Q1 2023 Omnicom Group Inc Earnings Call
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Good afternoon, and welcome to the Omnicom first quarter 2023 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 to zero and if you need assistance during the call. Please press Star then zero as a reminder, this conference call is being recorded at this time I'd like to introduce.
You to your host for today's conference Senior Vice President of Investor Relations. Gregory Lundberg. Please go ahead. Thank you for joining our first quarter 2023 earnings call with me today are John Wren, Chairman and Chief Executive Officer, and Phil Angel, Austro Executive Vice President and Chief Financial Officer.
On our website Omnicom group Dotcom, we've posted a press release, along with the presentation covering the information will review today as well as a webcast of this call an archived version will be available on today's call concludes before we start I would like to remind everyone to read the forward looking statements and non-GAAP financial and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 these statements represent 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 2022 Form 10-K.
During the course of today's call. We will also discuss certain non-GAAP measures you can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John then Phil will review our financial results for the quarter. After our prepared remarks, we will open the line for your questions.
I'll hand, the call over to John .
Thank you Greg Good afternoon, everyone and thank you all for joining us today.
We're pleased to share our first quarter results as we discussed on our last call. We entered 2023 extremely confident in our strategic and financial position I'm pleased to report that for the first three months of the year, we met our internal revenue and margin targets.
Organic growth in the first quarter was 542%.
Our growth was broad based across disciplines geographic regions and client sectors.
Advertising and media acquisition marketing and public relations with our largest contributors in the quarter.
Adjusted operating profit margins for the quarter was 13.5% non-GAAP adjusted earnings per share was $1 56 up 12, 2% versus non-GAAP adjusted EPS for Q1 2022.
Our cash flow and balance sheet remained very strong and support our primary uses of free cash flow dividends acquisitions and share repurchases.
We're pleased with our results for the quarter and remain on track to achieve our full year targets of 3% to 5% organic growth and 15 to 15, 4% operating margin.
Strategically we continue to invest in our creative leadership with T. W. As recent acquisition of dark horses.
London based award winning sports marketing agency.
Dark horses operates in a high growth area and works with a strong roster of global clients and influential sports organizations.
Well creates here, but he remains a core part of our culture and organization. We continue to be recognized for our integrated suite of services across precision marketing data e-commerce and other disorders.
Most recently our capabilities were highlighted by AD age who named US their 2023 holding company of the year.
The publication noted that while still creative Omnicom is a data driven powerhouse, enabling marketers to transform their businesses using capabilities in E Commerce consumer experience management CRM and more.
Our ability to deliver increasingly specialized integrated services enables us to expand the work we do for our clients and we remain their trusted adviser to them.
In fact in 2020 to 100 of our largest clients were served on average by more than 50 of our agencies across different disciplines and geographies.
As we move ahead, we continue to look for ways to strengthen our portfolio through acquisitions and investments in high growth areas, such as precision marketing health care E Commerce media and PR as well as in our core creative services.
I'd like to now turn to how we are approaching the new way our people work, which has resulted in changes in our real estate.
We created a plan that underlies our belief that our physical offices play a critical role in maintaining culture inspire creativity and innovation and promoting professional development.
Our approach also recognizes that providing flexibility creates benefits for their health and wellbeing of our people.
With this in mind, we recently announced we are requiring our people to work in our offices a minimum three days a week in practice many of our agencies are already at or well ahead with this requirement.
Many are working a full week in the office based on this plan during the quarter. We made the decision to exit over 1.6 million square feet of office space around the world.
Since 2018, we reduced our office footprint by 35%, while our employee head count has increased by approximately 4000.
We are also experimenting with different approaches to make it easier for our people to return to the office.
One example is in the New York Metro area, where we are opening three satellite offices in long Island, Connecticut, and New Jersey.
We are also opening new omnicom campuses in three cities in India.
And I you were gone in Hyderabad.
As the number of employees in India continues to grow at a significant pace.
So cover the financial impact of our real estate actions during his remarks.
Going forward, we continue to invest in new Martin workplaces that provides the type of environments, most effective for collaboration and in office work.
We are also rapidly charting a path of how we use new technologies for the future of work.
In the area of generative AI through our large scale relationship with Microsoft We have established a dedicated azure environment with secure enterprise access to the latest open AI G. P T bundle.
This unique setup is allowing us to responsibly develop new custom inversion controlled models.
<unk> various use cases within omni.
As well as supporting overall automation and transformation efforts.
Element includes careful consideration related to all aspects of generative a R from confidentiality to intellectual property rights privacy biases and ethics.
In conclusion, we are pleased with how the year has started and remain on track to meet the targets we set for the year at.
At the same time, we remain cautious as to how inflation interest rates the war in Ukraine.
Creasing tensions in the middle East and the recent banking and credit events in the United States could impact the economy and our operations.
Any of these risks have been evident for quite some time and we have developed plans to appropriately respond to any potential headwinds and minimize the effect on our financial performance.
Now I'll turn the call over to Phil for a closer look at the financials. So thanks John .
2023 is off to a solid start in what remains an uncertain year.
All of our disciplines and geographies grew organically in the first quarter and we continue to invest in our operations and took strategic steps to reduce our real estate footprint and.
And we continued our balanced capital allocation dividends acquisitions and share repurchases.
Let's begin with a high level review of the quarter on slide three.
John mentioned the transition to a flexible working environment with a hybrid model, which allows for partial remote work has resulted in changes to our real estate strategy.
And we made the decision to exit certain leases and reduce our office space.
While there will be some investments, we'll be making in existing and new locations.
That impact overtime will result in a lower rent and occupancy costs.
In the first quarter of 2023, we took a charge of $119 million related to this reduction in our office lease portfolio. The charge is primarily related to the noncash impairment of a portion of our operating lease right of use asset.
And the write off of the net book value of leasehold improvements at the affected locations.
As a result rent and occupancy expense will be reduced in the future.
And substantially all of the charges will be paid out of the remaining lease terms over the next few years.
This slide shows our reported results followed by certain adjustments, which make the period's comparable.
The resulting non-GAAP adjusted amounts for both periods.
In addition to the real estate charge I just discussed for 2023.
Operating expenses in the first quarter of 2022 include a $113 million charge.
Rising from the effects of the war in Ukraine.
In summary reported revenues were up 1% and non-GAAP adjusted operating income was flat.
Both were negatively impacted by foreign currency translation.
Moving down the income statement net interest expense improved due to higher interest income than we expected.
In Q2.
We estimate that interest expense will increase a bit primarily due to an increase in the interest rate applied to our pension and post retirement obligations.
This will be offset by an expected increase in interest income in Q2 of 2023 relative to Q2 of 2022 although we do not expect as much interest income in Q2 of 'twenty three as we had in Q1 of 23 due to our working capital cycle.
The second half of 2023 we expect that net interest expense will be flat to up slightly relative to the second half of 2022.
In Q1 of 2023 the effective tax rate was somewhat lower than our annual guidance of 27% due to a lower effective tax rate related to the real estate repositioning charge.
And the realization of certain tax benefits and Nols.
We still expect a tax rate of 27% for the balance of the year as indicated on our February 2023 call.
non-GAAP adjusted net income increased 9% as a result of share repurchases, our diluted share count declined by two 5%.
non-GAAP diluted EPS was up 12, 2% on an adjusted basis.
Without the headwind from negative foreign currency translation.
non-GAAP diluted EPS for the quarter increased by approximately 16%.
Now, let's review the quarter in more detail beginning with the components of our revenue change on slide four.
Organic growth was five 2% the impact from foreign currency translation was negative and reduce reported revenue by three 2%, which once again was a bit less than the preceding quarter.
Looking forward, we still estimate that the impact will moderate for the remainder of 'twenty 23, and will be approximately flat for the year the impact of acquisition and disposition revenue was negative 1%, primarily reflecting the disposition of our businesses in Russia announced near the end of the first quarter of 2022.
Given the recent disposition of a small research businesses earlier in April we expect a similar reduction of about 1% for the balance of the year.
Prior to any acquisitions, we expect to complete later this year moved.
Moving on to slide five let's review our revenue growth by discipline.
During the first quarter advertising and media posted 5.1% organic growth.
Once again led by strong performance at our media businesses.
Precision marketing had strong growth of 7% organically.
They need to invest in this area and we see opportunities for future growth in the market for digital customer experience data analytics and digital transformation services.
Or some brand consulting grew organically by three 3%.
Primarily on the strength of our branding and design agencies.
Spiritual organic growth was 8.4% led by Europe , the UK and the middle East.
Execution and support return to growth of three 6%.
Led by our merchandising and support businesses and offset by a reduction in our research businesses.
Relations with strong at five 8% coming off a challenging double digit growth comparable in Q1 of 'twenty two.
Finally health care grew four 8%.
We continue to see good growth trends in this business 20 twenty-three supported by new client wins last year.
Please note that we made some adjustments to reclassify certain agencies, among our disciplines to reflect changes weren't agency's current and future capabilities better aligns with their new disciplines.
Prior periods have been restated to the car presentation.
No changes were made to total revenues.
Total organic growth.
For your reference we've included a slide in the appendix of updated 2022 quarterly and annual revenues by discipline.
The impact of the changes on the 2022 presentation by discipline was minor.
The only notable change resulting from reclassifying, our digital communities agency.
Which has been more closely aligned with our research capabilities.
The commerce and brand consulting discipline to our execution in support discipline.
Turning to slide six for revenue by region, you can see the growth was above 5% everywhere, except Asia Pacific, where we saw some regional performance challenges impact results in the U S. Our 5.1% quarterly organic growth was led by advertising and media.
Susan marketing and public relations.
International organic growth of five 4% led by advertising and media.
In marketing and our experiential businesses had strong growth outside the U S.
Turning to slide six for revenue by region.
You can see the growth was above 5% everywhere, except Asia Pacific.
We saw some regional performance challenges impact results.
In the U S, our 5.1% quarterly organic growth.
By advertising and media.
Precision marketing and public relations.
International organic growth of five 4% led by advertising and media.
Marketing and our experiential businesses had strong growth outside the U S.
But were flat in the U S.
Regionally, we had positive growth across our top 10 countries.
The exception of China.
Looking at revenue by industry sector on slide seven compared to the first quarter of 2022.
<unk> had higher relative weights and food and beverage and auto.
Offset by a lower relative weight in technology.
Other categories were broadly stable.
Let's now move down the income statement look at expenses on slide eight.
Our total operating expenses were flat at $3 1 billion.
Salary related service costs were flat.
Increased resulting from organic revenue growth and additional head count was offset by the effects of foreign currency translation.
As a percentage of revenue these costs decreased 1% year over year.
Third party service costs, which include third party supplier costs, when we act as principal.
Regarding services to our clients.
Increased due to an increase in organic revenue.
These costs are an integral part of our service offering to our clients.
We provided additional operating expense detail this quarter with the addition of the third party incidental cost line.
Primarily consist of client related travel and incidental out of pocket costs that we will back to clients directly at our cost and we are required to include in revenue.
These costs were previously included in the third party service cost line.
And they tend to increase when revenue increases and decreases in revenue decreases and.
In Q1, the increase due to an increase in revenues.
We hope this incremental disclosure will assist in your analysis of our results.
Occupancy and other costs were down a bit.
They increased slightly due to growth in general office expenses as our workforce continues to return to the office.
Which was offset by the effects of foreign currency translation S.
SG&A expenses decreased primarily due to lower professional fees and the effects of foreign currency translations for your reference.
Slide 16 in the appendix presents our operating expense detail on a constant currency basis.
Similar to the income statement highlights slide we discussed earlier.
<unk> nine presents both the reported and non-GAAP adjusted results.
2023 and 2022.
By removing the Q1 'twenty twenty-three real estate repositioning charges and the Q1 2022 charges arising from the effects of the war in Ukraine.
Our first quarter 2023 adjusted operating income of $466 million.
Flat with the first quarter of last year.
Related adjusted operating income margin, 13.5% compared to 13.7% in the first quarter of last year.
Please turn now to slide 10 for our cash flow performance.
We define free cash flow as net cash provided by operating activities, excluding changes in operating capital.
Free cash flow for the first quarter of 'twenty twenty-three was $429 million.
Up 26, 3% from last year, which included the cash impact of charges arising from the war in Ukraine.
Changes in operating capital is typically negative in the first quarter.
And level for the first quarter of 2023 was similar to the last few years.
As we look forward for the full year 2023 we continue to expect changes in operating capital to be a source of cash again.
Regarding our uses of cash we used $142 million of cash to pay dividends to common shareholders. Another 13 million for dividends to noncontrolling interest shareholders.
Our capital expenditures of $23 million or at normal levels and flat with last year.
Acquisition spend net of dispositions and other items was $38 million and related to the acquisition of additional noncontrolling interests.
And lastly, our net stock repurchases for the quarter with $279 million.
Roughly in line with last year's first quarter level.
Well on the way toward our annual expectation of 500 and $600 million.
Slide 11 is an overview of our credit liquidity and debt maturities.
At the end of the first quarter of 'twenty three.
The book value of our outstanding debt was relatively flat at 5.6 billion compared to the same period.
Last year.
There were no changes in outstanding balances during the quarter.
Our $2 5 billion revolving credit facility, which backstops, our $2 billion U S commercial paper program.
Remains undrawn and.
Our cash and cash equivalents were $3 3 billion.
Turning to slide 12.
Our operating capital discipline consistently drives above average returns on both invested capital and equity.
For the 12 months ended March 31 2023.
We generated a solid return on invested capital 24%.
And a strong return on equity of 45%.
The strength of our business delivers attractive returns on a relative basis.
In both strong and weaker.
Macroeconomic environment.
In closing it was 2023 begins we continue to review our costs better aligned with our estimate of revenues and an uncertain economy.
And our decision to exit certain real estate in Q1 is consistent with this approach.
Our Q1 performance was solid and a first step toward delivering on our full year guidance of an operating income margin between 15% and 15, 4% excluding.
Excluding the impact of the real estate repositioning charge.
We expect to be at or close to the top of that range.
Our approach always includes the opportunity for strategic and accretive acquisitions.
And if those opportunities are not immediately available we will continue to use our free cash flow to boost total shareholder returns.
Dividends and share repurchases.
Operator.
Please open the lines up for questions and answers.
Thank you.
Thank you and then if you would like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the ones Youre command, if you're using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question you May press one zero at this time.
And the first question comes from the line of David Karnofsky with J P. Morgan. Please go ahead.
Hi, Thank you John just wanted to see if you could provide any additional context around the organic guide I think last quarter. You said you were extremely comfortable with the low end of three to five just given the performance at the top end of the range in Q1 has that level of comfort moved higher at all thanks.
Not yet.
We're still comfortable with 3%.
And our stretch target remains 5% for the year, we'll know more certainly by the time, we get to the second quarters call in July .
But.
The.
And the reason for that.
Is in my experience, it's just common sense not to fight the fed.
And and so.
We're not going to fight the fed and.
Whereas our clients continue.
The spend.
And we continue to win new business, it's all very positive.
Clients are getting cautious and theyre trying where they can to avoid long term commitments and create as much flexibility in there.
Spending as possible. Therefore, we're doing the same.
Okay and then Phil can you just confirm I think you said for the margin guide at the higher end of the range and then how should we think about the benefit of those real estate actions, maybe flowing through to future years.
So and in terms of the higher end.
I think where we're comfortable that we're well.
We will go to a close the year out closer to 15, four then than 15 and you know we're pretty confident.
Given the real estate.
Actions that we took.
And you know our conservative approach to managing the cost structure.
That's kind of an environment.
That will go up we're going to close the year, even though it's early we'll close the year between the midpoint and the high end of the range.
Anything on future years.
The real estate action.
You know in terms of the real estate actions I think that's part of what gives us confidence in getting to the high end of the range what would you need to keep in mind is that there's a number of other factors.
Yeah in our cost structure that are going to have an impact on specifics with respect to real estate.
As you know people come back to work.
Morph weaker frequently come back to the office, Yeah, we're gonna have to deal with a little bit of an increase in our occupancy costs will go to manage through that we're also making some investments.
John had referenced.
With some Ah trial with some satellite offices.
When you when you do a little work on that on the space that we have.
So.
Yeah.
There's a bunch of there's a bunch of moving parts just within the.
Rent and occupancy line, but we do expect it to be a benefit in Nevada fit in 'twenty three and.
And beyond.
For sure.
Thanks, a lot.
Sure.
Next go to line of Ben Swinburne with Morgan Stanley . Please go ahead.
Thanks, Good afternoon.
I had a question first on sort of the impact of your net net from net new business wins on your performance.
Yeah, including the L'oreal win late last year. It was was that new business big enough to call out in Q1 and <unk>.
Should we be thinking about you know further benefits from l'oreal kicking in later in the year.
I realize existing client spend kind of dwarfs net new business, but you guys did mention it on the last earnings call. So I wanted to see if we get an update on sort of the tailwind you're seeing and any any magnitude you can help us think about what's my my first question.
Yeah, Ben we take all that into consideration.
We're.
We're giving you that SM.
Estimate of what we think is happening in the revenue in the aggregate.
L'oreal specifically.
We were ramping up costs in the first period, our first quarter. The revenue doesn't didn't start until April the first.
Got it that's helpful. Thank you John and then I'm wondering how you guys thought about competition for talent as you reintroduce tariff I guess introduce to sort of back to work three days.
Any concerns there about how you compete in physician working at omnicom versus other opportunities and.
What's sort of the reaction internally you know to that message I'm.
Given what we've been through over the last couple of years, you guys feel pretty confident that it's net additive to the overall operation of the business.
Okay.
We certainly.
Not only I think the leadership.
Our groups believe that it's necessary and will therefore be effectively additive.
In the long run.
Where we benefit.
Is.
The great resignation.
It was over you see it.
And the layoffs that the tech industry is doing and some other in some other areas.
So we.
We believe that we'll be just fine naturally there'll be individual cases, where people.
Well, you want to come back and they'll seek other alternatives.
Got.
In the scheme of things.
It's not going to be significant.
We implemented this policy.
If you go around the world we.
We needed to put out the memo to a minimum of three days a week principally for the United States.
Once you get outside the United States people back in the office.
Like in Asia for about five days, a week and most of Europe at least for.
So.
You know people.
Our managers also know that.
At first when people come back we're going to invest a little money, making making an event you know to come back.
Just to reintroduce people to having to come back.
But.
I think we're also doing other smart things.
If you lived in long Island, Connecticut, or New Jersey.
And.
If we say come back to the New York Office. It would take you two hours in a cluster you afford it and tolls and whatever else yeah.
I think very wisely has put satellite locations. So people can have that as their permanent location.
And it's only on occasion during the course of a months will they have to come back to the city. So we're trying.
Very sensible thing to look out for the benefit and the welfare of our employees and it's time for them to come back because we're creative service company and we work better when we're together.
Thanks, Sean.
Next we'll go to line of Tim Nolan with Macquarie. Please go ahead.
Hi, Thanks, very much John could I follow up on the comment that you are you have in the press release, you mentioned in your prepared remarks about him taking operational steps and some plans in place to mitigate macro headwinds just to just to clarify if that's anything incremental.
Or if that's just basically you know the same message that you've been giving for some time now and then I have a follow up as well.
Sure.
I'd, probably say, it's a pretty.
Pretty consistent with what we've been saying.
Yeah.
So the last hundred conference calls that I've been on.
Hum.
Yeah.
There is.
One one thing that we.
It will benefit us.
As we continue to ramp up and the hiring say in places like India having.
Have increased in order for us to be called.
Cost efficient for the benefit of our clients as well as for our shareholders.
And that will continue to grow that's why I mentioned that were opening up three campuses, which in the past that's with tech companies that as.
Those two advertising agencies. So we have some plans.
And we are cautiously introducing them.
Just in the normal course of business.
To mitigate costs.
And we also have it in our ability to accelerate that if.
If we find that we have to adjust for something so.
No.
The plan is very the scenarios vary.
I think Phil had some statistics about how quickly we recover from very serious recessions in the past I don't know if there's any color to it or not.
You know I I think the commentary or the prepared remarks certainly.
More focused on.
Yeah, what we've typically done in the past and we're not waiting around.
As we didn't in the past.
You know for the serious headwinds to arrive where we're making sure we take a more sensible Conservative review.
Or.
That's all and conservative view.
So that we keep our cost structure in line with with our current and anticipated revenue base.
I think if you look at our performance coming out of the last couple.
Yeah either.
Recessions or or challenging times.
We've been able to manage through a pretty successfully.
And bounce back pretty quickly and I don't think you should expect anything different this time around either.
Okay, great. Thanks, and then could I follow up on the.
I meant on the Microsoft and the generative AI relationship I think it was last call that I asked the question about what my chat chat G. P. T due to the business and I Wonder if you could maybe elaborate a bit further I mean, there's a lot of discussion around you know this you know replacing people over time and you know.
Change in the creative process and so forth I think your answer then last quarter, Jonathan It's just it's a matter of improving workflows and making various things more efficient could you just elaborate a bit more now that you have an actual formal relationship with Microsoft in place now.
Sure I think there may be more now we were the second company I think Microsoft.
Entered into such a relationship with I think the first company was busy.
The unique deal.
And what we're using it for at.
At this point.
So we're taking all of omnicom's historical data.
And on top of what G. P. P can do.
And where.
We're running a lot of projects I'll come to that in a second.
We think.
For clients that want to participate in this.
Ill add their data and will create new models of how we.
You know do things to identify.
Consumers.
So putting it altogether.
And I think presently we have in excess of.
20 <unk>.
Projects going on testing different things I'd say, good five of them.
Our directors at the back office.
The balance of them are directed at the client side the revenue side of the business.
And then it has a lot of potential.
To positively impact the business I don't think you'll see that.
In 2023, because as I also said in my comments.
You have to be very careful with this and and maybe one of the reasons Microsoft picked us because we are very careful there's a lot of ethical questions and there's a lot of privacy questions. There's a lot that is incredibly powerful.
Cool can do but.
You have to get the guy draw guidelines and rules in place before you can actually.
Use it efficiently.
In the long term and this is just my belief.
The long term I think.
Creative arent, what I'd called knowledge workers will only find their jobs is enhanced by.
The way that will utilize this.
No.
Five years from now.
And and so we're very optimistic.
In.
We're testing it playing with it but we're certainly not deploying it.
Way that to the full extent of the power that it has.
The other thing that.
I would point out and you probably know this may sound like I've said it before.
But.
We built on the <unk>.
Over the last decade.
And we could we built it in such a way that is very very flexible and connected.
Two an awful lot of databases and put in plumbing that was really appropriate for what.
Yeah.
Playing with and adding gender generative a I.
<unk> is going to do.
So.
We are we have.
The installation we have the system deployed for us worldwide.
And now we're entering into an environment.
Where we're going to be able to make pretty quick progress I think.
In terms of what works and what doesn't work as people develop these rules look at the ethics of it.
Understanding what bias as you know it can be affected.
Okay. That's very helpful. Thank you.
Next we go to the line of Steven Kay Hall with Wells Fargo. Please go ahead.
Thank you.
So John you said that you don't want to fight the fed it seems like maybe the fed is winning the fight within inflation that usually means either a weaker consumer or higher unemployment. So I'm. Just wondering if that's your subsequent expectation and what does that translate to in terms of any growth implications for the company or how youre thinking about managing.
The business through that and then I have a couple of follow ups for Phil.
Sure Yeah, well the fed hasn't stopped so.
The world still fighting it.
You know what the employment numbers, they don't look as bad maybe as they could.
But.
The jury is still out about it.
If the fed is going to be able to get us into a recession that certainly trying to slow growth.
If they do as I said we've.
We've been playing game theory here for quite a number of years in terms of how we would respond to it when we see it when we believe it's going to occur.
We do though have the philosophy that win long term.
Partner type clients suffer we're gonna suffer along with them.
<unk>.
That's proved to be a very sensible investment in in the past when we faced I think more severe circumstances, because clients don't forget that and then as they recover.
You benefited from it as well so.
Yeah at this point, we're comfortable with it.
Certainly now comfortable with the low end of the range that we gave you.
Last quarter, we will strive very hard to get to the top end, but there's too many uncertainties as we sit here today.
For me to be.
Yep promising that to you as soon as we can we will.
So again, maybe I didn't quite answer all of your question.
I know that that's helpful. And then maybe Phil just first on the margin comment with the tighter end of the range is that fully due to the real estate repositioning or are there sort of general operating aspects that drove that as well and also your net <unk>.
Triste Oh.
It was quite low in Q1 I'm sure. That's just the rate that youre getting on your deposits. So good to see the fed is helping there should we use that as a decent run rate for kind of net interest going forward. Thank you.
Sure so on.
On the margin front, it's certainly.
It it's not just real estate I think it's a whole combination of things I mean.
We've got a number of factors that impact our margins.
And.
Yeah trying to balance them all is something we do every day at the lowest level.
So while we may be Uh huh, maybe have experienced some.
Wage inflation like everybody else has in the recent past.
Yeah, we've got a number of initiatives that we've been pursuing and continue to pursue.
In the areas of off shoring.
And automation, we continue to push those and I've made a lot of progress on that front and expect to continue to make more progress there.
Rest of this year and beyond especially with automation.
At the same time, we've taken some actions obviously in the area of real estate and occupancy costs. We do expect there to be a reduction on that front. Although you know at the same time, we will have some incremental occupancy.
Costs as well.
The more people back in the office and door.
Some of the investments that we touched on earlier. So it's you know it's all of those factors, but certainly the real estate.
You know the real estate moves we've made this.
This quarter I've got it.
Put us in a better position, where we feel more confident that we're going to finish the year at the high end of that range No question.
On the interest front I would say certainly it's mostly rate.
And you know in Q2 of 'twenty three we expect interest income to increase again year on year relative to Q2 of 'twenty two.
Probably not by the same.
Amount as in Q1, because our working capital cycle is such that we'll have less.
Our cash.
Available to invest relative to Q1.
So we expect interest income to go up we expect interest expense to go up just a bit as well largely because the interest rate used on our pension and post employment benefits.
That rate has gone up as well, it's a rate issue not a volume issue going the other way.
And the rest of our debt portfolio is relatively fixed.
When you get to the second half I think you know we had a considerable amount of interest income increases in the second half of 'twenty two.
I think you can expect a net interest expense in the second half to kind of be flat to maybe up.
Maybe a little bit of incremental interest expense.
Depending again on what happens with.
And with rates primarily.
Got it thank you.
Sure.
Next we'll go to the line of Jason Bazinet with Citi. Please go ahead.
I just had a question on the buybacks I heard you reiterate that five to 600 million for the full year.
But I just noticed you.
You did a decent maybe half of that in the first quarter and I was just looking back at the prior years and sometimes your buybacks are fun.
Front end loaded and sometimes are backend loaded is there.
Is there any sort of.
Algorithm that you guys have is that just a function of your view of the value of the shares is it working capital related or what is it that.
It causes your buybacks no I you know I think if.
I think if you go back.
Over a longer period of time, you can probably even go back 10 years, you'll see that most yep.
Yeah, most of the volume of buybacks has occurred in the past.
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The first quarter and the second quarter, usually the first quarter, a little more than the second quarter. So the first half of the year and then we turned.
They have less activity in Q3 and Q4.
There've been a couple of anomalies recently given.
Covid certainly for one.
And yeah, probably yeah, the economic slowdown.
Prior to that which is probably.
Probably close to eight to 10 years ago. So there might there might be a blip here or there, but but it's not yeah, it's not due to price sensitivity.
Or anything.
Similar to that week, we largely return cash to shareholders through the buyback and we tend to do that.
More so in the first half of the year and if I could just add one thing you know our capital policy is first to pay dividends.
Next to do acquisitions, and then finally to do share repurchases with that free cash flow.
And.
There's a number of tuck in.
Acquisitions that we're looking at currently which.
When we get completed with our due diligence and if we get across the finish line.
Cash will be used for that that might change.
Change yourself, there's no out.
No.
Excuse me there is no formula for.
We're going to do this in January we're going to do this in July .
Not how it works we use our judgment.
To get to these forecasts.
To be as transparent and as consistent as we can with you.
That's very helpful. Thank you.
Yeah.
And the last questioner will be Craig Huber with Huber Research partners. Please go ahead.
Oh, great. Thank you My first question historically your company and your peers.
Pricing has not been much of a factor in your organic revenue growth year to year on a like for like basis on the services you guys provide so I'm just curious in this higher interest rate environment are you be able to raise prices any more aggressively now versus what you've done in the past.
Yeah.
Yeah.
Wow.
Our people are always trying to get paid fairly.
For the services that we provide.
And we but we do live in a competitive environment.
So.
There's a lot of many clients have given us increases and many clients are not in a position to give us increases.
And.
To offset and to pay for.
Salary inflation as Phil mentioned earlier we've.
Sped up and.
We're doing a much more professional job with offshoring than I can say, we've done at any point in the past that.
It isn't necessarily to create.
Extra income that's to create extra resource. So we can continue to attract the best talent there is in the marketplace.
And then also John .
Your conversations with your clients.
Is your thought on this year changed materially since last time, you spoke to us too enough months ago in terms of the outlook for what Youre hearing from clients I mean, a lot has changed on the macro side of things and all the banking issues et cetera over the last couple of months and stuff, but it sounds like you're obviously keeping organic revenue growth outlook. The same but I'm just curious client for client are you sensing.
Essentially more cautiousness now versus where you were thinking two and half months ago. Thank you.
Yeah.
On a macro basis no.
Mirror prior to this call I was.
I was talking to the CEO of Adobe.
And one of the things he's saying is I wish people would stop.
Talking to the economy down because business is great.
And so it's a mix you know I don't think anybody expected the banking situation to occur.
You know that came out of left field.
But yeah.
I think everybody.
That I speak too.
Is.
Ends up being.
I'd have to say conclusion I reach is cautiously optimistic.
But in a very sophisticated way.
Expecting that there's still going to be a lot more uncertainty.
Until the fed and its partners around the world I think that they've done.
And so people are looking to create.
Flexibility without abandoning the commitments they've made to grow their brands.
That's it thanks John .
Youre welcome.
Thank you.
Got it.
And with that that does conclude our conference for today. Thank you for your participation for using AT&T conferencing service you may now disconnect.
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