Omnicom Group Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2023

Key Takeaways

  • Omnicom delivered Q4 organic revenue growth of 7.2% and full-year growth of 9.4%, with Q4 operating margin rising 50 bps to 16.6% and full-year margin up 40 bps to 15.4%.
  • Q4 EPS was $2.09, up 7.2% (13% on a constant currency basis), and full-year free cash flow topped $1.7 billion, with over 65% returned to shareholders through dividends and share repurchases.
  • In Q4 Omnicom won major new business including L’Oréal’s $1 billion U.S. media account and Burberry’s AOR, and launched a strategic e-commerce partnership with Albertsons Media Collective to boost retail media capabilities.
  • For 2023 Omnicom expects organic revenue growth of 3–5% and an operating margin of 15.0–15.4%, while noting potential headwinds from geopolitical risks, rising interest rates and inflation.
AI Generated. May Contain Errors.
Earnings Conference Call
Omnicom Group Q4 2022
00:00 / 00:00

Transcript Sections

Skip to Participants
Operator

Good afternoon, welcome to the Omnicom fourth quarter and full year 2022 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.

Gregory Lundberg
Gregory Lundberg
SVP of Investor Relations at Omnicom Group

Thank you for joining our fourth quarter and full year 2022 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, we've posted a press release along with a presentation covering the information we'll review today, as well as a webcast of this call. An archived version will be available when today's call concludes.

Gregory Lundberg
Gregory Lundberg
SVP of Investor Relations at Omnicom Group

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 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 Form 10-K, which should be filed tomorrow.

Gregory Lundberg
Gregory Lundberg
SVP of Investor Relations at Omnicom Group

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'll begin the call with an overview of our business from John. Phil will review our financial results for the quarter. After our prepared remarks, we'll open up the lines for your questions. I'll now hand the call over to John.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Thank you, Greg. Good afternoon, everyone, and thank you for joining us today for our fourth quarter and full year 2022 results. I'm pleased to report our fourth quarter performance was very strong on both the top and bottom lines, and we finished an outstanding year in 2022. We entered 2023 with a high level of confidence in our strategic and financial position while remaining cautious and being prepared for possible changes in the geopolitical and macroeconomic environment.

John Wren
John Wren
Chairman and CEO at Omnicom Group

For the fourth quarter, organic growth of 7.2% exceeded our expectations. Growth was broad-based across our disciplines, geographic regions, and client sectors. We again saw double-digit growth in our precision marketing, public relations, and experiential disciplines. Full-year organic growth was 9.4%.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Operating margin for the fourth quarter was 16.6%, an increase of 50 basis points compared to the prior year. For the full year, operating margin, adjusted for certain non-GAAP items illustrated on page 10 of our investor presentation, was 15.4%, which is 40 basis points higher than our operating margin in 2021. Earnings per share for the quarter was $2.09, up 7.2% versus the fourth quarter of 2021. The negative currency impact on EPS of the strong U.S. dollar was approximately 6%. On a constant currency basis, EPS increased by approximately 13%. For the year, we generated over $1.7 billion in free cash flow and returned more than 65% to shareholders in dividends and share repurchases.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Our liquidity and balance sheet remain very strong and continue to support our primary uses of cash, dividends, acquisitions, and share repurchases. Our strong performance validates the growing role we play as clients increasingly turn to us for advice in navigating through a complex marketing and communications environment.

John Wren
John Wren
Chairman and CEO at Omnicom Group

We're also advising our clients on transforming their organizations by deploying new processes and marketing technology platforms that can provide more connected experiences for their consumers. During the quarter, we expanded and further strengthened our talent. At the time of our Q3 remarks, we had just appointed Andrea Lennon to the new role of Chief Client Officer. In the fourth quarter, we added two prominent leaders. Kathleen Saxton, previously of MediaLink, joined as Chief Marketing Officer, and Alex Hesz, previously of adam&eve and DDB, joined as Chief Strategy Officer.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Andrea, Kathleen, and Alex will strengthen our position in the marketplace, identify and pursue new business opportunities, and work with our global client leaders and agencies to deliver innovative and transformational ideas to our clients. We're fortunate to be adding this team from a position of strength. We ended 2022 with significant new business wins and deepened our relationship with many of our enterprise-level clients.

John Wren
John Wren
Chairman and CEO at Omnicom Group

In the fourth quarter, L'Oréal named Omnicom Media Group its U.S. media agency of record. This marked one of the biggest wins of 2022, with an estimated $1 billion in U.S. media billings as reported by COMvergence. L'Oréal selected OMG due to its deep specialization and integration of expertise, talent, and technology to deliver modern marketing outcomes.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Our recently launched commerce agency, Transact, along with our best-in-class analytics and insights team at Annalect, which supports the Omni operating system, played instrumental roles in winning the L'Oréal business. Also on the media front, OMD secured a major win as it was named Media Agency of Record for Burberry. The win includes an innovative and bespoke agency model created specifically for Burberry.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Our healthcare group, which had 6.4% growth in the fourth quarter, won a significant new business pitch with Merck, capping off the year in which it won the four largest healthcare pitches of 2022. A key component of our new business success was driven by our e-commerce capabilities, an area where we've made and continue to make significant investments. We recently expanded our e-commerce capabilities through a partnership with Albertsons Media Collective, a retail media arm for the Albertsons Companies.

John Wren
John Wren
Chairman and CEO at Omnicom Group

This partnership will provide first-to-market solutions that will enable marketers to better target and measure ROI in the connected TV environments. Going forward, we plan to continue to invest in and expand our capabilities to solidify our position as best-in-class provider of retail, media, and e-commerce services, as well as in other high-growth areas such as precision marketing, performance media, and health.

John Wren
John Wren
Chairman and CEO at Omnicom Group

I want to thank our people around the world for helping us close out 2022 on such a positive note. It's your dedication and commitment and outstanding work that allows our agencies, clients, and Omnicom to succeed. We enter 2023 in a very strong position, supported by our strong financial performance, new business wins, and steady progress on our key strategic initiatives. We also continue to see strong demand for our services.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Based on current market conditions, we're targeting 2023 organic revenue growth of 3%-5% and expect our operating margin to be between 15% and 15.4%. At the same time, we remain extremely cautious of macroeconomic and geopolitical factors, including the ongoing war in Ukraine, the economic risks posed by rising interest rates, and higher inflation around the world. To be prepared, we continue to actively develop plans to respond to the headwinds from macro factors, and I'm confident we can manage through this economic cycle, and we have the leadership teams in place to minimize the impact on our top and bottom lines. I'll now turn the call over to Phil for a closer look at our financial results. Phil?

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Thanks, John. We're pleased to be closing 2022 with solid fourth quarter results driven by strong organic revenue growth, operating profit growth, and earnings per share growth. We finished the year with a healthy balance sheet and excellent liquidity. Our strong credit position and the operating flexibility of our business position us well for any macro uncertainty ahead. Please turn now to Slide 3, we'll begin our review with a summary of the fourth quarter income statement. Reported total revenue in the fourth quarter was flat year-over-year at $3.9 billion, with organic growth of 7.2%, offset by the negative impact of foreign currency translations and net disposition revenue in excess of acquisition revenue.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Since most of our expenses are incurred in the local markets where our revenue is earned, foreign currency translation also reduced our operating expenses, which were flat versus last year. Reported operating profit for the fourth quarter increased 3.2%, and on a constant currency basis, it increased 8.4%. Moving down the income statement, higher interest income again helped lower our net interest expense, which decreased by $18.5 million. Our tax rate of 26.5% was as expected. In 2023, despite the increasing interest rate environment, we currently expect interest expense to approximate 2022 levels and interest income to increase moderately in Q1 and Q2 of 2023 compared to the first half of 2022 and approximate 2022 levels in the second half of 2023.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

We also currently expect our effective book income tax rate in 2023 to be approximately 27%. The increase relative to our 2022 rate is primarily due to the U.K. tax rate, which is scheduled to increase in April of 2023. Overall, our Q4 2022 net income rose 3.3% on a reported basis. Combined with a reduction in shares year-over-year, diluted EPS rose 7.2%. Without the headwind from negative foreign currency translation, diluted EPS for the quarter increased 13.3%. For a view of the full year, please turn to Slide 4, where we show certain non-GAAP adjustments to make the periods more comparable. None of these adjustments are new this quarter. They were discussed earlier this year and last year.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

For the year-to-date 2022 period, operating expenses and income taxes were impacted by charges in the first quarter arising from the effects of the war in Ukraine. For the year-to-date 2021 period, operating expenses benefited from a gain on sale of a subsidiary, and both interest expense and income tax expense reflect the impact from the early extinguishment of debt in 2021. Continuing on slide four, similar to the quarterly results we just discussed, the strength in the dollar this year also impacted our year-to-date results. Foreign currency translation reduced revenues by 4.8%. Operating profit on a non-GAAP Adjusted basis of $2.2 billion was up 2.3%. Without the headwind from negative foreign currency translation, it increased 6.8%.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Non-GAAP Adjusted diluted EPS of $6.93 rose 8.5%, or without the headwind from negative foreign currency translation, it increased 13.6%. Let's now go into some more detail on our results, beginning on Slide 5 with an analysis of the change in our revenue. As discussed, our organic growth was 7.2% for the quarter and 9.4% year to date. The quarterly impact from foreign currency translation was negative 5.5%. It's worth noting that for financial reporting purposes, the U.S. dollar strengthened against the currencies of every country we operate in, except for Brazil when compared to Q4 of 2022. This impact was slightly less than it was in the third quarter, so it did move in the right direction.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

The impact of acquisition and disposition revenue was negative 1.4%, primarily reflecting the disposition of our businesses in Russia during the first quarter of 2022. Looking forward, if foreign currency exchange rates stay where they were as of February 1st, we estimate that the impact will reduce our revenue by approximately 3% in the first quarter and moderate for the remainder of 2023 to be approximately flat for the year. Based on deals completed to date, we expect the impact from net acquisitions and dispositions will result in a reduction of our revenue by approximately 1.5% in the first quarter, primarily resulting from the disposition of our businesses in Russia in the first quarter of 2022. Turning to Slide 6.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

For the quarter, we once again showed organic growth across all of our disciplines, with the exception of execution and support, as we expected. As you can see, performance in each of our other disciplines remained solid, with double-digit organic growth in three of them. Advertising and media, our largest category, posted 6% organic growth in the quarter, led by strong performance in our media businesses.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Precision marketing continued its strong performance, 11.6% organic growth, as clients continue to turn to us for digital transformation, digital customer experience, and data analytics services. Although this growth rate moderated a bit relative to the third quarter, we're excited about the outlook and will continue to invest in the space. Commerce and brand consulting was up 7.2% organically on the strength of our branding and design agencies.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Experiential organic growth was a strong 17%, where we saw more benefits than we expected from the FIFA World Cup and other year-end projects. Execution and support, which we expected would be choppy in the second half, had a decline of 2.8% against the comp of 5.2% growth in last year's fourth quarter. Public relations grew a strong 12.7% organically in the quarter, keeping up a double-digit trend reflecting continued client demand across many industries and geographies, including increased revenue of approximately $10 million, resulting from increased election spending in the U.S. in the second half of the year. Healthcare delivered solid organic growth of 6.4%. Turning to Slide 7 for revenue by region, we're pleased to see continued positive growth globally.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

In the U.S., our 5.6% quarterly organic growth was led by advertising and media, precision marketing, and public relations. International growth of 8.7% was also led by advertising and media and precision marketing, and also saw the strong contribution from experiential that I mentioned earlier. Regionally, we saw some expected slowdown compared to the first half of the year in the U.K. and Europe. Their organic growth of 10% and 5% respectively was still quite healthy. Asia-Pacific also improved, led by China and also driven by most of our other markets in the region. Looking at revenue by industry sector on Slide 8. Relative to the fourth quarter of 2021, the mix of our client portfolio was broadly stable.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Categories that moved year-over-year included an increase in exposure to pharma and health and a decrease in exposure to technology. Let's now turn to Slide 9 and look at our operating expenses for the quarter. For your reference, Slide 17 in the appendix presents this on a constant currency basis. Our total expenses were essentially flat at $3.2 billion, due primarily to the weakening of almost all foreign currencies against the U.S. dollar.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Salary and related service costs decreased as we saw an increase related to organic revenue growth and additional headcount, offset by the effects of foreign currency translation. Third-party service costs increased due to an increase in organic revenue. Occupancy and other costs increased primarily due to some growth in general office expenses as our workforce returns to the office, partially offset by lower rent.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

On the topic of rent, you may have seen in January that we moved the Madison Avenue headquarters for TBWA to a location that houses other Omnicom agencies. It is an open, modern, and collaborative space with an efficient design. This is another example of the rationalization of our rooftops, which we expect will continue in the future. SG&A expenses were down year-over-year due to lower professional fees, lower marketing-related costs, and reductions from the effects of foreign currency translations. Turning to Slide 10, our fourth quarter operating profit was $643 million, 3.2% increase from last year, net of a reduction of $32.3 million from the impact of foreign currency translation. Our operating profit margin reached 16.6% on total revenue compared to last year's margin of 16.1%.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Please turn now to Slide 11 for our cash flow performance on a full year basis. We define free cash flow as net cash provided by operating activities, excluding changes in operating capital. Free cash flow for the year was approximately $1.8 billion, flat compared to last year. Regarding our uses of cash, we used $581 million of cash to pay dividends to common shareholders and another $80 million for dividends to non-controlling interest shareholders. Capital expenditures of $78 million were at normal levels. Acquisition spend, net of dispositions and other items, was $330 million. Lastly, our net stock repurchases for the year were $594 million, at the high end of our expectations of $500 million-$600 million. 2023, we expect that we will also repurchase shares within this historical range.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Regarding the changes in our operating capital for the year, which resulted in use of cash of approximately $840 million, the principal factors that caused this reduction included a reduction in billings in 2022 resulting from certain client losses in 2021. Disposition of our businesses in Russia, including cash for operations in Q1 of 2022. Disposition of our specialty media business in 2021. Impacts from increased client activity related to the reopening in China at the end of the fourth quarter. Timing differences compared to the prior year in cash collections and cash payments at year-end. As we look forward, we expect changes in operating capital to be a source of cash again through fiscal year 2023. Slide 12 is an overview of our credit, liquidity, and debt maturities.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

During the quarter, the impact of foreign exchange rates on our euro and sterling-denominated debt caused the book value of our outstanding debt to decrease to $5.6 billion from $5.7 billion as of December 31, 2021. There were no changes in outstanding balances during the quarter, and our $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program, remains undrawn.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Our cash and cash equivalents were $4.3 billion at year-end. The reduction relative to year-end 2021 is due primarily to the changes in operating capital that I just discussed, as well as the effect of foreign exchange rate changes, which reduced our cash balance by $219 million for the year. Turning to slide 13, our operating capital discipline consistently drives above average returns on both invested capital and equity.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

For the 12 months end of December 31, 2022, we generated a solid return on invested capital of 28% and a strong return on equity of 40%. The strength of our business delivers attractive returns on a relative basis in both strong and weaker macroeconomic environments. In closing, as 2023 unfolds, we're prepared, as always, for an uncertain business environment. We have a strong track record of providing attractive returns through dividends and share repurchases while maintaining a strong balance sheet and managing our business through challenging market conditions. We will do so while continuing to invest in our strategic future growth. Operator, please open the line for questions and answers. Thank you.

Operator

Our first question comes from the line of Steven Cahall with Wells Fargo. Please go ahead.

Steven Cahall
Steven Cahall
Managing Director and Senior Equity Research Analyst at Wells Fargo

Thank you. John, maybe to start off with, you said you entered 2023 with a lot of confidence and you're also being cautious. That caution certainly served you well last year. As the macro really got worse throughout the year, you all did an impressive job of setting achievable targets. How should we think about the amount of kinda healthy caution that's in this guidance? Maybe related to that, as you came through the fourth quarter and into January, did you see trends that were either improving or deteriorating on a sequential basis to kinda set you up for how you're looking at the rest of the year?

John Wren
John Wren
Chairman and CEO at Omnicom Group

Okay. Thanks, Steve. There's a couple of questions in there. Let me start with, first with the guidance. In the guidance that we gave you, I'm gonna remind everybody we're five weeks into the year. 3+% I'm extremely comfortable about. There's a lot of reasons for that. There are some puts and takes depending upon the industry the clients are in. But on the whole, we feel very good. Our client base and what their planned spending is for the forthcoming future as far as we can see it. In truth, in 2022, we entered the year challenged by facing some losses from twenty

John Wren
John Wren
Chairman and CEO at Omnicom Group

Which we're not up against in the first quarter. As well as Russia, previously mentioned. More importantly, if you look at media wins, for instance, using the only reliable outside source, which I believe is COMvergence, you'll find that on a net billings basis, Omnicom won far more business in 2022 than any of our competitors. The combination of stability in our client base, those new business wins, which will start to contribute for the most part in and around April, but April and for the rest of the year, I'm extremely comfortable. We'll know more, obviously, as we get a little bit further into the year and continue to have conversations about stretch plans with our operating divisions. That's that. Having spent so much time on that, I've forgotten your second question. Sorry.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

In terms of the month-

John Wren
John Wren
Chairman and CEO at Omnicom Group

Yeah. Oh.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

I think the second one was the month of January. We typically don't place a lot of emphasis on one month in any quarter. We didn't see anything in terms of January's results that would cause us to change, you know, the commentary John just laid out.

Steven Cahall
Steven Cahall
Managing Director and Senior Equity Research Analyst at Wells Fargo

Thanks. Phil, maybe if I could just follow up on the margin guidance. Could you just confirm if that's EBITDA or operating profit? I know you had the $113 million adjustment in 2022, so what would be the comparable number for 2022 versus the 15%-15.4%? Thank you.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Sure. The number without the charge for Russia, which was about $113 million, is 15.4%. That's an operating margin percentage. Operating profit divided by revenue. That's the guidance, 15%-15.4% operating profit.

Steven Cahall
Steven Cahall
Managing Director and Senior Equity Research Analyst at Wells Fargo

Very clear. Thank you.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Sure.

Operator

The next question comes from the line of David Karnovsky with J.P. Morgan. Please go ahead.

David Karnovsky
David Karnovsky
Senior Research Analyst at JPMorgan

Thanks. Phil, just to follow up on the margin guide. I think we're generally conditioned to see organic growth, you know, at the level that you guided to, you know, kind of filtering down the margin expansion. Wondering if you could kind of speak to the puts and takes of the margin guide, any cost pressure that's, you know, potentially offsetting any gains that, you know, you might get from the incremental growth?

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Sure. I think, you know, I think given, you know, some of the uncertainty, the macro, and, you know, business conditions currently, we certainly plan the business to align our cost structures with our expected revenues, as we know them. We always have done that. We're somewhat conservative about how we do it, 'cause we don't wanna be relying on plans that have unsupported new business assumptions, where we maintain a cost structure that isn't sustainable, and isn't effective and efficient in achieving our margin objectives.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

We, like everyone else, have experienced some wage pressures, but there's a number of other initiatives we've been pursuing. We're gonna continue to pursue around outsourcing and offshoring and automation. And we're pretty comfortable with the margin targets that we've laid out. In terms of the general macro, there's some things that may be out of our control. We've given the guidance we have, which is 15%-15.4%.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Yeah. If I could just add one thing to that. Embedded in that, we're not always successful, but we have had a lot more success than I would've hoped for in going back to clients and getting increases, which will help mitigate that issue. We've also gotten a lot more sophisticated as we've gone through a couple of these recessions or years since, in that if a client's not willing to give us more, what we've been able to do is to increase the length of our contracts with those clients, therefore increasing the stability of our revenue forecast.

David Karnovsky
David Karnovsky
Senior Research Analyst at JPMorgan

Okay. John, you also noted in your prepared remarks, kinda e-commerce capability as playing a role in winning new business. You know, just wondering if you could speak to that and, you know, maybe the increasing role retail media is playing in terms of client allocation. Thanks.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Yeah. you know, at this point, selling client products and what COVID did for online sales is never going backwards. It's only going to further increase as we move further, you know, into the future. merges like Kroger and Albertsons will set up a third competitor to the Walmarts and the Targets that are out there, as well as the Amazons. budgets that sales departments traditionally had to motivate those stores to feature those products are in essence becoming types of media budgets. There's a lot of overlap and convergence in terms of the skills that you need. Having said that, there are some very special skills that you need to focus on retail and sales at that, you know, moment of notice or when you, when you get the customer's attention.

John Wren
John Wren
Chairman and CEO at Omnicom Group

We've looked at seeing if there was much to acquire, throughout 2021 and 2022, but at the same time, because we were a bit hesitant, we started building it. We've been building it for well over two and a half years. I think if you ask us or any of our competitors, every media request for a bid for the last several years, you have to come and demonstrate to that potential client the strength of your e-commerce capabilities. It's something that we are focused on, remain focused on, and we think is gonna play a very important role in future business, not only in 2023, but beyond.

David Karnovsky
David Karnovsky
Senior Research Analyst at JPMorgan

Thank you.

Operator

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

Ben Swinburne
Ben Swinburne
Managing Director and Head of U.S. Media Research at Morgan Stanley

Thanks. Good afternoon. John, you talked about the strength of Phil in the media business. advertising and media had, you know, another nice quarter, similar growth to last quarter. You called out media strength. It's interesting because if we look at the, you know, whether it's TV or digital advertising, things got pretty bleak in the back half of last year. It's clearly a separation here. Could you take us inside of the advertising and media discipline at Omnicom and sort of help us understand the drivers of that continued growth in the business? It doesn't sound like new business wins really were a factor in last year's results. I just wanna make sure I got that right. Then I had a follow-up for Phil.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Okay. Let me start off. The media wins, creative wins, as well as media wins, as well as precision marketing wins, all contributed to the performance that we had last year. Going into last year, we were still cycling on a couple of account losses that we had previously. New business did have an impact in getting us to where we were in 2022. That strength of batting above, you know, above at a very high average and above our weight because I think we deserved every win we got. You know, there was quite a bit of activity at the end-ish second half, last four months of last year, we were very successful with it.

John Wren
John Wren
Chairman and CEO at Omnicom Group

We continue to be successful as we go into this year on things that we announced. We don't have a crystal ball, as Phil said earlier, but we do have some sight in terms of accounts that are stable because we have multiyear contracts and accounts that people have put into review, maybe not become public yet or not. We're not in a defensive mode, and it's already February. We're on still and we're on our front foot, and we continue to be on our front foot. I'm very comfortable that the wins that we had in the latter part of last year will be contributing starting in the second quarter of this year, and that'll benefit the rest of 2023.

John Wren
John Wren
Chairman and CEO at Omnicom Group

I'm also confident in the teams that we have answering these briefs and the collaboration that is not just media or just creative or just precision marketing, but our holistic approach in responding to clients' business needs. In my reference, in my first answer to COMvergence, for media, in truth, that's the only third party that accurately accumulates and follows wins and losses, but they only do it in the media sector. There are a heck of a lot of wins in all the other areas of our business as demonstrated in the growth areas that you saw, with the exception of, you know, COVID closing China and some other headwinds had on our execution business. They haven't lightened up just quite yet, but they will.

John Wren
John Wren
Chairman and CEO at Omnicom Group

In truth, China opened up extraordinarily well in that area in the month of December. We weren't prepared to handle all the demand that there was in December. I'm bullish on where that particular business can be as we get further and further into the year, contributing to the strength that we have across all of our other areas.

Ben Swinburne
Ben Swinburne
Managing Director and Head of U.S. Media Research at Morgan Stanley

Got it.

John Wren
John Wren
Chairman and CEO at Omnicom Group

I don't know.

Ben Swinburne
Ben Swinburne
Managing Director and Head of U.S. Media Research at Morgan Stanley

Thank you, John. Oh, go ahead.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

I would just add then that, you know, when we talk about growth, and in this case growth in media, it isn't just new business wins, it's growth of existing clients, which all of our three global brands, when you look at their full year numbers, perform quite well in terms of growing their businesses and, you know, there isn't a direct correlation necessarily between the media industry and/or the pricing of media and our revenue streams. I think the more complexity there is in that landscape, and I think it's clear it's a much more complex landscape today than even just a few years back, retail media being one of, you know, those examples. The more complexity, the more in demand our services are.

Ben Swinburne
Ben Swinburne
Managing Director and Head of U.S. Media Research at Morgan Stanley

Got it. No, that's helpful, Phil. Maybe I don't know if there's a connection between the new business wins and your margin targets. I didn't totally understand your answer earlier on why margins would be flat to down in a year with this much top line. Is there some staffing up ahead of new business coming on that's part of that? Is anything structural change? Like, if you continue to put up 3%-5% growth in, you know, 2024 and beyond, I think we should see margin expansion, just wanna make sure there's nothing we're missing.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

I think it's the first week in February, as John had said. you know, I think if we were sitting here 12 months ago, looking out at 2022, it was a very different macro outlook than it is today, in 2023. Given that uncertainty, you know, we expect there's gonna be some challenges that we're gonna have to manage through. We expect to do it successfully. you know, we're not gonna be overly optimistic in terms of, you know, our guidance at this point.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Yeah. I mean, the only other thing I would add is that when we issue our K, I'm sure we'll be talking about our head count. Our head count definitely went up in 2022. It went up throughout the year. We're looking at a full year's cost for those incremental employees right now. It's hard to really predict what's gonna happen in the payroll environment, because we're going to start to insist. You'll see some reports that, you know, we are insisting bringing people back at least three days a week, that'll be finished and completed by way before the end of this quarter. There are costs associated with those people coming back, that we haven't necessarily had to bear as we were working remotely in the past.

John Wren
John Wren
Chairman and CEO at Omnicom Group

We're being a bit cautious, but I think we're being very sensible. You know, with the Fed raising interest rates and as well as some of the other challenges that are going on with the war, there are uncertainties out there. We, we plan for what we know. That's not what we're hoping for. I mean, we will do everything in our power to reasonably control our costs while attracting the best and brightest people that are out there in the marketplace. We will get some relief with some of the challenges that the tech companies are going through. We haven't seen the full impact of that yet.

Ben Swinburne
Ben Swinburne
Managing Director and Head of U.S. Media Research at Morgan Stanley

Got it. Thank you both. Appreciate it.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Sure.

Operator

Next question comes the line of Michael Nathanson with SVB MoffettNathanson. Please go ahead.

Michael Nathanson
Founding Partner and Senior Research Analyst at SVB MoffettNathanson

Right. Hey, thanks. One for John, one for Phil. Well, for both you guys. One of the challenges we have is trying to figure out what's normal, right? We had 2021 lapping 2020, and 2022 has been a recovery year too. The growth was extraordinary, 9%. When you look at your revenue buckets, what businesses do you think are expecting to slow, right? Has everything just kind of a normalization?

Michael Nathanson
Founding Partner and Senior Research Analyst at SVB MoffettNathanson

In your forecast of 3%-5%, is there just some, you know, acknowledgement that maybe the 2022 growth rate was a bit of a catch-up? Anything you can help on looking at kind of the normalization of growth and looking at 2022 and maybe like experiential, maybe there's some places that were caught up. Phil, can you remind me a bit of your currency and where it's moving? Is that a positive or a negative for margin? I know it's translation effect, but, you know, is there a kind of a bogey on margin due to where currency is moving and where it could possibly go to? Thanks.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Yeah, when we look at revenue, when we look at our clients, we look at what their business needs are in terms of selling their products. We're most interested in share of wallet, as opposed to, you know, individual expertise or crafts within the marketing experience. We've gotten better and better at this. We're on our front foot. We're not only answering the briefs that the clients are necessarily putting to us. We're not just answering questions. We're taking a look at their business, their sector, and trying to be helpful as a partner to them in growing their businesses. We don't really make the distinctions other than what the accounting systems spew out. It's relevant to me.

John Wren
John Wren
Chairman and CEO at Omnicom Group

In today's environment, that marketing funnel continues to collapse, and there's a lot of overlap between the skills or the areas in which, you know, we call out for historic purposes. I started off in an earlier answer explaining how retail e-commerce type of spending and media spending are overlapping, you know, almost completely overlapping today. Not every client's organization has separated the responsibilities for those two areas just yet. In essence, all those costs and all those different areas are being spent to get a great ROI and to move the client's product. That's where our real focus is.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

On.

Michael Nathanson
Founding Partner and Senior Research Analyst at SVB MoffettNathanson

I've got it.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

On the FX front or the currency front margins, there really hasn't been much of an impact on our margins from a currency perspective. Maybe 10 basis points plus or minus each quarter this year or less than 10 basis points. That's typical when, you know, most currencies are headed in the same direction relative to the U.S. dollar. You know, the costs are coming down, the revenues are coming down roughly in proportion to, you know, the change in the currency because the local currencies are, you know, naturally hedged. Unless we get a big swing in, you know, a particular currency where, you know, the revenue drivers from Omnicom are, you know-

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

There's a larger change or a larger proportion of revenue coming from a market where we have an overly high margin or a lower margin than our average. You know, we typically don't get margin swings caused by currency because of the natural hedge of our people are located in the same markets as revenue is generated. It's a natural hedging effect for the vast majority of our business that doesn't have any impact on margins.

Michael Nathanson
Founding Partner and Senior Research Analyst at SVB MoffettNathanson

Okay. Can I ask one more? I don't think you quantified what the hit's gonna be this year to divestments or acquisitions to total revenues. You know, I might have missed that. We got the first quarter. What's your estimate for the year of the revenue changes from divestments?

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Right now, we're gonna kinda cycle on Russia after the first quarter. That was the main.

Michael Nathanson
Founding Partner and Senior Research Analyst at SVB MoffettNathanson

Okay.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

That was the main disposition, that's still out there. You know, we'd expect the number for the rest of the year based on deals that are actually closed, you know, to be small, kinda close to a push, 'cause we don't have any sizable acquisitions or dispositions, that, you know, that are contributing as of now. We expect that to change if we can get some acquisitions done. I think for the balance of the year, it's gonna be flat after the first quarter.

Michael Nathanson
Founding Partner and Senior Research Analyst at SVB MoffettNathanson

Okay. Okay. Thank you.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Sure.

Operator

The next question comes from the line of Tim Nollen with Macquarie Group. Please go ahead.

Tim Nollen
Tim Nollen
Director and Senior Analyst at Macquarie Group

Hi. Thanks. I actually wanted to ask you a question about acquisitions and divestitures, too. If I look back several years, you've got six or seven years' worth of dispositions, not acquisitions. If I go back even to about 10 years ago, you were kind of at about zero acquisition disposition, for a number of years now. You know, you used to be a more acquisitive company. You've clearly been clearing out some of the businesses that have not been working and focusing on organic growth. I just wonder if there might be more opportunities to go for more acquisitions. You know, I know you're not gonna call what you might do in Q2, for example, but is this a more acquisitive environment emerging for you? If so, what kinds of things might you look at?

John Wren
John Wren
Chairman and CEO at Omnicom Group

Yeah. I think we outlined pretty much, Tim, what the areas we're most interested in, which I think I called out as being e-commerce, geographic expansion and skill expansion of our precision marketing group and our very strong healthcare group. Those are areas that we're constantly scraping the market, talking to everybody. We have an entire group that's dedicated to that in terms of mergers. I think this is a generalization, so I'm making a general statement. It's not 100% true, but it's mostly true.

John Wren
John Wren
Chairman and CEO at Omnicom Group

That is, I think with what the Fed has done in increasing interest rates, which I believe is pretty permanent, I don't think sellers have quite absorbed that yet in bringing their-- their pricing in line to what a, you know, any reasonable business person would anticipate as a terminal rate for buying an enterprise. We continue to negotiate, and most of the deals that we've been able to do have been strategic in nature, and they have to be good family members for this.

John Wren
John Wren
Chairman and CEO at Omnicom Group

They have to be able to operate in the environment that Omnicom operates in. You're correct in making, you know, calling out the fact that we have divested a number of companies pretty consistently over the last five years, but that shouldn't really come as a shock to anyone. We're not just getting rid of things that are, you know, anchors around our neck today.

John Wren
John Wren
Chairman and CEO at Omnicom Group

We're constantly reviewing the portfolio, constantly talking to people through our M&A group who are doing roll-ups in certain areas where we become aware of that. We have to make decisions that, gee, this company has value to us now, but are we gonna double down and support it to compete with what we anticipate this roll-up's gonna be able to accomplish? Or are we gonna just take a healthy profit and return it to our shareholders? That's what we've elected to do over the course of the last five years.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Where an acquisition has become, you know, falls short of our standards or we deem to be too expensive, we've not been shy and we spend a lot of money each year investing in building those businesses, which are reflected in lowering our margins in many ways. If we were running the business for any short period of time, you could stop some of those investments and increase your margins temporarily, but it would hurt long-term growth. We're constantly looking at the present, learning, hopefully, from mistakes of the past, but it also with a keen awareness about where our expertise is and where it should continue to be.

Tim Nollen
Tim Nollen
Director and Senior Analyst at Macquarie Group

Thanks, John. If I could maybe ask one more. There's been a lot of discussion this week about AI and this ChatGPT functionality that Microsoft has been investing in. Of course, was it last week or the week before that we had the DOJ lawsuit against Google. These are huge topics. I don't expect, you know, a precise answer, but I just wonder if you have any initial thoughts on how these developments may affect your business and the ad market as a whole.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Sure. You know, we ourselves, not Chat, but found that interesting, are constantly looking as a group that is looking to automate parts of the functions that we perform on a regular basis. Those are some of the investments that I alluded to. When I first became aware of Chat, the first phone call I made was to the head of PR. I said, "Using historic performance, I wanna test, you know, this product and see is it as good yet as, you know, it portends to be, and get an analysis from the people on the ground doing those type of tasks as to how they view it." They came back very positively. It's a good product. It's not a perfect product.

John Wren
John Wren
Chairman and CEO at Omnicom Group

I think when Microsoft really integrates it into its system, it will be able to ramp up so it doesn't crash, because right now it has a lot of people trying to play with it, and it uses a lot of whatever its available hosting capabilities are. In general, I probably would've given you a different answer two years ago than I will right now. All the automation that we're looking at enhances the capabilities and makes the jobs easier for our best and brightest people, and it eliminates a lot of the otherwise mundane projects or activities that we also get paid for.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Net, net, not everybody will love it. We'll be embracing it as quickly as we possibly can because we think it's good for our smartest people, and therefore it'll be good for what the work they do on behalf of our clients. I'm looking forward to it, and I'm looking forward to Microsoft getting behind it and making it something that is on everybody's desktop.

Tim Nollen
Tim Nollen
Director and Senior Analyst at Macquarie Group

Great. Thanks for that.

Operator

The next question comes from the line of Jason Bazinet with Citi. Please go ahead.

Jason Bazinet
Jason Bazinet
Managing Director and Media and Entertainment Analyst at Citi

I don't wanna take away from the results you guys put up because they're very good, and I heard what you said about account wins, and we can all see the numbers. You know, your competitors are also doing remarkably well recently. When I listen to the words you guys use to describe why there are all these tailwinds, whether it's e-commerce or connected TV or digital transformation, at least to my layman's ears, it feels like those things have been going on, you know, as sort of trends for the last five years, and yet all the holding companies are putting up great numbers sort of post-COVID.

Jason Bazinet
Jason Bazinet
Managing Director and Media and Entertainment Analyst at Citi

I feel like I'm missing the thread in terms of what's really caused your growth and your peers' growth to accelerate so much. If you were just gonna convey this to an institutional investor. You said, you know, if you buy Omnicom stock, you are net long what? Just two or three things that we'd all understand exactly what's happening that's causing the clients to use your services so much more than they were in the past.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Sure. The best answer and is the complexity of the marketplace and the complexity of marketing itself.

Jason Bazinet
Jason Bazinet
Managing Director and Media and Entertainment Analyst at Citi

Okay.

John Wren
John Wren
Chairman and CEO at Omnicom Group

The whole customer journey has changed. Technology has changed that. A lot of things which did in fact exist in, you know, the internet marketing companies existed in 1997 when I first made my first investments in them. They weren't really perfected into social media and into Instagram and other things until the period in which you're talking about.

Jason Bazinet
Jason Bazinet
Managing Director and Media and Entertainment Analyst at Citi

Yeah.

John Wren
John Wren
Chairman and CEO at Omnicom Group

If I had to sum it up in two words, and I could go deeper if you'd like, it's businesses requirements to transform themselves in a digital environment and the complexity that that brings. The reason I believe the sector is benefiting is, for the most part, not everybody, and I hope to be at the head of the pack, but I'm happy that my competitors are doing well as well. We've changed our product and our approach to be responsive to those client requirements caused by those two broad categories.

Jason Bazinet
Jason Bazinet
Managing Director and Media and Entertainment Analyst at Citi

Okay. Okay, that's great. Thank you.

Operator

Our next question comes from the line of Craig Huber with Huber Research Partners. Please go ahead.

Craig Huber
CEO and Founder at Huber Research Partners

Oh, great. Thank you. My first question, John, on pricing. Historically, this industry might not have had great pricing power on a like-for-like basis. I'm wondering if you could help us here, how you think about pricing for this year. Do you have more pricing power in this higher inflation environment?

John Wren
John Wren
Chairman and CEO at Omnicom Group

Should we? Yes. Are we speaking to our clients about that? Yes. Do they understand that the best and brightest people that are servicing them can demand more because of the inflationary periods that we're all living through? Yes. I think I tried to-- I quickly breezed over this in an earlier answer, but we've had some very good success in going to clients and getting increases in our pricing. Not everything we want by any standard, but getting that movement and that recognition. Clients who themselves are facing difficult times and are really or more difficult times, are really maybe not in a position to give us the level of increase that we want, but we don't stop there. We then say, "Well, guess what?

John Wren
John Wren
Chairman and CEO at Omnicom Group

In the past, you've been able to fire us and give us six months notice. We wanna extend our contract to be a 36-month contract before you could possibly review it, hoping that you don't need the end of 36 months either. In getting that in lieu of a price increase, we're able to add stability to our revenue base. We are benefiting. One's more measurable than another, but. The reason for that is because I think our product alignment is correct in terms of what the market needs are, and I think our clients respect the intelligence and the sophistication of the people that we have servicing them on their accounts.

Craig Huber
CEO and Founder at Huber Research Partners

My second question, John. For 2023, what industry sectors are you most bullish about when you compare it to that 3%-5% initial organic revenue growth outlook for this year? Is it healthcare, travel, retail? What would you point to, please?

John Wren
John Wren
Chairman and CEO at Omnicom Group

Well, the one that I can point to with real confidence is healthcare. I think there are increasingly new discoveries, new products all the time in the healthcare area. I'm confident that everybody on the planet is gonna have to eat food and drink beverages, so that sector of our business I'm comfortable with. Our tech sector, I think we're gonna suffer, get a little pain there, and we've planned accordingly because of the pain that those, some of those companies are going through. They'll reinvent themselves very, very quickly, and I'm very happy to have them as clients, even if they're facing challenges. The auto sector, I think two interesting things are going on, and clients have to continue to market in order to address this.

John Wren
John Wren
Chairman and CEO at Omnicom Group

One is there hasn't been a lot of new product in the past three years because of supply chain problems, which have now been, for the most part, solved by most major car manufacturers. The second thing which clients have to continue to bring their brands and promote their brands in order to be participants in this area is electric cars and the requirements of that to show progress in their product. You know, travel, I'm not gonna comment.

John Wren
John Wren
Chairman and CEO at Omnicom Group

I can speak for the [Wren] householders. Nobody shied away from it, but I don't know that much about anything else. Our clients are bullish, but every CEO that I speak to, truly believes in their products, believes in their future, and is cautious and appropriately cautious about the financial conditions of, you know, central banks and the Fed and where interest costs are gonna go. Hopefully that answers your question. That's about the best I can do.

Craig Huber
CEO and Founder at Huber Research Partners

It's very good. Thank you.

Operator

With no further questions in queue, I'll turn it back to our host for closing comments.

Phil Angelastro
Phil Angelastro
EVP and CFO at Omnicom Group

Thank you all for joining us on the call today. We appreciate you taking the time, and we'll talk to you again soon.

John Wren
John Wren
Chairman and CEO at Omnicom Group

Thank you.

Operator

That does conclude our conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.

Executives
    • Gregory Lundberg
      Gregory Lundberg
      SVP of Investor Relations
    • John Wren
      John Wren
      Chairman and CEO
    • Phil Angelastro
      Phil Angelastro
      EVP and CFO
Analysts
    • Ben Swinburne
      Managing Director and Head of U.S. Media Research at Morgan Stanley
    • Craig Huber
      CEO and Founder at Huber Research Partners
    • David Karnovsky
      Senior Research Analyst at JPMorgan
    • Jason Bazinet
      Managing Director and Media and Entertainment Analyst at Citi
    • Michael Nathanson
      Founding Partner and Senior Research Analyst at SVB MoffettNathanson
    • Steven Cahall
      Managing Director and Senior Equity Research Analyst at Wells Fargo
    • Tim Nollen
      Director and Senior Analyst at Macquarie Group
Powered by Quartr