Gregory Lundberg:

Thank you for joining our second quarter 2024 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omnicomgroup.com, you'll find a press release and a presentation covering the information that we're going to review today. An archived webcast will be available when today's call concludes. Before we start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we've included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2023 Form 10-K. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John, then Phil will review our financial results for the quarter. And after our prepared remarks, we will open the line for your questions. I'll now hand the call to John.

Philip Angelastro:

Thanks, John. As you just heard, there are many exciting things underway at Omnicom and our success is driven by the investments we've made and continue to make in leading tools, platforms and capabilities needed to serve our current and future clients in a rapidly changing marketplace. The strength of our business model is that we continue to make these investments while delivering solid financial results as we did in the second quarter. Let's review our performance beginning on Slide 4. Organic growth in the quarter was strong at 5.2%. The impact on revenue from foreign currency translation as we expected decreased reported revenue by 1%. If rates stay where they are currently, we estimate the impact of foreign currency translation will be negative 0.5% for Q3 2024 and for the full-year 2024. The net impact of acquisition and disposition revenue on reported revenue was positive 2.6% due primarily to the acquisition of Flywheel this January and partially offset by the cycling of some smaller dispositions. Based on transactions completed to date, we expect the impact of acquisition and disposition revenue will approximate 1.5% for Q3 and for the full-year. Now let's turn to Slide 5 to review our organic revenue growth by discipline. During the quarter, Advertising & Media growth was once again quite strong at 7.8%, driven by improved performance in advertising and excellent performance on our global media businesses. Precision Marketing grew 1.4%. While we saw a strong double-digit performance at Flywheel, some of our project-based consulting agencies within Precision Marketing encountered delays in client spending this quarter. We do expect a strong performance starting later in the second half as new wins are brought online and project spend returns to a more normal level. Public relations returned to growth in the quarter and was up 1%. In the U.S., growth was approximately 4% with a little more than half of that growth driven by U.S. election-related work. Healthcare grew 2% during the quarter with consistent performance for both our U.S. and international agencies. Branding and retail commerce declined by 3.8% as the environment for our branding agencies remains difficult. Experiential grew a strong 17.6%, driven primarily by client work-related to the Olympics. And execution and support grew 1.2% with strong performance by our field marketing business, which was offset by our merchandising business. Turning to geographic growth on Slide 6, we had a solid quarter across our regions. Our largest market, the U.S., grew 6.3%. Europe and the U.K. also posted strong growth. Asia-Pacific, however, was flat on a challenging comparison to Q2 2023 at our experiential business in China, while Latin-America continued its strong growth streak. Slide 7 is our revenue by industry sector for the quarter. Results year-to-date were generally stable as usual. Looking at our larger categories, we saw an increase in food and beverage and consumer products as a percentage of the total, driven by Flywheel's client mix, which was not part of our prior year revenue. Now let's turn to Slide 8 for a look at our expenses. In the first-quarter, salary-related service costs grew with increased staffing levels, which primarily reflect our acquisition of Flywheel in January. However, these costs were down over one point as a percentage of revenue year-over-year, reflecting ongoing strategic repositioning actions and changes in our global employee mix. Third-party service costs grew in connection with the growth in our revenue, especially in disciplines that have a higher-level of these costs, such as media, experiential and field marketing. Third-party incidental costs increased along with growth in our business and related out-of-pocket costs billed directly to clients. Occupancy and other costs increased year-over-year, mostly due to the Flywheel acquisition. Our rent expense decreased and although total occupancy and other costs increased, they were flat year-over-year as a percentage of revenues. SG&A expenses increased year-over-year, primarily from increases in professional fees incurred in connection with our strategic initiatives. As a percentage of revenue on a constant dollar basis, however, SG&A levels were only up slightly. Now let's turn to Slide 9 and look at our income statement in more detail. To start, in Q2 we took a repositioning charge of $57.8 million, which increased our operating expenses. This primarily reflects severance-related to efficiency initiatives, including strategic agency consolidation in the smaller international markets of our advertising networks, the start of our centralized production strategy and other efficiency efforts. These initiatives continue and although we expect some additional steps to be taken in these areas in Q3, we expect them to be primarily self-liquidating. The table on this page shows the impact of this repositioning charge in the second quarter of 2024 as well as the net impact in Q2 of 2023 of the $72.3 million repositioning charge as well as the gain of $78.8 million that were recorded in Q2 of last year. On a non-GAAP adjusted basis, EBITDA grew 5.5% and EBITDA margin was 15.3% versus the comparable 15.5% margin in the second-quarter of last year. As discussed last quarter, the relatively small decrease in margin includes the results of our Flywheel acquisition as well as the related integration costs. Similar to last quarter, EBITDA reflects the $21.5 million add-back to operating income, our amortization of acquired intangible assets and internally developed strategic platform intangible assets. We expect similar levels of amortization in the second half of the year. We also continue to expect our full-year 2024 adjusted EBITDA margin to be close to flat with our 2023 adjusted EBITDA margin of 15.6%. Moving down the income statement. Net interest expense in the second-quarter of 2024 increased $14.3 million to $41.7 million. The change was driven by a $5.2 million increase in interest expense due to higher outstanding debt from the Flywheel financing and a $9.1 million decrease in interest income due to lower average cash and short-term investment balances. Our income tax-rate of 26% was close to flat compared to Q2 of 2023. For the second-half of 2024, we continue to expect our income tax rate to approximately 27%. Higher-income from equity investments was offset by higher expense from earnings attributed to minority interests. And despite a reduced diluted share count, reported earnings per share declined due to the repositioning costs, but on a non-GAAP adjusted basis increased 4.8% to $1.95. Now please turn to Slide 11. Free-cash flow year-to-date is up 2.4% from last year. We define free cash flow as cash provided by operating activities, excluding changes in working capital. In Q2 2024, our working capital use followed its typical seasonal cycle and declined from Q1 to Q2. And our Q2 performance improved compared to Q2 of 2023 and the first half of 2023. We're making progress as expected and we continue to work towards our historically neutral levels of working capital. Regarding our uses of cash, we used $279 million of cash to pay dividends to common shareholders and another $34 million for dividends to non-controlling interest shareholders. Our capital expenditures increased to $62 million, which as discussed on prior calls, we expect to be somewhat higher than last year as we continue to invest in Flywheel and our strategic platform initiatives. Total acquisition payments were $829 million, which reflects the $845 million acquisition of Flywheel, net of cash acquired. There were no acquisitions in the second quarter. Finally, our stock repurchase activity, net of proceeds of stock plans was $246 million year-to-date and $70 million in the quarter. Our expectation for the year is unchanged with total repurchases reduced as a result of the Flywheel acquisition, approximately half of our historical average of $600 million. We continue to maintain our balanced approach to capital allocation with a competitive dividend, strategic acquisitions, share repurchases and an investment-grade balance sheet. Slide 12 is a summary of our credit, liquidity and debt maturities. At the end-of-the second-quarter of 2024, the book-value of our outstanding debt was $6.2 billion, up over $600 million from funding a portion of the Flywheel acquisition during Q1 of 2024. Our cash equivalents and short-term investments at June 30 were $2.7 billion, down slightly from last year. We also have an undrawn $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program. We continue to monitor the credit markets with regard to our $750 million of 3.65% senior notes that are due November 1st, 2024. At this point, given where interest rates are and our financing activity early in 2024 and the anticipated refinancing, our current estimate compared to last year is that net interest expense will increase by approximately $7 million in Q3 and $16 million in Q4. Slide 13 presents our historical returns on two important performance metrics for the 12 months ended June 30th, 2024. Omnicom's return on invested capital was 20% and return-on-equity is 43%, both of which consistently reflect our strong performance and solid balance sheet. I will now ask the operator to please open the lines up for questions-and-answers.

Cameron McVeigh:

Hi, John and Phil, thanks for taking my questions. Just had a couple. Advertising & Media growth was strong again this quarter with a lot of talk around generative AI. I was curious if you could help us parse out how creative is growing within that segment? And on that point, curious if you've seen customers start to experiment with any text-to-video platforms recently and if that has impacted client ad spend at all? Thanks.

Philip Angelastro:

In terms of some specifics though, ultimately the majority of the growth in the Advertising & Media discipline is from the strong performance of the media business, but the creative agencies within that overall grew this quarter, not at the same pace, but they grew relative to last year.

John Wren:

Sure. I would be happy to. This is something we've been planning since late last year. And the gentlemen that I mentioned in my prepared remarks, Sergio Lopez, comes from a very -- a competitor was very successful in this area, but we had to wait six months before he could join us. So our plans were kind of frozen until he came on-board in June. This is more to do with revenue possibilities and growth in the future than the cost efficiencies that we're going -- we went through in taking the charge that we took to reorganize our people. When I compare Omnicom's production revenue and performance, I would say that at least two of my competitors are two to three times in their reported numbers, so you have to look at everything from the top-down, are two to three times the size that we are or we work today. We decided that the only way that we're going to efficiently and effectively grow, especially in this AI environment, which is going to change those legacy production businesses was in fact to centralize it, centralize it with somebody terribly experienced in centralization of these type of activities having done it for two competitors in the past. And our expectations are that we'll finish the moves and the basic changes that have to go on throughout, we'll tweak them for the next quarter or two and that we fully expect to be what I'd rank us right now in that particular discipline out-of-the top five and the expectation is that within the next 30 to 36 months will be in the top three. So this had more to do with the revenue opportunity and what it offers. And it also fits very well with the ArtBotAI tool that we just generated and plus others that we have in the pipeline, which we'll be introducing as this thing rolls out and we gain more-and-more clients.

Operator:

Our next question comes from the line of David Karnovsky with JPMorgan. Please go ahead.

John Wren:

Yes, my confidence is built upon my conversation with clients and the business that we have today. I really don't control macroeconomic items nor the election or whatever those impacts are. And I think you'll all recall me having said this for the last 20 odd years that the fourth-quarter is always a project environment. So rather than change our forecast every day and every 90 days is the equivalent to every day. We're very comfortable with the forecast that we've given you. We're just slightly below the top-end having completed six months. And when we get evidence that the fourth-quarter post-election is going to be a stable period of time, we may elect at that point to review what guidance we've given you, but it's not our habit to be that flighty. We want you to believe what we say and so therefore we don't change what we say until we're confident about it.

John Wren:

I'm not prepared to talk to the business of others only to my own. Actually that comment and I have made that comment and that is my point-of-view is a business cycle comment, nothing changes overnight. And what it has to do with is with the enhancement of tools, the improvement of our algorithms to prove an ROI on a specific dollar spent and then getting clients to be able to articulate measurable KPIs in terms of what they're hiring us to do, that's the journey that we're on. This journey isn't going to happen in 180 days or 360 days. This is a journey that I've tasked the organization to look at three years out and to start testing, discussing, improving our measurement tools hopefully and we haven't done this as fully as or as fast as I would want, developing products which clients will be attracted to, which will be based primarily on outcomes. So it's going to be a very long story. Your question is going to be an excellent question for the next 36 months at least and we're started on that.

Operator:

Our next question comes from the line of Adam Berlin with UBS. Please go ahead.

John Wren:

Sure. Look, I'll comment and then I'm going to ask Phil to fill in what I don't cover. I would characterize the headwind on several things. One is there was a client loss in the quarter, which we will have cycled through before we get to the end-of-the year. So that one impactful. In the U.K. where we have a consulting business, some of those projects were delayed because of the election that was called. And the good news is, even though it's not reflected in the quarter's numbers, we've gotten confidence that with the new labor government, those projects are back on-track and they're going to be executed. So it was a temporary delay called by -- caused by something we couldn't affect somebody calling in an election and everybody turning their attention to it. And the third thing is actually just projects from here to there. Since we reported the third-quarter -- second-quarter numbers, in Precision alone, when the election is done, that headwind diminishes. The headwind associated with the loss will only last for another four months. More importantly though, we won a significant piece of business from a U.S. order manufacturer in just these last two weeks. And typically, when you win an account like that, there is at least the six-month delay before you start to enjoy revenue. In this particular instance, we're starting to get paid in August and beyond because of the activity and the nature of the work. And that will only build as we go out throughout the balance of the year. So the -- what you've seen in Precision Marketing, we're hopeful and we have some confidence -- we have confidence given the factors of what impacted us up to now that you'll see a reversal of that, an improvement in organic growth in the third and the fourth-quarter and then as we get into next year. I'll defer to Phil for anything I left out.

Adam Berlin:

Yes, that was really helpful. Thank you. And my last question is just on cash. And the working capital outflow didn't improve in the first-half. Do you think it will in the second-half? And related to cash as well, the repositioning charge of the $58 million, is that cash that's going to impact H2 or is it non-cash?

Adam Berlin:

Okay. All right. Thank you very much for your answers. Appreciate it.

Operator:

Our next question comes from Steven Cahall with Wells Fargo. Please go ahead.

John Wren:

Okay. The first question is a terribly important one because I think the behavior that you've seen over the last 18 to 24 months with who's been winning business and who has not is structural as well as other elements coming into play. In our particular case, I think the key differentiator, which in addition to having excellent people deployed, has been the decade long investment and the progress that we've made in Omni. And that was only -- it was doubled in terms of its capabilities and the information that we gather to provide insights with the acquisition of the transactional information that we got when we repurchased Flywheel's Commerce Cloud earlier this year. So that is a key differentiator when compared to what the competitor set was and how we did business three years ago and how all of us did business three years ago. Also now the improvement that we have in how we measure the effectiveness of media coupled with the content production tools that we've now automated and also then get included in some cases as modules that are compatible with the information that Omni generates is a key factor in why we have -- I think have been batting well above 600 and you'll see that reflected in the media wins and loss charts that seem to get published or updated daily, but if you go back and look at that information, you'll see that has been the consistent pattern. It's also that activity, even though I wouldn't attribute too much revenue yet to it also further enables us to get closer to that longer project I referred to where we're looking to outcomes and improving our client ROI, but that's more to come on that. But if you're looking for an immediate answer, that would probably be at the heart of it. I think even some of my competitors who are on the other side of this transaction truly understand the differentiation and the full capability that we have versus others. And it's gotten reflected in some technical reports when you look at what Forrester did in the second quarter and delve into some research that we haven't necessarily promoted, but it points out these differentiations. Having said that, I've now forgotten the second and third-part of your question. So could I ask you to just repeat…

John Wren:

Sure. Well, I don't think gross revenue comes into play with respect to production in the way that you might think of it. It's an assignment and you're deploying assets or people against it. I said that we were -- some of my immediate competitors are as much as three times larger than we are and we are below $1 billion in what I'd call production revenue. I'm not being specific, so below can mean anywhere from $500 million to $1 billion. And my competitors are at least the two that have been successful at this on a legacy basis are at least two to three times larger than us. If you take -- if you go back and look at Investor Days from some of our competitors as to who their largest clients are and who our largest clients are, we've been with Apple since 1984. It's a very significant client of one of my other competitors. And I think they've listed in their top thought. That's -- and they're not the biggest in the area. Now I don't expect to take that business away overnight, but that's the level of revenue that's available out there. When you centralize these teams, when you make important focused investments in the types of tools and services that you're going to be providing to clients. And we had left it on a decentralized basis until this year. And since the beginning of the year, since our plans last year, we've had very detailed plans of bringing it all together except for we did not want to take that action until the leader, the person who was going to take us to that level was free and available to join us. And because of restrictions he had in his prior employment arrangements, he could not join us until June. And as soon as he got here, we've been moving relatively fast. And that pace will only accelerate as we go through the end of this year and then certainly into next year. In terms of margins, it will contribute to the overall healthy growth of the company. The one wonderful thing about Omnicom is no particular area that we focus on has a permanent impact on the health of Omnicom or the lack of health at Omnicom. So this we see as it can -- I guess, I'd probably characterize it as another leg under the table.

John Wren:

Sure.

Michael Nathanson:

Thanks. Hi, John. I have a question for you on ArtBotAI. One of the concerns on the Street is that generative AI is going to make creative content much more efficient. And the ArtBotAI that was sent around about AT&T's use of ArtBotAI, the client is saying, look, this is incredibly efficient from the time spent and people required standpoint. So I wondered what are you seeing in terms of it is efficient, but what's the net impact to creative agency from using these tools on a revenue basis? That's what we're all trying to figure out. And you have a pretty good example here with ArtBotAI and AT&T.

Michael Nathanson:

Thanks, John. Can I ask you one more about your…

Michael Nathanson:

Okay, sorry. No, the question I had is, you talk about the goal to get more pay-for-performance, does it necessarily mean that you need both sides, the media side and the creative side? Because how do clients tease out the effectiveness of the creative versus the effectiveness of the media planning and buying, right? So how do you think about going to market to get paid for both sides of -- I guess, at least two sides of the transaction, the creativity and the optimization part?

Michael Nathanson:

Thanks John. Sorry, Phil.

John Wren:

I'll throw him a question, please. I've been talking to him.

Jason Bazinet:

Maybe I'm wrong about this, but when I look at -- when I look at your firm, it feels like the magnitude of adjustments you've made over the last couple of years, whether it's Omni or centralizing production of the Flywheel acquisition, but the magnitude of changes or adjustments are more significant than they've been in the past. And I guess my first question is, do you agree with that statement? And then second, are there any capabilities or skills that you feel like you're lacking today that wouldn't allow you to go win in the marketplace vis-a-vis your competitors?

Jason Bazinet:

Perfect. Thank you.

John Wren:

One -- just one little final point on that. As much as we make those investments and we support them from a top-down point-of-view, that innovation is bubbling up from the entire -- all of our colleagues throughout the world. And we learn from our clients and we learn from the people who don't have the lofty management positions to sit on calls like this. And where it works we double down.

Operator:

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

John Wren:

I'll answer the last part of your question first. At this moment, based upon having done a very significant plan and the information that we have, we think that any future adjustments to the architecture and the plan that we put in place will be self-liquidating in the quarter. So we don't think there's any bold action that you're going to see as based upon what we know right now, taking to -- bring this to the next level. It's a change certainly and that production is far more tech, far more -- there are improvements that are happening, which haven't even been rolled out yet in terms of production, how you do it, what makes it better, cheaper, faster. ArtBotAI is just one thing we introduced this quarter. So in the past, when these were simply departments of the agency or the company working on a very limited number of clients, they focused their attention and the tools that they needed to adjust what those client and agency requirements were. By centralizing it, we free that up to where we can continue to service those specific client requirements and then broaden our capabilities to offer to significant other clients. And there are benefits to scale because with scale you can make better investments, you have more assets to deploy against a particular assignment and you should be able and we will be able to do things better, cheaper and faster for our clients which again contribute to client savings, measurable ROIs, all the other things which touch the continuum of services that we are increasingly offering.

Operator:

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

Philip Angelastro:

I think just in terms of numbers first, yes, I think the numbers for us all throughout last year was about 8% of total revenue. The 7% in the quarter or in the first-half is not really much of a change driven by a reduction in spend. I think that's more of -- we're probably a little more heavily weighted because of Flywheel in 2024 to consumer products and some of their client base just adding a slightly different percentage of the total. So we haven't seen a significant drop-off that's really meaningful in the spend of our tech clients. There have been some pluses and minuses certainly, no question, last year in the first part of this year. But I don't think the numbers have really impacted us overall on a consolidated basis that significantly.

Philip Angelastro:

Sure.

Adrien de Saint Hilaire:

Thank you. I'll just stick to one question, please. There's been a bit of a deterioration in some macro indicators of late in the U.S. And I know, John, you said you don't control macro, but I would still be curious if you've seen or you felt in your recent conversation with clients that there is perhaps a desire to pull-back maybe on that spending towards the second-half on the back of those weaker data points. Thank you.

Adrien de Saint Hilaire:

Makes sense. Thank you.

Adrien de Saint Hilaire:

Sure.

Gregory Lundberg:

Thank you for joining our first quarter 2024 earnings call. With me today are John Wren, Chairman and Chief Executive Officer, and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omnicomgroup.com, you'll find a press release and a presentation covering the information we'll review today. An archived webcast will be available when today's call concludes. Before we start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we've included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements, and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2023 Form 10-K. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John, then Phil will review our financial results for the quarter. And after our prepared remarks, we will open up the line for your questions. And I'll now hand the call over to John.

Philip Angelastro:

Thanks, John. We began the year with solid results, and we're optimistic about the year ahead. Let's review the first quarter performance in detail, beginning with revenue on Slide 4. Organic growth in the quarter was 4%. The impact from foreign currency was relatively flat, decreasing reported revenue by 0.1%. If rates stay where they are currently, we estimate the impact of foreign currency translation will be negative 1% for Q2 '24 and flat for the full year 2024. The net impact of acquisition and disposition revenue on reported revenue was positive 1.5% due primarily to the acquisition of Flywheel this January. Based on transactions completed to date, we expect a positive contribution of approximately 2.5% for Q2 and 2% for the year. Now let's turn to Slide 5 to review our organic revenue growth by discipline. During the quarter, advertising and media growth was very strong at 7%, driven by excellent performance at our Global Media businesses. Precision Marketing, which now includes Flywheel grew 4.3%. We expect this to continue to be one of our fastest growing disciplines in the future. Public Relations declined by 1.1% in the quarter. We expect this discipline will improve the rest of the year and benefit from the 2024 U.S. elections. Healthcare grew 2.1% during the quarter, as we continue to cycle through some client losses from 2023, which we expect to lap after Q2. Branding and retail commerce declined by 3.8%, driven by a challenging environment for our branding agencies that are more aligned on project based engagements and faced a difficult comparison to Q1 of 2023 when they grew by 9%. You'll note that we've updated the name for this discipline, which was formerly called Commerce and Branding. Experiential grew a strong 9.5% led by the U.S. which offset a small reduction in revenue internationally. We expect this discipline to benefit later in the year from the Summer Olympic Games in Paris. And Execution and Support declined by 4.3% with mixed results that overshadowed continued strength in field marketing. Turning to geographic growth on Slide 6. We saw growth in six of our seven regions, led by the U.S. and Europe and a strong growth in Latin America, driven by advertising and media. Slide 7 shows our revenue by industry sector. First quarter results were very similar to last year. Now let's turn to Slide 8 for a look at our expenses. In the first quarter, salary related service costs grew as a result of increased staffing levels, primarily as a result of our acquisition of Flywheel Digital, but they were down as a percentage of revenue year-over-year, driven by our repositioning actions last year and through ongoing changes in our global employee mix. Third-party service costs increased in connection with the growth in our revenue. The third-party incidental costs increased somewhat, primarily as a result of increases in reimbursed travel and incidental out-of-pocket costs. Occupancy and other costs increased primarily due to our acquisition activity during the period, but were essentially flat as a percentage of revenue due to lower rents as a result of our prior year real estate rationalization. And SG&A expense was down both in dollar amount and as a percentage of revenue. Now let's turn to Slide 9 and look at our income statement in more detail. Our operating income increased 2.8% and the related margin was 13.2%, down slightly from the prior year adjusted margin of 13.5% arising primarily from our acquisition activity, including Flywheel. As you may recall, our margin estimate this year is based on EBITDA, which we have and continue to use as a measure of operating performance. Similar to our peers and in response to requests from investors, this reflects an adjustment for the amortization of intangible assets. The adjustment now reflects amortization expense related to both acquired intangible assets and internally developed strategic platform intangible assets. Strategic platform intangible assets relate to the costs we are required to capitalize and amortize over future periods in connection with the ongoing development of the Omni platform and the future ongoing development of the Flywheel Commerce Cloud platform. The amortization expense added back to calculate EBITDA does not include amortization expense for internally developed software related to administrative and back office operations tools, such as ERP or workflow platforms. For the first quarter of 2024, this amortization was $21.5 million, and we expect the remaining quarters of 2024 to approximate this amount. For comparability purposes, we've included a slide in the appendix of this presentation, and it reflects the prior year amortization related to acquired intangible assets and internally developed strategic platform intangible assets for the four prior year calendar quarters of 2023 and the full year for 2023 and 2022. The EBITDA in Q1 2024 were $500.4 million, increased 4.1% year-over-year and the related margin was 13.8%. We continue to expect our fiscal year 2024 EBITDA margin to be close to flat with our 2023 adjusted EBITDA margin of 15.6% for the full year. Moving down the income statement. Our income tax rate of 26% was similar to the rate for the first quarter of 2023. For full year 2024, we continue to expect our income tax rate to approximate 27%. Changes in income from equity investments and income attributed to minority interest investments were not significant. As you can see at the bottom of this slide, we have also provided a new line item, non-GAAP adjusted net income per diluted share. Similar to EBITDA, this also excludes the amortization on an after-tax basis that I just discussed related to acquired intangibles and internally developed strategic platform intangibles. This new reporting more closely measures the performance of our operating businesses year-on-year and is similar to our peer group's approach of adding back after-tax amortization expense when calculating non-GAAP diluted earnings per share. For the first quarter of 2024, this metric increased to $1.67 or 3.7% compared to the non-GAAP adjusted diluted earnings per share of $1.61 to Q1 2023. Now let's turn to cash flow on Slide 10. We define free cash flow as net cash provided by operating activities, excluding changes in operating capital. Free cash flow for 2024 was $415.1 million, a slight decrease of 3.2%. Regarding our uses of cash, we used $139 million of cash to pay dividends to common shareholders and another $13 million for dividends to non-controlling interest shareholders. Our capital expenditures were $23 million, similar to last year, although, we still expect fiscal year 2024 levels to be higher due to growth in capital investment at the newly acquired Flywheel. Total acquisition payments were $812 million, which reflects the $845 million acquisition of Flywheel net of cash required. Finally, our stock repurchase activity, net of proceeds from stock plans was $178 million in the quarter, which is in line with our estimate of total repurchases for the year of approximately half of our historical average given our Flywheel acquisition. Slide 11 is a summary of our credit, liquidity and debt maturities. At the end of the first quarter of 2024, the book value of our outstanding debt was $6.3 billion, up over $600 million from funding a portion of the Flywheel purchase price. As previously disclosed, we issued EUR600 million senior notes due March 2032 with a coupon of 3.7%. Net proceeds in U.S. dollars were approximately $643 million. Our cash equivalents and short-term investments were roughly flat at $3.2 billion. We also have an undrawn $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program. We continue to monitor the credit markets with regard to our $750 million of 3.65% senior notes due November 1, 2024. At this point, given where interest rates are and our financing activity early in 2024, we expect that net interest expense for the full year 2024 could increase by approximately $45 million relative to full year 2023. Slide 12 presents our historical returns on two important performance metrics for the 12 months ended March 31, 2024. Omnicom's return on invested capital was 22%, and our return on equity was 44%, both reflecting very strong performance. I will now ask the operator to please open up the lines for questions and answers. Thank you.

Cameron McVeigh:

Thank you and congrats on the numbers and closing Flywheel. Maybe if you could talk more to the Flywheel acquisition, potential value that unlocks both from a short-term and a long-term perspective, and then the expected margin impact this year over the long term? Thanks.

Philip Angelastro:

Sure

Philip Angelastro:

First quarter is the weakest.

Philip Angelastro:

So just on, Cameron, on margins short-term and long-term, the integration process continues. It's going very well, integrating Flywheel into all of Omnicom's operations. And as we've said back in the call in February, we expect Flywheel's margins will be approximate Omnicom's average margins by Q4 of this year, and we expect overall results to be accretive, excluding the amortization that was added as part of the deal, also by Q4. Longer term, we expect the deal or the business to be accretive to Omnicom's overall average margins over the long run, for sure.

John Wren:

There's areas we're focused on, I don't think I'll discuss Targets. So I'm done negotiating for them. But, yeah, as I said in the call, there are a few areas that are showing exceptional growth. It's in MarTech and transformation and also in content production, automation of content production and opportunities which geographically fill out our services in that area and also from point of view. In terms of specific big Flywheel type of acquisitions, we’re not looking at anything of that magnitude at this moment. So we’re focusing in on growing and also transforming much of our own business for the opportunities that we see the new technology and the marketplace offers

Operator:

Your next question comes from Adam Berlin with UBS. Please go ahead.

John Wren:

There's a lot to unpack, so I'm going to ask – re-ask some of you – to find some of your questions. In terms of Precision Marketing, at this moment, included in our forecast is probably low double-digit growth for that area, but that's subject to opportunities. Specifically with Flywheel, it's, as I said, stands alone. It's a component part of that and the marketplace itself, clients online activity, e-commerce is all growing. So we look further than this quarter, next quarter this year into the future and what it can do for us, and we're very bullish about its contribution to the whole process. That was, I guess, the first question. The second one?

Adam Berlin:

No. That’s helpful. Thank you very much.

John Wren:

Hold on. And on that, Adam, we're not focused at all on what the margin impact is in the first quarter that they joined our company. We're incredibly pleased at speed in which and the progress we've made in integrating because we're looking at the benefit that it is going to bring to the Omnicom moving forward. So we don't do that kind of waste time really on that type of activity. And the third question, if you could repeat it for me. I think, I know what it is, but...

John Wren:

I'm just going to make a general statement and Phil can fill it in. We're very happy with the growth that we've seen for sure. And that group has been growing very strongly for the last two years every quarter. So in any particular quarter, it's up against very difficult comps and we expect it to be -- continue to grow throughout the balance of this year, so.

Adam Berlin:

Okay. Thank you very much.

Operator:

Your next question comes from David Karnovsky with JPMorgan. Please go ahead.

John Wren:

Sure. In terms of the forecast, I think what we said in the fourth quarter was that we're giving you the range of 3.5% to 5%, saying that we're -- in the first quarter, we were still cycling through some client changes from the prior year. And that once we get into the second quarter and beyond, we were far more confident that we weren't facing any significant headwinds as we continue to grow the business. And as it turned out, the fourth quarter came in at 4%. So it seems very logical for us to remove that bottom end caution, I guess, at this point, and still feel that subject to macroeconomic changes in the world, I've seen a lot of them in the last couple of weeks, we're confident that we have the right product, right approach towards clients and our management teams are very strong and focused. So we have more confidence, and that's why we lifted the bottom end of the guidance up at this point.

John Wren:

Well, I wouldn't forecast it quarter-to-quarter. And I think I said in the previous answer that we expect it to be low double-digits at this point, and that was included in coming up to our overall guidance of 4% to 5%.

David Karnovsky:

Got it. Yeah. I was really asking about sort of the non-Flywheel part of the business, right digital business transformation and whether you had started to see more movement on some of the projects there?

Operator:

Your next question comes from Tim Nollen with Macquarie. Please go ahead.

Philip Angelastro:

Sure. I'll start with the organic growth, Tim. So we've always done the calculation consistently. So when we do an acquisition and in this case, Flywheel, we spent over $800 million of capital to acquire the company. We're responsible for the results, and we're measured on the results post-acquisition. So included in the results is Flywheel's organic growth. The acquisition revenue number reflects their prior or in the calculation, the acquisition revenue from the prior year is used as a measure to determine what the growth is based on the current year's revenue. So you take the current year revenue and compare it to the prior year revenue, if it grew, it's part of the organic growth. If it's negative, it's part of the organic growth. We've never excluded acquisitions from that calculation. And we don't see why you would exclude them for the first year in any way. I think we're responsible for the growth as part of the calculation. So we haven't changed the calculation and how we go about doing it.

Philip Angelastro:

Yeah. It was 104, they'd be negative 2 of organic growth

Tim Nollen:

All right. It's been a long time since you've done an acquisition of this size, so I'm forgetting how you do the accounting for it. So thanks for the explanation.

Tim Nollen:

Consistency. Thanks. And then remind us again relatedly then, when does Flywheel become part of reported growth, not acquisition growth as an organic reported growth, not acquired growth?

Tim Nollen:

Right. And then…

Tim Nollen:

All right. And then is it 12 months after acquisition that there's no more acquired revenue from the company. It's just all organic?

Tim Nollen:

12 months after acquisition close, okay.

Tim Nollen:

Okay. Great. And then lastly, on the retail commerce proportion of the branding number, is there a Flywheel in that or is that all in Precision Marketing.

Tim Nollen:

Got it. Okay. Perfect. Thanks so much.

Operator:

Your next question comes from Steven Cahall with Wells Fargo. Please go ahead.

John Wren:

I'm I didn't write your first question down, sorry. Repeat the first one, I'm sorry.

John Wren:

Well, things are in line for certain. And things are -- certainly things that we expected to grow are growing. And so the confidence is every week passes just gets more reassured as we go through the year. And at this point, looking at the new business activity that's in front of us for the next several months, we're defending very little at this point, and we have opportunities on quite a number of big brand names. And if our batting average holds up, as we go into the future, we'll take our fair share of that, which won't have too much of an impact as we get later in the year in terms of '24 numbers. But overall, it helps the health of the business, our confidence. And it will certainly give us a wind at our backs for next year as we move into the end of the year and into next. So all the signs at the moment are very constructive, and we're making a lot of progress on a lot of different fronts.

Steven Cahall:

And Phil, could you put that roughly flat just in the context of whether you think that's an industry trend related to macro or -- and/or technology or is any of that related to account wins or losses?

Steven Cahall:

Great. Thank you.

Operator:

Your next question comes from Michael Nathanson with MoffettNathanson. Please go ahead.

John Wren:

Sure. I'll start your answer. Now with respect to technology and the advertising sector, and then, I might ask Paulo is working most closely on AI has joined with us today, if he wants to add anything before Phil gets to answer. The single largest benefit of generative AI as we're using it is it makes it simpler for highly creative people to come up with different executions, different applications of their ideas across many different mediums and using the specific Omni data that we have and Flywheel commerce data to help understand where the consumer is and the messaging that we have to create in order to reach that consumer. So as this goes forward, automation affects every single part of the business, AI will affect every single part of the business and the programs and the things that we're doing are to take that on board to evaluate and shift up as a market leader and even in advance of testing things that are available or hopefully will become commercially available at some point in the future. I guess if there's a downside to it, it's a lot of the things that in the past might have been done manually and somebody got paid to do that execution work, which was typically pretty boring and repetitive, that gets eliminated. So you're not seeking to hire those level people to do that level of job and therefore get reimbursed at a profit for them. But what you are doing is, you're able to come up with better, cleaner, sharper ideas, which can either succeed fast or fail fast. And all that at the end of the day, benefits the client and makes the ROI on a marketing dollar spent greater. And that's where I think the contribution of generative AI is going to come in. And it's been my experience over my career, the more clarity I can bring to a client and explaining what the ROI is on the next dollar of marketing he's going to spend or she's going to spend means that we probably are going to benefit from that in servicing in some fashion. So philosophically, and there's a lot of moving pieces that are going on all the time and have been for quite a while now. But pretty intensely, adjusting to and exploiting where we can, those the things that generative AI does. But Paolo, who we've met before in previous calls, I think is really the guy that I depend upon, among others on this, and he works very closely with all of our suppliers and vendors. Paolo?

John Wren:

And it's a much longer conversation. But if you think through the technology, if you're in a competitive industry and the tech is way further than it is today, the competitors simply ask the same questions to reach the same consumers. They're all going to get the same answers. So it's not going to differentiate anybody. What brings the difference to this is the creative minds that we're able to attract in Omnicom and apply to those client challenges and objectives.

Michael Nathanson:

Okay. Phil, can I ask a quick one on the add back of amortization, I understand the intangible amortization. But what was the thinking on the internally developed strategic platform asset amortization. So that's -- so how is that -- why did you guys include that in the EBITA definition versus pure amortization from goodwill.

Michael Nathanson:

[indiscernible] Thank you, Phil.

Operator:

Your next question comes from Craig Huber with Huber Research Partners. Please go ahead.

John Wren:

Sure. Yes. It's more -- I'd answer it a little bit differently. Because we've cleaned up the portfolio, and there's always work to do, but not nearly as much work as we've done in the past, because we've cleaned up the portfolio, I think the products and the offerings that we have today are really market leading. And as we expose them to the marketplace and our clients and probably do a better job, actually, of marketing Omnicom and its products to the world, I do think that it will sustain our organic growth going forward. I have enough difficulty giving you guidance for the balance of this year. So I don't want to get too far ahead of my shoes, but I'm very confident that that we're going to be the most appropriate supplier in the marketplace with the type of activities that clients are looking to buy from a group like ours. And so with that confidence, that's just not me and what we buy or what we integrate, that is really reflective of the management teams that work on the various aspects of Omnicom and are executing and delivering our products worldwide. But at the end of the day, it comes down to those people, the products that we make available to them. But the creative genius and innovation that they bring to improving that product on a constant basis. So yes, I'm bullish, I guess.

Philip Angelastro:

Sure. So the approach to margins hasn't changed much over the years. We're always trying to find the right balance between growing the business in a sustainable way, making the appropriate investments in the business for the future. So Omni and Omni platform is a great example of that and balancing that with an appropriate margin and return to shareholders. So as it relates to 2024, certainly, we've got some -- an integration process to go through with Flywheel, as we said, going really well, but more to be done. We do expect to continue to make the investments we've been talking about with respect to the Omni platform and ongoing investments in Flywheel and Flywheel Commerce Cloud and ultimately, we see some opportunities with our cost structure being flexible to be part of the equation and how to maximize margins overall. We're looking at the long-term health of the business continuing to make those investments, that's part of what goes into the ultimate end result when it comes to margins because really, we're trying to grow operating profit dollars, not just hit a percentage. So I think the Flywheel transition and integration certainly a big part of it, along with continued investments in Omni and the Flywheel Commerce Cloud platform and AI balanced with some benefits coming from other initiatives we continue to pursue, whether it's the real estate portfolio, offshoring, near-shoring, etc., all of that is factored into the equation. And that's how we reach the expectations we have as we look out at all of 2024.

Philip Angelastro:

Sure. Thank you.

Gregory Lundberg:

Thank you for joining our fourth quarter and full year 2023 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President and Chief Financial Officer. Also joining for the question-and-answer session will be Duncan Painter, CEO of Flywheel Digital; and Paulo Yuvienco, Omnicom Chief Technology Officer. On our website, omnicomgroup.com is a press release and the presentation covering the information we'll review today as well as a webcast of this call. An archived version will be available when today's call concludes. Before I start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we have included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements. And these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our '22 Form 10-K and our '23 10-K, which we expect to file shortly. During the course of today's call, we will also discuss certain non-GAAP measures. You can find a reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We'll begin the call with an overview of our business from John, then Phil will review our financial results for the quarter. And after our prepared remarks, we'll open up the line for your questions. I'll now hand the call over to John.

Philip Angelastro:

Thanks, John. We finished the year on a strong note in terms of revenue growth and profitability, even though the business environment was uncertain in 2023. As we look towards 2024, we're optimistic about the performance of our agencies and an improving economy. Let me spend a few minutes reviewing the financial details of the quarter and then we'll open the lines up for questions and answers. Let's start with a review of our revenue performance on Slide 4. Organic growth in the quarter was 4.4%. The impact on foreign currency translation increased reported revenue by 1.2%. If rates stay where they are currently, we estimate the impact of foreign currency translation will be close to flat in Q1, 2024 and for the full year. The net impact of acquisition and disposition revenue on reported revenue was negative 0.7%, primarily reflecting the sale in Q2 of '23 of our research businesses. In 2024, we expect a positive contribution beginning in the first quarter with an increase of about 1.5% and around 2% for the full year, reflecting recent acquisitions and are having moved past recent dispositions. For the full year, organic revenue growth was 4.1%, this was in line with our revised guidance of 3.5% to 5%. We made some good progress toward this target, despite a challenging comparison to 9.4% growth in 2022 and an uncertain macroeconomic environment during the year. As John discussed, organic revenue growth outlook for the full year 2024 is between 3.5% and 5%. Now let's turn to Slide 5 to review our organic revenue growth by discipline. During the quarter, advertising and media growth was very strong at 9.3%, once again driven by Global Media performance, which was partially offset by softer results from our advertising agencies. Precision marketing growth contracted 1.1%, reflecting a difficult comp to 11.5% growth in Q4 of 2022 and cycling some client spending reductions from earlier in the year. As we look forward to 2024, we expect this to once again be one of our fastest-growing disciplines. Commerce and branding grew by 1% compared to growth of 7.5% last year, driven primarily by growth in specialty production, offset reductions in the quarter at our branding and commerce agencies. Experiential was down 8%, reflecting a difficult comp of 17% growth in Q4 of 2022 with the FIFA World Cup in Qatar, primarily offset by strong growth in Europe in the quarter, while quarterly results can be choppy based on the timing of certain client events. Experiential remains a solid business and is important to our clients' marketing plans. Execution and support declined by 0.4% with mixed results that included a solid performance in field marketing. Public relations declined 2.9% in the quarter due to difficult comps related to the U.S. midterm elections of 2022, when growth exceeded 12%, as well as softness in certain international markets. Finally, Healthcare continued its steady growth of 3.6% during the quarter. Turning to geographic growth on Slide 6, we saw growth in our five largest markets offset again by declines in Canada and the cyclical impact of experiential revenue in Middle East and Africa. The U.S. was up 0.6% in the quarter on solid performances by advertising and media, led by media, and our healthcare businesses, offset primarily by execution and support, public relations and commerce and branding. Slide 7 shows our revenue by industry sector for the full year and the quarter. Looking at the full year which tends to eliminate the volatility of client changes in the quarter, we saw a notable increase of 2 points in automotive and 1 point increases in both food and beverage and financial services. Weaker markets in technology and entertainment, which have been discussed widely in the industry over the course of the year, resulted in reductions of 3 points and 1 point, respectively. Now let's turn to Slide 8 for a look at our expenses. In the fourth quarter, salary and related service costs were higher due to increased staffing levels, but were down as a percentage of revenue year-over-year, driven by our repositioning actions earlier in the year and through ongoing changes in our global employee mix. Third-party service costs increased in connection with the growth in our revenues. We generated profit on these costs and the higher levels in the fourth quarter of 2023 compared to '22 were driven primarily by strong growth in our media business. Our disposition activity during the quarter and the year did not have much of an impact on this cost category. Third-party incidental costs were close to the same level as last year and reflect client-related travel and incidental out-of-pocket costs that a bill declines directly at our cost with no profit. Occupancy and other costs were down in both dollar amount and relative to revenue, driven by ongoing rationalizations in our real estate portfolio. SG&A expenses were up primarily due to $14.5 million in professional fees related to acquisition costs incurred in the quarter, the majority of which related to Flywheel. Excluding these costs, quarterly SG&A levels were comparable to last year. Now let's turn to Slide 9 and look at our quarterly and annual income statement. To make the numbers more comparable, the table and footnotes describe some of the other adjustments that were made during this year and last year that we discussed on prior calls. Our operating income margin was negatively impacted by $14.5 million of costs in connection with the Flywheel acquisition, as I just discussed; adjusting for this amount results in an operating income margin of 16.3% and an EBITDA margin of 16.8%. For the full year, our adjusted operating income margin was 15.2%, within our expected range of 15% to 15.4%. As a result of the Flywheel acquisition, we'll have higher levels of amortization expense than past dues and we will be focusing our margin expectations on EBITDA. We continue to expect integration costs, as well as operating synergies and related to the Flywheel acquisition during 2024 and the acquisition will be accretive to diluted EPS adjusted for amortization expense by the fourth quarter. For the full year 2024, we expect adjusted EBITDA as a percentage of reported revenue to be close to flat with last year. Also in this slide, you can see that our non-GAAP adjusted income tax rate of 26% for the full year 2023 and was comparable to 2022. We do not expect the Flywheel business to change our tax rate outlook for 2024, but the 2024 rate will be negatively impacted, primarily related to increases in the statutory rates of certain international countries. For full year 2024, we expect our rates to approximate 27%. Acquisition costs related to Flywheel and better performance at agencies with minority shareholders contributed to a decrease in reported net income of 1%, but an increase of 2.1% and on an adjusted basis. Lastly, adjusted diluted EPS of $2.20 for the fourth quarter increased 5.3% from last year. For the year, adjusted EPS increased by 6.9%. Slide 10 is our cash flow performance for the year. We define free cash flow as net cash provided by operating activities excluding changes in operating capital. Free cash flow for 2023 was $1.9 billion, an increase of 6.5%. This increase was driven in part from operational improvements compared to 2022 and the use of operating capital, which we expect to improve further in the future. Regarding our uses of cash, we used $563 million of cash to pay dividends to common shareholders and another $71 million for dividends and non-controlling interest shareholders. Our capital expenditures were $78 million, similar to last year and we expect 2024 levels to be higher due to growth investments at Flywheel. Total acquisition payments were $249 million, although we closed the Flywheel acquisition on January 2, 2024, using cash-on-hand of approximately $845 million. It remains our intention, as we stated in the October 30 announcement to finance two-third of the purchase price with new debt, which I'll discuss in a moment. Finally, our stock repurchase activity, net of proceeds from stock plans was $535 million year-to-date within our expected range. Our capital allocation in 2024 will be consistent with our practice of returning cash to shareholders through a healthy dividend, making strategic acquisitions that lead to accelerated growth and using a portion of residual cash to repurchase common stock. Since 2024 began with the closing of a larger-than-normal acquisition, we expect the total share repurchases in 2024 and or approximate 50% of our recent average. Slide 11 is a summary of our credit, liquidity and debt maturities. At the end of the fourth quarter of 2023, the book value of our outstanding debt was $5.6 billion. There were no changes in outstanding balances during the quarter other than foreign exchange translations. Our $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program remains undrawn, and our cash equivalents and short-term investments were $4.4 billion. We will continue to monitor the credit markets throughout 2024, and we expect to enter the debt markets to finance approximately $550 million or 2/3 of the $845 million we spent on Flywheel acquisition. And during the year, we will refinance the $750 million of 3.625% senior notes, which are due November 1, 2024. Financing the Flywheel acquisition will increase our interest expense in 2024. It's also likely that refinancing November notes will increase interest expense by some amount, but it is too early to estimate. For 2024, we expect that our internal financing of the Flywheel acquisition in early January with cash on hand prior to an expected financing of two-third of the purchase price, coupled with a decline in global interest rates. Will lead to lower interest income in 2024 compared to 2023. Slide 12 presents our historical returns on two important performance metrics for the 12 months ended December 31, 2023. Omnicom's return on invested capital is 26% and return on equity was 41%, both reflecting very strong performance. Healthy returns like these reflect the strength of our industry our operating discipline and the preservation of our conservative balance sheet. Operator, please open the lines up for questions and answers. Thank you.

Cameron McVeigh:

How are you guys thinking about the cadence of growth in margins over the course of 2024 from what you can see now, the comp to ease as the year progresses when you have the Summer Olympics and the U.S. election in November. So curious any color you can provide on how you expect the year to shape up? And then I have a follow-up.

Philip Angelastro:

Yes. I think I would just add that I think it's probably logical -- our margin expectations would kind of mirror that as the year goes on. And as performance builds, as John had said, you'll see some consistency in the performance of the margins as well.

Duncan Painter:

Yes. So well, firstly, Cameron, it's a pleasure to be here on the call. And I'm delighted to be part of the leadership group at Omnicom. We had the chance to work alongside Omnicom for a long time for me 12 years. And we always admired the pride and the quality that they focus on always leading with the best-in-class quality products and services in the market. It was always very, very clear and having built a platform in Flywheel that focused on exactly the same, that was very important to us. And since we've been here, it's really clear how this company really focuses on high-quality products and great service to customers. So there's a natural fit there. That all saying form is temporary, but class permanent is showing in the company. The other thing from our side is we really do think the scale of clients and the very early engagement we've already had with the clients that Omnicom has, but they clearly have very trusted relationships with them is giving us great access to not just maintain our growth rates, but to have some sense that we've got a chance to accelerate them and that's exciting for us. And we're great to see that come through. And just the quality of our ability to just expand across a range of really high-quality clients. And then finally, and perhaps the most exciting for us and the thing that we -- that John alluded to in his presentation is that there's no doubt from our diligence upon the, it's a modern next-generation platform that has, by far, the largest scale trading data on the marketing side. And having built on the flywheel side, the biggest trading data platform on the marketplaces. We're really excited about the ability to combine that information. We think it's a unique opportunity, and it really is for the first time ever going to give clients the real ability to measure marketing sales in one go. So that's definitely the most exciting element that we see.

Operator:

Next question will come from the line of David Karnovsky with JPMorgan. Please go ahead.

John Wren:

Sure. There's a lot there. First of all, AI is just AI. We've been investing in that for close to a decade more seriously in the last 5 years, you see it reflected in Omni Assist. What they're really talking about is the impact of Generative AI, I think, and what it's going to do to the entire landscape. And we've taken a view that it's going to make us more productive and make what I refer to as our knowledge workers, better, faster able to get come up with better answers and insights for our clients. It's unknown territory. One of the immediate concerns we had, and it's reflected in comments that I made earlier and it was released in November, when you look at AI and technology always travels faster than society's ability to absorb it and the laws and regulations that generally follow it. So making certain that we don't expose our clients to anything that can be create a problem because of its -- because it was handled improperly, is key. And the first move we made there was entering into the DoD [ph] images. So we're capable of accessing those and teaching our programs and platforms, how to utilize that in a fast and efficient way. And more of those type of arrangements are going to occur as we go forward. Also, I think the cost governments will be late in catching up with how they want to protect the consumer, we're going to have to tread very carefully. So I think our ability to do things will exceed whether or not we will use them to do things. And we're going to put the clients' interest and safety above all in that consideration set. In terms of bettering of products and things that we're doing, we already have a few clients who we're bettering products with who are very aware of the risks associated with it that we're going to break a few things. We're going to -- but at the end of the day, we're going to create a better, more efficient way. I'm going to throw the question to somebody who's sitting here as well. My colleague Paulo, who has been first and foremost in Head's committees, look at this. So, Paulo?

David Karnovsky:

Great. And then maybe one more. Just on the technology vertical, it's been a headwind across the industry for some time now. I think there's been some investor optimism that this could improve with easier comps for the year. Same time, we keep seeing layoffs in the technology space. I know it's been generally less an issue for Omnicom, but interested to know what you're seeing here and whether there's any read-through to business lines like precision marketing.

Operator:

And the next question comes from the line of Adam Berlin with UBS.

John Wren:

Well, I'll answer the second part of your question first. Media certainly was stronger in advertising, but we choose to treat it as one reporting entity when we put both of those numbers together because quite often, they've come together. More specific than that, I don't think is a protective way to look at the business. Yes, there are a lot of strength in the fourth quarter in media. There are a great number of projects and spending that was conservatively held back and then released into the fourth quarter, and we benefited from it, as you can see in the numbers. And I would say that was through the West including Western Europe.

Philip Angelastro:

Sure. For the year, certainly, the change in working capital was positive almost a $400 million improvement which we're pretty satisfied with. I think relatively speaking, though the overall negative reflects the fact that the actions of the Fed and over time, global treasuries have obviously made it a more challenging area to manage. I think the fact that we cut the change in half where we cut the number in half in 2023 is really reflective of good performance all throughout the organization. It's really a matter of 3 yards in a cloud of dust in terms of blocking and tackling to improve those numbers. We're certainly going to strive to get the number back to neutral, if not positive as we go but that isn't going to happen overnight. I think as the economic environment changes and as the rates eventually come down, I think you'll see some continued improvement. It's certainly an area we're very focused on and we're not done in terms of improving our performance. But it has been more challenging in the last few years than in half.

Philip Angelastro:

Sure.

Steven Cahall:

Thanks, maybe to first just to expand on the question around advertising and media. So I think you talked about how creative has been lagging, and then you've had a lot of strength in media, and you've definitely showed off strong capability there and want a lot of business. John, I'm just wondering if there's anything bigger to read about how the industry is changing and the acceleration in media with the slowdown in creative, do you think that's a change in the way marketers just think about the future of marketing and marketing spend is much more about the delivery than the content? And if so, are there any other changes that you might think about to your business longer term, if that is, in fact the case. And then just in Q4, your organic growth was pretty similar to what you've guided to for 2024. The EBIT margins were solid. They weren't necessarily up year-on-year. I know there's a lot of moving pieces then this year with Flywheel. But can you just talk about what's holding those margins a little flattish, like the guidance that you gave? And is there anything that could drive more margin expansion in the future? Thank you.

Philip Angelastro:

Yes, I'll give one on margins and expectations. I think as we've said in the past, we certainly strive over time to make steady progress on margins and make improvements. Certainly, in our two of our largest expenses, salary and service costs and occupancy and another, we see future opportunities. Certainly, on the salary-related side, there's still quite a few initiatives we have benefit from offshoring and automation. There are strong initiatives that we're pushing, and we'll continue to push in those areas. And we continue to go through a real estate rationalization and expect to benefit from that over time as well, and we continue to make some improvements there. I think, however, we talked a lot about AI on this call. That will be part of what helps us be more efficient and generate some of these benefits. But at the same time, it requires investments that we're going to continue to make in the business that, as we've talked about in the past, many of the investments we've made have run through the P&L, it's the right thing to do to make sure that our platforms are ready to give us the sustainable growth that we've been able to achieve and expect to achieve in the future. So it's a continual balance that we go through in terms of making those investments and generating the appropriate returns from a margin perspective and benefits for our shareholders ultimately as well. So I think that's a balance that we continue to manage. We look at it every year. We look at it every day. It's both. So hopefully, that's helpful.

Operator:

The next question comes from the line of Michael Nathanson with MoffettNathanson. Please go ahead.

John Wren:

Sure. Conflicts really are not. It's been quite a while since it really has become a topic or an item that concerns us. Most clients are very sophisticated these days and they're more interested in the teams of people that are servicing them on a consistent basis. And we -- and I think you'd see this experience throughout the industry have been able to cope very comfortably with that because those people never meet, it's only at the holding company level that they get consolidated. With respect to sectors, there will be challenges and all, and there will be benefits in some, and some will have low comps, and some will have more difficult comps. The one area that has never been strong or as strong maybe as it could be for Omnicom is in CPJ. And I think that with changes that we made first to the Commerce Group in terms of leadership, and then with the addition of Flywheel and the expertise that it brings, Omnicom now has thousands of more people who are confident in addressing the needs of CPG type of cans. And I think we'll be more competitive than we've been historically in that area as a result. So I'm very excited about that. We're still doing this. I think maybe, Duncan, if we turn it over to you first, if you want to comment on -- add some commentary on your side.

Philip Angelastro:

And then on your last question, I think certainly, media experienced very strong growth in the fourth quarter and had a great year. That growth was pretty consistent and strong across most of the media businesses and agencies we have in most markets for a number of reasons. And certainly, some of what you see in third-party service costs is a result of the gross media business is performing well also. There is a bit of a mix difference between those businesses within our media operation, but they complement each other quite nicely. And I think, we certainly have an offering that clients are very attracted to. And find very helpful and useful and valuable to meet their needs.

Operator:

And our next question comes from the line of Tim Nollen with Macquarie. Please go ahead.

John Wren:

Sure. When you look at where the strength was, the fourth quarter really has three components to it. Its clients releasing projects. New business wins in its impact. And then if you've lost anything where you're feeling that impact as you net down to what we report as organic growth. I'd say that -- the project work came in very strong, stronger than we expected in some parts of Western Europe. And we have a thesis about why, but it's certainly not something we plan for. It came in decently in North America. But North America, is where we were cycling through a number of losses that occurred in the advertising sector over a year ago. And when you lose something that's bad news, but then you have to live with it as you cycle through it. So all that is the alchemy of how you get to organic growth and as a result, that makes us -- we're still cautious about this year because of all the unrest and the Fed hasn't really started reducing rate yet. But in terms of what issues we had there for the most part, behind us. And some of the new business wins have not -- we haven't started benefiting from yet. So I'm very comfortable that 2024 will probably wind up looking more traditional than 2023 did. In terms of cookie deprecation, that's something we've been fully expecting for a very long time, but I could chat about it, but I'm going to throw it to Paulo because he's more of an expert and more closely deals with it on a day-to-day basis.

Operator:

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

John Wren:

Pharma, we remain very optimistic on. The only headwind I think we face as we go into '24 with Pharma was earlier in the year, we lost Pfizer, so we'll be cycling through that. But the only limitations we are currently looking through, not things that we haven't won or we haven't been asked to work on, but have they gotten through the FDA because pharma. And just the simple science of things in the advances that are occurring give us tremendous opportunities to continue to grow. And I think that will be not only '24 but '24 and beyond a very strong sector for us. Autos, when it comes down to is, we're very well represented in autos, and I think we have the best clients one could ask in the sector. There is this tension going on in the marketplace that most auto OEMs are dealing with in terms of what's the mix between the electric cars that we're going to be out in the market, more conventional cars and hybrid. And there's a lot of decision-making and a lot of long lead times that go into that. But in terms of the sector itself, there's no question. It becomes an information platform for the OEMs as we go forward and the more merrier from my perspective. And as Duncan mentioned, now with the addition of Flywheel, there was a whole sector of aftersales parts that we could do a modest job on, but now we can do a much more robust job when you look through how those goods are distributed to the ultimate consumer, which is, in many cases, an increasingly in marketplaces. So it's been a strong sector. It should even get stronger for us as we extend that over the coming months and years, and we're very comfortable with it.

Philip Angelastro:

We don't have the final number. Because there's a number of steps that we have to complete, given the acquisition just closed in early January. So we have some valuations and other things to do on the intangible assets which aren't complete. I would say, it's going to be a meaningful increase no question and amortization expense. And we obviously think the value of the Flywheel asset and team are going to prove to be a very wise investment. But amortization is going to go up in a meaningful way. We just don't have a number yet to guide you with, but that's something we're working through and we'll be working through quite diligently over the next few weeks and months before we finalize it. And then as far as project spend goes, I think similar to Q4 of '22project spend was quite strong but probably not as strong as '22. '22, for sure, was a much more robust time frame. I think when we were -- when we were having discussions in late '22 and early '23 and probably on our call in February '23. Yes, there are a lot of clouds that people saw on the horizon in this short term that actually turned out not to be as dark as some had expected. But the fourth quarter environment in 2022 is certainly much more robust than it was this year. But we're happy with the performance of agencies as far as capturing project spend in Q4 of '23. But relative to '22, certainly on '22 is more robust.

Craig Huber:

Great. Thank you both.

Gregory Lundberg:

Thank you for joining our third quarter 2023 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President, and Chief Financial Officer. On our website, omnicomgroup.com, we've posted a press release along with the presentation covering the information we'll review today, as well as a webcast of this call. An archived version will be available when today's call concludes. Before we start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we've included at the end of our Investor presentation. Certain of the statements made today may constitute forward-looking statements and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2022 Form 10-K. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation. We will begin the call with an overview of our business from John and then Phil will review our financial results for the quarter, and after our prepared remarks, we will open the line up for your questions. I'll now hand the call over to John

Phil Angelastro:

Thanks, John. As John said, our business is solid despite the challenges of the current macroeconomic environment. Before we open the call up for questions and answers, let's go through our third quarter results in more detail. Starting with the summary income statement for the second quarter on slide three. Reported revenue increased by 3.9% and organic growth was 3.3%. Reported operating income increased by 2.7% to $560.8 million and the related margin was 15.7%. Net interest expense was $38.3 million for the quarter, an increase of $9.2 million compared to the third quarter of 2022, due in part to lower interest income on cash and short-term investments. Q4, we expect that, compared to the prior year, net interest expense will experience a similar increase. Our reported income tax rate was 26%. This was lower than our 27% estimate from July due to a reduction in tax expense resulting from the vesting of share-based compensation. For the fourth quarter, we estimate our tax rate will be 27%. Reported net income in Q3 increased by 2% and diluted earnings per share was up 5.1%, driven by both higher net income and by lower shares outstanding, resulting from share repurchases. Let's turn to revenue on slide four. As mentioned, organic growth in the third quarter was 3.3%. The impact from foreign currency translation reversed course in the third quarter, increasing reported revenue by 1.7%. If rates stay where they are currently, we estimate the impact of foreign currency translation will be a benefit of approximately 0.5% for Q4 and a reduction of approximately 0.5% for the year. The impact of acquisition and disposition revenue is negative 1.1%, primarily reflecting the sale in Q2 of our research businesses. We expect a reduction of 75 basis points for the fourth quarter and expect that the recent acquisitions will result in an increase in reported acquisition and disposition revenue next year. As John discussed, our organic growth outlook for the year remains unchanged at 3.5% with a stretch target of 5%, which still factors in some uncertainty about the level of year-end incremental marketing spend and project work that we expect our agencies will be successfully capturing in the fourth quarter. Now let's turn to slide five to review our organic revenue growth by discipline. During the quarter, advertising media posted 6.1% growth, its strongest this year, driven by continued strength in our media business globally. Precision marketing grew 4.3%. Solid performance given the comparison to the 16.2% growth that experienced in Q3 of '22 and the challenging backdrop of certain of their technology and telecom clients that we discussed last quarter. Commerce and Branding declined by 1.7% driven by reductions at our shopper marketing agencies. Experiential grew 9.2%, led by Asia, Europe, and the UK, which offset negative growth in the US and the Middle East. Execution and Support declined 3.6% due primarily to declines in our merchandising business. The Public Relations was down 5.5%, reflecting difficult comps against the 12.6% growth we delivered in Q3 of 2022. Approximately half of the reduction relates to less revenue connected to the 2022 election cycle and the balance was due to a slowing of project spend in the quarter. We expect a similar headwind related to a reduction in revenue in Q4 compared to the benefit from the election cycle in Q4 of 2022. Finally, Healthcare grew 3.8% with good momentum at several large clients. Turning to slide six, we saw growth across our larger regions offset by a decline in Canada as well as a decline in the Middle East and Africa, which grew by 12.2% in Q3 of 2022, caused in part by the cyclicality in Experiential. Looking at the year-to-date revenue by industry sector on slide seven. Compared to the third quarter of last year, we had higher relative weights in two of our larger categories, food and beverage and automotive and, as expected, a lower relative weight in technology and a reduction, although smaller, in telecom. Now let's turn to slide eight where you can see good progress on our expenses year-over-year. Salary and related service costs were down as a percentage of revenue year-over-year driven by our repositioning actions and through changes in our global employee mix. Third-party service costs increased in connection with growth in our revenues. These costs include third-party supplier costs when we act as principal in providing services to our clients. They are an integral part of our service offering to our clients, and we generate profit on them. Third-party incidental costs increased due to an increase in client-related travel and incidental out-of-pocket costs that have billed the clients directly at our cost at no profit. Occupancy and other costs were helped by reductions in our real estate portfolio in the first quarter of 2023. Reductions in rent expense were offset partially by an increase in operating expenses from higher levels of in-office work globally. SG&A expenses were up a bit, primarily due to higher professional fees related to the acquisitions we recently completed. Turning to slide nine. Operating income in Q3 was up 2.7% on a reported basis, and the related margin was 15.7%, down slightly as expected from 15.9% in the third quarter of 2022. For the full year, we remain comfortable with the expected operating margin range of between 15% and 15.4%. On a nine-month year-to-date non-GAAP adjusted basis, as presented here on slide nine, operating income margin was 14.8% compared to 14.9% in 2022. Our EBITDA margin in Q3 was 16.2%, also down slightly from 16.4% in the third quarter of 2022. On a nine-month year-to-date non-GAAP adjusted basis, our EBITDA margin was 15.3% compared to 15.5% in 2022. Slide 10 is our cash flow performance for the first nine months of the year. We define free cash flow as net cash provided by operating activities, excluding changes in working capital. Free cash flow for the third quarter of 2023 was $1.3 billion, an increase of 9.4% from last year. We continue to expect changes in working capital to be close to flat for the year as it usually is. Regarding our uses of cash, we used $424 million of cash to pay dividends to common shareholders and another $47 million for dividends to non-controlling interest shareholders. Our capital expenditures were $64 million, similar to last year. Total acquisition payments were $202 million. And our stock repurchase activity, net of proceeds from stock plans, was $530 million year-to-date. Most of this took place in the first half of the year. Slide 11 is a summary of our credit, liquidity and debt maturities. At the end of the third quarter of 2023, the book value of our outstanding debt was $5.6 billion. There were no changes in outstanding balances during the quarter other than foreign exchange translations. Our $2.5 billion revolving credit facility, which backstops our $2 billion US commercial paper program, remains undrawn. And our cash equivalents and short-term investments were $2.8 billion. Our next debt maturity is not until November of 2024. Slide 12 presents our historical returns on two important performance metrics for the 12 months ended September 30th, 2023. Omnicom's return on invested capital was 23%, and return on equity was 47%. These metrics continue to be an excellent indicator of our conservative capital structure and the health of our business. In closing, despite a challenging macro environment, we're pleased with our financial results and our year-to-date organic growth of 4%. We believe we are positioned very well for strong growth in the future when the caution on the macro environment clears. Operator, please open the lines up for questions and answers. Thank you.

Benjamin Swinburne:

Thank you. Good afternoon. John, I guess I'll ask you the standard fourth quarter question around the macro and just trying to parse your words a little bit and understanding whether you're feeling that the caution that you guys referenced today has increased from earlier this year. Obviously there's a lot of things happening in the world that would necessarily explain that. But I'm just wondering if you could add a little more color on how clients are feeling about Q4 and looking into next year. And then I'll just ask my follow-up, maybe for Phil or whoever wants to take it. Is it fair to call the tech sector a clear and sort of different headwind to sort of the overall business for Omnicom? I noticed, I think year-to-date, that vertical was down 300 basis points year-to-year. It's been a big theme across the industry sort of the year of efficiency. I'm just wondering if you think that's a fair way to think about what we're seeing in the business in 2023.

Phil Angelastro:

Yes. I'd certainly echo John's comments as far as the Q4 outlook and the very typical process we go through to capture as much of that project spend as we can in the fourth quarter, agency by agency, all across the world. Regarding your tech question, Ben, I think from our perspective, given relative comps, we don't really see the tech headwinds as significantly different than the broader macro at this point in time, now that we're through nine months of 2023. Maybe they close out the year not as strong as they did last year as far as spending, but at some point in the near future, we don't see this as a permanent decline. We think they're going to come back and invest in their brands and begin to spend at a higher level at some point in the near future.

Benjamin Swinburne:

Sure. Thanks, John. Thanks, Phil.

Operator:

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

John Wren:

To answer your first question, we're not quite ready to give you guidance for '24 just yet because our people are out doing a bottoms-up plan, which they won't present to us for another six or seven weeks, and then that gets tweaked throughout the balance of the year. But with the experiences that I've had, with the new business wins that we've enjoyed and the places where we faced headwinds this year, we're set up very well to have a very successful 2024. And that's what I anticipate to see when we actually get that bottoms-up review back from our companies. So I'm confident and I don't see any significant adjustments that we have to make to our portfolio, which, in and of itself, is very flexible, to service those client needs and enjoy the growth that's associated with it. Do you want to take the second question? Or I can do the dividend, too.

John Wren:

The dividend is really a board matter, and it will come up in the board meetings that come between now and, say, February. We'll have more to say as those meetings occur.

Steven Cahall:

Thank you.

Operator:

And our next question comes from the line of Tim Nollen with Macquarie. Please go ahead.

John Wren:

Sure. I have to admit to not reading the report that you're referring to. But in terms of our portfolio, yes, there's been a significant expansion in our media business, and that is growing. There's been quite a bit of success in that. If you look at the conversions -- I probably said that wrong, report. When you take media wins versus media losses, we continue to come out on top, and I'm confident that, that is going to hold. There's a few opportunities, which we expect to be asked to participate in reviewing which are offensive opportunities where we're not defending existing business other than in some statutory audit reviews. And our CRM business, which grew very strongly and hit a couple of road bumps in the beginning of this year, has come out of it very strong and just won a few very large and significant clients that are going to help us next year. It becomes an increasing part of our portfolio as well. Our PR unit, even though it's suffering a little bit because of the comparables of not being in an election year, next year is an election year, so that same group will be benefited as a result of that. So the portfolio has been tweaked. We've gotten rid of, in a very sensible way, assets in the past. And I think going forward, I don't know if Phil commented on it or not, but I think where we were showing net divestitures for probably the last three years, we're now with the acquisition activity we had and adding to the portfolio. From a net perspective, we're growing those areas and we're buying into those areas to support our companies where we see the greatest growth.

John Wren:

The only thing I would add to that is I get more people back into the offices, which we continue to have success with, but there's still work to do. I think that will further support our growth.

John Wren:

Yes, sir.

John Wren:

Thank you.

David Karnovsky:

Thank you. John, we saw the uptick in precision marketing in the quarter. I wanted to see if you could provide more color there. Is that just comps? Or are you starting to see some movement on projects that maybe were paused previously? And then for Phil, on principal costs, it looks like or sorry, third-party service costs, it looks like growth accelerated there a touch in the quarter. Can you parse that out between maybe principal trading and other areas like events? And then just with principal trading generally, I don't know how much you're willing to quantify in terms of organic revenue contribution, but maybe you could discuss the business at a high level what the reception is from clients to the offer. Thank you.

Phil Angelastro:

Sure. Regarding the second question and third-party service costs, we don't really parse the number in the way that you've suggested. But we had strong growth, as we said in our prepared remarks, in the media business, no question, as well as experiential. Both of those businesses do come with those third-party service costs as part of the business. Certainly, a reference back to Tim's question regarding clients and the flexibility that they're looking for, they're certainly looking for a full suite of products from a media perspective and a wide range of marketing services that they'll avail themselves of. And our service offering can cover all of those things that they're looking for. So some of that growth certainly is in media, experiential, field marketing as well, but we had strong growth through most of our disciplines in the quarter, and we're certainly happy with those results.

Operator:

And our next question comes from the line of Michael Nathanson with MoffettNathanson. Please go ahead.

John Wren:

Sure. I think the success of the media operation is down, one, to management of that specific operation. We've expanded the suite of services that we make available to clients in the media area. It is, of all of our services, probably one of the most measurable in terms of when we utilize the data and the amount of data that we have, we're able to optimize for the benefit of the client how they spend their money, improve it. So there's a great deal of analytics that are there today that weren't even possible four or five years ago. And I think, well, I do know this to be true. We have a reputation of delivering on what we promised when we're pitching for business. And I dare say we have the best reputation in the industry of delivering what we promise. And that has benefited us through this process.

John Wren:

Sure. Yes, we've always had -- the M&A pipeline remains very strong for us. We have a team that's constantly looking at opportunities. They have to meet all of our internal criteria. It would have to typically be something that's additive to the portfolio of services that we offer our clients. If it's something that we can build and is expensive, we've steered away from it in the past, and we've been pretty consistent about that in the last -- at least the 26 years that I've been the CEO. But there are opportunities, and some of them are in areas that we've had on our list for a very long period of time that looked more reasonable than they did when the interest rate was zero.

Michael Nathanson:

Okay. Thank you, guys.

Operator:

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

John Wren:

I think, well, there's still a lot of uncertainty in the marketplace because of all the things we talked about and in previous answers in our prepared remarks. Having said that, clients are pretty sophisticated, and they know that, no matter what the difficulties are, they have to continue to support their brands because if they don't, when the good times return, they'll have a much more difficult time regaining or maintaining their market share. So as we look at clients in '24 -- '23 was a tough year for many sectors. And that's why we referenced a couple of times earlier the tech sector. I would say, in my opinion, '23 was the first time in the tech sector had to face readjusting its business. And people, earlier in the year, went through massive layoffs and cutbacks of their own staffing, which they hadn't had any experience in their history of even needing to do. It was pure growth prior to this year. That's behind them now. They're a lot more experienced than they once were as we look forward. So clients aren't -- they know we're not through all the hurdles that exist out there, but they're confident that their brands and their positioning from their companies, they've taken a lot of pain and they're positioned well to go into the future.

John Wren:

And you can't forget that, if you go back a year, interest rates were quite different for everyone. And sure, there's been a lot of sudden changes as the Fed has increased rates, and it takes people a bit of time to adjust what they're doing to those changing environments. But I think at this point -- everyone thinks -- they don't know when it's going to reverse itself, but they're adjusting to the current environment, and they don't think they're facing the same headwind in areas like that going forward. So again, it just adds to the confidence.

John Wren:

Sure. I don't think we've recovered completely the inflation that we faced. When you look at this, from Western Europe, US and then emerging markets, inflation has been more severe. We haven't had some pricing flexibility but not to the extent of how fast inflation has risen. Now we're hoping that inflation has stabilized, and we'll start to enjoy the benefits of that. The other thing which impacts our business is actually an account the day you win it, the next 90 days is probably the least profitable time that you'll have that account because you're ramping up staff and you're changing organizations in order to accommodate and not drop any balls as the business has passed from one of our competitors to us. So that has some kind -- that has an impact not on unit pricing but on the overall costs that we face as we adjust and staff up for these events. More precise than that, I can't really be. I don't have any hard data which supports specific areas in the company. One of the reasons, though, that we've been able to expand our base in offshore and near-shore markets for more of the functions that we have to fulfill in order to complete our job, we've gotten better at that. We've grown the staff from -- we've doubled it in this past year. And I think in my comments we've said that we expect that to grow two to three times over the next 24 months because we have the infrastructure now to accommodate that growth. That gives us a bit of relief on the inflation that we haven't been able to pass on to our clients, so by doing things differently.

Phil Angelastro:

We don't really have a number, Craig. I think certainly, every one of our businesses has some expectations regarding project work in the fourth quarter. The key for us is, when we meet with them, ensuring they're not keeping staff on hand hoping to get new business as we head into the fourth quarter and then the cost structure is out of whack with their expected revenues. They need to have some historical analysis, and we've got plenty of that in order for our agencies to have certain amounts of project spend in their forecast. But typically, they're incentivized to benefit from capturing that year-end project spend. And our clients, by and large, want to spend the rest of their budget and grow their businesses through the end of the year. So those factors typically help us and help our clients to get to the point where we can capture a significant amount of that spend. But we don't have a hard and fast number. Blank percent of the $200 million to $250 million is in the forecast, but certainly, some of it in the forecast. But we're pretty conservative about how much our agencies can put in their forecasts because the last thing we want is people to be hiring ahead of the revenue or keeping people around that don't necessarily have anything to do if the revenue doesn't come through. That's a pretty consistent practice we followed for quite some time.

Phil Angelastro:

Sure.

Gregory Lundberg:

Thank you for joining our second quarter 2023 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President, and Chief Financial Officer. On our website, omnicomgroup.com, we've posted a press release along with the presentation covering the information we'll review today, as well as a webcast of this call. An archived version will be available when today's call concludes. Before we start, I'd like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we've included at the end of our Investor presentation. Certain of the statements made today may constitute forward-looking statements and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2022 Form 10-K. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John and then Phil will review our financial results for the quarter. After our prepared remarks, we will open up the line for your questions. And I will now hand the call over to John.

Phil Angelastro:

Thanks, John. As you just heard, we had a solid quarter and first-half of the year, and we are on track with our expectations for both revenue growth and operating margin. Let's now go into some more detail on our results. Starting with the summary income statement for the second quarter on slide three, reported revenue increased by 1.5% and by 3.4% organically. Reported operating income increased by 1.7% and operating margin was 15.3%. Reported net income in Q2 increased by 5.1% and our Q2 diluted earnings per share was up 8.3% on a reported basis. During the quarter, we recognized a gain of approximately $79 million on the disposition of our research businesses, which were included in our execution and support discipline. And we also incurred repositioning costs of approximately $72.5 million related to severance. We have also included slide nine in the deck, which summarizes our reported results alongside our non-GAAP adjusted results, which exclude the net impact of $6.5 million pretax from these two items. We'll review that analysis in a few minutes. Let's now turn to revenues on slide four. Our organic growth in the second quarter was 3.4%, which brings our year-to-date organic growth rate to 4.3%. The impact from foreign currency translation only reduced reported revenue by 0.7%, compared to a reduction of over 3% in Q1 2023. And if rates stay where they are currently, we estimate the impact of foreign currency translation will be a benefit of approximately 1.5% for Q3 and Q4 and close to flat for the year. The impact of acquisition and disposition revenue was negative 1.5%, primarily reflecting the sale-in Q2 of our research businesses. We expect a similar reduction of 1.5% for the balance of the year, although acquisitions we had recently completed will moderate this somewhat. Now let's turn to slide five to review our organic revenue growth by discipline. During the second quarter, advertising, and media, similar to Q1 of ‘23 posted 5.1% growth, driven by strength in our media business. Precision marketing grew 2.3%, certainly clients, especially those in the tech and telecom industries, have become more cautious with their spending as reflected in our tech consulting and transformation agencies. This also reflects in part the business coming off a strong 21% growth comp last year. We expect our investments in generative AI will naturally benefit this discipline and we expect growth in this discipline to accelerate in the future. Commerce and brand consulting grew by 2.4%, driven primarily by our branding and design consulting agencies. Experiential growth was 9.2%, driven by strong results in Europe and France in particular, as well as China for clients in the automotive and luxury categories. Execution and support revenue fell 3.8%, due primarily to declines in our merchandising and field marketing agencies. Public relations was flat in Q2, coming off a 16% growth comp last year, which reflected the benefit of some revenue from the U.S. election cycle that wasn't present this year. Finally, healthcare performance was solid at 3% and our outlook for this discipline remains very good over time. Turning to slide six, we once again grew organically in every region globally. Notably, there was strong growth in Asia Pacific, led by China, which had the benefit of easier comps, due to the lockdowns in Q2 of 2022. Looking at the revenue by industry sector on slide seven. Compared to the second quarter of 2022, we had a high relative weights in food and beverage, pharma, and health and automotive, offset by lower relative weights in technology and telecom. Other categories were relatively stable. Turning to slide eight, which is our Operating Expense Detail, you can see a more granular view of our operating expense levels. Slide 16 in the appendix also shows these expenses on a constant dollar basis. Salary-related service costs were again down as percentage of revenues year-over-year. We saw reductions driven by some of our repositioning actions and through changes in our global employee mix. Third-party service costs increased due to an increase in organic revenue, particularly in proprietary media and events. These costs include third-party supplier costs when we act as principal in providing services to our clients. They are an integral part of our service offering to our clients and we generated profit on them. Third-party incidental costs, which we began breaking out separately last quarter, decreased a bit compared to the prior year. These costs primarily consist of client related travel and incidental out of pocket costs that we build back to clients directly at our cost at no profit. Occupancy and other costs were up slightly in dollar terms, but flat as a percentage of revenue. As discussed last quarter, we saw increased occupancy costs associated with higher levels of in office work offset by lower rent from the reductions in our real estate portfolio in the first quarter of 2023. SG&A expenses decreased in both dollar terms and as a percentage of revenue, due primarily to lower professional fees. Now let's turn to slide nine. As I mentioned earlier, this is a clear presentation which summarizes our reported and non-GAAP adjusted results for both the three and six months ended June 30th. As a reminder, the non-GAAP adjusted amounts in the second quarter of 2023 include a gain of approximately $79 million on the disposition of our research businesses, as well as repositioning costs of approximately $72.5 million related to severance or a net impact of $6.5 million pretax. Operating income was up 1.7% on a reported basis and up 50 basis points on a non-GAAP adjusted basis. The related operating income margins were 15.3% and 15.1%, respectively both of which were close to flat with the operating income margin of 15.2% from the second quarter of 2022. For the full-year, we're comfortable with the expected range of our operating income margin of between 15% and 15.4%. Net interest expense was $27.4 million for the quarter, a reduction of $12.7 million primarily from higher levels of interest income, compared to Q2 of 2022, given comparable higher short-term investing rates were in place in the second-half of 2022. The second-half of 2023, we expect that net interest expense will be flat to up slightly relative to the second-half of 2022. Our reported income tax rate was 27%. The non-GAAP adjusted tax rate, excluding the gain, the repositioning costs, and the related taxes was 26.3%. We still expect a rate of 27% for the balance of the year. Reported net income in Q2 increased by 5.1%, and non-GAAP adjusted net income increased by 4.7%. Our diluted earnings per share was up 8.3% on a reported basis and up 7.7% on a non-GAAP adjusted basis. Year-to-date reported diluted EPS is up 16.3% and up 9.4% on a non-GAAP adjusted basis. This diluted EPS growth was also driven by lower shares outstanding resulting in share repurchases. Slide 10 shows our cash flow performance so far this year. We define free cash flow as net cash provided by operating activities, excluding changes in operating capital, which historically we expect to be neutral for the year. Free cash flow for the second quarter of 2023 was $880 million, an increase of 14.7% from last year. Regarding our uses of cash, we used $285 million of cash to pay dividends to common shareholders and another $32 million for dividends to non-controlling interest shareholders. Our capital expenditures were $40 million. Acquisition payments were $55 million, excluding net proceeds from dispositions of approximately $180 million. A stock repurchase activity, net of proceeds from stock plans, continued in the second quarter, bringing our year-to-date amount to $506 million. Slide 11 is a summary of credit, liquidity, and debt maturities. At the end of the second quarter of 2023, the book value of our outstanding debt was $5.6 billion. There were no changes in outstanding balances during the quarter other than foreign exchange translations. Our $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program, remains undrawn and our cash equivalents and short-term investments were $2.8 billion. Our next debt maturity is not until November of 2024. Slide 12 presents our historical returns on two key metrics for the 12-months ended June 30th 2023. We generated a return on invested capital of 22% and a return on equity of 46%. These metrics are a strong reflection of the strength of our business and our conservative capital structure. Slide 13 is the summary of all our recent technology partnership announcements. As a reminder, our historical development of Omni, our current investments in technology and services that prepare our business for the future are largely reflected in our operating income. We expect to continue to grow our revenues, improve our operations, return cash to shareholders through dividends and share repurchases, while we manage with the current economic environment. And as John discussed, continue to prepare for a dynamic future. Operator, please open the lines up for question-and-answers. Thank you.

Michael Nathanson:

Thanks. Thanks, good afternoon. One for John and one for Phil. John, as you noted in your opening comments, Omnicom has always had a really strong position on the creative side of the business, especially with your global networks. And I wonder, do you think that generative AI even lowers that [Technical Difficulty] advantage or brings new entrants into this industry? So I guess, I know you feel is a positive outcome, but we're worried about competition or just people breaking up and doing it on their own. And Phil, any help on the repositioning charge? What is that related to? Is this the end of it for the year? And what type of incremental benefit do we see in the margins from these actions? Thanks.

Phil Angelastro:

As far as the second question, Michael, the repositioning charge primarily almost substantially related to severance actions that we took to get our cost structure in line with our revenue expectations for the year. We were pretty aggressive in trying to make sure that we made the appropriate changes that we thought we needed to make. Some of it was a swap out of skills and some of it was a realignment of the cost structures to be more conservative in the forecast for the balance of the year. We don't expect the level that we experienced in Q1 and Q2 as far as repositioning in the second half. But Roe is going to continue to look at the business to balance the cost base with revenue expectations as those change. Could that change in the second half? Not likely, but we're always going to be looking at the cost base pretty aggressively, especially in the uncertain times we're in right now. As far as margins go, our expectations are still where they were at the beginning of the year. We expect to be within the range of 15% to 15.4% that we talked about back in February. We don't have any reason to change that as far as the full-year margins go. So we're still expecting that. We're making quite a few investments as came through on the prepared remarks with respect to GenAI and others. And as you know, for us, most of those investments run through the P&L as opposed to through large acquisitions. So, our expectations haven't changed as far as margins for the year.

Operator:

Next, we'll go to the line of David Karnovsky with J.P. Morgan. Please go ahead.

John Wren:

Yes, I would. I'd say, I couldn't answer it any better than you asked it based upon known uncertainties out there. And for those of you who have been following us for a long time, there's always budget flush and projects in the fourth quarter, which are not our focus at the moment, but we'll increasingly become focused as we get into and out of the summer. And just as a bit of color, I think in the last 22-years, I think I can only recall two years where that project revenue didn't come through. But there were -- the years that, that occurred where -- when there was economic uncertainty to the level that is potentially there for the balance of this year.

John Wren:

Yes. I mean, I think -- if you look at, I think, a chart, it's probably number seven, which outlines and compares our revenue by industry, I think Phil mentioned this in his comments, where we saw the biggest pause was really in our tech sector and in our telecommunications sector. We didn't lose any clients in those areas, but they went through some pretty severe restructurings of their own during the first-half and they were conservative about most of our costs. If I have to make a general statement, since the beginning of the year, CEOs have been looking for flexibility. They haven't -- they're not walking away from their commitments. And PepsiCo even mentioned earlier today in its conference call that it was increasing its spending. So, I believe we're in a very good place, a sound place. But as certain clients suffer, we'll go along for a bit of the ride. But we haven't lost anything. We've been winning business. So that helps us as well.

Operator:

Next, we'll go to the line of Ben Swinburne with Morgan Stanley. Please go ahead.

John Wren:

Ben, you stole it from me. That's I was going to say and all of the above. Certainly, productivity, for sure…

John Wren:

…because naturally, it will make the gathering of data and the refinement of data, which leads to better insights in a much more rapid, labor-less intensive way. In terms of our growth, I believe that for the last several years, increasingly, we're able to prove to the client the ROI of a dollar spent. And so as a result of that productivity and with the complexity that will come with all the questions, which will surround how we use generative AI in various markets given different laws and different regulations, our ability to navigate that -- those markets, those issues, increased efficiency and effectiveness and improvements in our ability to measure the benefit of a dollar spent, I believe will lead to increased organic growth over the near and long-term.

John Wren:

I might address that in the reverse of how you posed it.

John Wren:

First, in terms of Precision Marketing, we expect it to continue to grow. It is a core long-term part of our business. And what you saw what really happened in the first part of the year is that you take a Facebook, which cut 20,000 jobs. If you are the CEO of that company cutting 20,000 jobs, you can't let everything else go on in a normal sense. Plus, -- and I'm not picking on Facebook, I'm just using it as an example or a proxy for the rest of the industry. As you do that, you disrupt your own company for a very short period of time. They've been able to recover pretty quickly. Well, as you do that, the people that you -- who have been working on certain projects, pause, change, may have different bosses and there might be a pause and a reevaluation. What's key is not that because we're a service company, so we'll succeed with our clients and we'll suffer with our clients. The beauty of Omnicom is its depth of its client base and the geographic base in which we operate. But we can't expect everything to remain constant for us as companies go through whatever level of reorganization they have to go through. So that's really that. The media wins and media -- in the back of last year, if you take 2022, our media group won more new business than the rest of the industry. And that winning streak continues. We only -- that 800, we don't expect 1,000. And so that's why you see the continued strength in that area.

Operator:

Next, we'll go to the line of Steven Cahall with Wells Fargo. Please go ahead.

John Wren:

Okay. Probably one of the things -- it's hard to project or to forecast. But in the area -- in the U.S., in events and entertainment type of events, we had a reduction in the quarter of that sector of 9.1%. So even though I pointed to those two areas it's because it's very evident when you look at our presentation materials. But I would never say always, only, or never. That's just one of the areas which dragged our growth down a little bit in the U.S.

Steven Cahall:

Great. Thank you.

Operator:

And next, we'll go to the line of Tim Nollen with Macquarie. Please go ahead.

John Wren:

Sure. There's slightly different reasons associated with each one of these partnerships, but a central theme is we did -- we do have the Omni platform, which does service and we have it deployed to over 50,000 people around the world. So that makes us attractive. Our open architecture is key to why I think we were considered and given the opportunities we were given with these companies. Because connecting to them, enhancing in how their products will be utilized, being flexible across a large number of clients using different types of systems or different applications, that open architecture means that we're not protecting a base and then trying to ingest something very new. We were established from the very, very start to operate in an environment that we couldn't predict what was going to change or what was going to come. But we wanted to build in the flexibility in the architecture that we developed. So that whatever came along, it would be very simple to discard what was no longer useful and to incorporate what was going to be meaningful. So I think those are the key items that put us to the front of the queue with many of these companies. I fully expect that as they get further along down the road with their products that they're going to open their apertures up to others in the industry, that won't come as a surprise. But the platform, that Omni platform, I know you hear us talking about it a lot, but I can't explain enough the value of the open architecture and the fact that we have complete flexibility and -- as the primary reason. Also, these tech companies know that we take very seriously transparency and we look to be a leader in privacy, which are all concerns of these organizations as their products maybe get questioned by legislations and governments. You see it in threats that people are perceiving to employment in certain industries. The fact that we're hypersensitive to that and always have been hypersensitive to that also makes us an attractive partner to do business with.

John Wren:

Yes, sure. And thank you for that question, because I didn't include something in my answer that I should have. Also, this is philosophical and would hand over heart and know that we do it 100% of the time. When we ingest client’s first-party data and then enrich it with the second-party and third-party data we have, that data remains the data of our clients. We don't take and reuse or resell that data is exclusively theirs. And that's, in effect, what we're doing in the cleanrooms. It's a simplification, but that's what we're doing. And clients -- the more sophisticated clients, are increasingly attracted to that guarantee. And so that's also a terribly important element of why we are considered. And there's even a major supplier here or a partner that hadn't opened up to -- opened up their cleanrooms to anyone, but to us. And as a result of our -- this partnership, we pointed that out again to them but at a very high level. And we're now doing cleanrooms with them. But even though it seems like it is focused on creativity or creative products, but there's a lot awful -- and that's why it gets mentioned in the short descriptions that we provided in our presentation, but it goes much deeper than that because many of the products that we're embedding and looking to incorporate in what we offer to clients are really driving efficiencies. And we'll be creating APIs for CRM, for commerce, for PR, across the board.

John Wren:

You're welcome.

Craig Huber:

Thank you. John, curious, can you talk a little bit further about the tone of business out there, the tone of the client conversations that you're having here in the U.S. and Europe and how that may or may not have changed versus going into the start of this year, please?

Craig Huber:

Then my follow-up question, John, can you just touch on wins and losses out there for Omnicom in the first-half of the year? And just what is your characterization of the amount of accounts that are up for review that you're willing to talk about first half of the year? Is it slower than normal? Is it above the average? Is it about the same as you've seen historically? What's sort of going on out there in your view because the trade press clearly is not picking up as much as they used to?

Craig Huber:

And John, if I could just sneak in one more about the two ongoing strikes in Hollywood. If this drags on for a number of more months here and stuff, and people start to look at what their ad budgets for traditional television, et cetera, some streaming stuff that's up with the change in the content not being as good as before. Do you -- can you make a case that could actually be a positive for Omnicom in your industry as it adds further complexity of your customers would need, say, more handholding for Omnicom and figure out what they do in that sort of environment, sort of unknowable and stuff? And how do you view that?

Craig Huber:

Okay. Great. Thank you, John. That's helpful. Thank you.

Jason Bazinet:

There's so much hype out there about generative AI. I'd just like to ask a basic sort of calibration question. Let's say, five years from now, what percent of your revenues do you think would be using generative AI roughly?

Jason Bazinet:

Okay. Thanks.

Jason Bazinet:

Very good. Thank you.

Gregory Lundberg:

Thank you for joining our first quarter 2023 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omnicomgroup.com, we have posted a press release along with the presentation covering the information we will review today as well as a webcast of this call. An archived version will be available when today’s call concludes. Before we start, I would like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we have included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements and these statements represent our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2022 Form 10-K. During the course of today’s call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John, then Phil will review our financial results for the quarter. After our prepared remarks, we will open the line for your questions. I will now hand the call over to John.

Phil Angelastro:

Thanks, John. 2023 is off to a solid start in what remains an uncertain year. All of our disciplines and geographies grew organically in the first quarter and we continue to invest in our operations and took strategic steps to reduce our real estate footprint. And we continued our balanced capital allocation, dividends, acquisitions and share repurchases. Let’s begin with a high-level review of the quarter on Slide 3. As John mentioned, the transition to a flexible working environment with a hybrid model, which allows for partial remote work has resulted in changes to our real estate strategy and we made the decision to exit certain leases and reduce our office space. While there will be some investments we will be making in existing and new locations, the net impact over time will result in lower rent and occupancy cost. In the first quarter of 2023, we took a charge of $119 million related to this reduction in our office lease portfolio. The charge is primarily related to the non-cash impairment of a portion of our operating lease right-of-use assets and the write-off of the net book value of leasehold improvements at the affected locations. As a result, rent and occupancy expense will be reduced in the future and substantially all of the charges will be paid out of the remaining lease terms over the next few years. This slide shows our reported results followed by certain adjustments, which make the periods comparable and the resulting non-GAAP adjusted amounts for both periods. In addition to the real estate charge I just discussed for 2023, operating expenses in the first quarter of 2022 include a $113 million charge arising from the effects of the war in Ukraine. In summary, reported revenues were up 1% and non-GAAP adjusted operating income was flat. Both were negatively impacted by foreign currency translations. Moving down the income statement, net interest expense improved due to higher interest income than we expected. In Q2, we estimate that interest expense will increase a bit, primarily due to an increase in the interest rate applied to our pension and post-retirement obligations. This will be offset by an expected increase in interest income in Q2 of 2023 relative to Q2 of 2022, although we do not expect as much interest income in Q2 of ‘23 as we had in Q1 of ‘23 due to our working capital cycle. For the second half of 2023, we expect that net interest expense will be flat to up slightly relative to the second half of 2022. In Q1 of 2023, the effective tax rate was somewhat lower than our annual guidance of 27% due to a lower effective tax rate related to the real estate repositioning charge and the realization of certain tax benefits and NOLs. We still expect a tax rate of 27% for the balance of the year, as indicated on our February 2023 call. Non-GAAP adjusted net income increased 9%. As a result of share repurchases, our diluted share count declined by 2.5% and non-GAAP diluted EPS was up 12.2% on an adjusted basis. Without the headwind from negative foreign currency translation, non-GAAP diluted EPS for the quarter increased by approximately 16%. Now, let’s review the quarter in more detail, beginning with the components of our revenue change on Slide 4. Our organic growth was 5.2%. The impact from foreign currency translation was negative and reduced reported revenue by 3.2%, which once again was a bit less than the preceding quarter. Looking forward, we still estimate that the impact will moderate for the remainder of 2023 and will be approximately flat for the year. The impact of acquisition and disposition revenue was negative 1%, primarily reflecting the disposition of our businesses in Russia announced near the end of the first quarter of 2022. Given the recent disposition of our small research businesses earlier in April, we expect a similar reduction of about 1% for the balance of the year, prior to any acquisitions we expect to complete later this year. Moving on to Slide 5, let’s review our revenue growth by discipline. During the first quarter, advertising and media posted 5.1% organic growth, once again led by strong performance in our media businesses. Precision marketing had strong growth of 7% organically. We continue to invest in this area and we see opportunities for future growth in the market for digital customer experience, data analytics and digital transformation services. Commerce and brand consulting grew organically by 3.3%, primarily on the strength of our branding and design agencies. Experiential organic growth was 8.4%, led by Europe, the UK and the Middle East. Execution and support returned to growth at 3.6%, led by our merchandising and support businesses and offset by a reduction in our research businesses. Public relations, was strong at 5.8%, coming off a challenging double-digit growth comparable in Q1 of ‘22. Finally, healthcare grew 4.8% and we continue to see good growth trends in this business, 2023 supported by new client wins last year. Please note that we made some adjustments to reclassify certain agencies among our disciplines to reflect changes where an agency’s current and future capabilities better aligns with their new disciplines. Prior periods have been restated to the current presentation. No changes were made to total revenues or total organic growth. For your reference, we have included a slide in the appendix of updated 2022 quarterly and annual revenue by discipline. The impact of the changes on the 2022 presentation by discipline was minor. The only notable change resulting from reclassifying our digital communities agency, which has been more closely aligned with our research capabilities from the commerce and brand consulting discipline to our execution and support discipline. Turning to Slide 6 for revenue by region, you can see that growth was above 5% everywhere except Asia-Pacific, where we saw some regional performance challenges impact results. In the U.S., our 5.1% quarterly organic growth was led by advertising and media, precision marketing and public relations. International organic growth of 5.4% was led by advertising and media, precision marketing and our experiential businesses had strong growth outside the U.S., but were flat in the U.S. Regionally, we had positive growth across our top 10 countries with the exception of China. Looking at revenue by industry sector on Slide 7 compared to the first quarter of 2022, we had higher relative weights in food and beverage and auto offset by a lower relative weight in technology. Other categories were broadly stable. Let’s now move down the income statement and look at expenses on Slide 8. Our total operating expenses were flat at $3.1 billion. Salary-related service costs were flat. The increase resulting from organic revenue growth and additional headcount was offset by the effects of foreign currency translation. As a percentage of revenue, these costs decreased 1% year-over-year. Third-party service costs, which include third-party supplier costs when we act as principal in providing services to our clients, increased due to an increase in organic revenue. These costs are an integral part of our service offering to our clients. We provided additional operating expense detail this quarter with the addition of the third-party incidental cost line, which primarily consist of client-related travel and incidental out-of-pocket costs that we will back to clients directly at our cost, and we are required to include in revenue. These costs were previously included in the third-party service cost line, and they tend to increase when revenue increases and decrease when revenue decreases. In Q1, they increased due to an increase in revenues. We hope this incremental disclosure will assist in your analysis of our results. Occupancy and other costs were down a bit. They increased slightly due to growth in general office expenses as our workforce continues to return to the office, which was offset by the effects of foreign currency translation. SG&A expenses decreased primarily due to lower professional fees and the effects of foreign currency translations. We will reference – Slide 16 in the appendix presents our operating expense detail on a constant currency basis. Similar to the income statement highlights slide we discussed earlier, Slide 9 presents both the reported and non-GAAP adjusted results of 2023 and 2022 by removing the Q1 2023 real estate repositioning charges and the Q1 2022 charges arising from the effects of the war in Ukraine. Our first quarter 2023 adjusted operating income of $466 million was flat with the first quarter of last year. The related adjusted operating income margin was 13.5% compared to 13.7% in the first quarter of last year. Please turn now to Slide 10 for our cash flow performance. We define free cash flow as net cash provided by operating activities, excluding changes in operating capital. Free cash flow for the first quarter of 2023 was $429 million, up 26.3% from last year, which included the cash impact of charges arising from the war in Ukraine. Changes in operating capital are typically negative in the first quarter and level for the first quarter of 2023 was similar to the last few years. As we look forward for the full year 2023, we continue to expect changes in operating capital to be a source of cash again. Regarding our uses of cash, we used $142 million of cash to pay dividends to common shareholders and another $13 million for dividends and non-controlling interest shareholders, both similar to last year. Our capital expenditures of $23 million were at normal levels and flat with last year. Acquisition spend, net of dispositions and other items was $38 million and related to the acquisition of additional noncontrolling interests. And lastly, our net stock repurchases for the quarter of $279 million, roughly in line with last year’s first quarter level and well on the way toward our annual expectation of $500 million to $600 million. Slide 11 is an overview of our credit, liquidity and debt maturities. At the end of the first quarter of ‘23, the book value of our outstanding debt was relatively flat at $5.6 billion, compared to the same period last year. There were no changes in outstanding balances during the quarter. And our $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program, remains undrawn. And our cash and cash equivalents were $3.3 billion. Turning to Slide 12. Our operating capital discipline consistently drives above-average returns on both invested capital and equity. For the 12 months ended March 31, 2023, we generated a solid return on invested capital, 24% and a strong return on equity of 45%. The strength of our business delivers attractive returns on a relative basis in both strong and weaker macroeconomic environments. In closing, as 2023 begins, we continue to review our costs to better align with our estimated revenues and an uncertain economy. And our decision to exit certain real estate in Q1 is consistent with this approach. Our Q1 performance was solid and a first step toward delivering on our full year guidance of an operating income margin between 15% and 15.4%, excluding the impact of the real estate repositioning charge. We expect to be at or close to the top of that range. Our approach always includes the opportunity for strategic and accretive acquisitions. And if those opportunities are not immediately available, we will continue to use our free cash flow to boost total shareholder returns through dividends and share repurchases. Operator, please open the lines up for questions and answers. Thank you.

David Karnovsky:

Hi, thank you. John, just wanted to see if you can provide any additional context around the organic guide? I think last quarter, you said you were extremely comfortable with the low end of 3% to 5%, just given the performance at the top end of the range in Q1, has that level of comfort moved higher at all? Thanks.

David Karnovsky:

Okay. And then, Phil, can you just confirm, I think you said for the margin guide at the higher end of the range? And then how should we think about the benefit of those real estate actions maybe flowing through to future years?

David Karnovsky:

Anything on future years for the real estate action?

David Karnovsky:

Thanks a lot.

Operator:

Next, we will go to the line of Ben Swinburne with Morgan Stanley. Please go ahead.

John Wren:

Yes, Ben, we take all that into consideration. We’re giving you the estimate of what we think is happening in the revenue in the aggregate. But L’Oreal specifically, we were ramping up costs in the first quarter. The revenues didn’t start until April 1.

John Wren:

We certainly, not only I, I think the leadership of our groups believe that it’s necessary and will therefore be effectively additive in the long run. Where we benefit is the great resignation is over. You see it in the layoffs that the tech industry is doing in some other areas. So we believe that we will be just fine. Naturally, there will be individual cases where people want to come back, and they’ll seek other alternatives. But in the scheme of things, it’s not going to be significant. As we’ve implemented this policy, if you go around the world, we needed to put out the minimum of 3 days a week principally for the United States. Once you get outside the United States, people have been back in the office like in Asia a minimum of 5 days a week and most of Europe, at least 4. So people – our managers also know that at first, when people come back, we’re going to invest a little money, making an event to come back just to reintroduce people to – having to come back. But I think we’re also doing other smart things. If you lived in Long Island or Connecticut or in New Jersey, and if we say come back to the New York office, it would take you 2 hours and cost you a fortune, tolls and whatever else. We, I think, very wisely have put satellite locations. So people can have that as their permanent location and only on occasion going in the course of a month will they have to come back to the city. So we’re trying every sensible thing to look at for the benefit and the welfare of our employees. And it’s time for them to come back because we’re a creative service company, and we work better when we’re together.

Operator:

Next, we will go to the line of Tim Nollen with Macquarie.

John Wren:

Sure. I probably say it’s pretty consistent to what we’ve been saying for the last 100 conference calls that I’ve been on. There is – one thing that will benefit us is we continue to ramp up in the hiring, say, in places like India have increased in order for us to become cost efficient for the benefit of our clients as well as for our shareholders. And that will continue to grow. That’s why I mentioned that we’re opening up three campuses, which in the past, that’s what tech companies did as opposed to advertising agencies. So we have some plans, and we are cautiously introducing them just in the normal course of business to mitigate costs. And we also have it in our ability to accelerate that if we find that we have to adjust for something. So the plans vary. The scenarios vary. I think Phil had some statistics about how quickly we recovered from very serious recessions in the past. I don’t know if that would add any color to it or not.

Tim Nollen:

Okay, great. Thanks. And then could I follow-up on the comment on the Microsoft and the generative AI relationship? I think it was last call that I asked the question about what might ChatGPT do to the business. And I wonder if you can maybe elaborate a bit further. I mean there is a lot of discussion around this replacing people over time and changing the creative process and so forth. I think your answer then last quarter, John, is that it’s just – it’s a matter of improving workflows and making various things more efficient. Could you just elaborate a bit more now that you have an actual, formal relationship with Microsoft in place now?

Tim Nollen:

Okay. That’s very helpful. Thank you.

Steven Cahall:

Thank you. So, John, you said that you don’t want to fight the Fed. It seems like maybe the Fed is winning the fight with inflation. That usually means either a weaker consumer or higher unemployment. So, I am just wondering if that’s your subsequent expectation? And what does that translate to in terms of any growth implications for the company, or how you are thinking about managing the business through that? And then I have a couple of follow-ups for Phil.

Steven Cahall:

No, that’s helpful. And then maybe, Phil, just first on the margin comment, with the tighter end of the range, is that fully due to the real estate repositioning, or are there sort of general operating aspects that drove that as well? And also, your net interest was quite low in Q1. I am sure that’s just the rate that you are getting on your deposits. So, good to see the Fed is helping there. Should we use that as a decent run rate for kind of net interest going forward? Thank you.

Steven Cahall:

Got it. Thank you.

Operator:

Next, we will go to the line of Jason Bazinet with Citi. Please go ahead.

Phil Angelastro:

No. I think if you go back over a longer period of time, you probably even go back 10 years, you will see that most of the volume of buybacks has occurred in the past – in the first quarter and the second quarter, usually the first quarter a little more than the second quarter, so the first half of the year. And then we tend to have less activity in Q3 and Q4. I think there have been a couple of anomalies recently given COVID, certainly for one, and probably the economic slowdown prior to that, which is probably close to 8 years to 10 years ago. So, there might be a blip here or there, but it’s not due to price sensitivity or anything similar to that. We largely returned cash to shareholders through the buyback, and we tend to do that more or so in the first half of the year.

Jason Bazinet:

That’s very helpful. Thank you.

Craig Huber:

Great. Thank you. My first question, historically, your company and your peers’ pricing has not been much of a factor in your organic revenue growth year-to-year on a like-for-like basis on the services you guys provide. I am just curious, in this higher interest rate environment, are you being able to raise prices any more aggressively now versus what you have done in the past?

Craig Huber:

And then also, John, your conversation with your clients, has your thought on this year changed materially since the last time you spoke to us 2.5 months ago in terms of the outlook for what you are hearing from clients? I mean a lot has changed on the macro side, I think with all the banking issues, etcetera, over the last couple of months and stuff. But it sounds like you are obviously keeping organic revenue growth outlook the same, but I am just curious, client-for-client, are you sensing any more cautiousness now versus what you were thinking 2.5 months ago? Thank you.

Craig Huber:

That’s it. Thanks John.

Phil Angelastro:

Thank you.

Gregory Lundberg :

Thank you for joining our fourth quarter and full year 2022 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omnicomgroup.com., we've posted a press release along with the presentation covering the information we'll review today as well as a webcast of this call. An archived version will be available when today's call concludes. Before we start, I would like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we have included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements, and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our Form 10-K, which should be filed tomorrow. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We'll begin the call with an overview of our business from John, then Phil will review our financial results for the quarter. And after our prepared remarks, we'll open up the lines for your questions. I'll now hand the call over to John.

Phil Angelastro :

Thanks, John. We're pleased to be closing 2022 with solid fourth quarter results, driven by strong organic revenue growth, operating profit growth and earnings per share growth. We finished the year with a healthy balance sheet and excellent liquidity. Our strong credit position and the operating flexibility of our business position us well for any macro uncertainty ahead. Please turn now to Slide 3, and we'll begin our review with a summary of the fourth quarter income statement. Reported total revenue in the fourth quarter was flat year-over-year at $3.9 billion with organic growth of 7.2%, offset by the negative impact of foreign currency translations and net disposition revenue in excess of acquisition revenue. Since most of our expenses are incurred in the local markets where our revenue is earned, foreign currency translation also reduced our operating expenses, which were flat versus last year. Reported operating profit for the fourth quarter increased 3.2%; and on a constant currency basis, it increased 8.4%. Moving down the income statement. Higher interest income again helped lower our net interest expense, which decreased by $18.5 million. Our tax rate of 26.5% was as expected. In 2023, despite the increasing interest rate environment, we currently expect interest expense to approximate 2022 levels and interest income to increase moderately in Q1 and Q2 of 2023 compared to the first half of 2022 and approximate 2022 levels in the second half of 2023. We also currently expect our effective book income tax rate in 2023 to be approximately 27%. The increase relative to our 2022 rate is primarily due to the UK tax rate which is scheduled to increase in April of 2023. Overall, our Q4 '22 net income rose 3.3% on a reported basis. Combined with the reduction in shares year-over-year, diluted EPS rose 7.2%. Without the headwind from negative foreign currency translation, diluted EPS for the quarter increased 13.3%. For a review of the full year, please turn to Slide 4, where we show certain non-GAAP adjustments to make the periods more comparable. None of these adjustments are new this quarter. They were discussed earlier this year and last year. For the year-to-date 2022 period, operating expenses and income taxes were impacted by charges in the first quarter arising from the effects of the war in Ukraine. For the year-to-date 2021 period, operating expenses benefited from a gain on sale of a subsidiary and both interest expense and income tax expense reflect the impact from the early extinguishment of debt in 2021. Continuing on Slide 4, similar to the quarterly results we just discussed. The strength in the dollar this year also impacted our year-to-date results. Foreign currency translation reduced revenues by 4.8%. Operating profit on a non-GAAP adjusted basis of $2.2 billion was up 2.3%. And without the headwind from negative foreign currency translation, it increased 6.8%. Non-GAAP adjusted diluted EPS of $6.93 rose 8.5%; or without the headwind from negative foreign currency translation, it increased 13.6%. Let's now go into some more detail on our results, beginning on Slide 5 with an analysis of the change in our revenue. As discussed, our organic growth was 7.2% for the quarter, and 9.4% year-to-date. The quarterly impact from foreign currency translation was negative 5.5%. It's worth noting that for financial reporting purposes, the U.S. dollar strengthened against the currencies of every country we operate in, except for Brazil when compared to Q4 of 2022. However, this impact was slightly less than it was in the third quarter. So it did move in the right direction. The impact of acquisition and disposition revenue was negative 1.4%, primarily reflecting the disposition of our businesses in Russia during the first quarter of 2022. Looking forward, foreign currency exchange rates stay where they were as of February 1, we estimate that the impact will reduce our revenue by approximately 3% in the first quarter and moderate for the remainder of 2023 to be approximately flat for the year. Based on deals completed to date, we expect the impact from net acquisitions and dispositions will result in a reduction of our revenue by approximately 1.5% in the first quarter, primarily resulting in the disposition of our businesses in Russia in the first quarter of 2022. Turning to Slide 6. For the quarter, we once again showed organic growth across all of our disciplines with the exception of execution and support as we expected. As you can see, performance in each of our other disciplines remained solid with double-digit organic growth in three of them. Advertising & Media, our largest category, posted 6% organic growth in the quarter, led by strong performance in our Media businesses. Precision Marketing continued its strong performance, 11.6% organic growth as clients continue to turn to us for digital transformation, digital customer experience and data analytics services. Although this growth rate moderated a bit relative to the third quarter, we're excited about the outlook, and we'll continue to invest in this space. Commerce & Brand Consulting was up 7.2% organically on the strength of our branding and design agencies. Experiential organic growth was a strong 17% where we saw more benefits than we expected from the FIFA World Cup and other year-end projects. Execution & Support, which we expected would be choppy in the second half, had a decline of 2.8% against the comp of 5.2% growth in last year's fourth quarter. Public Relations grew a strong 12.7% organically in the quarter, keeping up a double-digit trend, reflecting continued client demand across many industries and geographies, and including increased revenue of approximately $10 million, resulting from increased election spending in the U.S. in the second half of the year. And Healthcare delivered solid organic growth of 6.4%. Turning to Slide 7 for revenue by region. We're pleased to see continued positive growth globally. In the U.S., our 5.6% quarterly organic growth was led by Advertising & Media, Precision Marketing and Public Relations. International growth of 8.7% was also led by Advertising & Media and Precision Marketing and also saw the strong contribution from Experiential that I mentioned earlier. Regionally, we saw some expected slowdown compared to the first half of the year in the UK and Europe, but their organic growth of 10% and 5%, respectively, is still quite healthy. Asia Pacific also improved, led by China and also driven by most of our other markets in the region. Looking at revenue by industry sector on Slide 8. Relative to the fourth quarter of 2021, the mix of our client portfolio was broadly stable. Categories that moved year-over-year included an increase in exposure to pharma and health and a decrease in exposure to technology. Let's now turn to Slide 9 and look at our operating expenses for the quarter. For your reference Slide 17 in the appendix presents this on a constant currency basis. Our total expenses were essentially flat at $3.2 billion due primarily to the weakening of almost all foreign currencies against the U.S. dollar. Salary and related service costs decreased as we saw an increase related to organic revenue growth and additional headcount, offset by the effects of foreign currency translation. Third-party service costs increased due to an increase in organic revenue. Occupancy and other costs increased primarily due to some growth in general office expenses as our workforce returns to the office, partially offset by lower rents. On the topic of rent, you may have seen in January that we moved the Madison Avenue headquarters for TBWA to a location that houses other Omnicom agencies. It is an open, modern and collaborative space with an efficient design. This is another example of the rationalization of our rooftops, which we expect will continue in the future. SG&A expenses were down year-over-year due to lower professional fees, lower marketing-related costs and reductions from the effects of foreign currency translations. Turning to Slide 10. Our fourth quarter operating profit was $643 million, a 3.2% increase from last year, net of a reduction of $32.3 million of the impact of foreign currency translations. Our operating profit margin reached 16.6% on total revenue compared to last year's margin of 16.1%. Please turn now to Slide 11 for our cash flow performance on a full year basis. We define free cash flow as net cash provided by operating activities, excluding changes in operating capital. Free cash flow for the year was approximately $1.8 billion, flat compared to last year. Regarding our uses of cash, we used $581 million of cash to pay dividends to common shareholders and another $80 million for dividends to non-controlling interest shareholders. Capital expenditures of $78 million were at normal levels. Acquisition spend, net of dispositions and other items was $330 million. And lastly, our net stock repurchases for the year were $594 million, at the high end of our expectations of $500 million to $600 million. In 2023, we expect that we will also repurchase shares within this historical range. Regarding the changes in our operating capital for the year, which resulted in a use of cash of approximately $840 million, the principal factors that caused this reduction included

Steven Cahall :

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

Phil Angelastro:

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

Phil Angelastro:

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

David Karnovsky :

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

John Wren :

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

John Wren :

Yes. At this point, selling client products and what COVID did for online sales is never going backwards. It's only going to further increase as we move further into the future. Mergers like Krogers and Albertsons will set up a third competitor to the Walmarts and the Targets that are out there as well as the Amazons. Budgets at sales departments traditionally had to motivate those stores to feature those products are, in essence, becoming types of media budgets. And there's a lot of overlap and convergence in terms of the skills that you need. Having said that, there are some very special skills that you need to focus on retail and sales at that moment of notice or when you get the customers' attention. We've looked at seeing if there is much to acquire throughout '21 and '22. But at the same time, because we were a bit hesitant, we started building it and so we've been building it for well over 2.5 years. And I think if you ask us or any of our competitors, every media request for a bid for the last several years, you have to come in and demonstrate to that potential client the strength of your e-commerce capabilities. So it's something that we are focused on, remain focused on, and we think is going to play a very important role in future business, not only in '23, but beyond.

Ben Swinburne :

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

Phil Angelastro :

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

Phil Angelastro :

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

Operator:

Next question comes from the line of Michael Nathanson with SVB MoffettNathanson.

John Wren :

When we look at revenue, when we look at our clients, we look at what their business needs are in terms of selling their products. So we are most interested in share of wallet as opposed to individual expertise or crafts within the marketing experience. So -- and we've gotten better and better at this, we're on our front foot. So we're not only answering the briefs that the client isn't necessarily putting to us, we're not just answering questions. We're taking a look at their business, their sector and trying to be helpful as a partner to them in growing their businesses. So we don't really make the distinctions other than what the accounting systems spew out is relevant to me. And in today's environment, that marketing funnel continues to collapse and there's a lot of overlap between the skills or the areas in which we call out for historic purposes. I started off in an earlier answer, explaining how retail e-commerce type of spending and media spending are overlapping -- almost completely overlapping today. Not every client's organization has separated the responsibility for those two areas just yet. But in essence, all those costs in all those different areas are being spent to get a great ROI and to move the client's product. And that's where our real focus is.

Michael Nathanson :

Okay. And so I can ask one more. I don't think you quantified what the hit is going to be this year to divest into acquisitions to total revenues. I might have missed that. We got the first quarter, but what's your aspect of the year of the revenue changes from divestments?

Operator:

And the next question comes from the line of Tim Nollen with Macquarie Group.

John Wren :

I think we outlined pretty much there. What the areas that we're most interested in, which I think I called out as being e-commerce, geographic expansion and skill expansion of our precision marketing group and our very strong healthcare group. So those are areas that we're constantly scraping the market, talking to everybody, we have an entire group that's dedicated to that in terms of mergers. I think this is a generalization. So making a general statement, it's not 100% true, but it's mostly true. And that is, I think, would be what the Fed has done in increasing interest rates, which I believe is pretty permanent. I don't think sellers have quite absorbed that yet in bringing the pricing in line to what any reasonable business person would anticipate as a terminal rate for buying an enterprise. But we continue to negotiate and most of the deals that we've been able to do have been strategic in nature, and they have to be good family members because they have to be able to operate in the environment that Omnicom operates in. You're correct in making -- calling out the fact that we have divested today, we're constantly reviewing the portfolio and also constantly talking to people through our M&A group who are doing roll-ups in certain areas where we've become aware of that, and we have to make decisions that, gee, this company has value to us now but are we going to double down and support it to compete with what we anticipate those roll up is going to be able to accomplish? Or are we going to just take a healthy profit and return it to our shareholders. And that's what we've elected to do over the course of the last five years. And where an acquisition has become fall short of our standards or we deemed to be too expensive, we've not been shy and we spend a lot of money each year investing in building those businesses which are reflected in lowering our margins in many ways. If we were running the business for any short period of time, you could stop some of those investments and increase your margins temporarily but it will hurt long-term growth. So we are constantly looking at the present, learning hopefully from mistakes of the past, but it also with a keen awareness about where our expertise is and where it should continue to be.

John Wren :

Sure. We ourselves not shy, but found that interesting. We're constantly looking as a group that is looking to automate part of the functions that we perform on a regular basis. And those are some of the investments that I alluded to. When I first became aware of chat, the first phone call I made was to the Head of PR and as I said, using historic performance, I want to test this product and see, it is good yet as it pretends to be and given an analysis from the people on the ground doing those type of tests as to how they viewed it. And they came back very positively. It's a good product. It's not a perfect product. I think when Microsoft really integrates it into its system, it will be able to ramp up, so it doesn't crash just right now, it has a lot of people trying to play with it and use a lot of whatever is available hosting capabilities are. But in general, I probably would have given you a different answer two years ago than I will right now. All of the automation that we're looking at enhances the capabilities and makes the job easier for our best and brightest people. And it eliminates a lot of the otherwise mundane projects or activities that we also get paid for. So net-net-net, not everybody will love it. We'll be embracing it as quickly as we possibly can because we think it's good for our smartest people, and therefore, it will be good for what the work they do on behalf of our clients. So I'm looking forward to it. And I'm looking forward to Microsoft getting behind it and making it something that is on everybody's desktop.

Jason Bazinet :

I don't want to take away from the results you guys put up because they are very good, and I heard what you said about account wins and we can all see the numbers. But your competitors are also doing remarkably well recently. And when I listen to the words you guys used to describe why there are all these tailwinds, whether it's e-commerce or connected TV or digital transformation. At least to my layman's here, it feels like those things have been going on as sort of trends for the last five years and yet all the holding companies are putting up great numbers sort of post COVID. And so I'm still I feel like I'm missing the thread in terms of what's really caused your growth and your peers' growth to accelerate so much. So if you were just going to convey this to an institutional investor, and you said, if you buy Omnicom stock, you are net long what -- your just two or three things that we'd all understand exactly what's happening that's causing clients to use your services so much more than they were in the past.

Operator:

And our next question comes from the line of Craig Huber with Huber Research Partners.

John Wren :

Should we? Yes. Are we speaking to our clients about that? Yes. Do they understand that the best and brightest people that are servicing them can demand more because of the inflationary periods that we're all living through? Yes. I think I tried to -- I quickly read over this in an earlier answer but we've had some very good success in going to clients and getting increases in our pricing. Not everything we want by any standard, but getting that movement and that recognition. And clients who themselves are facing difficult times and there really are more difficult times, are really maybe not in a position to give us the level of increase that we want but we didn't stop there even and say, well, guess what, in the past, you've been able to fire us and give us six months' notice. We want to extend our contract to be a 36-month contract before you could possibly review it, hoping that you don't at the end of 36 months either. But in getting that, in lieu of a price increase, we're able to add stability to our revenue base. So we are benefiting. One is more measurable than another. But -- and the reason for that is because I think our product alignment is correct in terms of what the market needs are and I think our clients respect the intelligence and the sophistication of the people that we have servicing them on their accounts.

John Wren :

Well, the one that I can point to with real confidence is healthcare. I think they're increasingly new discoveries, new products all the time in the healthcare area. I'm confident that everybody on the planet is going to have to eat food and drink beverages. So that sector of our business, I'm comfortable with. Our tech sector I think we're going to suffer, get a little pain there, and we planned to quarter because of the payment those -- some of those companies are going through. But they'll reinvent themselves very, very quickly, and I'm very happy to have them as clients, even if they're facing challenges. In the auto sector, I think two interesting things are going on and clients have to continue to market in order to address this. One is there hasn't been a lot of new product in the past three years because the supply chain problems which have now been, for the most part, solved by most major car manufacturers. And the second thing, which clients have to continue to bring their brands and promote their brands in order to be participants in this area is electric cars and the requirements of that to show progress in their product. So travel, I'm not going to comment. I can speak for the red household, nobody shied away from it, but I don't know that much about anything else. Our clients are bullish. But everybody -- every CEO that I speak to truly believes in their products, believes in their future and is cautious and appropriately cautious about the financial conditions of central banks and the Fed and where interest costs are going to go. So hopefully, that answers your question. That's about the best I can do.

Phil Angelastro :

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

Operator:

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

Gregory Lundberg:

Good afternoon. Thank you for joining our third quarter 2022 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omnicomgroup.com, we've posted a press release along with the presentation covering the information we'll review today as well as a webcast of this call. An archived version will be available when today's call concludes. Before we start, I would like to remind everyone to read the forward-looking statements and non-GAAP financial and other information that we have included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements, and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2021 Form 10-K. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John, then Phil will review our financial results for the quarter. And after our prepared remarks, we'll open up the line for your questions. I'll now hand the call over to John.

Phil Angelastro :

Thanks, John. As you just heard from John, our third quarter results were solid, reflecting growth across all our disciplines. While the rate of growth as expected, is below our first half results. We feel very good about the competitive position of our company, leading us to raise our guidance for full year 2022 organic growth and we have a positive outlook for 2023 and beyond. Further down the income statement, our cost management has resulted in strong operating performance and operating profit margins. and our disciplined approach to capital allocation and investment has led to both improved service offerings and increased shareholder returns through dividends and buybacks, all while maintaining an excellent credit and liquidity position. Let's go into the financial details of the quarter, beginning on Slide 3. Reported total revenue in the third quarter was flat year-over-year at $3.4 billion. Organic growth was 7.5% for the quarter. However, as I'm sure you're aware, the U.S. dollar has strengthened significantly and almost half of our revenue is outside the U.S. In dollar terms for the third quarter, this drove the largest negative quarterly impact from foreign currency translation so far this year, a $216.6 million or 6.3% reduction of revenue. With most of our expenses incurred in the local markets where our revenue is earned, foreign currency translation impacted our profits as well. Reported operating profit for the third quarter increased around 1%. While on a constant currency basis, it increased 6%. Below line, higher interest income helped lower our net interest expense, and we benefited a bit from the translation impact of our euro and British pound-denominated debt. Overall, our net income rose 2.5% on a reported basis. Combined with a 4% reduction in shares year-over-year, diluted EPS rose 7.3% after a negative 5% headwind from foreign currency translation. On a year-to-date basis, it's helpful to turn to Slide 4, where we show adjustments to make the current and prior year-to-date periods more comparable. None of these adjustments are new this quarter. They were discussed earlier this year and last year. The year-to-date 2022 period, operating expenses and income taxes were impacted by charges in the first quarter arising from the effects of the war in Ukraine. For the year-to-date 2021 period, operating expenses benefited from a gain on sale of the subsidiary and both interest expense and income tax expense reflect the impact from the early extinguishment of debt. Similar to the quarterly results we just discussed the strength in the dollar this year also impacted our year-to-date results. Foreign currency translation reduced revenues by 4.5%. Operating profit on a non-GAAP adjusted basis was up 1.9%. And on a constant currency basis, was up 6.1%. For a more detailed look at our results, let's now turn to Slide 5, and begin with an analysis of the changes in our revenue. As discussed, the quarterly impact from foreign currency translation was negative 6.3%. The impact of acquisition and disposition revenue was negative 1%, primarily reflecting the disposition of our businesses in Russia during the first quarter. Organic growth was 7.5% for the quarter and 10.3% year-to-date. Looking forward, if FX rates stay where they were as of October 12, we estimate that the impact of foreign exchange rates will reduce our revenue by approximately 6.5% in the fourth quarter. Based on deals completed to date, we expect the impact from net acquisitions and dispositions will result in a reduction of our revenue of approximately 1.4% in the fourth quarter, primarily resulting from the disposition of our businesses in Russia. Turning to Slide 6. For the quarter, we once again showed growth across all of our disciplines with double-digit growth in three of them. Advertising & Media, our largest category, posted 6% organic growth in the quarter, led by strong media results. Precision Marketing continued its strong performance with 16% organic growth as clients turn to us for digital transformation, digital customer experience and data and analytics services. Commerce & Brand Consulting was again up 11% organically on the strength of our branding and design agencies. Experiential organic growth slowed to 2% as we continue to experience declines in China. As expected, growth in this discipline will remain choppy. Execution & Support which we also expected would grow slower in the second half, had organic growth of 4%. Public Relations grew a strong 13% organically, reflecting client demand across many industries and geographies. And lastly, Healthcare delivered solid organic growth of 5%. Turning to Slide 7 for organic growth rates by region. It's clear that growth was solid overall, but vary widely by region and as expected, each region grew a bit less than they did in the second quarter, both in the U.S. and internationally, in Q3, Organic growth was primarily driven by revenue growth in Advertising & Media, Precision Marketing, Commerce & Consulting and Public Relations. Organic growth in the U.S. was strong at 7.6%. And outside the U.S., the organic increase in revenue was led by the UK at 11.5% and Europe at 6%. Looking at revenue by industry sector on Slide 8. Relative to the third quarter of 2022, the broad distribution of our clients remain very stable. Let's now turn to Slide 9 and look at our operating expenses for the quarter. For your reference, a slide in the appendix also presents this on a constant currency basis. Our total expenses, exclusive of depreciation and amortization, were flat at $2.8 billion, down 10 basis points as a percentage of revenue. Salary related service costs were fairly constant at 50.8% of revenue compared to 50.4% last year. The slight increase was due primarily to the increase in organic revenue, an increase in headcount and a return to more normal business conditions. Third-party service costs were flat at 21% of revenue. Occupancy and other costs were also flat at 8.2% of revenue, a decrease due to lower rents and other occupancy costs, partially offset by an increase in office expense and other costs resulting from the return of our workforce to the office. SG&A expenses were down year-over-year as a percentage of revenue, due primarily to decreases in professional fees and third-party marketing costs. Turning to Slide 10. Our third quarter operating profit was $546 million, a 1% increase from last year, net of a reduction of 5.2% due to the impact of foreign currency translation. Our operating profit margin of 15.9% on total revenue was 10 basis points above last year's result. Please turn now to Slide 11 for our cash flow performance. We define free cash flow as net cash provided by operating activities, excluding changes in working capital, which are generally positive for us on an annual basis. Free cash flow for the first nine months of 2022 was $1.23 billion compared to $1.25 billion for the first nine months of last year, a small reduction year-over-year. However, as a reminder, we note that $48 million of the charges we recorded in the first quarter of 2022 for the effects of the war in Ukraine were cash related. Regarding our uses of cash, we used $438 million of cash to pay dividends to common shareholders and another $63 million for dividends to non-controlling interest shareholders. Our capital expenditures of $66 million were at normal levels. Acquisition spend, net of dispositions and other items was $330 million. And lastly, our net stock repurchases during the third quarter were $486 million. We continue to expect total repurchases for the year at our historical annual range of around $500 million to $600 million. Slide 12 is an overview of our credit, liquidity and debt maturities. During the quarter, the impact of foreign exchange rates on our euro and sterling denominated debt caused the book value of our outstanding debt to decrease to $5.5 billion from $5.7 billion as of December 31, 2021. There were no changes in outstanding balances during the quarter and our $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program, remains undrawn. Our cash and equivalents were $3.3 billion, flat with our balance at June 30, 2022, reflecting an increase in net free cash flow during the quarter, which was offset by the negative impact of foreign currency translation. Turning to Slide 13. Our operating capital discipline consistently drives above-average returns on both invested capital and equity. For the 12 months ended September 30, 2022, we generated a solid return on invested capital of 25% and a strong return on equity of 43%. We're confident that the outlook for our business growth and our prudent process for capital allocation will lead to increasing returns as they have historically. Operator, please open the lines up for questions and answers. Thank you.

Steven Cahall :

John, maybe one for you and then one for Phil. Rather than asking for you to prognosticate on organic growth, which I know is hard maybe to ask it a different way. How are you thinking about the cost base and being proactive in a pretty volatile revenue environment? I think when we last spoke, you mentioned that there maybe could be some real estate opportunities or some opportunities in things like hiring and incentive comp. So I'm just thinking about when you look at the environment right now, is it a time to be very proactive or based on the good growth that you put up in the third quarter, do you actually feel like things are pretty stable in that proactive cost management is more something you can think about in the future?

Steven Cahall :

Great. And then, Phil, kind of a similar flavor to the same question. This year, growth is strong and operating margins are guided to kind of flat year-on-year. Does the same logic hold that if growth slows down, operating margins stay pretty consistent? Or if we do get into a tougher growth environment, do you expect there to be some downward pressure to operating margins?

Operator:

And the next question comes from the line of Jason Bazinet with Citi.

John Wren :

Yes, sure. Our portfolio today isn't comparable really to when our portfolio was 3.5, four years ago. That -- the instances you referred to, 2019, 2020 was the end of a five-year period in which we were disposing things. That contributed to our profit, but didn't necessarily contribute to our growth. And we were able, in good times, to find buyers who are interested in those companies, and we offloaded them. Similarly, we made investments in areas where we believe that growth would be consistent in good times and in bad, you can see that reflected in our precision marketing, assets. You can see that in the changes that were made in our public relations category and also the expansion of services in the health area. So as well as more traditional areas, we cleaned up low growth geographies and/or what we felt were product loans. It's a process which has served us well. It will continue to serve us well, I believe, as we face more challenging times if they come and we're planning that more challenging times aren't -- we're facing more challenging times because of inflation and some of the macro factors that are out there in the marketplace. And we're also very comfortable, I'd say, in the upgrades we've made to our management and our leadership throughout the world over the same period of time. So everybody on the team is aware of those many, many steps that we have to go through in order to be successful, period.

John Wren :

No, I don't think it's wrong. I think that the marketplace complexity has increased, which makes not only Omnicom, but our competitor is important. I think the great resignation, which had an impact on some of our businesses were able to manage through, also had an impact on how our clients face that complexity. And I don't have the evidence to back this up, but I believe it to be true is in the last two recessions, it's been pretty evident that companies that continue to market through those recessions, prospered and came out of them more quickly than ones that just focused on cutting costs and indiscriminately. So a combination of factors and technology is different. There's a revolution we're moving to electric cars. We're moving to more efficient ways of doing business. All of those things means that you want your brand known and supported by the marketplace and known as being progressive in addressing issues, which are going to face businesses, recession and in good times.

David Karnovsky :

John, just wondering if you could speak a little bit to what you're hearing from clients right now in terms of how you kind of balancing perceived or real macro risk against kind of the need to invest in brands and performance. And then with regards to year-end project work, any early view into how this potentially looks? And Phil, I'm wondering if you could say kind of what you've assumed within your guidance out of that sort of $200 million to $250 million you've historically flagged?

Phil Angelastro:

And on the year-end project front, I'd say we're in a similar situation that we've been in in every October for quite some time. We don't have a lot of visibility yet into how much you earn project work or agencies are going to capture. Typically, thereafter, a number which is in the neighborhood of $200 million to $250 million of potential project spend. Some years, we get it all, some years very rarely, I would say, we don't get much, if any of it. I would say we don't expect to get it all this year. But as we've gone through the process of looking at the fourth quarter with our companies, agency by agency bottoms up. There's a number of companies that have an expectation based on their past history of what they could capture. They've made an estimate probably a conservative estimate. And as we look out into the fourth quarter, we've kind of considered that in our guidance. So we do expect that will be successful we don't expect we'll get it all this year, but we're pretty optimistic or the one thing we know is that people are going to be out there working on getting it because their incentives are aligned with ours, and it will drive incremental profit and incremental bonus for them as well.

John Wren :

There's no alchemy. We did change leadership in recent conversation with some of my other management. I'm extremely proud of the leadership that we have of that group. It's craft-driven and craft lead now. And I know that in the past, when it was run or managed by people who didn't have such a deep understanding of the craft, the performance was different the gentleman and team that leads it now is very proactive, very hands-on, very close to its clients and its people. And I think that's paying huge dividends. And it's hard to measure, but it's easy to see. I think the product is also much closer and much more important in the consumer journey and probably more relevant in terms of brand awareness as well as the actual completion of the sale. Influencers didn't exist in 2016, they exist today. PR takes a leading position in things like that. So I don't have the precise answer, but I do know that we have the right people, I think, doing the right things and adjusting our product appropriately for the current circumstances that we're operating in.

Michael Nathanson :

John, a question for you and one for Phil. I think, John, there's a thesis emerging that the complexity of digital beyond Facebook and Google is really driving demand for your digital media business across everyone's business at this point. Can you talk a bit about what you've seen in what isolate on the media buying front planning front just on digital and just the addition of retail media, TikTok, Apple, Amazon, Netflix to come, what do you see in terms of like the growth rates rolling it down to there? And then Phil, if there's a concern with the model, it's just rising inflation on -- for salary and services, can you talk a bit about what you're seeing kind of on a point-to-point level on inflation and how that could be managed wage inflation in the next 12 to 14 months?

Phil Angelastro:

On the inflation or managing things. Certainly, it's a reality of what everybody is dealing with today, ourselves and our agencies along with our clients. And frankly, we're -- as we've said before, we continue to look for efficiencies in the cost structure. It's a flexible cost structure. We've been pursuing opportunities for offshoring outsourcing automation, as John mentioned earlier. And we've got a number of open positions and access to a flexible workforce that we could fill those positions if we need to with contractors and a flexible workforce rather than with permanent people in some cases. We're also having discussions with our clients on an ongoing basis, and those discussions continue. The results vary. Some of them result in increase in our rate card changes in the scope of work, incremental work, et cetera. So there's no one silver bullet to deal with inflation in our cost base. But it's a combination of things that really we need to do at the detailed agency-by-agency level. But we're certainly driving a number of initiatives to make sure that we take advantage of whatever opportunities we have to find efficiencies and new ways of working coming out of COVID is certainly helpful in that respect.

Ben Swinburne :

Just keeping with the theme of trying to think about the strong results to continue to deliver and the macro, we're all worrying about, could you talk to us a little bit, John, about the performance of the company this year thus far in the UK and the euro markets where arguably the macro maybe is the most concerning and yet you're doing double-digit growth. Is there anything you would add to the comments you've made already on this call about sort of what's driving that performance? And then I had a quick follow-up for Phil.

Ben Swinburne :

Got it. So do you think there's some share gain in there, too, it sounds like?

Ben Swinburne :

Right. And then, Phil, I guess, technically, this is two. I wanted to just, again, come back to the implied fourth quarter and your guidance, I think would be, I don't know, something like 3% or 3.5% organic. You already talked about the project work. Anything else you'd call out that would suggest that growth would step down that much from Q3 to Q4? And then anything on the buyback. The buyback was a little lower this quarter than last quarter. Is that just sort of being a little more conservative given everything we're reading and seeing out there? Or anything you want to say about capital allocation as we look forward, given the strong balance sheet and cash flow?

John Wren :

The only thing I would add, I think implicit in the numbers that you can look at. The overall project work that we always refer to is still out there. We've spent the last several weeks going company by company, looking for people who had more certainty about the projects that we'd be coming through, and there's still some portion of that, that as we continue to make inquiries and weeks go by it, we'll get more and more clarity.

Craig Huber :

Great. My first question, I mean, given these I think there are very strong results during the quarter and year-to-date, and you compare that to the macro headwinds out there that we all know about. Can you maybe just talk about maybe the tone the conversations you're having with maybe your major European and U.S. clients here to help account for the fact that your numbers are seemingly so much stronger that the macro environment is shaping up as?

Phil Angelastro :

Certainly, from a macro perspective as well in terms of the first nine months of the year, the consumers continue to spend, clients have continued to spend. I think we're talking about what happens if and when the environment changes, hard to gauge how much it's going to change by. But the environment certainly has been a positive in the context of the types of services that we provide.

Craig Huber :

That's very helpful. My follow-up question, if I could. With the very high inflation rates out there, do you feel that that's helping your organic revenue growth here that you're able to pass on higher cost here in a material way much more so than the past?

Operator:

And at this time, we have no one else in the queue. We'll turn the call back over to management. Please go ahead.

Operator:

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

Gregory Lundberg:

Thank you for joining our second quarter 2022 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omnicomgroup.com, we posted a press release along with the presentation covering the information we'll review today as well as a webcast of this call. An archived version will be available when today's call concludes. Before we start today, I'd like to remind everyone to read the forward-looking statements, non-GAAP financial and other information that we've included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2021 Form 10-K. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John and then Phil will review our financial results for the quarter. After our prepared remarks, we will open up the line for your questions. I'll now hand the call to John.

Phil Angelastro:

Thanks, John. As John said, our second quarter results were very solid. Organic growth continued at a very high rate, driven by performance across all of our disciplines. Our growth delivered healthy operating margins and good earnings per share performance. And we continue to return a significant portion of our free cash flow to our investors through dividends and additional share buybacks. Let's go into the financial details of the quarter, beginning on Slide 4. This view of the reported income statement shows adjustments to make the second quarter of the prior year comparable as well as making the six months for both 2021 and 2022 comparable. As we described last year, for the second quarter of 2021, operating expenses in the second quarter of last year benefited from a gain on the sale of a subsidiary. Interest expense includes a charge in the second quarter of last year on the early extinguishment of debt. And income tax expense in the second quarter of last year was also impacted by the early extinguishment of debt. In addition, as we discussed last quarter, for the year-to-date 2022 period, operating expenses included charges arising from the effects of the war in Ukraine in the first quarter of this year, and income taxes were also impacted by these charges. As you can see at the bottom of the slide, the net effects of these items resulted in strong EPS of $1.68 versus $1.46 from Q1 of 2021 as adjusted, representing EPS growth of 15.1% in the second quarter. For the six months, EPS of $3.07 as adjusted grew 10% from $2.79, also as adjusted. Our reported tax rate was 26.5% this quarter, the same level we expect for the remainder of the year. Net interest expense for Q2 of $40.1 million declined by $6.8 million from $46.9 million in Q2 of 2021, excluding the charge from the early extinguishment of debt last year, as previously discussed. The decline was principally driven by an increase in interest income in Q2 of 2022 of approximately $4 million. Given our principal debt is fixed rate, we expect net interest expense to decline in the second half compared to the prior year as interest income increases due to higher investing rates compared to 2021. Lastly, our diluted share count was down almost 5% year-over-year in the second quarter due to our ongoing share repurchase activity. Now let's look at our results in more detail, beginning with revenues on Slide 5. Reported revenues were flat as another quarter of strong organic growth at 11.3% was offset by the negative impact of foreign exchange rates and disposition revenue in excess of acquisition revenue. Both of these impacts were expected as we saw the dollar continue to strengthen globally and as we pass the final two months of our divestiture of a specialty media subsidiary last June, which was included in our Advertising & Media discipline in the U.S. The year-to-date results closely mirror the second quarter. If rates stay where they were as of July 15, we estimate that the impact of foreign exchange rates will reduce our revenue by approximately 6% in the third quarter and by 4.5% for the year. Based on deals completed to date, we expect the impact from net acquisitions and dispositions will result in a reduction of our revenue by approximately 1% in the third quarter, primarily resulting from the disposition of our businesses in Russia, and by approximately 4.5% for the full year. Turning to Slide 6. It's clear that our organic strength was broad-based across all of our disciplines. Advertising & Media, our largest category, posted 8% organic growth in the quarter, with strong performance in both our media and our creative agencies. Precision Marketing continued its strong performance with 21% organic growth in the second quarter. Commerce & Brand Consulting was up 11%, led by our branding and design agencies. Experiential had organic growth of 37%, but it's worth noting that lockdowns in Q2 in China weighed on these otherwise good results. As a reference, in reported dollar terms for the first six months of 2022, this discipline has reached approximately 80% of its pre-pandemic revenue levels. Execution & Support was up 9%, led by our merchandising and point-of-sale businesses. PR was up a very strong 16%, reflecting growth from both long-standing and new clients and increased business activity across many sectors of the economy. And Healthcare, which is 10% of our revenues, grew an impressive 9%. Turning to Slide 7. We once again saw strong organic growth rates in every region with the exception of Asia-Pacific, which was impacted by the lockdowns in China, as I just mentioned. This was nicely offset by acceleration in the U.S., Europe and the U.K. In the U.S., which is more than half of our revenues, our 10.7% organic growth was primarily driven by growth in Advertising & Media, Public Relations, Precision Marketing and Healthcare. Outside of the U.S., growth was led by Europe, which was primarily driven by Advertising & Media, Experiential and PR. Despite the headwinds in Experiential in Asia, the region saw strong results in Advertising & Media, brand consulting and Healthcare. Looking at revenue by industry sector on Slide 8 relative to the second quarter of 2021. The broad distribution of our clients remained relatively stable. As a percentage of the total, we did see an increase in technology, offset by reductions in both retail and travel and entertainment. Two sectors that have both been impacted by the economy and by some lingering pandemic effects. Let's now turn to Slide 9 and look at our operating expenses for the quarter. In total, our operating expenses were relatively flat, which is a good result given the strong growth in our business, tight labor markets in several regions and our continued investment in our strategic focus areas. Salary and related service costs were 50.5% of revenue compared to 50.9% last year after adjusting 2021 for amounts related to acquisitions and dispositions. Third-party service costs were 21.4% of revenue compared to 20.1% last year, also after adjusting for amounts related to acquisitions and dispositions with the increase reflecting growth in our businesses. Occupancy and other costs, which are less directly linked to changes in revenue, were flat year-over-year. We will continue to manage our real estate footprint in alignment with how people are working in our offices post pandemic. And it's also worth mentioning that our rent expense was down this quarter. S&A expenses were up 7.5% year-over-year, following the increase in our business activity, including higher marketing and professional fees compared to last year. Turning to Slide 10. Our second quarter operating profit was $541.6 million, a 4.6% increase from last year and our operating profit margin of 15.2% on total revenues was well above the comparable amount for last year of 14.5% as adjusted. Please turn now to Slide 11 for our cash flow performance. As you know, we define free cash flow as net cash provided by operating activities, excluding changes in working capital, which are generally positive for us on an annual basis. Free cash flow for the first six months of 2022 was $768 million, down $28 million or 3.5% from the first half of last year. However, $48 million of the charges we recorded in the first quarter for the effects of the war in Ukraine were cash-related. Absent this, we were up a bit year-over-year. Regarding our uses of cash, we used $294 million of cash to pay dividends to common shareholders and another $38 million for dividends to non-controlling interest shareholders. Our capital expenditures of $43 million were at normal levels. Acquisitions net of dispositions and other items were $289 million. And lastly, our net stock repurchases during the first quarter were $393 million, including another $100 million in the second quarter. As we said on our call in April, for the full year 2022, we expect we will spend at our historical annual range of around $500 million to $600 million. On Slide 12 is an overview of our credit, liquidity and debt maturities. There were no changes in our outstanding debt during the second quarter, and our gross leverage at June 30 was 2.4x. In addition to $3.3 billion of cash and short-term investments, we also have a $2 billion U.S. commercial paper program, backstopped by our $2.5 billion revolving credit facility. I'll end my prepared remarks today on Slide 13, which shows our strong return on invested capital of 24.4% for the 12 months ended June 30, a 41.9% return on equity. These are very strong and very competitive returns and reflect Omnicom's consistent operating performance and approach to capital allocation. At this point, operator, please open the lines up for questions and answers. Thank you.

Steven Cahall:

So maybe first question, you could just talk a little bit about how the business compares today to what it was like in previous cycles. A lot of change in the industry, a lot of it has changed in the complexion of the Company as you've bought and sold certain businesses. So maybe, John, I would just love to get your take on how different the business is maybe to some of the last times we were heading into a more volatile macroeconomic environment? And then to kind of follow up on that, you gave the flattish margin guidance for the year on a really strong organic growth number. What I'm wondering is, let's just say that maybe next year the growth isn't going to be so good because of the macro for the industry. Does it also mean that the margins are pretty steady? Have we just kind of reached a point where the margins are kind of steady through the cycle? Or should we expect margins to be down a bit if organic growth slows down? I would just love to get your view on the margins. Thank you.

Phil Angelastro:

Yes, just one clarifying point. You referred to margins in 2022 being flat. When you carve out the second quarter non-recurring gain from the disposal of a business we had last year and you keep margins flat, that represents somewhere around 30-plus basis points of improvement year-on-year, lifetime. So -- and like John said, certainly, we're always focused on ways to be more efficient, utilizing outsourcing and offshoring and automation. And there's just an awful lot of uncertainties out there in the future, but we're always trying to be more efficient and then deliver that improvement prospectively.

Jason Bazinet:

Well, I haven't lived through as many recessions you guys have, but I've lived through three, and let me -- at least on the sell-side, and let me just ask this question. The behavior on the buy-side, historically is a company misses, another company misses and then the buy-side wakes up and says, hey, it's a recession. This is the only time I can remember where the buy-side is convinced that there's a recession when there isn't as much tangible evidence on the ground of a slowdown. And so, I guess my question for you is, does the buy-side's pessimism seem reasonable to you based on what you're hearing from your clients, I guess not this year, but potentially next year?

Operator:

Next, we'll go the line of Tim Nollen with Macquarie. Please go ahead.

John Wren:

Sure. Tim, as we look out, there's going to be a couple of areas where advertising is going to be absolutely necessary, especially as you get into things like the streaming wars that I anticipate will be coming next year. Also as the subscription services have to become ad-supported, that will create opportunities for our clients. And with the data and our capabilities to optimize client spending we should be able to take advantage of that to the benefit of the client proving that $1 invested gets such a $1 return. So also when they compare to prior periods, as I said -- mentioned just briefly a couple of minutes ago, I truly think we have a more balanced and fit-for-purpose portfolio today than at any other point in my career. And we are able to pivot. We're a great deal more agile. And whether it's digital or whatever the requirement is in reaching the customer and we're terribly focused on Precision Marketing. Which when you boil it down, is selling things. And that's why we exist to attract clients to products and to move them our shelves or out of warehouses and sell and I'm pleased. I'm never 100% satisfied. That's why we're always making investments. And our reference to e-commerce is very important, not only this year and next year, but once you look at projections about where this marketplace is expected to go in the next couple of years, we're making investments that will keep us fit for purpose as we move forward. So I don't know if that covers it, Tim, but...

John Wren:

Certainly.

Tim Nollen:

Which is about -- it's just -- probably just nitpicking and I might know the answer, but it's looking at your revenue in Q2 and year-to-date. It looks like Asia-Pac was the laggard in Q2, and it looks like it slowed meaningfully from Q1. And just -- is this related to China lockdowns? Or just if you could just let us know why that particular reason sticks out versus the rest?

Operator:

Next, we'll go to the line of David Karnovsky with JPMorgan. Please go ahead.

John Wren:

I believe that the investments clients are making are structural and they will continue. And we haven't announced it, we've already won business. It doesn't really start until the first quarter of next year. So I have reason to believe my statement. The first part of your question, I'm sorry, if you would.

John Wren:

Sure. No other macro trends that I can point out. There are always puts and takes in terms of what clients are doing. And I'd say on balance, because of the portfolio and because of the agility that we've developed, we're able to shift with the clients as that occurs.

Operator:

Next, we'll go to the line of Ben Swinburne with Morgan Stanley. Please go ahead.

John Wren:

Sure. Our area of focus hasn't changed at all. We -- I commented the areas we're most interested in, in my prepared remarks. And I think that's fairly consistent with where we've been all year. I do think that -- although I'm waiting for it to come through, that people on potential targets are adjusting their expectations, albeit not quick enough for us in terms of the cost of capital and what that's going to do to the fantasy land that occurred for -- if I get back 24 or 30 months, we're coming back into more normalcy as the Fed increases rates, and then other areas in the world to defend their currencies and markets also could increase rates. That's going to make deals more reasonable than they were this time last year.

John Wren:

Well, you've known us for quite a while. And again, we're going to refer back to my prepared remarks, we remain cautious, and you know that we're cautious. We increased the guidance from -- in each of the past two quarters. Modestly, you could argue, given where we are for six months. And it is us just simply being cautious. We're not ones to overextend ourselves. And for those that have followed us for a long time, not for the third quarter, but in terms of the fourth quarter, there's -- for the last, God knows how many years, always caution about the amount of project business that happens at the end of the year. I'll know better by the time we get to October. But we weren't going to project that was going to come through at this point because we prefer to be cautious and then over-deliver if we can.

John Wren:

It did oddly enough. I mean it's -- in the last over two decades, I think it's come through in all but two years. So -- but again, that becomes is there going to be heat in Europe in the fourth quarter or not.

John Wren:

And thank you for getting that question out of the way.

Benjamin Rosner:

Great. Following up on an earlier question on margins as it relates to the recession as well. So in prior economic downturns, you've been able to effectively manage margins given the variable cost nature of your business model. But now you expect to have over 10,000 engineers at the Company this year. This is much more compared to less than 1,000 engineers around five or so years ago. So my question is does having more engineers or technical talent, does that meet your operating cost model more fixed and less variable than it was in prior economic downturns? And in this context, how are you thinking about managing margins, if there is a recession?

Operator:

And next, we'll go the line of Dan Salmon with BMO Capital Markets. Please go ahead.

John Wren:

It's really -- it's a client-by-client discussion. And I believe every client knows and understands as they go forward, that it's going to be an increasing part of how they reach and service their customers. The packaged goods area that you're referring to is a reasonable size of our portfolio. It's not disproportionate in terms of the balance in the portfolio. So it's part of the puts and takes that we've seen. And -- but as I look forward and as the team looks forward, it's a very important area. We are prepared and we've targeted acquisitions in this area. We're making investments in building out technology in the commerce area to be supportive of that anticipated business. And I don't think you can compare us to that environment and the impact that it had on certain parts of the market during COVID because people couldn't get out of their houses. There is going to be a lull in those companies. It's more an ever-increasing important place to our clients and so therefore to us as we move forward.

John Wren:

And the proof point of this is how many boxes I have to break up every week that are delivered from a house.

Operator:

Next, we go to the line of Craig Huber with Huber Research Partners. Please go ahead.

John Wren:

Yes. Except for the executional business is to require social gatherings, which are affected by closedowns, which Phil talked about. The math of what you're talking about is absolutely correct and it's reflected in us being cautious. I think there's only one short paragraph in my prepared remarks, as you can go back and look at where I emphasize that word. And we endeavor every day to exceed our forecast. So that's not a prediction in this environment. I don't know if I did justice to your question.

Craig Huber:

Sure. My other question is on Asia. In the second quarter at 4.7% organic number, if you took out China, can you tell us the rest of Asia-Pacific be similar up low double digits, similar organically to the rest of the portfolio? How would it attract taking out China?

Phil Angelastro:

So, I think it's safe to say the rest of the portfolio in Asia performed consistently in terms of organic growth with the rest of our portfolio and the reported numbers.

John Wren:

Certainly, I'm going to thank you all for joining us today. We really appreciate your time, and we look forward to seeing you at investor events over the coming weeks and months. Thanks a lot.

Operator:

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

Gregory Lundberg:

Good afternoon. Thank you for joining our first quarter 2022 earnings call. With me today are John Wren, Chairman and Chief Executive Officer; and Phil Angelastro, Executive Vice President and Chief Financial Officer. On our website, omnicomgroup.com, we've posted a press release along with a presentation covering the information we'll review today as well as a webcast of this call. An archived version will be available when today's call concludes. Before we start, I'd like to remind everyone to read the forward-looking statements, non-GAAP financial and other information that we have included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements, and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2021 Form 10-K. During the course of today's call, we will also discuss certain non-GAAP measures. You can find the reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John then Phil will review our financial results for the quarter. After our prepared remarks, we will open the line up for your questions. I'll now hand the call over to John.

Phil Angelastro:

Thanks, John, and good afternoon. Thank you for taking the time to join us today. Our first quarter results were very strong. It's good to see the continued momentum, which resulted in growth across every one of our disciplines. Before we go into the details, please turn to Slide 3, where I'd like to draw your attention to the fact that our operating profit and EPS were negatively impacted by the announcement of our withdrawal from Russia as well as charges related to the effects of the war in Ukraine on our agencies there. We have sold or are committed to dispose of all of our businesses in Russia. And during the quarter, these actions resulted in a pretax charge of $113.4 million. As a result, operating profit of $353 million was down $112.4 million or 24.1% compared to Q1 of 2021. Our tax rate was elevated due to the non-deductibility of the charges plus an additional $4.8 million tax charge related to our withdrawal from Russia. Reported revenues were down slightly as strong organic growth of 11.9% was offset by the negative impact of foreign exchange rates and disposition revenue in excess of acquisition revenue. Turning to Slide 4, which shows non-GAAP adjusted amounts. You can see after adjusting for the charge, our first quarter operating profit was $466.4 million, slightly above last year. And our operating profit margin was 13.7%, also slightly above last year. Amortization expense was flat year-over-year, and as a result, non-GAAP adjusted EBITDA and EBITDA margin were flat with last year. As a reminder, last year's 15.4% operating profit margin included a gain from the sale of a subsidiary of $51 million, which was recorded in the second quarter. As John said, we are still comfortable with our guidance of 15.4% for the full year 2022. Slide 5 shows the non-GAAP adjusted amount for net income of $292 million for the first quarter and diluted EPS of $1.39 per share, up 4.5%. We are pleased with this underlying performance and the strong organic growth across our businesses and geographies as well as work and travel environment that continues to normalize. Let's now go into some more detail, beginning on Slide 6. Our organic growth was a strong 11.9% or $408 million. The impact of foreign exchange rates decreased our revenue by 2.5 percentage points. If rates stay where they were as of April 15, we estimate the impact of foreign exchange rates will reduce our revenue by approximately 3% in the second quarter and by 2% for the year. The impact on revenue from our net acquisitions and dispositions decreased revenue by 9.9%. This was consistent with our expectations and is primarily the result of disposition activity from Q2 of 2021 and our advertising and media discipline in the U.S., which we will cycle through after the second quarter. We expect this reduction from dispositions, including the disposition of our businesses in Russia, to reduce our revenue by approximately 6.5% in the second quarter of 2022. And we expect acquisitions, net of dispositions, based on deals completed to date, to be approximately negative 4.5% for the full year. Now let's look at the changes in our total revenues by business discipline on Slide 7. Advertising and media, our largest category, posted 9% organic growth in the quarter, with continued momentum in both our media and our creative agencies. Precision Marketing grew 20.3% organically in the quarter and is now approximately 10% of our total revenues, up two points from the first quarter of last year. Our strong growth is being led by demand for our capabilities in digital transformation, MarTech, data and analytics and activation. In particular, Credera continues to perform exceptionally well. Commerce and Brand Consulting was up 13.8%, led by our branding agencies and continued benefits from corporate spin-offs, brand architecture work and widespread focus on corporate reputation around DE&I and ESG issues. We're also seeing increased demand from clients looking for retail media, e-commerce and DTC solutions. Experiential had organic growth of 68% compared to negative 33% in Q1 of 2021, reflecting an increase in the number of global in-person events. These events are important to our clients' brands because they engage with customers and build loyalty in unique ways. Results were especially strong in the Middle East. As we look forward this year, we expect growth to continue but will likely be choppy by quarter as clients adjust to the post-COVID environment. Execution and support was up 6.3%, led by demand in field marketing and a pickup in physical retail activity. PR was up a very strong 14% and reflecting growth from both long-standing and new clients and a pickup in overall activity as clients adapt their post-pandemic positioning. Healthcare grew 7.7% with strong performance across our agencies. Turning to Slide 8. We saw strong organic growth rates in virtually every region, and we're pleased that growth was solid within each of these regions and across all of our disciplines. In the U.S., our 10.6% organic growth was led by Precision Marketing, Advertising and Media and Public Relations. Outside of the U.S., growth was led by Europe, and its growth was driven by advertising and media, experiential and PR. The Asia-Pacific region was also a key driver, as was the Middle East, which saw strong growth in experiential and advertising and media. Looking at revenue by industry sector on Slide 9. Relative to the first quarter of 2021, the broad distribution of our clients remained fairly stable. The only notable shifts were a two-point increase in technology, offset by a reduction in revenue from clients in the travel and entertainment industry. But this change was largely driven by the disposition of a business that had a high concentration of clients in this industry in Q1 of 2021. Let's move down the income statement now on Slide 10 and review our operating expenses for the quarter. In total, our operating expense levels were down by 20 basis points year-over-year despite the significant pickup in our business activity and the continuation of our strategic investments in the business. When you look at operating expenses as a percentage of revenue, the year-over-year comparison is not comparable because the impact of dispositions made subsequent to Q1 of 2021. Salary-related service costs, our largest category increased by 8.8%, consistent with growth in our revenues, excluding dispositions and acquisitions. Adjusting 2021 for amounts related to acquisitions and dispositions, salary and related service costs were 53% of revenue, roughly the same level as this year. Third-party service costs were down $199 million or 22%. They decreased by approximately $315 million from dispositions and were offset by an increase of approximately $114 million from growth in our businesses. Adjusting 2021 for amounts related to acquisitions and dispositions third-party service costs were approximately 19% of revenue, similar to the level this year. Occupancy and other costs, which are less directly linked to changes in revenue were up 2.9% year-on-year due to an increasing number of people returning to the office, partially offset by lower rent and other occupancy costs as we continue to efficiently manage our real estate portfolio. The increase in SG&A expenses on a year-over-year basis was due primarily to a normalization of our business. At 2.8% of revenues this quarter, SG&A has been around this level for 12 months now and is in line with our pre-pandemic run rate. There's one thing I would like to highlight regarding interest expense going forward. Please remember that our interest expense in Q2 of 2021 had a $26 million onetime charge related to the early redemption of our 3.625% notes. Our total interest expense that quarter was $80 million compared to just $51 million this quarter and $43 million net of interest income. We expect net interest expense for Q2 and the remainder of 2022 to approximate that run rate. We expect our tax rate for the remainder of the year to approximate 26.5% similar to our rate this quarter after adjusting for the charges arising from the effects of the war in Ukraine. Our diluted share count was down 3.2% primarily due to our share repurchase activity in the second half of 2021 and in the first quarter of 2022. Let's now turn to Slide 11 for our cash flow performance. We define free cash flow as net cash provided by operating activities, excluding changes in working capital, which are generally positive for us on an annual basis. Free cash flow of $340 million was down $43 million Adjusting for the cash-related portion of the charges arising from the effects of the war in Ukraine of $48 million, free cash flow was flat year-on-year. Regarding our uses of cash, we used $147 million of cash to pay dividends to common shareholders and another $14 million for dividends to non-controlling interest shareholders. Our capital expenditures of $23 million were back to normalized levels. Acquisitions net of dispositions and other items were $259 million. As highlighted at the back of this presentation, this included the purchase of TA Digital and is aligned with our stated strategy of pursuing acquisitions in our faster-growing disciplines. And lastly, our stock repurchases during the first quarter were $287 million net. This puts us on the way toward our historical annual range of $500 million 500 million to $600 million. This capital allocation mix may vary in emphasis as opportunities present themselves. But our overall approach and philosophy have not changed. Slide 12 is an overview of our credit, liquidity and debt maturity schedule. There were no changes in our long-term debt outstanding during the quarter. As of March 31, our total leverage was 2.5 times. In addition to the $4 billion of cash and short-term investments on the balance sheet, we also have a $2 billion U.S. commercial paper program backstopped by our $2.5 billion revolving credit facility. I'll end my prepared remarks today on Slide 13, which shows our strong return on invested capital of 26.4% and for the 12 months ended March 31 and 41.7% return on equity. These returns are both extremely strong and are a reflection of our consistent operating performance and consistent approach to capital allocation. At this point, operator, please open the lines for questions and answers. Thank you.

David Karnovsky:

Just on the outlook, given the really strong results in Q1, it does appear you're assuming and not a significant deceleration in organic for the rest of the year on what I think are relatively similar to your comps. Just wondering, John, if you could speak a little bit more to the conversations you're having with clients on inflation, supply chain, and the economy and kind of how that's impacting your view on guidance?

David Karnovsky:

Okay. And then maybe just a follow-up on the outlook. I would be interested to get your views on areas like experiential and execution and support, at the end of 2021, these segments were running still well below 2019, and we did see a big acceleration for events in the quarter, maybe less so for execution. Just wondering, how much of a lift towards pre-pandemic levels you're expecting or seeing as restrictions fully go away?

Phil Angelastro:

I think our expectations for those two disciplines are certainly more subject or we've got less visibility. It's probably a better way to describe it when you get to the second half of the year. Certainly, the businesses have done a good job getting ready to come out of COVID, and they've been growing coming out of COVID. So we're happy with their performance. But as we look at the second half of the year, since they're largely project-based their forecasts are probably more conservative than most and I think subject to a little bit more uncertainty in terms of clients' spending plans especially experiential given some of the changes that could occur like the ones here that are being experienced in China right now. So, those two disciplines in particular, we're certainly happy with our operating performance, but in the second half, there's a little less visibility to how they're going to perform sitting here today.

Jason Bazinet:

I guess I just -- I want to ask this question because I'm going to get asked by a cynic, I'm sure tomorrow, if I don't ask it. So the increase in the outlook, which is unusual, as you said, usually don't do it in the first quarter with the sort of flat margins at 15.4 relative to your prior outlook. I think a cynic would say this is just because inflation ran hotter than you anticipated. Is that a wrong interpretation of the lift in the organic growth?

Phil Angelastro:

Yes. One reminder, I think, in terms of the expectations of operating margin for the year, the prior year baseline of 15.4 included a gain on sale of business of $50 million. So, there is some operating performance improvement expected for the year. But yes, I don't know if that's what you're after or you just focus perfect.

Phil Angelastro:

Sure.

Tim Nollen:

It's a very strong result in Q1. And if you look at the Q1 acceleration versus the Q4 number, and I don't normally do this -- but if you look on a kind of a stacked basis, in Q4 '21 versus Q4 '20, you were basically flat organic. And in Q1 '22 versus Q2, you're basically up 14%, if I'm looking at my numbers right. So, it's a really surprisingly strong growth figure. And I just wonder, given a whopping year-over-year comparison coming up in Q2, you were at 24.4% last year. I wonder if you can give us any idea how to think about Q2. Again, understanding everything you've said thus far on the full year outlook and all the uncertainties in the second half and so on? That would be very helpful.

Tim Nollen:

Yes. No, that's helpful. I mean I understand there are a lot of other factors. It's just -- it's a very difficult comparison coming up in Q2. So I guess it's good to hear the optimism on the growth rate for the second half of the year? Just trying to understand how to think about the Q2 growth rate given that high base.

Phil Angelastro:

Yes. I think from a revenue perspective, Tim, certainly, the first quarter of '21 as far as the baseline goes, that was the last quarter of some of the COVID hangover as we were coming out of COVID, principally starting in Q2 of last year. So, the bar wasn't quite as high relatively speaking, for this quarter's performance relative to last year. We're certainly very, very pleased with the results. As we head into the second quarter, the second quarter of last year was again -- the first quarter really post-COVID, where performance jumped quite a bit because the 2020 numbers were down a great deal and weren't all that comparable. So it is a quarter where the business had kind of finally bounced back in terms of the baseline we're facing in Q2 of '22. But certainly, the performance in the first quarter is very encouraging, and we've got some momentum. We expect that momentum to continue as we look at the second half of the year. As John said, there's a little more uncertainty in the back half and a little less visibility from where we sit today.

John Wren:

Well, the one great thing in terms of numbers is that those are not a significant percentage of our business. And as I might have mentioned in my prepared remarks, I've had an opportunity two weeks ago to meet all of the leaders from all of the disciplines from Romania all the way up through Poland that border the Ukraine. And they're all bullish about their business, but their primary concern was taking care of the Ukrainians that were coming across the border because they've had surges suddenly in the populations and what the requirements are. So big five, which are the U.K., Spain, France, Germany and Italy, although Belgium and the Netherlands are also very, very strong performance, so -- and they're all at the moment, and great shape.

Dan Salmon:

Okay. I have a couple of questions. First, John, in the past, you've talked about it being important for Omnicom to remain agnostic to different technologies, whether that's AdTech or MarTech, you also generally held that view about third-party data assets as well. So my question is, does the Omni ID represent a little step in that direction? I'd like to hear about -- a little bit about it specifically, but it's more of the bigger picture view that I'm interested in. And then a second, just for Phil, you mentioned the uptick in the technology vertical as a percentage of revenue. Is that just a matter of where the verticals landed this quarter? Or would you like to see that trend continue?

Dan Salmon:

Yes, fair enough.

Dan Salmon:

Just on tech -- yes, technology.

Operator:

And next, we'll go to the line of Steven Cahall with Wells Fargo. Please go ahead.

John Wren:

Well, I agree with the last statements. With everything that's going on in the world, specific warrants to be a little bit conservative. But we're very happy with our media business overall. And it's been very successful, both with its existing clients and then new business opportunities that's been presented. When you look at history, inflation has always been good for that element or part of the business. And we don't see anything materially changing at the moment. The other thing which is yet to be seen, I've been predicting it since it really started is what I'm anticipating to be the streaming wars. And in the environment where the consumer might have a little -- has to be a little bit more cautious of the amount of money they spend to get what they want, I think you're going to see more and more advertising in some of these services. People like Hulu and others have proven that it works, and I think the others will adapt it. They were always -- in my view, they're always going to adapt it. I think this -- the environment we're in today will speed that process up. So very comfortable with our portfolio though.

John Wren:

Okay. Well, you asked me about a segment in my business and the impact of inflation. As I said earlier, we build our forecast from the bottom-up, looking at what our reality is. And we're comfortable that we've taken into consideration, and that's why we're holding -- we're actually improving our margins by holding our margins the same as last year because of the unusual gain that we had from the sale of a subsidiary last year. So, there's an awful lot of moving parts and components. And we spent a great deal of detail time testing the information that we're getting from our various subsidiaries in the markets that we operate in. I don't know if Phil wants to add anything.

Operator:

And next, we'll go to the line of Ben Swinburne with Morgan Stanley. Please go ahead.

Phil Angelastro:

So specifically, with respect to Russia and the Ukraine, now the 15.4 excludes the $113 million charge we took this quarter for us Russia. We may be good, but we're not that good. So that was obviously totally unexpected when we were on the call in February. And it hasn't -- it has not been an easy situation to deal with largely because of the people and what John had mentioned in his prepared remarks and then earlier on this call. So the 15.4 excludes that charge. And with respect to Europe, we haven't seen any meaningful or significant changes in our forecast from Europe. We've had a number of conversations with people who run our businesses in. John can add some color in his conversations with clients in that region, but we haven't seen any big changes in our forecast from our European businesses at this point.

John Wren:

Ben, to be perfectly honest, I did not see that article yesterday. I will go back and read it now and see what it says. In the conversations that I've had with our clients, we see both being -- I have not noticed any deterioration at all in terms of e-commerce. And so, the quick answer to your question is, I've not seen evidence today to support the article.

Phil Angelastro:

I'll go first in comments. I think the direct answer is no. We don't see significant increases in growth trends relative to what our expectations were, the last few quarters. I think they're solid businesses. They are, in some respects, project-based and clients might change their investment a little bit more quickly than some of our other businesses. But they've done well. We expect them to continue to do well. Their growth profile that was probably a little lower than certainly other parts of our business. As you can see when you look at the revenue breakout that we provide, our expectations for the second -- for the rest of the year for them are not as robust as the rest of the business.

Craig Huber:

John, my first question, with all the privacy data changes out there, both with iOS, for example, but also government-mandated privacy changes out there over the last couple of years. Is that good, bad or sort of indifferent for your business? How do you sort of view that right now?

Phil Angelastro:

Yes, I think the changes are only going to make it more complex for clients to reach the consumers they're trying to reach. And in that environment, we certainly think it benefits us because we're an independent third party with the skills and the tools and the technology to help them make the appropriate decisions they need to make to continue to find and reach those consumers. So the complexity certainly, we view it as a positive.

John Wren:

There are several components to organic growth. One of which is new business wins and the other, which is inevitable in every one of us and our competitors periodically or losses that you experience at some point during the prior year because you haven't had yet a full year either. We've entered '22 in a very strong position, having had a very successful 2021 -- and that's given us a lot of confidence. But this is not just us sitting here at corporate defining what's going on in the ground, on the ground, our forecasts are built truly from the bottom up, and there's weekly dialogue with all the leaders of our practice areas and networks about changes, even subtle changes that are going on. So, we're as close as we can be to what's going on.

John Wren:

And we're pretty damn good at math.

John Wren:

Well, I really want to thank all of you for spending the time with us and speaking with us today. And we look forward to speaking with you in the coming weeks.

Operator:

Thank you. And that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.

Gregory Lundberg:

Thank you for joining our fourth quarter and full year 2021 earnings call. With me today are John Wren, our Chairman and Chief Executive Officer; and Phil Angelastro, our Chief Financial Officer. On our website, omnicomgroup.com, we posted a press release along with a presentation covering the information we’ll review today as well as a webcast of this call. An archived version will be available when today’s call concludes. Before we start, I'd like to remind everyone to read the forward-looking statements, non-GAAP financial, and other information that we have included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings, including our 2020 Form 10-K and our September 2021 Form 10-Q. During the course of today’s call, we will also discuss certain non-GAAP financial measures. You can find a reconciliation of these to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John. Then, Phil will review our financial results for the quarter. And after our prepared remarks, we will open the line-up for your questions. I'll now hand the call over to John.

Phil Angelastro:

Thanks, John, and good afternoon. Thank you for taking the time to join us today. Our fourth quarter results continued the momentum of the third quarter and helped us finish the year in a strong position. While the world isn't the same as it was pre-pandemic, we are in a stronger position to serve our clients in 2022 and beyond. Let's begin with a brief look at our income statement on Slide 3. Growth in revenues and operating profit flowed through to net income for both the quarter and the year. Combined with the resumption of our share buyback program, we had 6% growth in diluted earnings per share. Dividends grew 7.7% in 2021, and we're pleased to resume this growth after maintaining our dividend payments throughout the pandemic. Please turn to Slide 4, and we'll go through our results in more detail, starting with revenues. Our total revenue growth in the quarter was 2.6%, while our organic growth for the quarter was 9.5% or $358 million. The impact of foreign exchange rates decreased our revenue slightly in the quarter by just 30 basis points. However, if rates stay where they were at January 31, we estimate that the impact of foreign exchange rates will reduce our revenue by approximately 2% in both the first and second quarters of 2022. The impact on revenue from our net acquisitions and dispositions decreased revenue by 6.6%. This was consistent with our expectations and is primarily the result of disposition activity from Q2 of 2021. We have also acquired some excellent businesses in key growth areas, which I will discuss later. Based on transactions completed to date, we estimate the impact of acquisitions net of dispositions will reduce our revenue by approximately 9% in the first quarter and by approximately 5% in the second quarter of 2022, and we expect positive acquisition growth in the second half of 2022. Slide 5 presents the changes in our total revenues by business discipline. Advertising, our largest category posted 7.4% organic growth in the quarter. Both our media agencies and our creative agencies contributed nicely to this growth. Precision Marketing grew 19.6% organically in the quarter and is now 8% of our total revenues. As John discussed, the businesses in this discipline are doing exceptionally well and have a great pipeline for their work in digital and marketing transformation, consulting services, e-commerce, marketing sciences and digital experience design. Commerce and Brand Consulting was up 12.4%, with widespread strength across our larger agencies. In Commerce, our agencies experienced strong growth, although off a reduced base. In Brand Consulting, we're seeing benefits and good activity in the technology sector and from corporate branding aimed at reputation, ESG and DE&I. Experiential's growth in excess of 50% benefited from a return of some in-person events throughout the fourth quarter before the Omicron variant took hold, and we expect continued growth in 2022, although likely choppy as brands look to engage with consumers in person. Execution and Support was up 5.2%, with growth in the US businesses exceeding the performance of our businesses in Europe, where our field marketing business was impacted by the new variant. PR was up 4.4% and Healthcare was up 4.5%. Both of these disciplines reflected strong performance across their agencies. It's worth remembering that they performed relatively well throughout the pandemic. So we are pleased with the results. Flipping to Slide 6, you can see that we grew organically in each of our regions and growth came from most of our disciplines within these geographies. In the US, our 7.8% organic growth was slightly higher than last quarter, led by advertising and media as well as precision marketing, where growth remains over 20%. Also results for Experiential business in the US this quarter were quite strong, as I mentioned. Outside the US, growth was led by the UK and the Asia Pacific region, with strong PR, media and commerce and consulting results in the UK and broad strength across the board in Asia. It's worth mentioning, the strong organic growth of 48% for the Middle East and Africa, our smallest region. Revenue in Q4 of 2020 was down over 35%. In Q4 2021, Advertising and media performance was strong. In this quarter's results were also positively impacted by experiential revenue related to the Dubai Expo, which was initially scheduled for 2020. Looking at revenue by industry sector on Slide 7. Relative to full year 2020, there was a 2-point increase in our revenue mix from technology clients, offset by a 1 point reduction in the revenue mix from pharma and health. Let's now turn to Slide 8 for a review of our operating expenses. Salary-related service costs, our largest category, increased by 11.1%. As expected, these costs, which include freelance support increased along with our increase in revenue as the travel and entertainment costs, which aligns with the fact that our people are slowly going out in certain markets and meeting with clients in person. The next line item, third-party service costs were down 11.2%. They decreased by approximately $220 million from dispositions and were offset by an increase of approximately $100 million from growth in our businesses. Occupancy and other costs, which are less directly linked to changes in revenue, were up 4.2% year-on-year due to higher general office expenses as we return to the office, offset by lower rent and other occupancy costs as we continue to use our spaces more efficiently. SG&A expenses were up 8.4% on a year-over-year basis due to an increase in marketing, professional fees and new business costs. In total, our operating expense levels were up slightly, less than 3% from the fourth quarter 2020 to 2021. We're comfortable with this growth because it is linked to a return to the pre-pandemic environment as well as our continued revenue growth, new business opportunities and investments for future growth. If you turn to Slide 9, you can see our operating profit growth and our margin performance. For the quarter, operating profit increased 1.3% and represented a 16.1% operating margin. This is a slight margin decline from the fourth quarter of 2020, when expense levels were well below normal. Our fourth quarter EBITDA change and margin performance was similar. For the full year operating profit was up 37.5% with a margin of 15.4% and EBITDA was up 35.4% with a margin of 15.9%. As we look forward, while we expect to continue to see a return of certain costs to more normalized levels, we also expect that they will be offset in part by reductions in certain discretionary and infrastructure costs, resulting from new ways of working and efficiencies achieved during the pandemic. As John mentioned earlier, for the full year 2022, we anticipate delivering the same strong reported operating profit margin of 15.4% that we delivered in 2021. And as always, we will continue to focus on growing our operating profit dollars. Let's now turn to our cash flow performance on slide 10. We define free cash flow as net cash provided by operating activities, excluding changes in working capital, which are generally positive for us on an annual basis. Free cash flow of $1.8 billion, grew 5.4%. We're pleased with the strength of this important metric. Regarding our uses of cash, we used $592 million of cash to pay dividends to common shareholders and another $113 million for dividends to non-controlling interest shareholders. We maintained our dividend throughout the pandemic in 2020 and increased it by 7.7% in 2021 to a quarterly rate of $0.70 per share. I'm going to discuss capital expenditures in two pieces. Our normal capital expenditure levels were unchanged from 2020. Additionally, in the fourth quarter of 2021, we had a very unique opportunity to purchase our primary office building in London for approximately $575 million. Subsequent to the purchase during the fourth quarter of 2021, we issued 325 million-pound sterling notes due in 2033, with an attractive 2.25% coupon. To give you some background, we have more than 5,000 people at work there for multiple agencies. It's our largest office building globally in our second largest market. We've been consolidating space in London for some time and have exited 31 buildings since 2015. London is a key market for our future. And this building is in the South Bank area west of London Bridge near the Tate Modern, culturally vibrant area of London key to attracting and retaining talent. Financially, it's an attractive opportunity for our business. And we will avoid expected market increases on our rent that didn't compare favorably to outright ownership. The purchase of this building has not changed our capital allocation strategy and did not impact our credit rating. Acquisitions picked up relative to 2020 at $202 million. As we talked about last call, we are investing in the areas most important to our clients and therefore, to our future revenue growth. Two acquisitions in the fourth quarter of 2021 are highlighted at the back of this deck. JUMP 450 Media, performance media agency that is now part of Omnicom Media Group. And BrightGen, a digital business transformation specialist that is a significant implementation partner for the Salesforce marketing stack. BrightGen is now part of our precision marketing group. And lastly, we ramped up our stock repurchases during the fourth quarter, bringing the year to $518 million. As you know, our pre-pandemic annual range was $500 million to $600 million. So, we are solidly back on track with this important total return component for our shareholders. Our historical capital allocation has been very consistent. Using our free cash flow for dividends, stock repurchases, and acquisitions. We don't expect this to change going forward. Although we do see more opportunities for acquisitions similar to those we completed in 2021. These tuck-in type acquisitions are efficient for us because the acquired agencies and their service offerings can contribute across our group to serve an embedded base of clients and to help win new ones. Slide 11 shows our credit and liquidity. Notwithstanding the sterling note I just mentioned. You can see that our other financing activities throughout the year lowered our outstanding debt from December 2020 to December 2021. At year-end, our total leverage was 2.4 times. In addition to the $5.3 billion of cash on the balance sheet at year-end, we also have a $2 billion commercial paper program backed up our $2.5 billion revolving credit facility. I'll end my prepared remarks today on slide 12. We chose our strong return on invested capital of 33.4% for the fiscal year 2021 and 44.3% return on equity. Both of these took notable steps up in 2020 and remain very healthy indicators of the strength of our business and its attractiveness to shareholders. At this point, operator, please open the lines for questions and answers. Thank you.

David Karnovsky:

Hi. Thank you. John, I was wondering if you could provide some additional color around your organic outlook for 2022. What assumptions are you making around pandemic or supply chain headwinds? And does your outlook at this point account for a full return to our events and execution businesses?

David Karnovsky:

Yeah. No, that was great. And then for Phil, wondering if you could just speak a little bit more to the puts and takes on the margin outlook. How does the purchase of your London headquarters impact that? And then just to confirm, is the guide for consistent margin against your reported figure. I just wanted to check as you did have the $50 million gain from the ICON sale in there?

David Karnovsky:

That’s clear. Thank you.

Jason Bazinet:

I just had a question on the disposition headwinds. You talked about minus 9 in the first quarter, minus 5 in the second quarter. Does that assume more acquisitions sort of coming in, or is that just the normal seasonal profile of businesses that were disposed of that accounts for it?

Phil Angelastro:

There's some choppiness in/or seasonality in the dispositions in the first quarter of last year, while the number is a little bit bigger. But the way we calculate that number, we do an estimate based on transactions that have closed to date. So we certainly have a robust pipeline of acquisitions that we're looking at. Some of them, we will do, some of them won't work out. But as we look out at the year, knowing what we know today in terms of what's been completed today, that's our expectation for the first quarter and the second quarter. We expect that number will change. The net number will change as we complete some transactions as we complete some acquisitions, I should say, throughout 2022. So, we expect acquisition growth net in the second half, in the third quarter and the fourth quarter. And if we close on some transactions earlier in '22 that we've been negotiating, the negative number might come down a bit, but that's where we stand today.

A – Phil Angelastro:

Sure.

Ben Swinburne:

Thanks. Good afternoon. John, 5% to 6%, obviously, a very strong guide for '22. I think that would be your highest organic growth year since – obviously, other than the coated rebound '21 since back in '2015. When you step back and think about the repositioning of your portfolio, is that the biggest sort of difference between what we saw in the several years before the pandemic when growth was sort of 2% to 3% and what you expect now? Would you chalk it up to sort of changes in product offerings, or anything else you'd be interested in sort of your high-level perspective on that. And then I just was wondering if you guys saw a lot of variability on that 5% to 6% through the quarters because the comps from '21 are all over the place. So I'm just wondering if you had any advice in thinking about the quarterly progression? Thank you.

Ben Swinburne:

Right. Got it. Anything in the quarter, I don't know if you were, Phil, other comment or?

Ben Swinburne:

Okay. Thank you, both.

Operator:

Next, we'll go to the line of Michael Nathanson. Please go ahead.

John Wren:

Well, I'll try to answer your questions as best I can. I have enough trouble running Omnicom. So I don't really worry about the huge acquisitions that my competitors are making. When it comes to us, and I think there's an article, Forester and some of the other magazines and other publications have picked up yesterday, with a client speaking to the subject more than -- so it should carry more credibility than me saying something about it.

John Wren:

On Omnicom about on the investments we've made, the transparency that we stayed absolutely committed to in an ever-changing environment where the transparency. I mean where privacy rules are changing and being reinterpreted as we sit here tonight both outside the United States and even in certain of the larger states in the country. And we don't think that that's over. We think that's still an open subject. But we think we're in a great position to not have to defend any moves that we've made or revenues that we've purchased, and we can adapt our services and our partners to whatever the current market conditions require. But we all would agree that this is something that governments that have been playing around with it and talking about it and courts in certain jurisdictions are actually starting to look at a lot closer than any time in the past. So, we're very, very happy with it. I think the key takeaway, if you glance at that story that I referred to, is we've built Omni initially as a media product for audiences and other things. And what we've been able to successfully accomplish in the last several years as we've been rolling it out is it's become the operating platform, which informs every aspect of the services that we provide to clients that allow us to deploy it. And that's why in my comments, I noted that there are really two areas where we're going to get growth next year. One is in continuing to win new business, but as importantly, to extend services in areas that we're not currently servicing long-standing client relationships. So, the confidence is built on a pretty detailed look at ourselves versus our competitors in the marketplace, and we're very, very comfortable with the decisions that we've made.

Michael Nathanson:

Thank you both.

Operator:

And next, we'll go to the line of Steven Cahall. Please go ahead.

John Wren:

Sure. Let me take part of it and then Phil can supplement what I say and answer to the specific question you addressed to him. I think we ended the year at the same employer, employee level as we were pre-pandemic. And I think in the last year 2020 to 2021, we went from about 65,000 folks to a little over 70,000 employees. So that growth is there. There is no denying that there is wage inflation and that we've been coping with this and dealing with it. We're also not anticipating inflation, but anticipating how do we improve our productivity we've been making investments. As Phil mentioned in his comments, outsourced to automate to look to the future in terms of AI and what contribution they can make. So there are quite a bit of puts and takes in terms of what we expect to face from a salary and wage inflation point of view. And we've been very careful before we got on this call and said that we could maintain our margins -- our strong margins at last -- to 2021 levels. Phil, you might want to.

Steven Cahall:

Great. Thanks for that context.

Operator:

Next, we have a question from the line of Tim Nollen. Please go ahead.

John Wren:

No, it's okay. It's an important question to ask. We don't have any major dispositions under consideration. So that, for now is in the rearview mirror. We -- as we've said and we might have said it earlier, when maybe you were jumping around, we've been focused on the fastest-growing part of our business, which is the precision marketing, the data and analytics, business transformation, consulting, e-commerce because everybody is doing is really commerce and performance media and health care and our acquisition pipeline in those areas. And there are a number of conversations that are ongoing and we expect that we'll be closing deals after this call. And as we move through the rest of 2022, in these areas. If some of the great opportunity pops up, thank God we have the financial resources to look at it and take advantage of it because we have not – we maintained their agility and flexibility with respect to how we can use the needs of our clients and how we can best serve those.

John Wren:

I've never been happy reaching into my pocket and paying. I check more than I've had to. So the one thing that pivots off of the list of areas that I just recited is that the acquisitions we're looking at, we'll be able to look at them independently and be happy with them, but we'll also, more importantly, believe that we can leverage them with our existing client base and the existing needs of our clients.

Tim Nollen:

We watch every shackle, as you have been playing on.

Q – Craig Huber:

Thank you. John, my first question, just sort of big picture, I think most investors are being very happy if you guys delivered 5% to 6% organic revenue growth. Can you maybe share with us, if you would, the tone of the conversations with your clients as I sort of think about the marketing advertising budgets for this year, and how optimistic are they really leaning into brand awareness out there, driving transactions? Let me just touch on that first, please?

Craig Huber:

Sean, as you know, ever since Facebook reported a few days ago, there's been a lot of talk after that about TikTok and taking a lot of share out there of users' time on their mobile devices and so forth. I'm curious from your standpoint, from advertising going to TikTok or similar platforms like a Snap, Snapchat or what have you. Are they sort of viewed out there by your customers is more of experimental, or is it really sort of pick up steam after the advertising revenue shifting there?

Craig Huber:

Great. Thank you, John.

John Wren:

I want to thank you all for joining us. We'll see on the next call.

Gregory Lundberg:

Thank you for joining our third quarter 2021 earnings call. With me today are John Wren, our Chairman and Chief Executive Officer, and Phil Angelastro, our Chief Financial Officer. On our website, omnicomgroup.com we’ve posted a press release along with a presentation covering the information we will review today. A webcast of this call is also available there and an archived version will be available when today’s call concludes. Before we start, I would like to remind everyone to read the forward-looking statements, non-GAAP financial and other information that we have included at the end of our investor presentation. Certain of the statements made today may constitute forward-looking statements and these statements are our present expectations. Relevant factors that could cause actual results to differ materially are listed in our earnings materials and in our SEC filings including our 2020 Form 10-K, and our June 2021 Form 10-Q. Also during the course of today’s call, we will discuss certain non-GAAP measures in talking about Omnicom’s performance. You can find the reconciliation of these measures to the nearest comparable GAAP measures in the presentation materials. We will begin the call with an overview of our business from John, then Phil will review our financial results for the quarter. After our prepared remarks, we will open the line up for your questions.