Yahoo Finance Omnicom Group Inc. (NYSE:OMC) Q1 2024 Earnings Call Transcript
Omnicom Group Inc. (NYSE:OMC) Q1 2024 Earnings Call Transcript April 16, 2024
Omnicom Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Omnicom First Quarter 2024 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I'd like to introduce you your host for today's conference, Senior Vice President of Investor Relations, Gregory Lundberg. Please go ahead.
Gregory Lundberg: Thank you for joining our first quarter 2024 earnings call. With me today are John Wren, Chairman and Chief Executive Officer, and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omnicomgroup.com, you'll find a press release and a presentation covering the information we'll review today. An archived webcast will be available when today's call concludes. Before we start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we've included at the end of our 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 2023 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. And after our prepared remarks, we will open up the line for your questions. And I'll now hand the call over to John.
John Wren: Thank you, Greg. Good afternoon, and thank you for joining us today on our first quarter 2024 results. I'm pleased to report that we're off to a solid start to the year. Organic growth in the first quarter was 4% with strong growth in our advertising and media, and precision marketing disciplines. EBITA margin, which excludes amortization of acquired and strategic platform intangibles, was 13.8% for the quarter, and operating margin was 13.2%. Non-GAAP adjusted earnings per share, which excludes after-tax amortization of acquired and strategic platform intangibles was a $1.67, up 3.7% versus the comparable number in Q1 2023. As a result of our strong performance in the first quarter, we are increasing our full year organic growth range to between 4% and 5%.
As discussed, during the quarter, we raised EUR600 million through a senior note offering to partially finance the acquisition of Flywheel. Our cash flow and balance sheet remained very strong and support our primary uses of cash flow, dividends, acquisitions and share repurchases. The Flywheel acquisition is off to a great start. Flywheel's Commerce Cloud is fully integrated into Omni. Omni audience and behavioral data combined with Flywheel's digital marketplace point of purchase transaction data provide us with the most comprehensive data set in the industry. Across several significant Omnicom clients, Flywheel teams are now fully engaged to deliver the enhanced value of our combined capabilities and insights to them, including new ways to plan and build audiences using Omni audience data and Flywheel's performance benchmarks, full funnel investment management built on Omni and enhanced with Flywheel's data specific to performance across commerce platforms.
Using Omni influencer capabilities and connecting them to commerce and retail outcomes from Flywheel and holistic video measurement and optimization based upon integrating Omni's video viewership data with Flywheel's Commerce outcomes. These products and services are helping our clients sell more goods more efficiently across hundreds of digital marketplaces and optimizing their investment across media platforms. In addition to integrating Flywheel Commerce Cloud, we made important updates to Omni's generative AI functionality during the quarter. This includes completing a first mover partnership with Shutterstock that allows us to integrate its text to image model into Omni. As part of our first mover partnership established with Google and their Vertex AI platform last year, we became the first holding company to receive access to the Gemini 1.5 next-generation model.
We remain committed to Omni's open architecture and flexibility, leveraging these valuable partnerships. We've seen notable traction with Omni Assist, the generative AI tool we launched in 2023. Employees for more than 40 markets globally have access to Omni Assist and using it to produce audience intelligence, summarize cultural trends, recommend influences and much more. Some of our agency teams are also creating client-specific Omni Assist agents. For example, a client dedicated marketing consultant, media consultant and briefing agent to streamline global, multi-brand client agency planning. As we work alongside our clients to explore how these new technologies can transform their businesses, two areas are critical to how we can drive transformation and growth.
Our digital transformation consulting business and our content production capabilities. This past month, our highly successful consulting firm, Credera, announced the simplification of its organization to offer clients a more streamlined experience. Its services will now be delivered under a single global brand through two primary business units. Digital with capabilities in MarTech, e-commerce and digital platforms and consulting with capabilities in management and technology consulting, data, AI and business transformation. Since joining Omnicom in 2018, Credera has grown from 300 employees in three U.S. offices to over 4,000 people across 17 locations worldwide. This growth is a testament to our track record and success in acquiring and integrating businesses in new high growth market segments.
Today, our clients demand more high quality, personalized creative content delivered across more media channels and at faster speeds. We have developed standardized platforms and processes to automate the development of content and deliver it at the right time and place to consumers by combining Credera's expertise in designing and implementing intelligent content platforms, leveraging our Adobe partnership, our product, our content orchestration engine, and Omni's Audience and Data insights. Our solution provides unmatched outcomes through an open operating system, fueled by customer centricity to some of our most important brands, such as AT&T and Nike. I'm pleased that our strategy resulted in industry recognition in the first quarter, including Omnicom being named WARC's number one holding company for effectiveness, PHD being recognized as Adweek's Global Media Agency of the Year.
Omnicom Media Group being recognized Leading Global Media Agency for 2023 with nearly $3 billion in net new business. Although, risks and uncertainty continue to exist in the global economic and geopolitical environment, we remain optimistic about our position in the industry, our strategies and our financial performance. I remain confident that our management teams are well prepared to drive operational excellence even as they monitor and adapt to the changes in the macro environment. I'll now turn the call over to Phil for a closer look at our financial results. Phil?
Philip Angelastro: Thanks, John. We began the year with solid results, and we're optimistic about the year ahead. Let's review the first quarter performance in detail, beginning with revenue on Slide 4. Organic growth in the quarter was 4%. The impact from foreign currency was relatively flat, decreasing reported revenue by 0.1%. If rates stay where they are currently, we estimate the impact of foreign currency translation will be negative 1% for Q2 '24 and flat for the full year 2024. The net impact of acquisition and disposition revenue on reported revenue was positive 1.5% due primarily to the acquisition of Flywheel this January. Based on transactions completed to date, we expect a positive contribution of approximately 2.5% for Q2 and 2% for the year.
Now let's turn to Slide 5 to review our organic revenue growth by discipline. During the quarter, advertising and media growth was very strong at 7%, driven by excellent performance at our Global Media businesses. Precision Marketing, which now includes Flywheel grew 4.3%. We expect this to continue to be one of our fastest growing disciplines in the future. Public Relations declined by 1.1% in the quarter. We expect this discipline will improve the rest of the year and benefit from the 2024 U.S. elections. Healthcare grew 2.1% during the quarter, as we continue to cycle through some client losses from 2023, which we expect to lap after Q2. Branding and retail commerce declined by 3.8%, driven by a challenging environment for our branding agencies that are more aligned on project based engagements and faced a difficult comparison to Q1 of 2023 when they grew by 9%.
You'll note that we've updated the name for this discipline, which was formerly called Commerce and Branding. Experiential grew a strong 9.5% led by the U.S. which offset a small reduction in revenue internationally. We expect this discipline to benefit later in the year from the Summer Olympic Games in Paris. And Execution and Support declined by 4.3% with mixed results that overshadowed continued strength in field marketing. Turning to geographic growth on Slide 6. We saw growth in six of our seven regions, led by the U.S. and Europe and a strong growth in Latin America, driven by advertising and media. Slide 7 shows our revenue by industry sector. First quarter results were very similar to last year. Now let's turn to Slide 8 for a look at our expenses.
In the first quarter, salary related service costs grew as a result of increased staffing levels, primarily as a result of our acquisition of Flywheel Digital, but they were down as a percentage of revenue year-over-year, driven by our repositioning actions last year and through ongoing changes in our global employee mix. Third-party service costs increased in connection with the growth in our revenue. The third-party incidental costs increased somewhat, primarily as a result of increases in reimbursed travel and incidental out-of-pocket costs. Occupancy and other costs increased primarily due to our acquisition activity during the period, but were essentially flat as a percentage of revenue due to lower rents as a result of our prior year real estate rationalization.
And SG&A expense was down both in dollar amount and as a percentage of revenue. Now let's turn to Slide 9 and look at our income statement in more detail. Our operating income increased 2.8% and the related margin was 13.2%, down slightly from the prior year adjusted margin of 13.5% arising primarily from our acquisition activity, including Flywheel. As you may recall, our margin estimate this year is based on EBITDA, which we have and continue to use as a measure of operating performance. Similar to our peers and in response to requests from investors, this reflects an adjustment for the amortization of intangible assets. The adjustment now reflects amortization expense related to both acquired intangible assets and internally developed strategic platform intangible assets.
Strategic platform intangible assets relate to the costs we are required to capitalize and amortize over future periods in connection with the ongoing development of the Omni platform and the future ongoing development of the Flywheel Commerce Cloud platform. The amortization expense added back to calculate EBITDA does not include amortization expense for internally developed software related to administrative and back office operations tools, such as ERP or workflow platforms. For the first quarter of 2024, this amortization was $21.5 million, and we expect the remaining quarters of 2024 to approximate this amount. For comparability purposes, we've included a slide in the appendix of this presentation, and it reflects the prior year amortization related to acquired intangible assets and internally developed strategic platform intangible assets for the four prior year calendar quarters of 2023 and the full year for 2023 and 2022.
The EBITDA in Q1 2024 were $500.4 million, increased 4.1% year-over-year and the related margin was 13.8%. We continue to expect our fiscal year 2024 EBITDA margin to be close to flat with our 2023 adjusted EBITDA margin of 15.6% for the full year. Moving down the income statement. Our income tax rate of 26% was similar to the rate for the first quarter of 2023. For full year 2024, we continue to expect our income tax rate to approximate 27%. Changes in income from equity investments and income attributed to minority interest investments were not significant. As you can see at the bottom of this slide, we have also provided a new line item, non-GAAP adjusted net income per diluted share. Similar to EBITDA, this also excludes the amortization on an after-tax basis that I just discussed related to acquired intangibles and internally developed strategic platform intangibles.
This new reporting more closely measures the performance of our operating businesses year-on-year and is similar to our peer group's approach of adding back after-tax amortization expense when calculating non-GAAP diluted earnings per share. For the first quarter of 2024, this metric increased to $1.67 or 3.7% compared to the non-GAAP adjusted diluted earnings per share of $1.61 to Q1 2023. Now let's turn to cash flow on Slide 10. We define free cash flow as net cash provided by operating activities, excluding changes in operating capital. Free cash flow for 2024 was $415.1 million, a slight decrease of 3.2%. Regarding our uses of cash, we used $139 million of cash to pay dividends to common shareholders and another $13 million for dividends to non-controlling interest shareholders.
Our capital expenditures were $23 million, similar to last year, although, we still expect fiscal year 2024 levels to be higher due to growth in capital investment at the newly acquired Flywheel. Total acquisition payments were $812 million, which reflects the $845 million acquisition of Flywheel net of cash required. Finally, our stock repurchase activity, net of proceeds from stock plans was $178 million in the quarter, which is in line with our estimate of total repurchases for the year of approximately half of our historical average given our Flywheel acquisition. Slide 11 is a summary of our credit, liquidity and debt maturities. At the end of the first quarter of 2024, the book value of our outstanding debt was $6.3 billion, up over $600 million from funding a portion of the Flywheel purchase price.
As previously disclosed, we issued EUR600 million senior notes due March 2032 with a coupon of 3.7%. Net proceeds in U.S. dollars were approximately $643 million. Our cash equivalents and short-term investments were roughly flat at $3.2 billion. We also have an undrawn $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program. We continue to monitor the credit markets with regard to our $750 million of 3.65% senior notes due November 1, 2024. At this point, given where interest rates are and our financing activity early in 2024, we expect that net interest expense for the full year 2024 could increase by approximately $45 million relative to full year 2023. Slide 12 presents our historical returns on two important performance metrics for the 12 months ended March 31, 2024.
Omnicom's return on invested capital was 22%, and our return on equity was 44%, both reflecting very strong performance. I will now ask the operator to please open up the lines for questions and answers. Thank you.
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