in our historical approach capital allocation and the use of our free cash flow in the future.

Year over year changes for Capex or acquisitions, as we continue to conservatively manage our cash.

While stock repurchases are down relative to pre pandemic periods due to a curtailment during the pandemic.

We resumed our activity during the second third quarters of this year.

And we expect to continue in Q.

And beyond.

You should not expect a change in our historical approach capital allocation and the use of our free cash flow in the future.

We will continue to pay an attractive dividend.

We've indicated that we increased our focus on acquisition opportunities and are in the process of closing on several acquisitions.

Importantly, our acquisition strategy is focusing on the faster growing disciplines in our portfolio and driving future organic growth for the company.

And when we use the balance of our free cash flow to repurchase our stock.

Our strong cash generation again enhanced our credit and liquidity, which you can see summarized on.

On slide 11.

Our total debt was down about $500 million since this time last year as we eliminated the extra liquidity we added early on in the pandemic.

We did this through the early retirement in Q2 of 1.25 billion of our 3.65% senior notes, which were due next year.

Are partially replaced with the issuance of $800 million of 2.6% 10 year notes due in 'twenty 31.

As you can see in the slide our maturities are well lathered with nothing due until late 2024.

As we de Levered to pre pandemic levels.

As for our <unk>.

Debt ratios due to our overall operating improvement versus Q3 of 2020.

And our recent refinancing activity.

We've reduced our total debt to EBITDA ratio to 2.2 times.

And our net debt to EBITDA ratio to 0.4 times.

I'll end, our prepared remarks today on slide.

Slide 12, where you can see for the 12 months ending September 30th 2021 we generated a strong return on invested capital of 26, 4%.

And our return on equity of 47%.

Both metrics increased substantially over the 'twenty 'twenty levels, while these.

So just two points in time it is important to remember our long term track record of providing solid returns to shareholders through business execution, and the resulting consistent allocation of capital to.

Dividends strategic acquisitions and share repurchases.

And that concludes our prepared remarks today.

Operator, please open the lines up for questions and answers.

<unk>.

Ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your Touchtone phone you may remove yourself from queue at any time by pressing one zero again.

If you're using a speakerphone please pick up the handset before pressing the numbers.

Once again, if you have a question. Please press one than zero at this time.

Our first question comes from the line of Alexia Quattrone with J P. Morgan. Please go ahead.

And thank you very much I guess my first question is on the overall advertising market.

John you know I'm, not really asking about organic.

That growth outlook, but more about underlying.

State of the marketplace are you are you still seeing kind of an acceleration and growth or recovery or we are we sort of more of a steady state I'm trying to get a sense. If there's some verticals, whether it's entertainment or maybe auto that haven't fully recovered and therefore, you know theres still better days ahead.

Ted.

So in theory ahead of us in terms of where we are in the recovery and any thoughts you know staying on that vein of how we should think about that project based business at the end of the year. I know you don't usually have a lot of inside this early on but if you have any thoughts on that I'd. Appreciate it. Thank you.

Sure there.

There are still some areas to come that clients would like to deploy.

Money too.

Especially when it comes to live events.

And execution type of.

Activities, we saw that startup.

Again very well.

Robustly in China in the beginning of the third quarter.

Slowdown in China, as China continue to have some problems, but we're wherever its possible you can see that.

We're coming back in.

Companies like the insurance companies or some of our government accounts.

I'd like to get back out on.

On the road.

Visit with people constantly so theres more more to come I think having said that our underlying underlying growth areas have been.

As I said in the call CRM advertising and media, they've been strong and they're more than compensates.

Slide four.

The not yet returned.

Segments, where people will in fact spend money.

As we move forward as more people get back to a regular schedule and I think it's been 20 months since most people are shut down.

And it's.

Without any severe.

Disease setbacks.

I think we will increasingly see more and more people back into offices and.

Because they're already going to sporting events and dinner and.

Enjoying themselves so.

More to come.

And I'm pretty bullish about the future.

And just on that in the past yeah on the pretzel business.

Yeah.

And in truth interests.

At this point.

We have forecasted what.

Our folks have told us as you know that changes and can change quite a bit as you go through the quarter.

We're being a bit conservative this year because.

You know there have been supply chain.

<unk> throughout.

This pandemic.

They have gotten a bit more severe but not outrageously more severe and we know that clients will continue to spend at the level. They're currently spending that we just don't know if there'll be those year end <unk>.

<unk>, where they can deploy more dollars.

So.

I think it was pretty clear.

That.

We believe that.

I think for the first time.

I didn't warn about that [laughter] listened to.

And probably for the first time.

I told you what we believe organic growth can be for the full year.

In terms of what we see right now.

Yeah, that's really helpful. I appreciate that and maybe just one follow up for Phil If I may on on margins for the longer term and I'm not looking for.

Guidance for next year, but just more of a quality Ari commentary I'm.

Shouldn't we see margins you know not necessarily higher than this year, obviously, but when you look versus a normalized year like 2019.

Should EBITDA margins be maybe a little bit better in theory. Just you have you know you have more of a normalized cost structure, but maybe not.

Not 100% back to the way it was pre Covid and of course, you have some of the benefit of the divestitures in the restructuring I'm curious, how we should think about profitability versus again pre COVID-19 going forward.

Sure.

In summary, I think based on everything we know today.

Now as we look out into the future beyond.

What John said in his prepared remarks, which which was essentially.

Where we're comfortable that.

Through nine months, we're at.

EBIT margin of 15.1.

Today in fact for the year.

<unk>.

We will be 15.1.

I think as we look out into the future we don't expect that.

Our margins are going to deteriorate.

From that it's too early to forecast two.

So, but we're optimistic.

That you know won't be able to maintain those levels, there's an awful lot of.

Unknown at the moment with Covid in.

Returning to travel.

We have benefited from a reduction in travel expenses.

Wanting to and some of the other addressable spend cost that that our agencies have done a great job.

Managing.

We do expect to maintain some of that permanently.

But as we grow costs are going to come back.

And the challenge for us is going to be to maintain them relative to.

And cost base and you know we're confident that.

Our performance through nine months.

You know what will.

We'll be sustainable and our expectations for this year.

Will it be similar from a margin perspective going forward.

Thank you very much very helpful. Thank you.

Who are growing and the next question comes from the line of Jason Bazinet with Citi. Please go ahead.

Yeah.

I just had a simple question on slide six.

Disparity in organic growth between the U S and rest of world.

Great way to interpret that that the icon disposition.

In the U S or is.

You too.

Before Jim organic growth rate. Thanks.

Yeah.

I Kinda itself you are correct as it is a U S based business.

So certainly that.

That is a part of it.

There's also when you look at the components of.

Our growth in experiential.

And and the experiential discipline.

The growth outside the U S was was significantly higher than the growth inside the U S. Both.

The U S experiential business on the international experiential business grew rapidly.

In the quarter.

Quarter.

Which was certainly a positive.

But the growth outside the U S, which is more.

St large event, driven as opposed to the U S business, having some component of consultative a consultative part of the business.

Grew less rapidly it grew right. Its performance was really really good but.

The U S.

<unk> business grew at a less rapid rate than the international business and.

Yeah, we're happy with with the performance of both and then.

Yeah.

In.

So as you said before I call on the dispositions is largely U S based business.

Okay. Thank you very much.

Sure.

Yes.

And the next question comes from the line of Ben Swinburne. Please go ahead with Morgan Stanley. Please go ahead.

Hi, good afternoon guys.

I have.

In the U S questions. The first for one or both of you really on using your balance sheet and cash flow sort of more aggressively John you talked about M&A last.

Last quarter and wanting to be more active you guys have picked up the pace there a bit but I'm just wondering if you think.

You know if you would like to do larger deals if you can find them.

It makes sense financially.

Particularly in areas like precision marketing or if that's just a business where you are generally either building organically and or buying kind of tuck ins.

And Phil the same kind of question on the buyback I mean, you guys bought back I know you've picked up the pace this quarter.

But you know your balance sheets in great shape, you don't have any charities anytime soon.

And named pretty cheap businesses growing just curious if you guys think that the balance sheet should be a more offensive weapon.

Weapon for for lack of a better phrase and what we've seen recently.

Let me see if I can answer your first question.

The.

The size of the opportunity really is never gotten.

Monies in our way one way or the other in terms of our ability.

Affordability for what we believe is this strategic and accretive transaction.

What is different and I did mentioned in the last call you right.

Was we went from a mode.

Cleaning up the portfolio too.

Two really reactivating.

Are people that are looking for certain acquisitions in the areas that I outlined.

And the practice in addition to the corporate effort that's going on there.

Each one of that.

Practice areas.

And that we're focused on for acquisitions.

Is it has a similar group to the corporate group out scouring the market to find out if we can find partners that we wanted to do business with going forward.

So on on just to continue on.

What jumped what John had said and then talk about capital allocation more broadly.

Certainly our our.

Reference says we've indicated is is.

And more of our free cash flow on an acquisitions.

Mechanic that the characteristics that we've typically describe them.

On touched on.

So we're very confident in the areas that we are.

I Wanna growing and where we're looking for acquisitions.

The faster growth areas.

And businesses that are going to contribute to an acceleration of organic growth in the future.

And that job, but I don't think you can you should expect anything to change.

Significantly in our approach to capital allocation you know we'll continue.

To look at our free cash flow.

And paying attractive dividend, we're going to continue as we said.

<unk> more aggressively to pursue acquisition opportunities in those higher growth areas.

And and Yeah, we expect to continue to be successful.

On that front.

We did start to get back in the market.

A little bit in the second quarter more in the third quarter of this year.

In terms of buying back shares.

And using our free cash flow for buying back shares that'll continue in Q4, we don't set.

And won't set an acquisition bogie.

For 2022 in terms of a dollar amount or a percentage of free cash flow.

And if.

Or more attractive deals available.

We're going to pursue them in and you know, if we overspend or under spend our free cash flow, we're going to do it for the right reasons.

And you know our share buyback approach won't change in that broader context either.

And.

If I could just ask a follow up to <unk> question on the revenue guidance for 2021.

<unk> of 9% I think that implies something like five or 6% for the fourth quarter roughly John you mentioned, you were being conservative or that your colleagues conservative on project is that that's sort of why we're seeing sort of a diesel.

And innovation relative to last year is still you know pretty favorable comp in the fourth quarter or anything else you would add about supply chain or anything else in Q4 that you'd want to highlight.

Sure in answering <unk> question.

That forecast that implied forecast I believe you calculated to be pretty.

Accurate.

Any projects that we had been able to forecast.

Included in that you know in what we're seeing so it's not without.

Some activity.

We.

And each.

Salary normally.

As you know I get on the call and say well, who knows what growth is really going to be.

Because we don't know what the budget flush project spending is going to be.

We've taken a real hard look at it this year and and we've probably done a better.

Each year.

Ferreting out some of those unknowns than we have in past years.

So it's a fairly big.

Upon everything we know sitting here right now, it's a very reliable.

Outlook.

Having said that you know that's what we expect.

That's what we are.

Hiring for and planning day to day as we go through the tactics of running our business.

If something were to come in so be it but.

At this point I don't think it would be reasonable a responsible to a forecast more.

Understood.

Giambi.

And the next question comes from the line of Craig Huber with Huber Research partners. Please go ahead.

Thank you I have a few questions. The first one John if you could just touch on curious your general conversations with your clients out there what is the general tone of business from there.

And how do you think that's going to translate here into their market advertising spend that will go through on the call.

Sure.

Most of the conversations that I've been having with our clients.

Uh huh.

Have you been multifaceted.

And they are generally very optimistic that as people return to the workplace.

And so to start to spend money starts to get it.

Out of the house.

That we'll see more and more.

Spending in growth at least in the near term.

It's probably.

I mean bird by them.

The supply that some of our clients can come through with.

And in terms of.

The goods that are held up in port or.

Or.

You know they know will come they'll be able to market, but they're not certain.

Really tempted to they'll have them in their parking lots or stores to sell today.

Okay.

That's very issue for the most part we've spent a great deal of time looking at this and talking to people about it to find out what the impact is.

From those issues.

On the current level of spending that we're seeing.

And we're very comfortable.

That we don't see any real cutbacks.

From.

You know what we're currently projecting for you.

So.

And.

It's the great unknown everybody.

Yeah. It covers every bit of the news and all the rest and.

And.

I think all responsible people are focused on it.

Daily.

So.

Yeah.

John we've talked about this in the past.

Long term once we get through the pandemic here that the economy normalizes out here, you've expressed optimism to get your organic growth rate back to global nominal GDP type growth rates yourself just go through for us what why you're so optimistic you'd be able to get back to that please.

The reason I have been optimistic is that.

In the three years, leading up to the pandemic.

What we would do it would be we were strategically and I think sensibly and responsibly.

Hmm.

Trimming and reshaping our portfolio.

For companies that we believe we're going to contribute to our growth.

The longer term.

And.

We finished for.

For the most part.

That process.

At the end of last year the beginning.

I guess this year forgive me.

And last year, we started to.

Truly search for.

And support.

Using our acquisition dollars.

Some of the areas.

You know that we have decided will be large contributors to growth going forward.

And so the part of our portfolio has changed.

Changed.

Guests over the.

The last several years and we've.

Been very.

Deliberate during the pandemic.

<unk> do.

Do not take our foot off the accelerator.

And so I think the portfolio, we're left with matches where clients need and they're going to spend their money now and for the foreseeable future.

And we'll keep working at it and trying to.

They do.

To grow it and make certain that we can provide services.

That in the aggregate.

I'm confident.

That we're going to get back to GDP plus.

And then my final question, John as you kind of look back on those three.

Two or so prior to the pandemic, we organic revenue growth lagged global normal GDP, what else would you point to why that actually happened.

Now looking back on that.

I just gave you what I think was the real principal reason I'm sure.

Three year or any other factors.

I'd have to think.

More before I could.

Point to any other single thing that moves materially have impacted it.

The reshaping of the portfolio.

It's terribly important.

Yes, certainly.

Or am I not to dwell too much on on the.

Distant past either.

Very good thanks, guys.

Yes.

And the next question comes from the line of Dan Salmon with BMO capital markets. Please go ahead.

Hey, good afternoon.

Trump I wanted to return maybe.

Maybe not specifically to the jumped 450 acquisition that made a lot of sense for O. M. G. Retail media is a really hot space right now what what I wanted to ask about John was really how do you feel about your e-commerce capabilities across the entire portfolio, presumably the accelerating shift to E comm.

Commerce is relevant to a lot of your agencies, so we'd love to hear how you're capitalizing that across the group.

Thank you.

Certainly.

For a good part.

Our 2020.

And the earlier part of 2021.

There was a concerted effort, especially focused out of our media and retail.

Shopper marketing.

Practice areas.

To take a very hard look into skill sets.

Capabilities that we had within omnicom.

And how we.

He could ensure and accelerate.

Our knowledge and importance to our clients.

As they depend more and more on e-commerce solutions to interface with their consumers and their customers.

And.

We're very bullish.

That we have.

A pretty significant.

Set of resources out there, they're able to respond to that need.

And it's one of the areas.

That we've identified and we continue to search.

For sensible acquisitions.

Which will enhance the skills that are already within the company.

Yeah.

If I could slip in one follow up fulfill with maybe the worst in the pandemic behind US can you comment just a little bit on the type of leverage level that you and John maybe you could comment as well and the board are looking.

Looking at over the near to mid term.

I you know I think after we we recently Delever delever.

As we referenced them I think you can expect us to stay in and around our historical levels.

On a gross debt basis, so two two.

2324 in that neighborhood.

Yeah, I think I think the board certainly is comfortable with that we as a management team.

A relatively conservative about our leverage levels and I you know I think you can expect to see us.

In and around those levels going forward.

Two quick.

Couldn't agree more with them and if you looked historically.

They've been two times whenever we've intentionally deleveraged and taken any insurance out.

One was after the great recession in 2008.

One was after.

And then Nick here.

Oh.

So the management.

Been terribly consistent for a very long period of time.

Yeah.

Thank you I appreciate it.

Sure.

Yeah.

And the next question comes from.

From Michael Nathan with Moffett Nathan. Please go ahead.

Thanks, I have two for you guys one along the same line yeah, I wonder over the past 18 months or so.

What have you learned about your cost structure and client services.

That you can internalize and maybe save going forward.

But there there has to be something.

That may have surprised you about how you went to market and maybe things that you could capture going forward and then the flipside of that is.

John there's always been times of hiring.

Tiring challenges, but can you talk a bit about either the wage pressures you're seeing or maybe.

The lack of candidates and the pressure.

As you know we can find good people and at this time any different than in.

In prior times on those counts so thanks.

Sure.

I'll take the first part of our Ah Yeah, I'll start with the first part and then and then you can add so so certainly.

We learn we learned quite a bit about our.

People in our businesses.

Communication was certainly critical end and continues to be critical with all constituencies that make up our businesses SAR employees.

The people that manage our individually.

Individual agencies, our clients staying close and then throughout the pandemic.

What was certainly made possible by the technology investments, we have made over the last several years.

And we're able to do so without a hitch so so yeah.

Technology played a large role I think we've learned that doesn't awful lot that we can do as a business and our people can do to service their clients using that technology to do things that we never thought were possible before that's gonna enable us going forward.

To look at the business a little differently in our infrastructure a little bit differently. So that we can continue to to to get the most out of those technology investments.

Going forward.

We also think from from a people perspective.

Yeah mentoring our.

Forward, Paul, especially our younger.

Colleagues.

It it works fast one when people are together creativity works fast when people are together, there's an awful lot we can do remotely.

No question, we've proved that out but over time.

You know, we're a culture that.

Our piece best when we're together certainly the pandemic proved that our we need to be flexible in that approach and it may different market by market or business by business.

But you know I think I think we are a culture of collaboration.

At work and while we can utilize technology to.

To take advantage of a number of of.

Opportunities, we do work best and look forward.

Two are people coming together to collaborate again in person.

And certainly.

No.

The the.

Acceleration of digital and e-commerce.

You know broadly in the marketplace and you know each of our clients pursuing their own strategies yeah. We.

Our agencies have done a great job in helping them deal with all the changes that come with that and.

You know certainly our precision marketing group.

<unk> has done extremely well in that area, helping its clients.

On a number of initiatives that they're pursuing in.

You know digital and E Commerce, and you know we're optimistic that you know that growth will continue.

And you know in an accelerated pace.

I only have a couple of points to make in trying to answer your question, but feel free to them.

Come back have been covered okay, I would say almost at any point in time, there's always a challenge too.

More of the best and the brightest.

This period of time, it was not made that any easier and we continue to go out and search.

And.

Tried to bring into omnicom.

Those people who possess those skills.

So again are looking for a place.

That.

Has a truly defined culture.

That.

We will offer them career paths that.

They can look forward to and.

You know a diverse set of clients in different industries.

And.

Practice their craft.

As Phil said, we also spend.

As part of that culture, very dedicated never cut back a penny on this.

On what we dedicate to training and development of our younger staff.

So.

That challenge.

That is ever present.

Now, we like everybody else.

Faced with.

Some nuance and some different challenges.

Yeah.

During this period.

But we're also.

As we face some salary increases for certain.

Is <unk>.

We're a very highly incentive compensation.

Model.

So in terms of what we pay out in total comp.

We're well within.

Our capability of dealing with any challenges that we've seen thus far.

We anticipate.

In terms of the inflation salary costs, so environment and culture becomes terribly important.

The other thing when looking at.

Groups like ours.

Which can't be overlooked.

Is that our clients.

And their marketing.

Cummins are facing.

More severe challenges of losing.

Talent and requiring.

Our assistance in certain areas that maybe in more comfortable times, they wouldn't has been keen to to buy or.

Turning to par as you know wanting to be first in the queue to make sure that we can reserve those people.

To service their needs.

So.

It's.

Yeah.

Hmm.

For everything that makes the glass half empty.

We've been able to.

Or been blessed with as being really hurtful.

Thanks, guys.

Sure.

Yeah.

And the next question comes from the line of Tim Nolan with Macquarie. Please go ahead.

Oh thanks.

Hum I've got a macro question in a business question. The macro question is about inflation actually so we've talked about supply chain issues, a fair bit on this call but.

Previous macro.

Cycles inflation has often been a good thing for AD spending and therefore for your business and I Wonder if you have any thoughts on that.

Ups now or if that maybe is.

Gave indication of some of the supply chain issues now instead.

And then the business questions you, you're talking a fair bit about precision marketing here, which is great to hear I Wonder if you can give us a bit more color maybe on you know what.

What are some of the M&A opportunities it seems like that's the.

But you're looking at to bolster your precision marketing business, what kind of areas do you feel like you would like to fill out better and how you would then look versus your peers.

I don't know where to start.

I mean I can't.

Predicting inflation, but I say F O probably I'll take a shot at it.

So so there's certainly been lots of press.

Yeah on inflation for for.

Quite a while now is a transitory is it.

Not transitory.

You know plenty of people.

People have an opinion many of which are different.

Yeah, the fed has their own opinion as to whether its transitory.

But but certainly sectors like CPG auto food have been impacted and and you know, we'll see how it how it plays out over time.

Hum, but to date the feedback we've gotten in our discussions with clients.

It it really hasn't been a.

A negative or positive and having any kind of a meaningful impact at this point on their spending plans near term. So you.

We haven't seen and don't expect significant reductions in consumer spending in the near term and you know ultimately.

I don't think there's a definitive answer that anyone has at this point in time, we're just gonna have to see how it how it plays out.

And then regarding.

The precision marketing space.

We've done a few deals.

Of some.

You know business transformation consulting firms.

And also some martech.

Consulting firms.

That had been quite.

We last fall.

And we built out.

Cordero the initial acquisition, we did several years ago.

It has some global offices now in more offices in the U S than it had before.

Yeah extremely successful and you know we expect that.

<unk> six <unk>.

That success will continue and certainly those are areas.

Within precision marketing that that.

Yeah, we're looking for opportunities and we expect to find some additional opportunities there are some other some other strategic areas within within.

What could.

As a relatively broad category. But we haven't we haven't finalized any of those transactions and we're not sure whether we'll be successful or not but certainly.

But we haven't we haven't finalized any of those transactions and we're not sure whether we'll be successful or not but certainly.

We've got our.

We've got our eye on a on a few different opportunities.

Thank you very much.

Yeah I'm sure you know.

At this point I've been asked to thank everybody and sorry, if we couldn't get to all of your questions and we hope to see and speak to you very soon.

So was that I just wanted to say thank you for joining us and you.

The industry time.

Thank you.

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Q3 2021 Omnicom Group Inc Earnings Call

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