Omnicom Group's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.22.14 | About: Omnicom Group (OMC)

Omnicom Group Inc (NYSE:OMC)

Q1 2014 Earnings Conference Call

April 22, 2014 08:30 am ET

Executives

Randall Weisenburger - Chief Financial Officer, Executive Vice President

John Wren - President, Chief Executive Officer, Director

Mike O'Brien - Senior Vice President, General Counsel, Secretary

Analysts

Craig Huber - Huber Research Partners

Alexia Quadrani - JPMorgan

James Dix - Wedbush

William Bird -FBR

Dan Salmon - BMO Capital Markets

Doug Arthur - Evercore

Peter Stabler - Wells Fargo

Operator

Good morning, ladies and gentlemen, and welcome to the Omnicom First Quarter 2014 Earnings Release Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If you need assistance during the call, (Operator Instructions). As a reminder, this conference call is being recorded.

At this time, I would like to now introduce you to today's conference call host, Executive Vice President, Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead.

Randall Weisenburger

Good morning. Thank you for taking the time to listen to our first quarter 2014 earnings call. We hope everyone has had a chance to review our earnings release. We posted on the omnicomgroup.com website both, our press release and the presentation covering the information that we will be presenting this morning. This call is also being simulcast and will be archived on our website.

Before we start, I've been asked to remind everyone to read the forward-looking statements and other information that is included at the end of our investor presentation, and to point out that certain of the statements made today may constitute forward-looking statements and that these statements are our present expectations and actual events or results may differ materially.

I would also like to remind you that during the course of the call, we will discuss some non-GAAP measures in talking about Omnicom's performance. You can find the reconciliation of those measures to the nearest comparable GAAP measure in the presentation materials.

We're going to begin the call with some remarks from John Wren about both the state of our business and our potential merger with Publicis. Following John's remarks, we will review our financial performance for the first quarter and then both of us will be happy to take your questions.

John Wren

Good morning. I would like to thank you all for joining our conference call. I am pleased to speak to you about our first quarter business results and update you on the progress we've made on our strategic initiatives. At the end of my remarks for the quarter, I'll update you on the proposed merger with Publicis. Randy and I will be available to answer questions at the end of the prepared remarks.

Omnicom's performance continues to consistently demonstrate the strength, diversity and stability of our business. As you know, 2013 ended successfully as markets improved around the world and we met all our stated objectives for the year. I am pleased to report that our excellent performance in 2013 was reflected in the level of bonuses earned by our employees for achieving these objectives.

2014 is off to a very good start. Irrespective of the timing open issues or complexities of the proposed merger, our employees have remained focused on our clients and growth strategies. Importantly, we are on plan to meet our targets for the full year 2014.

Now, back to the quarter. Our growth strategies continue to result intangible benefits. During the quarter, we made several strategic acquisitions, we continued to enter into innovative partnerships and made significant progress in advancing our industry-leading digital and data platforms. I'll cover this in more detail in a moment.

For the quarter, organic growth was 4.3%. Our year-over-year margins, excluding merger-related expenses, continued to improve. We also continued to invest internally in our talents and agencies to expand our partnerships and to make acquisitions in innovative service areas that will fuel our growth. In many ways, our first quarter results are reaffirmation of our performance in the market improvement we have experience since the second half of 2013.

Broadly speaking, the U.S. and the U.K. are showing consistent forward momentum. Euro markets are steadily, but slowly improving. For the first time since the first quarter of 2012, we had positive organic growth in this region. Among our larger euro markets, Germany was positive for the quarter while France continued to be negative.

Latin America, Asia and Eastern Europe continued to perform well with some countries spending above others; specifically, Brazil, Russia China and India. The crisis in Ukraine occurred late in the quarter and we do not yet have visibility on the impact it may have in Russia and our other European operations.

By discipline, we experienced positive results across our business. Within the brand advertising category, we had very strong overall growth in media, including high double-digit increases in search and programmatic buying. In CRM, our sports and event marketing and shopper marketing operations, performed extremely well. In our specialty category, we continue to see very positive growth in our healthcare business.

Turning to our cash flow and balance sheet, the diversity and stability of our business has once again reflected in both, our strong cash flow generation and in our industry-leading return on equity. Omnicom's strong cash flow, balance sheet and liquidity provide us the flexibility to prudently and opportunistically invest in our people and our operations as well as in acquisitions that improve and expand our service offerings and footprint.

Overall, I am extremely pleased with the operating and financial performance of our business. Let me now provide an update on the progress we are making against our key strategic initiatives. Recruiting, developing and retaining the best talent, expanding our geographic footprint and service offerings to our clients, particularly in emerging disciplines in economy, investing in our digital and analytical competencies in the key markets around the world and delivering big ideas based upon meaningful consumer insights across all marketing and communication channels.

Our ongoing investments in recruitment, diversity and training programs are helping us improve the skills of the many talented individuals at our agencies. An important measurement of our challenges is industry peer and client recognition. Let me just mention a few of our achievements during the quarter. FleishmanHillard was named agency of the year by PRWeek. BBDO Worldwide was named the most awarded agency network in the world in 2013 Gunn Report for the eighth consecutive year and DVB was the third most awarded network. Also for the eighth consecutive year, Omnicom's Media Group, OMD Worldwide was named the world's most creative media agency by the Gunn Report.

I want to congratulate all the people and agencies for their many outstanding achievements. As I mentioned on our last call, collaboration across different marketing services and geographies is the new normal. Many large multinational clients are asking us to manage their entire marketing process bringing them big ideas and delivering them across disciplines, media and markets.

At Omnicom, we have formed teams of subject matter experts from across our agencies for the purpose of delivering integrated solutions, building brand and driving results for our clients. Our approach is designed to fulfill our clients' needs and desires for integrated services and allows us to support and grow the iconic brands in our portfolio. We believe our ability to recruit and retain top talent and to provide the best service to our clients is achieved by ensuring our brands maintain their individuality and collaborate to meet our clients' needs.

To further strengthen our efforts, we have recently announced that Peter Sherman is rejoining Omnicom as an Executive Vice President to lead innovation and collaboration across our client portfolio. Peter is returning to Omnicom from J. Walter Thompson, where he served as CEO of North America. In the war for talent, there's nothing more rewarding than seeing a former employee rejoin Omnicom after leaving for a period of time to work for a competitor.

Last quarter, we continued to expand our capabilities through acquisitions in the digital and in mobile areas. In February, we completed the acquisition of 22feet one of India's leading and most dynamic digital marketing firms. 22feet will be merged with Tribal Worldwide, India part of the DDB Mudra Group. The new agency will offer its clients end-to-end digital and mobile marketing solutions.

In Brazil, we took a majority stake in the advertising agency Mood. Continuing to expand the capabilities of the TBWA Brazil group, Mood's culture of innovation and depth of talent will strengthen our business capabilities in that market. Also in Latin America, Omnicom's Media Group recently acquired Media Interactive, which expands our capabilities in Chile, Colombia and Peru.

Lastly, in the U.K., Omnicom's Media Group acquired Mobile5, whose work includes creating mobile ads, developing apps and building mobile sites. Mobile5 will serve as a mobile Center of Excellence for the group in the European region. In addition to these acquisitions, we continue making internal investment in our networks, agencies and service platforms.

Today's market complexity demands our agencies to deliver their services seamlessly and efficiently across mediums and markets. Given this backdrop, Omnicom recently announced the formation of Eg+ Worldwide, a global implementation and production agency which will be a leader in leveraging the latest technologies to help global brands implement, amplified and localized creative concepts across moving, image, digital and print media channels.

Today, Eg+ deliver services globally through our offices in L.A., New York, Paris London, Singapore and Tokyo, supported by digital production centers in China, India Mexico and Poland. Eg+ has 39 offices and more than 1,200 employees around the world.

As I have said before, our industry has become increasingly complex and fragmented. New platforms and technologies come and go at mach speed. We have therefore maintained an open partnership with technological leaders as opposed to making bets on specific platforms. This approach allows us to have access to the latest technologies for the benefit of our clients marketing strategy.

Consistent with this strategy, last month we signed the first of its kind agreement with Instagram. Instagram product change will partner with our media and creative agencies, including our OMD PHD as well as BBDO, DDB and TBWA, to develop highly visual digital concepts for our clients. Overall, our diverse service capabilities and top talent, combined with our open-source approach to technology and extensive partnerships, are unique in our industry and position us extremely well for the future.

Turning to the proposed merger with Publicis, given the merger's complexity and open issues, the transaction is moving slower than we originally anticipated. To better understand our progress, it is important to delineate the three separate approval tracks we are working on. First is antitrust. Clearance has been obtained in the U.S., the E.U. and 12 other countries around the world. China is the only market remaining for antitrust approval.

On April 17th, Omnicom and Publicis entered Phase 3 of the Chinese review process. Phase 3 is a 60-day period ending June 16, 2014. If the regulator is not able to resolve all questions by June 16th, we will need to withdraw and resubmit our filings and continue the process. Second is tax, the French tax ruling approval process is pending. In addition, Omnicom and Publicis have made joint applications with other tax authorities for purposes of establishing the desired tax treatment of the new Publicis Omnicom Group. Specifically, we have jointly applied to the Dutch Ministry of Finance and the U.K. HM Revenue & Customs authority to establish exclusive tax residency in the United Kingdom. Unexpectedly to-date, we have been unable to obtain the Competent Authority agreements necessary to establish the tax status. If we cannot obtain these agreements, it could affect the likelihood of satisfaction of the conditions to closing of our deal.

Last, other regulatory approvals, the S4 has to be filed with reviewed and declared effective by the SEC, similarly the European perspectives is to be filed with reviewed and approved by the AFM, the Netherlands regulatory authority for financial markets. We have not yet completed our filed documents with either the SEC or the AFM. The timing, financial statement preparation and other disclosures are in process. Given the proposed merger's complexity and open issues, at this point it's not practical to predict exactly when the transaction will close.

Before I turn the call back to Randy, we will go through Omnicom's first quarter financial performance in greater detail, I'd like to make a few final comments.

Financially, Omnicom has continued to excel in delivering consistent revenue growth, strong margin performance, stable cash flows and an industry leading return on invested capital. We remain strongly committed to maintaining this performance. Strategically, we have a very stable talent base and are making significant progress on our core priorities. We believe, we are very well positioned to compete in an increasingly complex and dynamic landscape.

Our liquidity and strong balance sheet allow us to further invest in the business, make acquisitions and deliver value to our shareholders. Finally, I'd like to acknowledge the spirit and drive of the people at all of our companies that I believe are the best in the industry. The creativity and insights they deliver to our world-class clients, their ability to work together across disciplines and geographies and their financial discipline are the key factors that show themselves in our top and bottom line results. Randy?

Randall Weisenburger

Thank you. As John detailed, our agencies continue to make excellent progress against both, their strategic and operational objectives. They have continued to make the investments needed to further develop and expand their capabilities, which consistently resulted in the highest organic growth rates in the industry. I think the market now stands at 19 in the last 22 years. Equally important, they have made these investments while establishing a track record of delivering outstanding quarter-to-quarter financial performance for our shareholders.

As John also pointed out, our Q1 performance is a great start to keeping that track record going for another year. As we have done for last couple of quarters, this quarter we have again added our third column of numbers labeled non-GAAP. The only difference between the GAAP and non-GAAP figures is that we have excluded the incremental cost and we have incurred related to the potential merger with Publicis in the non-GAAP figures. These costs which are predominantly professional fees totaled $7 million during the quarter. Most of these costs are not tax-deductible, therefore most of the cost flow straight through to net income. This quarter net income was reduced by $6.8 million and EPS was impacted by $0.03. We believe that the non-GAAP figures help in evaluating the performance of our operations.

For the presentation, I will focus most of my comments on the non-GAAP column, so we have included the reported numbers side-by-side for easy reference and clarity.

Page 1, for the quarter, revenue came in at $3.5 billion. The good news was organic revenue growth, which following another industry-leading year in 2013, increased again this quarter to 4.3%. The bad news was FX continued to be a fairly strong headwinds, negatively impacting revenue by 70 basis points and acquisitions net of dispositions decreased revenue by another 60 basis points. I'll go into further detail on our revenue growth in a few minutes.

Moving down to P&L, our non-GAAP EBITDA increased 4.3% to $414 million and resulting EBITDA margin was 11.8%, which was up 10 basis points over Q1 of last year. FX this quarter, in addition to hurting revenue, also negatively impacted operating margins by about 10 basis points. The markets where FX had a biggest negative impact were Brazil, Canada and Russia, which are generally higher than average margin markets as well.

In spite of the FX challenges, non-GAAP operating income or EBIT for the quarter increased 4.8% to $390 million and the operating margin of 11.1% increased 20 basis points year-over-year. Again, the only difference between the non-GAAP and GAAP numbers is the exclusion of the $7 million of incremental merger-related costs.

Turning to Page 2, and looking at the items below operating income. First, net interest expense for the quarter was $39 million, down $1.9 million year-over-year and down about $800,000 from the fourth quarter. Almost all of the change was due to lower short-term debt balances driven by both, better working capital management and the suspension of our share repurchase program since the middle of last year.

Taxes, due to the increased benefits from the tax reorganization that we completed at the end of 2012, our operating tax rate for the quarter [and] in line with our expectations going forward will be about 33.2%, down from the 33.6% rate we had for the last couple of years. The GAAP tax rate of 33.8% was higher this quarter, because nearly all of the merger costs are not tax-deductible.

Earnings from our affiliates decreased to $600,000 this quarter, primarily as a result of a reduction in the year-over-year performance of certain of our affiliates in the Middle East, and the allocation of earnings to the minority shareholders and our less than fully owned subsidiaries increased $2.8 million to $22.5 million, mainly the result of the strong performance of our Latin American and Middle Eastern operations which have a local minority shareholders. As a result of the foregoing, our non-GAAP net income for the quarter was $212 million, an increase of 3.5% versus Q1 of 2013.

On Slide 3, we show the allocation of net income to common shareholders and to participating securities, which are the unvested restricted shares held by our employees. The resulting non-GAAP net income available for common shares in Q1 was $208 million. This chart also shows our diluted share count, which with the suspension of our share buyback program is only down marginally from Q1 of 2013. As a result, our non-GAAP diluted EPS increased 5.3% to $0.80 and our GAAP EPS increased $0.01 to $0.77 per share.

On Slide 4, we take a closer look at our revenue performance. First, with regard to FX, on a year-over-year basis the U.S. dollar weakened versus the euro, the pound in the RMB. It strengthened against most of our other significant operating currencies. The more significant markets included Australia, Brazil, Canada, Japan and Russia. The net result reduced our revenue for the quarter by $22 million or about 0.7%.

Looking ahead, if FX rates stay where they are currently, we expect FX to turn positive by about 60 basis points in Q2 and about 25 basis points for the full-year. Revenue from acquisitions net of dispositions decreased revenue by 0.6%. This is primarily due to the sale of a recruitment marketing business during the second quarter of 2013. Our recent acquisitions continue to partially offset the impact of this disposition.

We expect acquisitions net of dispositions to be negative again in the second quarter, but then we cycle through the disposition of the recruitment marketing business by the third quarter and acquisitions should have a positive effect in the second half of the year. Finally, with regard organic growth, we had another strong quarter, up 4.3% or about $147 million. This was driven by a combination of items. First, our agencies continue to benefit from the development and expansion of their integrated digital capabilities. Although widespread, the growth of our media business is the most recent best example of this trend.

We also continue to benefit from the strong performance of our agencies in the emerging markets. This quarter, we had excellent organic performance in a number of markets, including Argentina, Brazil, China, Colombia, India, Indonesia and Malaysia. Finally, although slow, the recovery of Europe and our European businesses continues.

Turning to our mix of business on Slide 5, for the quarter, our revenue was split 49% brand advertising and 51% marketing services. As for their respective organic growth rates, brand advertising was up 4.9%, again driven by the strong growth in our media business and marketing services was up 3.8%.

Within marketing services, CRM was up 4.2%, a strong performance across our businesses with our events, sales promotion, production and research businesses leading the way. Public relations was up 1.2% in the quarter and specialty communications increased 5.2%, driven by another strong quarter from our healthcare businesses.

On Slide 6, our regional mix of business in the quarter was split approximately 57% in North America, 25% in Europe, 10% in Asia Pacific, with the remainder in Latin America and Africa, and the Middle East.

In North America, we had organic revenue growth of 4.8%, driven by our media, brand advertising and CRM businesses. Our other regions, all had positive organic growth as well. Europe was up 2.3%, led by strong performance in the U.K. and Russia. Asia-Pac was up 5.7%, Latin America was up 7.4% led by strong results in Brazil and Africa and the Middle East was up 6.6%.

In our larger European markets as I mentioned earlier, the U.K. and Russia continued their strong performance. Germany, Ireland, Portugal and Spain were all positive this quarter and unfortunately France continue to struggle. Although our organic revenue performance in aggregate for the Eurozone was only marginally positive in the quarter, this represented the fourth consecutive quarter of sequential improvement.

In Asia-Pac, we had strong performances across most of the region with double-digit organic growth in Malaysia, Indonesia, Japan, and the Philippines and high single-digit growth in India, New Zealand, China, Vietnam and Singapore.

In Latin America, Argentina, Brazil and Colombia, all turned in double-digit organic results. We have also provided an additional slide on Page 7 that presents our revenue by our old geographic subsets. Obviously, this is the same revenue data just group differently. I'll leave that information for you to review separately.

On Slide 8, we present our mix of business by industry sector. Keep in mind, these numbers are total growth, not just organic growth. As you can see, there was only a slight change year-over-year, with the retail sector increasing on the strength of several client wins over the past year and the telecom sector lagging behind this quarter.

Now, turning to Slide 9, first you will notice we changed the format of this slide, so you have to let us know offline what you think about the new presentation. As for our performance, we had a strong start to the year from a cash perspective as well. We generated $312 million of free cash flow, excluding changes in working capital during the quarter.

As for our primary uses of cash, dividends paid during the quarter totaled $131 million, consisting of dividends to common shareholders of $106 million and then $25 million paid to minority interest shareholders. This was up significantly from last year, when we pay our normal Q1 dividend in the fourth quarter of 2012.

Capital expenditures of $42 million was up about $4 million from last year, acquisitions including earnout payments, net of the proceeds received from the sale of investments totaled $16 million. Finally share repurchases net of the proceeds received from stock issuances under our employee share plans totaled only $9 million. This is down $230 million from 2013, because we were required to suspend our share repurchase program following the announcement of the potential merger with Publicis. As a result, we generated $114 million in net free cash during the quarter, again, excluding changes in working capital.

Turning to Slide 10, focusing first on our capital structure, the primary year-over-year change was the redemption of $407 million of our convertible notes during the second quarter of last year. As a result, our total debt at March 31st was down to just over $4 billion and our net debt position at the end of the quarter was $1, 950 billion, down about $420 million from last year. As a result of the decreased debt, our total debt to EBITDA ratio improved to 1.9 times and our net debt to EBITDA ratio improved to just 0.9 times and our interest coverage ratio remains very strong at 10.8 times.

On Slide 11, you can see we again delivered excellent returns on both, total invested capital and common equity. Although both return figures were negatively impacted by the suspension of our share repurchase program, they remained very strong with the return on invested capital of 17.1% and return on equity of 29% for your reference, these returns were computed under reporting GAAP numbers, not the non-GAAP figures.

Finally, on slide 12, we track our cumulative return of cash to shareholders for the last 10 years. The line on the top of the chart shows our cumulative net income from fiscal 2004 through March 31st of this year, which totaled $9.1 billion, and the bars below show the cumulative return of cash to shareholders including both, dividends and net share repurchases, the sum of which during that period totaled $9.4 billion for cumulative payout ratio of just over 103%. During this period, as a result of both, our internal investments and very targeted acquisitions, we also grew revenue and EPS by 69% and 220%, respectively.

With that, that concludes our prepared remarks. There are a number of other supplemental slides included in the presentation materials for your review, but at this point we are going to ask the operator to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question today comes from the line of Craig Huber, representing Huber Research Partners. Please go ahead.

Craig Huber - Huber Research Partners

Yes. Good morning. Thanks for taking the questions.

John Wren

Good morning, Craig.

Craig Huber - Huber Research Partners

Randy or John - Hi. Can you just elaborate a little bit further your comments earlier just about what's potentially holding up the merger with Publicis. You mentioned some tax issues and stuff go a little deeper in depth if you would please. Thanks.

John Wren

Sure. I think as we have said consistently, this is a very complex transaction. As a result, there are issues that arise which have to be solved, so there are really great deal challenges. There is a number of gating items as I attempted to explain. From a statutory point of view, we have cleared everywhere, but China, where we are in phase, what they call Phase 3.

By comparison, Randy might have a little bit more color on this. (Inaudible) I believe was in Phase 3 for 43 days, 45 days something along those lines and the Chinese will move at the speed chart - Chinese will move, we respond to their questions as they come up and we have to satisfactorily answer all of the regulators questions before we will get approval.

With respect to tax, let me turn that one to Mike O'Brien, because it is complex. I do have an understanding of it, but not quite as good as others.

Mike O'Brien

Yes. Craig, I think as John mentioned and I think as everyone knows, the tax structure of our deal is very complex and somewhat unexpectedly or probably very unexpectedly, obtaining regulatory approvals from the various tax authorities has become more difficult than I think we originally anticipated at the time we signed the deal.

You have to keep in mind too that our agreements with Publicis have a lot of requirements, there's a lot of conditions and covenants, so there is a lot of moving parts, if you will. You got to remember the new company is to be incorporated in the Netherlands. The agreements required Publicis', Omnicom's principal place of business being the United Kingdom. The agreement calls for the merger to be tax-free in a lot of prospects free to Omnicom, tax free to our shareholders, tax free to Publicis, tax-free to Publicis' shareholders. Finally, our agreements with Publicis require that the new company be a tax resident of the United Kingdom and that's essential for the new company's tax planning going forward. So complying with all these different covenants and conditions, certainly presents certain complexities and challenges. We still have a lot of work ahead of us.

John Wren

It's not a complete answer to your question, because we don't know. We are tackling these things as we can and as quickly as we can and then we have yet to submit as I said on call the regulatory filings to both, to the SEC and the AFM.

Craig Huber - Huber Research Partners

Then unrelated question, Randy, if I could just ask the perform you guys had in the quarter on the organic revenue front and in EBITDA margins of I guess, 14 basis points year-over-year adjusted for the one-time items. Would you expect that similar type performance for the remainder of the year for quorum account please?

John Wren

Yes. Not 100% sure of that. We are certainly working to drive every efficiency we can from the business, but now we are going to have 14 basis points of margin expansion every quarter, I am not sure. First quarter is a smaller quarter. We have had great results. Our businesses are working, I think, extremely hard both, on the business front and the cost control front, but we are focused predominantly on investing in our core activities, expanding our capabilities to drive revenue growth on a long-term basis.

We have gotten hurt this quarter in particularly by other 10-plus basis points because of FX. I noted that, I don't know how prominently it came out of my comments. Most of the time FX is pretty neutral when it comes to margins, but this quarter frankly the markets where FX was negative happen to be markets that have higher than normal or higher than our average margins, so it did have a bit more of a negative impact on margins than what used to be.

Craig Huber - Huber Research Partners

Lastly, real quick if I could, your net new client wins bigger in the second quarter, but what was that size please? You usually target about a $1 billion you would hope for?

Randall Weisenburger

Yes. We are a little bit under a $1 billion this quarter, largely because of the Vodafone loss. You will get those pretty solid new business period, but as I've always said each quarter you get one or two big wins or one or two big losses and it pushes you sort of above or below that $1 billion marks, so unfortunately this quarter we are a little bit below it.

Craig Huber - Huber Research Partners

Great. Thank you.

John Wren

Thank you.

Operator

Our next question today comes from the line of Alexia Quadrani with JPMorgan. Please go ahead.

Alexia Quadrani - JPMorgan

Thank you. Just a follow-up question on your comment regarding your merger, I guess given the challenges with the tax approvals and the fact that you are guys had to wait at stuff for the Chinese approvals. Would you likely hold off and sign I guess a proxy until you get more clarity on these issues?

John Wren

Well, that is very complex. As soon as we file our Q, we begun to update our financial statements, we order - we will have to do a little bit of work for the first quarter. Reconciling our GAAP financials to IFRS, so we will continue to work on it.

Alexia Quadrani - JPMorgan

Okay, then just a follow-up on the cash. I think, we have talked about in the past for, if it wasn't clear, you have to wait till the merger is complete, so within the buyback or just maybe have the filing done, but I guess it sounds like the filing will still be a little raised off here. Should we assume that right now your cash balance will just obviously build or will you go up through maybe acquisitions or other uses of cash or? I guess any commentary you give on that would be great.

Randall Weisenburger

Cash flow obviously builds unless we have uses for it. Our acquisition pipeline is pretty full, but as everyone knows, we are pretty discriminating when it comes to acquisitions. We will continue to be very prudent with shareholders' money and make the acquisitions that we think are beneficial for shareholders. The timing of that, you know, frankly is when the acquisitions are ready to close. I don't think it's really possible for us to spend as much money as we are generating with acquisitions, so inevitably I guess that means the cash balances will build.

Alexia Quadrani - JPMorgan

I guess, I put it in another way and I am not sure if this is that easy to answer, but has your priorities for use of cash longer term changed or right now it's sort of you are in a bit of a holding pattern. You still will evaluate acquisitions given the full pipeline, but you have always in the past had a preference for share buybacks. Is it too soon given all the plans and mergers to make that depend that statement still a preference or can we - that once everything is set out and you are free to get back in the market that would likely be use of cash.

Randall Weisenburger

Just to be clear what I've always stated is we are going to consistently pay dividend and try to increase that dividend pretty regularly. Our next priority is making acquisitions that are beneficial to our shareholders and growing our business. Then we basically use the balance of cash in share repurchases, but our first priority has always been great acquisitions.

We generate a lot of free cash. It's frankly difficult to spend that amount of free cash on acquisitions that are accretive for our shareholders, so our historical or recent preference has been to internal development which is a strong focus of every one of our businesses to make sure we have the capabilities necessary to serve our clients.

John Wren

There is nothing to add to that. Those have consistently been our objectives and the way that we have approached it. Omnicom will continue to do that as long as Omnicom is here. A couple of quarters delay on the share repurchase program. It doesn't alter our long-range [projected] views or strategic plans.

Alexia Quadrani - JPMorgan

Okay. Thank you very much.

John Wren

Thank you.

Randall Weisenburger

Frankly, because we have cash doesn't mean we are not focused on making sure we pay every bit of attention possible to our own cash management working capital initiatives. Frankly, we have re-doubled those efforts probably each year for the last couple of years.

Alexia Quadrani - JPMorgan

Thank you very much.

Operator

Our next question comes from line of James Dix with Wedbush. Please go ahead.

James Dix - Wedbush

Thanks very much. Just a couple of things as you think about the combined company kind of after the transaction. I think you've indicated in the past some expectations for higher organic growth of the companies to do that separately maybe in a range of 100 basis points or so. I am just wondering if you could give any more color qualitatively where that growth would come from, any particular types of disciplines, any particular types of regions, just thinking through that, so we can understand where that's coming from.

Then just secondly, in terms of the media buying and planning business specifically, how should we think about the greater now potential for that business to get leverage in the market, in particular on the digital marketing side where it would seem the benefits of scale are quite different than in a more traditional areas like (Inaudible). Thanks very much.

John Wren

Sure. I'll do the first bit last. Certainly, larger media scale is a contributor to growth. Omnicom and separately Publicis are large enough individually by themselves to get as prices as we know it today. What it will do it give us a broader client base from which to go out especially from a individual front - premium type inventory as clients may want and therefore we can service or enter into agreement to get a first look or to do whatever we need to do at that time.

Then area by way that we spend a fortune - we spend an appropriate amount of money internally investing in, because if you had a strategy a month ago it's not necessarily the strategy for the future, because the environment is changing so rapidly and so you have to stay on top of it all the time. Scale will help.

In terms of our comments and I think I am just going back to our road show and moving consistent since then post the merger, and when I say post the merger I don't mean post the merger, but after the company start to integrate we have a better opportunity than we currently have marginally, but for cross-selling, we are going into new areas, we are doing a number of things. Those are efforts which are embedded and for the principal reasons for Omnicom's consistent growth over the last 19 years and so more clients the (Inaudible) systems, so we look. We have the systems, we have the people that are trained to Omni Systems, of the systems, so we so we look forward to that.

James Dix - Wedbush

Great. Thanks very much.

John Wren

Thank you, James.

Operator

Our next question today comes from the line of William Bird representing FBR. Please go ahead.

William Bird -FBR

Good morning. Other important open issues related to the deal beyond the three-track cited?

John Wren

There are multiple issues. I mean, I don't know - important is a qualitative word the most urgent are they gating items that I mentioned.

Randall Weisenburger

I mean, it's a large complex transaction, so until the day we close, there is going to be items that are scores of internal staff and attorneys are focused on. There is a lot to be done here, but there was gating items of the other primary focus to getting the deal close.

William Bird -FBR

Thanks. When will you know the outcome on your tax status? Is that knowable and how do you think about plan B should approval not come through?

John Wren

Well, I think there are scheduled meetings between the two groups, scheduled for beginning in next week with the appropriate experts to determine the next steps about going back to the regulators and what we will need to do what we won't need to do.

With respect to a number of items that Michael mentioned, there is no plan B. Those things are requirements to get to a closing.

William Bird -FBR

Thank you.

John Wren

Thanks, Bill.

Operator

We will go to line of Dan Salmon with BMO Capital Markets. Please go ahead.

Dan Salmon - BMO Capital Markets

Good morning guys. I'll maybe return to the questions around media planning and buying a little bit more. Thank you for the data around your growth in search and programmatic media and I was just wondering, John, if you could expand on that a little bit. Just maybe broadly, broad comment as that business accelerates it sort of how you see the future of media buying evolving. Is that group around intellect and elsewhere in the business starts to move up and then maybe just specifically around the growth you are seeing, if that's more a combination of more clients being willing to come and execute their plans like that or an extension of services of Omnicom. I am sure it's a little bit of both and they overlap, but I would love to hear a little bit more on that.

John Wren

Sure. Well, your first question analytics is the primary and its related services are where we are concentrating Omnicom's efforts, so as to make what we are doing or the strategy and approach we are taking are very focused and controlled and not scattered to the diversity of our company and has proved to be very successful and we have been able to move very quickly in becoming world-class.

The marketplace as you know is changing. Clients and data to indicate return on investment are becoming accepting digital buys increasingly every week every day. Some are early adopters, some are little slower to dedicated increasing part of their budget and mobile is just about to take off, and I don't know sitting here today how much of existing budgets mobile will draw, but we are working under the assumption that between display and also to digital venues, it's going to increasingly over the coming years drive more and more of the clients' budget, because we will be able to tell our - the messaging as to who we reach, when we reach them and what the message we are using to reach them is, so a lot of effort, a lot of very successful platforms are being developed, a lot of very innovative partnerships are being entered into and it's ongoing.

We mentioned Instagram on the call. I was hoping to have yet another interesting one done before the call and then probably come in the next couple of days, so it's very iterative and it's a very dynamic landscape platform.

Randall Weisenburger

Dan, you probably know that as well as anybody. You have done some really great work in the space with some your digital hub work. I think the last one I read I thought you nailed it pretty well.

Dan Salmon - BMO Capital Markets

Thanks and thanks for all that detail John. I appreciate it.

Operator

Our next question comes from the line of Doug Arthur with Evercore. Please go ahead.

Doug Arthur - Evercore

Yes. Randy, just a question on cost trends. Office and general expenses have been sort of flat to down year-over-year for five quarters. Why is it happening? Is that likely to persist as a trend for the full-year?

Doug Arthur - Evercore

Before I answer your questions, let me just point that we are getting pretty close to market open, so we are going to have this to your last call or last question. Frankly, there is a tremendous focus throughout the company, throughout every agency top to bottom and side-to-side focused on increasing the efficiency of our operations. It's a requirement of our clients, it's a requirement in the marketplace to stay competitive. So, frankly we are changing the way offices are being structured, we are changing the way we are managing all of our back office and support costs.

We have to obviously continue to deliver to our clients the level of consulting services, because that's frankly what they are buying, but how we are overseeing, how we are housing, how we are managing those operations are getting more and more efficient every day.

I'll say unfortunately from the standpoint of our ability to drive efficiencies were already pretty efficient in those areas, so while there is continuous improvement, those improvements can only have a certain degree of ultimate effect, because a relatively small percentage of our total cost.

Doug Arthur - Evercore

Great thank.

Randall Weisenburger

Does that cover everything you had?

Doug Arthur - Evercore

Yes. I mean, I guess, I was just looking for some color on you are implying that you have kind of done everything you can, but is no - slightly up likely to be a trend for the rest of the year.

Randall Weisenburger

No. Hopefully, I didn't say that. I didn't mean that we have done everything we can do. I said is, we have done a lot and we are going to continue to focus on and continue to drive those cost improvements. I think those costs are hopefully flat to maybe slightly declining while we were growing revenue.

There are mix issues and there are geographic issues when FX bounces around the way it's done in the last, I'll say few quarters. This quarter in particular, some of the places where FX has had its biggest impact are our higher margin countries and therefore it does have a negative impact a little bit on the margins.

Doug Arthur - Evercore

Okay. Great. I got it. Thanks.

John Wren

We have still three minutes, so.

Randall Weisenburger

I guess, we will take one more question.

Operator

All right, our final question today will come from line of Peter Stabler with Wells Fargo. Please go ahead.

Peter Stabler - Wells Fargo

Thanks. A question for John, one of the primary support point you offered for the merger was kind of the rapid evolution the tech landscape. Given then it's been about nine months since the announcement and the tech space and the marketing tech space has been early active, just wondering if you could update your thoughts here and tell us whether things are kind of roughly playing out the way you expected. Thanks very much.

John Wren

Thank you. Well, I think as Maurice has said, I have said many times. We continue to operate as two separate companies until the merger is approved, and we continue to enter into partnerships to make internal investments as fast as we can absorb them and where we see the - you where the stuff is going and that's what we attempt to do every single day and especially in the digital area and our partnerships with all these technology partners and our importance to them allow us some insights as to where they are going and what is going to be beneficial to our clients and that's how we prioritize our investments. That's just rapidly growing every day. I have a meeting later on today we are all approved - some significant internal spending to support some programs and some platforms that we believe will start to become normalized by the end of the year that will contribute to our growth in the future, so we continue to make those investments, we have a fabulous team and there we go.

In terms of what our services are and we know what they're not, because there's a lot of confusion when you listen to people and see how each holding company is described. What we do is, we thought we are actually client-focused and most of our people at this point are digitally, I would say (Inaudible) are digitally competent to a much higher level than was two, three years ago or five years ago and that only improves every single day and Omnicom is very well-positioned. It contributes to our overall growth, because there isn't a campaign or assignment that is significantly digital today, so we continue as I'm sure Publicis does in making investments in this area, because it is the future and that's where the puck is going to go.

Peter Stabler - Wells Fargo

Thank you, John.

Randall Weisenburger

Okay. Thank you all very much. We appreciate your time. If you follow-up questions, we will be happy to try to take them offline. Have a great day.

Operator

Ladies and gentlemen, that does conclude your conference for today. We thank you for your participation and using the AT&T Executive TeleConference. You may now disconnect.

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