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Omnicom Group Inc. (NYSE:OMC)

Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference

March 04, 2013 10:10 am ET

Executives

Randall J. Weisenburger - Chief Financial Officer and Executive Vice President

John D. Wren - Chief Executive Officer, President and Director

Unknown Analyst

Well, next up is Omnicom. Am I on? Okay, good. Next up is Omnicom Group, the -- one of the largest advertising and marketing services organizations worldwide. Major global platforms include DDB, BBDO, TBWA and DAS. The company is also one of the largest media buyers with platforms OMD and PHD. Not the largest but arguably the most awarded, whether you look at Gunn Report, Ad Age, Adweek, campaign magazine both in developed and developing world. So welcome to -- President and CEO, John Wren; and EVP and CFO, Randy Weisenburger.

Randall J. Weisenburger

Hi.

John D. Wren

Thank you.

Question-and-Answer Session

Unknown Analyst

So we have a lot of topics to cover. Thank you for being here. The usual topics are going to be around what sounded like a rosier outlook on your conference call, the fixation with margins, capital allocation and what the assets are out there to buy among others, and we'll do Q&A as well. But I did want to start out with something a bit more thematic. It seems appropriate, given that you've gone through this multiyear transformation of your business, where you've looked pretty closely at what you do and what you have and reacted to changes in the marketplace around you, whether they be geographic or demographic or technological. And I just wanted to get a sense for you, if you could outline for us what those broad megatrends are that you're reacting to and where you think Omnicom goes within a couple years to react to those.

John D. Wren

Okay. Subject to any opportunity that comes up, which might be interesting, what the company does is we hire incredibly talented people to reflect and effectively be agent for our clients. So we're media agnostic. So we love anything that works. We prefer things that you can measure that a client is investing money in it. And we find ourselves in a -- yes, we did go through that exercise certainly. It started probably 2.5 years ago. There's one company that hangs on that eventually we'll rid ourselves of, but it's not big enough for any of you to care about. And one of the filters, and there are a lot of filters we put through in terms of looking at our portfolio, was did we believe that this company, this brand was going to be relevant 5 years from now? And if it wasn't, we went on the "to be disposed of" list, either repaired or disposed. And we've gotten through most of that process. Now we're looking further and further to see how we can leverage across ourselves but, again, for the benefit of the client for the most part, to take the inefficiencies out but doing in a way that it doesn't destroy the culture of our major brands within the business. Because in many ways, since it is a personal service business, that's what differentiates it, that small difference. But culture is what differentiates it as it's approaching an ever complex marketplace. So the difference -- maybe another way to explain it, the difference between 4 years ago and today is now we're hiring data geeks, so you wouldn't really allow out with the clients but they're incredibly helpful.

Unknown Analyst

Some of them may be in this room.

John D. Wren

So if anybody needs a job, please see me after dinner. But because a lot more, there's always been too much data. But we -- everyday, we get better and better at mining the valuable data, which can affect the company's progress and sales. And we find that we need increasingly a different -- we need to complement our staff with people who come at it in a different way and can be useful in that. So the change that we started within the company a couple years ago, as I've explained to most of our employees, that was just practicing sprinting. You're in for a marathon because change is constant.

Unknown Analyst

Does the value that you bring to clients change as a result? I mean, are you still helping your brand break through clutter? Or are there new services or tools that you can deliver the results?

John D. Wren

Ultimately, it's the latter. But we're -- since we're a service company, complexity is our friend. So the more complex the world becomes, the more ways there are to reach client audiences and to sell your product. The more complicated but measurable that becomes, that's good for us. And we're responsive to it in many ways and leading it in some other ways.

Unknown Analyst

When you think about some of the high-performing businesses, the ones that meet the criteria that you want to invest in incrementally, what comes to mind in terms of specialty areas or tools or skill sets?

Randall J. Weisenburger

It's pretty broad. I mean, our objective at Omnicom is to really have the full complement of marketing services. So some people could think everything has to be digital. But frankly, some of our field marketing operations are brilliant-delivered, great return for investors and a great service for our clients. So the -- Omnicom's objective is to have that full scope or full complement of capabilities, and we want to invest in top talent and the key geographies to allow them to serve their clients.

Unknown Analyst

And your focus is on multinationals principally. I think you've designed your business around that. It's obvious. Now is that true? Is that an accurate statement? And will that remain that way if you penetrate some of these faster-growing geographies?

John D. Wren

Yes. I mean, our objective is blue-chip clients. So you would find them today to be multinationals, from a U.S. or Western perspective. But there are quite a number of companies that are going to emerge from Asia and other markets that fall into that same category there. Instead of servicing in a local way just their local market, they have requirements to go outside of their market. That generally means that they have to at least reach the same standards of behavior in doing business, as you referred, to multinationals. So we're always looking to expand. We're looking to learn. We're looking to make sure that we're -- that our clients want to pay us a premium price because they respect what we do. I mean, at the end of the day, that's really what we're looking to do. So you can find a Chinese company that's prepared to do that and you can also find a Chinese company that could hire a Chinese agency that's not prepared to do that. I'd distinguish it more that way rather than try to label groups.

Randall J. Weisenburger

I think in some respects, you're referencing a way that I answer questions or certain questions. We try to -- as we've tried to build out the portfolio of companies of Omnicom, we've looked to the smartest marketers on the world and tried to understand their needs by discipline, by geography. And we figure, if we can build Omnicom to serve the needs of the smartest marketers in the world, then we're going to be pretty well positioned for others. Obviously, from this country, we look at some of the large multinationals and think of those companies as being some of the smartest marketers in the world. As you go to different geographies around the world, it may well be a national firm and not a multinational in that country. But we're trying to build, as John points out, blue-chip clients. I'd phrase it as really the smartest marketers in the world. If we can learn and work with them, we're going to be pretty well positioned long term.

John D. Wren

And just to add to

[Audio Gap]

So we're very interested in local clients to make sure that we're locally relevant. I mean, we and the other big groups focus and talk about big multinationals, but we have 5,000 clients. And I can assure you, I don't know the name of the last 100. So that they tend to be very local, very small but appropriate to sort of what we're doing.

Unknown Analyst

Okay. Can we spend a moment talking about current business environment, current trends? It may have just been me, but I did -- it may have been me reading into your tone. Maybe you woke up and were feeling a little bit better on the day of results. But it sounded as though you were a little bit more optimistic about the current marketing environment, perhaps about the way your year had started or looking at the client budgets relative to a prior investor conference you attended in January. Was that me? Was that...

Randall J. Weisenburger

I think I thought, I said the same thing. I don't know.

John D. Wren

Yes. I suspected you spent too much time with Obama already. But no, no.

Unknown Analyst

5 years [ph].

John D. Wren

No, but the client budgets are a little bit more optimistic than what we're forecasting internally for setting up our business and for what we're willing to say at this point. And so far, we've only seen January numbers and they're certainly within the range of what we've said publicly. We'll see February in a couple of days, and then I'll feel even twice as good as I did in January. But over the near term, this year next, I'm convinced that the U.S. will grind through, probably -- hopefully be the -- one of the more leading operations in terms of consistency of its performance. And if that's the case, we should be able to figure out how to be very successful in it. I'm happy that China just finally got through the process of seating the new government because, it will be another couple of months, but I think then, there's an opportunity for them to get their hands on what they're doing and move forward. So U.S., Asia, brighter in the year in 2014. I think South America is -- and Europe is going to be difficult for a long time. I mean, I was in Europe last week. And I had a lot of time to sit around and watch TV, but leave it on as background noise. Retail chains have -- closing 57 stores here, and they're not necessarily my clients but it's an economic tone. So I think Europe is going to be hard for the foreseeable future, but I'm hopeful about the rest of the markets. And then we have a -- some economic situations to deal with. We've been able to demonstrate over a lot of years that we can sort that out and make the best of it. So -- and as I said, 2014, I'm more optimistic about than 2013.

Unknown Analyst

In the U.S. more specifically, large market for you, important market for most companies. Do you have -- a line into clients in terms of if they're -- to what extent they are or not reacting to the uncertainties in Washington?

John D. Wren

Not a single CEO I know privately is happy about the uncertainty in the United States, but they're responsible for running their company. So after they express that, they get on with, "We now have to go run that company." So they do. I think the dysfunction in Washington is holding down what could be even better performance in the United States if CEOs knew exactly what the rules are going to be and for what period of time. So -- and somebody's going to win, somebody's going to lose. So we'll get clarity at some point. It's a pain in the neck, though, to listen to them argue like children, which is not helpful.

Randall J. Weisenburger

If nothing else, we'd have something else to talk about, which would be more positive than talking about the dysfunction.

John D. Wren

And the importance of the U.S. is that I think Asia is not strong enough to lead the world out of the doldrums. It's going to have to be -- and I don't see Europe getting its act together anytime soon. So it's going to have to be -- start with better performance in the United States, and that will affect, I think, the rest of the world. So -- but between now and then, we just continue to do what we do the best we can.

Unknown Analyst

And you're doing fine. The -- Randy, I like your framework of thinking about marketing relative to GDP. You've encouraged us all to think about your business as GDP plus. And we've noted that historical pattern in past years, where your marketers caught up after cutting back and it was outpacing GDP for a number of years. And you predicted without specific time lines that at some point it would converge, and it really hasn't happened. At least, it didn't happen in 2011 and it didn't happen in 2012, this convergence. And maybe this year is a little bit more difficult because there's the potential of the sequester to affect GDP. But do you have an updated view on, are we going to be in this period where you continue to...

Randall J. Weisenburger

Well, I think it's a matter of just practicality on a long-term basis. Marketing is highly correlated with companies' revenues. Some of the things in 2008 and 2009 made us sort of rethink, when we say GDP, what do we really mean? And what we really meant by it and we use GDP as a proxy for is our clients' revenues. So basically, if you were somehow able to take a survey of the top 5,000 or 10,000 companies of the world, of their revenue, marketing spend has to be highly correlated with that spend over a period of time. And you can have some fluctuations. Generally, marketing is pretty consistent. I think in the 2008-2009 timeframe, people made different decisions and probably cut marketing back. And eventually, probably restored it, if not all the way, largely there. Our industry has benefited with the added complexity of the marketplace, added complexity of reaching consumers. Frankly, the more complex consumers have gotten have meant more marketing dollars. John phrased it as, Chaos is good for us. Complexity is good for a services firm. So that should allow us to outpace or capture more of that marketing spend during, I don't know, but I'll say the foreseeable future, 5, 10, 15 years. We use GDP as the tracker, as the reference for clients' revenues. We're probably getting more of conversions of GDP to our clients' revenues. We saw the disconnect. Government spending is a piece of GDP as well, nondiscretionary GDP. I mean, frankly, marketing dollars are really around discretionary GDP. It's not around just substinence (sic) [subsistence]. Yes, I think we'll get back to more of a normal pattern.

Unknown Analyst

Has your business gotten more volatile in recent years because of any number of factors, whether it's digital or these external events? If you think about it as a portfolio and you like to minimize volatility, do you have implications as to when?

Randall J. Weisenburger

I think, certainly the economy has been volatile. But I think marketing has been pretty consistent during that period. I mean, 2008, 2009, we kind of forget. It's been a long time. But it was a pretty extreme economic period and we were worried about all the banks going bankrupt. We were worried about major clients not being able to fund things. Companies took some extreme positions. That's pretty abnormal, certainly only happened one time in my lifetime. Absent that, I think the consolidation of our industry, the complexity of our industry has probably reduced the volatility as it comes to service providers. That economic backdrop is sort of put aside.

Unknown Analyst

Let me just throw one in here. If we ask your marketers, if they -- what they would like to fix about the relationship with their agency service providers, do you have a sense of what that might be or what you might hear?

John D. Wren

I have a sense of it. The last thing on earth I'm going to do is answer your question and provide -- put that in the head of anyone. So it was nice to ask but...

Unknown Analyst

I can move on.

John D. Wren

I could tell you what's wrong with W peace funds [ph]. But it's perfect for low income.

Unknown Analyst

Okay. All right, then I'll move on to the topic of margins because I'm sure you want -- you're right here to talk about that one. So now that you've hit your 2-year goal to restore your EBITDA margins to that 13.4% level of 2007. It sounds like you're discouraging us from getting ahead of our skis too much.

John D. Wren

That would be a fair way to put it. We take a lot of things into consideration when we're managing the company. It's what tools do we have, the ability to buy them, what people do we have, do we need to complement and supplement them, the rewards that we give people or don't give people. And we look at that whole mix. And then we also -- the end result of that is the margin which we return to the shareholders. Everyone's endeavoring constantly to improve margins. But we have a long history, maybe contrary to others in our business, of doing it and then telling you about it, as opposed to telling you we're going to do it and then maybe we'll never get there and have a fabulous reason for why we didn't achieve it. We just tend to keep quiet, follow the same principles and goals, and we're generally pretty happy with the result. Given what we see in the marketplace, the uncertainties we see in the marketplace, given the fact that we've taken even our -- some of our internal forecasts that we've gotten from companies down to a more conservative look at it, we're not comfortable in February or March of saying we're going to just focus on increasing margins to the shareholders. It's going to -- our performance is going to come in and we're going to look at it and then make those decisions. So I'd rather achieve them than not achieve them. I'm certainly comfortable with the level of margins that are out there now based on everything that we know, but not prepared to make anybody's day by giving them something this early in the year with all the things that are uncertain, so. Anyway.

Randall J. Weisenburger

And I can't resist with a group of investors. So for 10 years, I've tried to discourage everyone from focusing on margins. I don't think it's the way to evaluate our industry. We look at margins on each individual agency's basis, and each agency should have its optimal margin. So for some agency, that might be a 30% margin. And frankly, if it's doing 28%, it's not good enough. At another agency that's doing 12%, if that is the right margin, that's the right margin. Because frankly, if you drove it to 28%, you'd ruin it. So Omnicom is a result of a large number of agencies in a lot of different geographies, and we're trying to get every agency to operate at or close to its optimal level. But our mix of business changes both by geography and by type of business, and that can move some things around. So even when I look at a margin now at 13.4%, back in 2004 or 2005, I said those were pretty good levels then. We've kind of gotten back to those levels. And they were 2005, 2006, 2007, the margins were about that same range. 2008, they obviously took a dip. On an apples-to-apples basis, given our mix of business and given the regulatory environment and the money that we have to spend to comply with that, these margins, I would guess, are about 50 to 70 basis points higher than what they were comparably in 2004, even though it's reported as the same number. So I think our businesses are doing pretty well in managing their costs. I think we've made a lot of great strides in improving the efficiency of the overall, I'll say, corporate environment. Our procurement programs, our centralization of IT, and service centers have created lots of efficiencies. We've obviously had a lot of things to deal with to try to manage the overall margins for Omnicom. But again, as management, our focus is trying to get each individual agency at the right level, not trying to manage some theoretical number in the aggregate.

Unknown Analyst

And other groups call out a massive ERP implementation. Is there anything equivalent to that behind the scenes that is a driver for you?

Randall J. Weisenburger

There's 1,000 little things that we're doing or 1,000 -- or frankly, for the people doing it, they're big things. But it's 1,000 things. There's no one thing in this business, which is either good or bad that you can go out and change the result in a significant way. I also tell people, we have roughly, call it, 2,000 agencies around the world. It's $100,000 an agency, which the -- it's a relatively small number. But if we get -- if we get all the 2,000 agencies to make a $100,000 decision the right way, that's $200 million. That actually is a meaningful number. The problem is $100,000 decision going the wrong way is also $200 million. So it's not a matter of going at it -- you can't go out and find the $50 million change. We probably can't even go out and find the $10 million change in one spot. So the key is getting all of the people to move into the right direction, making lots of great decisions and try to get as efficient as we can. But it really is three yards and a cloud of dust.

John D. Wren

The only way I can think of is to adopt what our competitors had done and start reporting headline margins and then -- as opposed to GAAP margins. And you then might think that they've gone up, but...

Unknown Analyst

You might as well, because I think, given 10 years, we'll probably still be asking you about margins.

John D. Wren

Oh, no, no, no, I said...

Unknown Analyst

But point taken on that...

John D. Wren

I do it every day. So I mean -- so we're chasing margins, chasing what's appropriate for each company.

Unknown Analyst

Your focus then is on return of capital. Can you move -- what can you do to move that? Do you have a business quarterly -- corollary for you that you believe that you can take that return of capital back to a level that's higher than it's at today? Or is it, again, similarly maintaining it?

Randall J. Weisenburger

Well, I think it's about -- I don't know how high it can go. Our return on total capital is probably in the 17% or 18% range over a 20-year period. I think that's pretty good. Can it be 19%? I'm sure it can be. We're obviously striving to make it as strong as possible. Return on equity is equally important, maybe even more important because that also includes the capital structure, which having part of the CFO title, is kind of what we're focused on, taxes and our capital structure. We've averaged almost 28% return on equity for a long period of time. I think those are very strong numbers.

Unknown Analyst

I'm going to ask one more question, and then we'll turn it over to the audience for Q&A. It's around capital allocation. I promised I would ask about that. You've been raising the dividend by double-digit rates the last number of years, while also having a healthy buyback program. But there has been this notice -- it seems like a noticeable shift in the favor of dividend. Can you explain the rationale for that?

John D. Wren

We both probably can, but go ahead.

Randall J. Weisenburger

Okay. We -- over the last 10-year period, we've returned effectively 100% of our net income to shareholders. Our intent is to obviously continue to return capital to shareholders in that fashion. Obviously, we like keeping the flexibility that if the right acquisitions or the right investments come along, we can reduce our share repurchases and still maintain the capital structure that we want to maintain. As the company has gotten bigger and bigger, I think we still have that flexibility and increasing the amount of the dividend payouts. So over the last 4 or 5 years, we've had very solid, very high double-digit increases in the dividend sort of balancing out that mix, keeping the sort of the split between share repurchases and dividends in sort of a 40-60 range. It still gives us plenty of flexibility to do what we want to do or what might come up, yet have a more consistent return to shareholders through the dividend.

Unknown Analyst

And it's come along to outspending free cash flow, outspending your -- on the combination of dividends, shareholder repurchase and acquisitions. Would you be comfortable taking up -- would you be comfortable taking your leverage share up beyond the current level in order to continue to do that?

Randall J. Weisenburger

We've said for a long time, we want to keep a BBB+ rating. So what level John or I are comfortable with is interesting. What level S&P and Moody's are comfortable with is potentially a touch more interesting or at least it's more relevant.

Unknown Analyst

How close do you think you guys are?

Randall J. Weisenburger

Well, the way Moody's calculates, it's about a -- I think they think we're about 3.25 is their calculation of leverage. They go and capitalize rents. They don't give you credit for cash. They do a handful of things that we don't naturally do. But again, it's relevant. I think we could be at 3.5 before they notch us down to BBB+. I think with S&P, it's about -- I think we're about 2.85, and I think we can be to 3. That's probably roughly $400 million or $500 million of additional leverage. That's in addition to using the cash that we have on the balance sheet because neither one of them really gives us credit for our cash. Last year, let's go back to history a little bit, in 2009, we delevered the firm about $1.2 billion, just out of...

John D. Wren

Peers.

Randall J. Weisenburger

It's hard for the market, just to see if we could. We've put that leverage back. And last year, we raised about $1.25 billion of additional debt. And we said over a couple year period, we would likely outspend our free cash by that amount. If we outspend our free cash, which should -- it's probably -- I think last year, it was about $325 million. So you got about just a little bit shy of $1 billion to go. If we do that over the next 18 to 24 months, that would be probably a likely thing.

Unknown Analyst

Okay. Any questions out in the crowd? We have one over here on the right.

Unknown Analyst

Yes. Randall, I have 2 balance sheet questions. One, I remember correctly, the difference between your leverage of gross debt and net debt is huge. It's 2x, I think. It was 1 versus 3 or something like that. So what's the purpose of keeping all this cash if you can't -- I mean, you don't -- a, you don't earn anything on it and b, you don't even get credit for it.

Randall J. Weisenburger

That's fine. So that's about $1 billion that I just mentioned that over the next 18 or so months, we will likely take that cash and return it as excess cash to shareholders or I shouldn't say shareholders. We'll use that cash past our earnings. So that will change those ratios a little bit.

Unknown Analyst

When is your next significant refinancing need or opportunity of some size?

Randall J. Weisenburger

2016 is the next due date of a bond. We can -- we'll see how we decide to finance that at the time or prior to that. We obviously go through an evaluation periodically to determine if it makes economic sense to refinance that bond early. It's generally an economic disadvantage, so it would cost our existing shareholders a little bit of money to buy that bond in and replace it with something at whatever cheaper interest rate on its face. But economically, it wouldn't be breakeven. Part of the evaluation is what do you -- what do we think the capital markets are going to do. If I think the interest rate is going to be a lot higher in 2016, we're probably better off refinancing it earlier than that. But that's a bit of a guessing game at this point. But economically, straight up, we can't refinance that bond and replace it with an existing bond without it being a net economic cost.

Unknown Analyst

What does Facebook mean for your business? And where are you seeing the biggest shifts between different medium?

John D. Wren

Facebook's another medium device we use to reach consumers, and it is in the mix. I mean, it's an important company. We're engaged with them all the time, more in what's going to happen in the future. We do spend a lot of money with them or with them. And we have some great examples, which are client specific and I'd have to ask permissions to disclose them. But where we've used them to seriously affect the sales of certain franchisees around the world. And we're on this path of discovery with them, especially as they are engaging and investing more in mobile. And I have a very strong belief that mobile will be the most constant device that we'll all deal with in the future. So we have a very good relationship with them and good business with them today, and it's a growing business. They're not going to overtake the world. They're not going to shut everybody else down. They're a part of an important mix. You asked in terms of shift?

Unknown Analyst

[indiscernible]

John D. Wren

Yes. I mean, it's more and more every year, it gets dedicated to per se digital. But there's an awful lot of things out there that could affect it or disrupt where the money is spent in the whole media chain. And you see that with things as one-off as Netflix's house of cards where, gee, if I was a cable owner, I'd be terribly worried about what that might ultimately bring to you. And there's also some changes going on at the same place. I think that as video becomes -- as YouTube and others get 100 stations that people are actually not only posting things on but programming things for, you'll see more money diverge to that. And it's not going to be new money. It's going to come somewhere out of the mix. So it's probably in out of door -- at home and some other things that will twinge it a little bit in the near term. Longer term, everything's up for grabs. There's a lot of money that intermediaries get that it can be taken out of the system. So I don't know if that's responsive, but -- I'll give you a day on Obamacare, too.

Unknown Analyst

But we'll save that for the next presentation, maybe one-on-ones.

John D. Wren

Okay.

Unknown Analyst

But we're out of time. I want to thank you both for being here today.

John D. Wren

Thank you very much.

Unknown Analyst

Enjoyed it very much.

Randall J. Weisenburger

Thank you, all very much.

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