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Omnicom Group, Inc. (NYSE:OMC)

Q4 2005 Earnings Conference Call

February 14th 2006, 8:30 AM.

Executives:

Randall J. Weisenburger, Chief Financial Officer, Executive Vice President

John D. Wren, Chief Executive Officer, President

Analysts:

Steven Barlow, Prudential

Jason Helfstein, CIBC World Markets

Alexia Quadrani, Bear Stearns

Lauren Fine, Merrill Lynch

Debra Schwartz, Credit Suisse

Paul Ginocchio, Deutsche Bank

Troy Mastin, William Blair & Company

William Bird, Citigroup

Operator

Ladies and gentlemen, good morning, thank you and welcome to the Omnicom Fourth Quarter and Year-End 2005 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. Operator Instructions As a reminder this conference call is being recorded. At this time I would now like to introduce you to today’s conference call host, Executive Vice President and Chief Financial Officer of Omnicom Group, Mr. Randall Weisenburger. Please go ahead sir.

Randall J. Weisenburger, Chief Financial Officer, Executive Vice President

Thanks you. Good morning everyone, I would like to start by giving the good reminders. Remind everyone that forward-looking statements and other information that is included on page 1 of our Investor Presentation will contain certain statements discussed today may constitute forward-looking statements. These statements are present expectations, actual events or results may differ materially. We urge to take no obligation to update or revise any forward-looking statements.

Now with that said, thank you all for taking the time to listen to our Fourth Quarter 2005 Earnings Call, we hope that everyone had a chance to review our earnings release. We’ve posted it and a presentation covering the information that we will present this morning to our website. This call is also being simulcast and will be archived on our website. We will begin the call with some brief remarks from John Wren, and then following those remarks, we will review the financial performance in a little more detail. And then at the end of the call both John and I will be happy to take questions.

John D. Wren, Chief Executive Officer, President

Good morning, thanks for joining us and Happy Valentine’s Day. 2005 overall was an outstanding year for Omnicom. Our agencies continue to gain market share setting a record 5.5 billion in net new business. The good news is a significant number of these wins actually came late in the year and we’ll benefit our growth in 2006.

In the fourth quarter all of our markets except The Netherlands and South Africa showed positive growth. For the year we had a positive growth except for Africa, which is not a very significant part of our revenue base. Many of you might have read the trade press yesterday, which reported on our ability to keep business in the family. What one thing reported is the great job that our team did especially in Western Europe this past year, retaining important accounts which were put into review during the year.

Our strategy of staying focused on having the best talent in the industry and making investments in their education and development, I believe are really paying off. As we examine our efforts around the world, we are making significant progress in Asia since posting Michael Birkin out there as a CEO of Omnicom Asia in April. I probably expect that over the next 18 months, Omnicom will be in a strong position in all those markets and certainly as strong as our competitors and consistent with the strength that we showed throughout the rest of the world. 2006 also marked Omnicom’s 20th Anniversary and I expect it to be a strong year. With that I’ll turn things over to Randy.

Randall J. Weisenburger, Chief Financial Officer, Executive Vice President

Thanks John. Let me repeat, 2005 was an excellent year, we are extremely pleased with performance of our agencies both from a financial perspective and the outstanding success they’ve had in gaining market share and further distinguishing themselves in a marketplace through the unparallel level of creativity.

As John mentioned as a result, 2005 was a record new business year with net wins of just over 5.5 billion. And with many of those wins coming in the third and the fourth quarters, which hopefully will give us a nice tail win going into 2006.

Going to the numbers, revenue in the quarter increased $150 million to 2.94 billion, that was an increase of 5.4%. As a result revenue for the year increased 7.5% to 10.48 billion. Operating income in the quarter was 426.1 million, up 7.9%, with an operating margin of about 14.5% which is a 30 basis point increase over last year. For the year operating income increased 10.2% to 1.339 billion with an operating margin of 12.8% also about 30 basis point improvement over last year. Most of our operating leverage in 2005 came from continuing improvements in the utilization of our infrastructure cost, as well we continue to restore incentive compensation programs, as well as completing the shift away from stock options to more cash based plans. In addition over the course of the year we further increased our investment in our training programs, and as we previously announced we significantly ramped up our investment in developing our business in both China and India.

Net interest expense for the quarter was $16.5 million, that’s up from $10 million last year. For the year net interest expense was 59.2 million, up from 36.6 million last year. These increases are primarily the result of having to pay larger suite repayments on a various convert issues as well as year-over-year increases in short-term interest rates.

On the tax front, our tax rate for the quarter was 33.7%, that’s up about 10 basis points from last year. For the year our tax rate was 34%, up from 33.6% last year, and our annual rate is being impacted by the high book tax rate related to the divestiture of our business in Australia and New Zealand that occurred in the first quarter. As of the impact of that transaction, our year-to-date rate would have been 33.7%, which at this point looks to be reasonable estimate for 2006.

Net income for the quarter increased 6.8% to 252.6 million bringing the full-year net total to 790.7 million, which was an increase of 9.3% over last year. Diluted EPS for the quarter increased 10.2% to $1.41 per share bringing full-year earnings to $4.36 per share or an increase of 12.4%.

Analyzing our revenue performance a bit, organic growth was extremely strong in the quarter coming in at 7.6%, and accounted for 213.1 million of our revenue growth. For the year organic growth accelerated to 7.3%, that’s about 70 basis points better than last year, and had accounted for 709.4 million of our total revenue growth.

Acquisition revenue was marginally negative at 2.8 million or 0.1% in the quarter. For the full year acquisitions were a net negative 28.8 million or about 3/10th of 1%. As we’ve discussed before and you will hear this a few times throughout this presentation, the negative acquisition growth is due predominantly to the divestiture in the first quarter of our business in Australia and New Zealand. However, during the second half of 2005, acquisition activity picked up a bit, and in Q4 we closed some seven small acquisitions.

Going into 2006, the negative impact of that divestiture will cycle away and the positive impact of new acquisitions will become more impactful.

FX had a negative impact in the quarter of 2.1% or about 59.9 million. For the full-year FX was marginally positive, adding 53.3 million to our revenue or one half of 1%. Based on current foreign exchange rates, we would expect the impact of foreign exchange in Q1 to be a negative between 2.5% and 3% and then improving as the year goes on to maybe something like 1.5% to 2% negative in Q2, maybe a 0.5% to 1% negative in Q3, and flat in Q4. Obviously, those estimates are based upon today’s exchange rates continuing, they will obviously change.

As for mix of business in the quarter, traditional media advertising accounted for 44.4% of our revenue, and marketing services 55.6%. For the full-year those ratios were 43.8% advertising, and 56.2% marketing services. As per their respective growth rates, traditional media advertising grew 8.6% in the quarter bringing the full-year rate to 9.1%, and marketing services which continue to be driven by the strong performance of our CRM business grew 3% in the quarter and 6.4% for the year. Keeping in mind once again the divestiture in the first quarter was in the CRM category reducing our total growth rates in both the marketing services area and in CRM.

Breaking down marketing and services revenues for the quarter, CRM was approximately 35.1% of our revenue, public relations 9.1% and specialty communication 11.4%. As for the respective total growth rates, CRM was up 3.5% in the quarter, 6.8% for the full-year, again this category was negatively impacted by the divestiture. Public relations grew 1.3% in the quarter, 2.1% for the year and specialty communications increased 2.7% in the quarter and 8.9% for the full-year.

Our geographic mix of business in the quarter was 53.6% U.S. and 46.4% International. In the United States, the total revenue growth rate in the quarter was 133.6 million or 9.3%, acquisitions added 16.9 million of that growth, and organic growth was very strong totaling 116.7 million. On the international front, revenue increased 16.8 million or 1.2%, acquisition growth was a net negative 19.7 million, organic growth was much improved in the quarter, up 96.4 million, and FX had a positive impact or had a negative impact of 59.9 million.

Cash flow, our after-tax free cash flow and our primary uses of cash are presented on pages 7 and 8 of the Investor Presentation. Page 8 is a condense version, that’s pretty much the version I walked through. Our primary source of cash flow is net income, adjusted for basic non-cash charges which were also primarily stock-based compensation charges such as stock option expense and restricted stock amortization, as well as the related tax benefits, and then depreciation and amortization. In addition, we have a fairly significant difference between our book taxes and our cash taxes, this is primarily due to the tax benefits associated with our convertible bonds and the tax deductible goodwill amortization.

Working capital is also generally a source of free cash flow, however due to the large swings in these numbers day-to-day internally we generally analyze our cash flow excluding changes in working capital which is the way we’ve presented it on page 8.

For the year, our after-tax free cash flow excluding working capital changes and excluding the proceeds from asset sales totaled $1.169 billion and exceeded our net income by some $378 million. With that cash, we have four primary uses, first our CapEx and dividends, our CapEx is generally limited to items like furniture and fixtures, we saw the improvements in basic PCs and servers. For the year, CapEx totaled 162.7 million, and in dividends, our dividend payment totaled $164 million for the year.

During the fourth quarter of 2005, our Board declared a $0.25 quarterly dividend, that was an increase in 11.1% over previous quarters of $0.225. Yesterday, our Board also declared a $0.25 quarterly dividend payable on April 6th of 2006 to shareholders of record on March 9th. Our next use of free cash is acquisitions, which for the year totaled $268.6 million, net of proceeds, that $268.6 is net of proceeds received on divestitures. And finally, we use our remaining free cash for buying shares. For the year we repurchased $731.8 million of our stock, we also received 88.1 million of proceeds from option exercises and stock issued under our employee stock purchase plan, bringing the net repurchase amount down to 643.7 million.

As a result of those repurchases, we reduced our weighted average diluted share count by about 4.8 million shares, bringing the weighted average total down to 181.8 million for the year. I’ll take our actual share repurchase total for the year was just over 9 million shares. Now on that positive note, John and I will be happy to take any questions.

Questions-and-Answer Sesssion

Operator

Great, thank you very much. Operator Instructions And our first question this morning comes from the line of Steven Barlow with Prudential. Please go ahead.

Q - Steven Barlow

Thank you. Randy, could you just give us what the suite repayments were in the fourth quarter, and what you think they might be for 2006, obviously you did need to pay some the other day? Secondly, do you have a forecast of what your organic revenue growth might look like in 2006 based on the 5.5 billion of net new business wins? Thanks.

A - Randall Weisenburger

Okay the suite repayments, the suite repayment in Q1 was I think, its 4625 per bond, that was an increase over the suite repayment on that same bond we paid last year. As for interest rates based upon where short-term rates are at right now and based on the suite repayments that we’ve made and how they carry out over the course of the year, which we would expect our net interest expense to go up to in the range of about $100 million for next year from the $60 million this year. As far as forecasting the suite repayments in July, in that $100 million is the forecast if there would be an increase in those payments again it’s largely driven off what happens with short-term interest rates. As for organic growth, in 2006, we really don’t provide forecast, we think the markets right now are steady to improving.

Q – Steven Barlow

Fair enough, thanks.

A - Randall Weisenburger

Thank you.

Operator

Thank you. And we have a question then from the line of Jason Helfstein with CIBC World Markets. Please go ahead.

Q - Jason Helfstein

Thanks. Can you perhaps talk about the margin target then for ’06, would you expect kind of, this was a good margin quarter for you guys year-over-year, would you expect further margin improvement in ’06 or flat margins? And then just secondly, assuming I did my math right, it look like your aftertax free cash flow that the number you talked about on a per share basis it was like 643 and it increased about 4.5% a year. And I think you guys have said that this was a very good year for you both, the organic revenue growth shows that in the margin improvement. So I guess the question is, if this was, if you deliver 5% free cash flow growth per share on one of your best years, perhaps do you think it make sense to increase the dividend to just payout more capital to shareholders, if its getting harder for you guys to perhaps drive growth through acquisitions? Thanks.

A – John Wren

There was a couple of questions in there, so and I didn’t write down fast enough, so could you...?

Q - Jason Helfstein

Sure, so just first one was about margins, is there, are you prepared to talk about perhaps your’06 margin target, should we expect flat margin, should we expect another improvement in margins? And then so, could you quantify the improvement in margins? And then second, about dividends?

A - John Wren

Okay. We don’t forecast margins but we fully expect margins to improve. The reason that we don’t forecast margins is, one is we don’t forecast anything, but the primary reason is that we want to achieve efficiencies through our operation, controlling our cost and growing our revenues. We don’t want to drive unnatural behavior is down into our companies and since we are so dedicated, we spend so much in say training and development for instance. If we were to set margin targets, the people responsible at lower levels would talk what was it immediately needed, in the quarter or in the year which is contrary to our strategy. So, for that reason we don’t attempt to forecast our margins, because we want them to behave in a fashion that’s consistent with our overall strategy towards quality, because we think quality is going to drive gains in market share and gains in market share going to drive improvement in the company. And so, we are not – it’s very important that margins don’t get forecasted, in terms of running an organization like this, but we fully expect them to improve as we go throughout the year.

Q - Jason Helfstein

Okay. And then a question on dividends and I think everyone probably usually like to ask you guys what you are seeing in product line budgets. But my dividend question was just that, this is a very good year for you guys and on a per share basis your free cash flow grew about 5%. So, perhaps would you think about, perhaps increasing your dividend, is that something you guys thought about, a higher yield and perhaps like one and you know 1% or so where it is today?

A - John Wren

Well, I think Randy outlined what we use our free cash flow for. And I think if you really go back and examine the last 3 to 4 years, we did precious little in the way of acquisitions. We have a focus on the 30 odd business platforms that we have, with the silly money that was out there in the past 18 months from, investment people who were willing to pay almost anything to get into the area, it seems to be on the vein, and these targets are becoming more realistic in terms of what our willingness to pay for that as -- as we go through the year, and we examine what we are doing, we think that we struck a pretty good balance between repurchase of shares, acquisitions and what we wanted to pay for them, and our board, the decision to increase our dividend which we did do during the year is a decision from our Board of Directors which they periodically look at.

Q - Jason Helfstein

Okay, so basically – so in that your answer, you were saying that you were seeing less competition for acquisition targets, perhaps that will be a great use of free cash flow in ’06?

A - John Wren

Yes.

A - Randall Weisenburger

We expect the acquisition activity to continue to pick up, it picked up a bit in ‘Q4 as well. Your analysis, your cash flow analysis also – there are couple of anomalies in it that are probably worth mentioning, I mentioned in my opening that we’ve shifted a lot of our compensation programs away from stock and option-based expense to more cash-based expense. You can see the cash flow forecasted the reduction in the stock-based compensation. The second fact in there is depreciation and amortization, is those year-over-year numbers are about flat as is our CapEx, as our business grows we’ve been shifting our investments to more lease-based programs, we’re leasing more of our computers and software, we obviously lease our office space in those sorts of things. So, it has a little bit of an impact on some of those cash flow numbers, I think our cash flow has really grown much more inline with our net income growth.

Q - Jason Helfstein

Okay, and last one, I apologize for being so long, just John do you have a comment as far as, you are seeing for client budgets for ’06 compared to ’05?

A - John Wren

With the exception of the auto industry, I see a fair amount of bullishness in – from what we’ve talked about with our clients. And it’s really the total marketing budget which is not simply advertising, it’s both marketing services and advertising. And we are extremely well positioned in the advertising agencies where we have, they all have terrific leadership, they all win everything in terms of peer review and we think that we will continue to gain market share in that area. And then marketing services which are really undefined, we are extraordinarily well positioned to take advantage of shifts in budgets and shifts in spending, especially as we get into things like the Internet and things that – we’ll be doing more in that area in the second quarter as well. And I would think that most of our acquisition dollars this year are going to go regionally to Asia and specifically to supporting CRM and Internet related type of investments which have a more proven ROI and are more reflective of, I think our clients are thinking moving forward.

Q - Jason Helfstein

Thank you.

A - John Wren

Thank you.

Operator

Thanks. And we have a question then from the line of Alexia Quadrani with Bear Stearns. Please go ahead.

Q - Alexia Quadrani

Hi, thank you. John, if you could expand a bit on your comments on the auto category in terms of you’re saying that the budgets and how they look, I guess both domestically and internationally? And then my second question would be if you could ballpark maybe the amount of revenue of those marketing, as most of your marketing services coming from Internet related advertising market, and maybe talk about the growth you’re seeing there and what type of competition you face? And then just lastly if you could maybe touch on the public relations segment, and if you expect it to see a pick-up in 2006 in that area?

A – John Wren

Okay, so the three questions, the first one being…

A - Randall Weisenburger

Auto.

A – John Wren

Auto, the auto industry especially the domestic auto players are suffering and they are making reductions within their own companies. And we are also making some staff reductions in those areas. The interesting thing about that is we are not, even if you read I guess Ad Age yesterday talked about the anticipated thoughts in one of our Detroit offices, we have been in the suite for the switch, we’ve got a program in place for over a 6 months where we haven’t been filling new jobs, so a number of the cuts that make headlines aren’t real people, their open positions that we’ve anticipated because, the struggles of the auto industry haven’t – they are not surprising us. So, they are continuing to do what they have to do to adjust their business, and as good partners we are adjusting with them. If you take our largest client Daimler Chrysler, we’ve been with them since 1926. And so that’s whatever that is, 80 years, and we’ve had a great years and we’ve had some tough years and we can well absorb being a great partner with them as we move though this process.

In terms of international, some of the Japanese companies are facing different challenges, they are growing, so it depends on who you’re talking about within the auto sector. But domestically it certainly more challenged than outside of it. In terms of the Internet related, let see that everywhere, we have embedded in just about everyone of our operations on Internet component and we haven’t try to segregate that because it is part of the integrated solution in spending our clients’ money wisely, where we are looking at for later on in the years aggregating our purchasing power, just from a pure buying point of view and those discussions are internally happening because I think if we’re able to aggregate we’ll demonstrate that we buy a good share of what’s spent in the Internet and we have, we’re well positioned to make investments to even grow that further and faster, but its embedded in everyone of our units, when you look to the specialty companies that are in that area, if you look at the last Forrester report, it ranked only 14 which is the big shift since 2001, specialty internet companies and I think we either own, I think we own 5 of those 14 including the top rated ones, and one of the 14 was an investments of ours, so our investors in 1996 have really paid out very well for us and we’re very well positioned both on an integrated basis and on a specialty basis to move with our clients’ requirements in this area. And your third question was public relations.

Q - Alexia Quadrani

Yeah.

A – John Wren

Probably, Randy is up a little bit on this one. They were up against pretty tough comps, in 2004. And certain new, some PR aspects generate a lot of money when there is new product launches as opposed to in advance of that, and there is no specific reason or a specific company in our portfolio that I am troubled with, we’re just, we are working through the growth issues, but there were tough year-over-year comps in that area especially in the fourth quarter.

A - Randall Weisenburger

And the quarter has been kind of up and down over the course of the last year or two, I do expect that the category will continue to improve from the fourth quarter levels as we go through next year.

Q - Alexia Quadrani

Thank you.

A - Randall Weisenburger

Thank you.

A – John Wren

You are welcome.

Operator

Thanks. And we have a question then from the line of Lauren Fine with Merrill Lynch. Please go ahead.

Q - Lauren Fine

Great, thank you, just a few quick questions. John, your comments about BBDO in Detroit, should I take that that the headcount reduction won’t result in higher than average severance in the first quarter? And then I have some follow-up.

A - John Wren

We are not expecting higher than average severance in the first quarter.

Q - Lauren Fine

Okay. And then Randy, I think, if you could quantify what the impacts of FX have been on actual EPS in the fourth quarter?

A - Randall Weisenburger

I don’t know off the top of my head. If you give me a couple of minutes I’ll see what I can do and we can go on to other questions, and we’ll try to --

Q - Lauren Fine

All right, (indiscernible) one more than on this call, John, I am not sure in your prepared remarks Q1 and there is much details one might have like on which country has actually started to perform better in the fourth quarter, I heard which ones were still negative. And then as you look at 2006, recognizing you don’t want to provide a forecast of organic revenue growth, where would you expect to see either stabilization improvement or deterioration in trends around the world?

A - John Wren

Specifically, the areas that we’ve talked about in the last, I guess 12 to 16 months was weakness in growth in the Euro countries and we saw a turnaround in, and that was primarily where we saw the softness over the last 16 months. We saw a positive turn on year-over-year comparisons of growth, not to the level of the U.S. or Asia Lauren, but certainly a positive trend. And what I do mentioned was this year in many of those markets, England and France, we had to re-pitch some of our largest clients and our teams which are primarily lead by women who are incredibly confident and have done their extraordinary job in some of our larger units in Western Europe, just a heck of a job in retaining those clients. And so, if the trends continue in England, Germany some of our bigger countries, France, I am positive that for the first time they are going to start to contribute to our overall growth. I see Asia continuing to expand especially over the next 2 years, we don’t have some of the acquisitions were planned, finished, and announced in the fourth quarter of this year, but we’re in the process of cleaning up due diligence on some of those or you will see some moves. If not in the first quarter probably right before we get, around the time, we get to make to the conference call for the first quarter. So, I am pretty bullish, the South America continues to be strong and the U.S. for us continues to be strong with the one exception of, the auto industry which I talked a little bit about, I don’t know if that was responsive or.

Q - Lauren Fine

No, that was actually very helpful, and I guess just one last question on new business. Are you seeing any particular changes in the competitive landscape, it looks like maybe some of, public agencies are showing up more on fixtures and, there was always some hard issue in the industry with one agency, but in general are things changing in terms of the competitive tenure of new business?

A - John Wren

No, not really, I think that we are getting recognition that we have the best quality agencies and so, and we are getting more integrated everyday, but legitimately integrated in terms of bringing advertising, we’ll remain I believe at the core of – of where client spend a lion’s share of their money, but more and more money is getting diverted to measurable ROI type of activities, the internet, CRM and those things. And there has been a great effort which we can demonstrate now very clearly with case studies where we’ve been able to do that and it’s really an accomplishment which stood 20 years but one that is moving forward very rapidly. And that makes us, when you have quality across the board where you have these three strongest agencies, and they are all very, very strong and then you have outstanding national agencies, that gives us even though there is an Omnicom and there is three other competitors which for – for financial purposes we look at, when you get one level beneath that, when you look at the quality of our holdings and, how many quality holdings I can put up against the client versus some of our competitors, I think that’s adding and benefiting us quite a bit.

Q - Lauren Fine

Great, thank you.

A - Randall Weisenburger

To answer your question on CapEx impact in Q4, it was between two with the isolating that as if it was, the only factors between $0.02 and $0.03 per share.

Q - Lauren Fine

Great, thank you very much.

Operator

Thanks. And we have a question then from the line of Debra Schwartz with Credit Suisse. Please go ahead.

Q - Debra Schwartz

Hi thanks, I was wondering if you could tell us what you’re seeing for the Olympics and what you’ve expected to add to Q1 growth?

A – John Wren

Historically, I think we’ve done pretty consistent with this for years, we don’t expect the Olympics to, change revenue growth, revenues significantly, it’s just not a, it’s not going to move the needle dramatically for us.

A - Randall Weisenburger

I think in total, you had the Olympics, and then later on the year Euro and the World Cup, this is a good year with a lot of activity but clients do spend more in the ones to support those events, but in many cases its reallocation of budget. And, as oppose to a dramatic increase simply for those events.

Q - Debra Schwartz

Okay, thanks and then I was also wondering if you could comment on what you are seeing in India, what’s your strategy is there and what type of growth do you saw in 2005?

A - Randall Weisenburger

India we’re in the process of making several acquisitions and, it’s probably not our strongest market.

A – John Wren

India for us is a very small market, so well we may have substantial growth in it in 2006 on a percentage basis, yeah it’s a pretty small market for us with several of our networks having affiliates in the market as opposed to consolidated subs as well. So if I don’t suspect, the growth in India well again it maybe substantial on a relative basis, I don’t believe - it’s not going to be a major driver to our performance in 2006.

A - Randall Weisenburger

Now, that’s why I gave myself 18 months to get us up to our punching strength in the way they were moving and the clients that we’re winning, and I believe we’ll continue to win and we’re expecting that to grow and we’ll wind-up in a much stronger position as we continue to focus on that geographic area, because we’ve deployed the assets and we’re investing the money in the management out there that are completely and totally focused on that region.

Q - Debra Schwartz

Okay. So, then within the break market where is you biggest focus?

A - Randall Weisenburger

I would say China. It’s probably at the moment the largest market, but you have Korea where we have a very strong position and we’re making additional investments and Russia, India.

A – John Wren

And don’t get strong, the growth in India was quite strong, it was probably 15% plus for the year. Several of our agencies positioned there is through affiliates, so the revenues are not consolidated, so while they are positioned from serving the client perspective is covered, it’s not tremendously impactful on overall revenues, but that again is something that we intend to focus on and change overtime.

A - Randall Weisenburger

But not to give you the wrong impression, we think we can achieve our objectives of growth without being held hostage. We have always been extraordinarily disciplined in terms of what we’re going to pay for anything in any market and that’s not going to change irrespective of our objectives.

Q - Debra Schwartz

Great, thank you.

A - Randall Weisenburger

Thank you.

Operator

Thanks. And we do have a question then from the line of Paul Ginocchio with Deutsche Bank. Please go ahead.

Q - Paul Ginocchio

Yeah thank you. Just a couple of quick questions on, could you just talk about in the fourth quarter where lows in Banc of America, in there for the full quarter and if they weren’t how many months were they in there? Second, can you just talk about the search business and you made an acquisition in the fourth quarter, can you talk about the percentage of your clients that you are doing search for, and where your agency a record have been also sort of a follow-on from that percentage of your clients were they have a different digital agency of record, then agency of record and what the trends are related to that. And finally, I think you gave incentive comp a year ago, could you just give that update us for this year as well? Thanks.

A - Randall Weisenburger

Again I am…

A – John Wren

We can’t write as fast…..

A - Randall Weisenburger

Well, well one of our guys can, I think you asked about lows I’m certain there wasn’t much if anything in the fourth quarter. Anyway I think we had one month of revenues in the fourth quarter that. In terms of search we are talking about our acquisition, I don’t know, it’s a small company, we bought it to expand it but we are, we are going across, we don’t have the information as I said on the call.

A – Randall Weisenburger

But in the – I mean the number of clients that we have, that we are agency of record in for search, though on a percentage to our total client is, very small which is, gives us a lot of potential in some of these acquisitions, some of the reasons why we do them and some of the reasons why people want to join the Omnicom group is to really have better access to penetrate in that client base.

Q - Paul Ginocchio

Some clear on that, so you are not doing search for many of your clients?

A - John Wren

Well we have 5000 clients. So when Randy says percentages they, they cover the globe, its not a - the answer to the question is we don’t – we don’t know, because we haven’t tried to capture that data. What we are doing in search is we are making investments, we are learning, we are making decisions as to whether make additional investments or – acquisitions and or to invest money in some of our existing assets and data centers and to enhance our capabilities and that’s a process we are going through in the first quarter right now, and we don’t get that granular in terms of the detail information. So I couldn’t give you an honest answer because we haven’t asked our people to provide us that level of information.

A - Randall Weisenburger

And cash compensation, cash incentive compensation year-over-year was up about 12% or 13%.

Q - Paul Ginocchio

Randy if I could, just a follow-up on the sort of digital, what are the trends you are seeing with sort of digital versus – is there still people bringing out digital agency records or they bringing it more? And also now you’ve integrated most of your digital agencies, is that what your clients are doing as well within the overall medium mix? Thanks.

A - Randall Weisenburger

From what I can gather its mixed, clients will –some clients will name agency, digital agencies of record depending upon, what their programs are, sometimes that will be the same as their agency of record, sometimes its not.

A - John Wren

And, these trends are moving very rapidly, I mean you are going to within a relatively short period of time you are going to see them, I think the merger of TV and the net and things that are produced for specific companies and we are well engaged in that strategy of people looking at it all the time, and our style has been to make investments under gauss in areas that are – of interest to us, learn to figure out how it applies to our clients and where we can deploy it, and once we have decided that we’ve learned sufficiently then we get aggressive in terms of building out more of those assets either through building them and making investments, which run through our P&L or acquisitions if they are available.

A - Randall Weisenburger

And we try to set ourselves up, the way the clients hope to buy the services. Not every client is organized the same way, so we certainly don’t try to limit ourselves in thinking that there is only one way to go about doing it.

Q - Paul Ginocchio

Okay thanks very much.

A - Randall Weisenburger

Thank you.

Operator

Thanks. And we have a question out from the line of Troy Mastin with William Blair & Company. Please go ahead.

Q – Troy Mastin

Thank you. Wanted to dig in a little bit to the marketing services growth over the last couple of quarters, I know you’ve got divestiture in Australia, New Zealand and tougher compares in Public Relations, but I suspect that marketing services still may have grown a bit more slowly than advertising over the last couple of quarters, is that true? Does this surprise you at all, and could you give us some insight as to why this may be happening if its temporary and the outlook for the relative growth rates between marketing services and advertising going forward?

A - John Wren

Well I think our advertising is market share driven. Number one, we are winning, we are winning quite a number of new businesses, I am not quite certain, it comes in as a new business win, because the advertising agencies led it and as you get through the contracts and actual experience and then the media planning function, some of these dollars get diverted to marketing services based upon what the clients trying to accomplish, we’ve – we continue to grow at a very strong pace given the marketplace and given the fact that we haven’t done acquisitions to speak up. Randy mentioned that we spent $200 million in acquisitions but only 78 million was spent on new acquisitions, the balance of that money was spent on paying earn-out payments. So that piece is going to pick up and since we have the best advertising companies in the world, I don’t expect us to be spending a lot of money on advertising, through our advertising companies. I expect us to be making investments in CRM and in internet related operations. You know going back to an earlier question, some of the leading companies, when you look at mobile applications for the internet are based in Korea, they are not based in the United States, they are based outside of the United States.

Recently China which, it doesn’t allow people to vote have the show, which is similar to American Idol where I think something like a 110 million Chinese use their cell phones to vote for the first time. That has – that’s very interesting from an advertising and marketing point of view, it’s extraordinarily interesting, but it’s also probably interesting from a political point of view as you move forward. So there are different strategies being deployed differently, if you look at the use of ITV you have to really go to Scandinavia, you look at some of the internet voice applications, they are being created in places like Estonia. So, the world is really a terribly interesting place and these technologies are being deployed differently in different markets, and in some cases the U.S. is slower than many parts of the rest of the world. But that’s why you will see us making investments; those are the things we are interested in because those are the things are, we believe our clients are going to be most interested in over the next 3 to 5 years.

A - Randall Weisenburger

We’re also seeing a little bit of shift in our reporting of numbers, as John mentioned we are consolidating a lot it that internet media buying and planning which is – it was probably coming out of our standalone media – of standalone internet agencies, and not getting reported or picked up through an OMG, so it would show up as traditional media advertising. We also have a lot of our internet activities are really spread around all of our agencies where we have strong in-house Ethernets in each of those. The reporting of those revenues if its internet based, but its advertising oriented, it would probably show up as advertising versus CRM, whereas before when those revenues were more standalone, they would have been more on the CRM category. Our media business is also doing quite well, OMG which is, combination of OMD and PHD, we’re making some very significant strides and they were also been several acquisitions in that space over the last couple of years that are, that are really taking off.

Q – Troy Mastin

And then maybe a quick follow-up are you – is it fair to say right now you are suffering a double hit on your P&L from stock compensation expense due to options issued in your shift to cash comp, which would be recognized in the current period or am I thinking about that the wrong way, if that is true, any idea how meaningful this would be and how long it persists?

A - Randall Weisenburger

Well we are early in expensing options. So compare – when you try to do comparisons to others in our category I think that’s something is an anomaly but…

A – John Wren

But I don’t think its a double hit on a year-over-year basis, I think we are shifting the compensation expense from options to more cash based, which has an impact on a cash flow statements, I don’t think it has a year-over-year impact on the P&L itself.

A - Randall Weisenburger

I think we have time for one more call, we are getting pretty close to market opening.

Operator

Very good. And the last question then will come from the line William Bird with Citigroup. Please go ahead.

Q - William Bird

Yeah I am just wondering if could clarify on the international, do you think the pick up is sustainable? Thanks.

A - Randall Weisenburger

We need an economist.

A – John Wren

Right, if there are no more Danish cartoons, Asia or South America I think, yes. Western Europe, I – prior to 5:30 this morning I would have said yes for certain, and then I saw someone coming across and saying that first quarter growth in France is 6/10th of a percent. We are really going to be impacted in Western Europe on their GDP growth and the quality of our assets, but last year in Europe – Western Europe the non-Euro countries, we spent a lot of time, we are pitching and maintaining our client base as oppose to what we have done in the United States where we go and face with the many of those challenges, we’re going out and getting new business, I am on my way this evening to Europe to just, you know on, on a new business, a very significant new business related activity so, so we see growth. But we don’t have a crystal ball.

A - Randall Weisenburger

And we are certainly hopeful that the pick up in the fourth quarter in Europe continues, there are some pretty good tail wins, and then I think the World Cup is coming up this year, so that should be a positive, the Olympics I guess in Italy, we don’t really think the Olympics make a significant difference in our, say our global revenues it may, change Europe a little bit. So, I guess we are optimistic at this point but not trying to be economist.

Q - William Bird

Thanks.

John D. Wren, Chief Executive Officer, President

Thank you all very much. We are getting pretty close to 9:30, so we are going to call it off. Thank you for taking the time to listen to our call.

Operator

Great, thank you very much. And ladies and gentlemen that does conclude our conference for today. Thanks for your participation and for using AT&T’s executive teleconference. You may now disconnect.

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Source: Omnicom Group, Inc. Q4 2005 Earnings Conference Call Transcript (OMC)
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