Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website. So I'd like to welcome John Wren, Chairman and CEO, and Phil Angelastro, EVP and CFO, to the conference. Welcome both.
Thank you.
To start, you've gone through a number of dispositions and acquisitions recently, most notably the disposition of Icon and the recent acquisition of Flywheel. You know, what is the strategy behind this active M&A cycle Omnicom seems to be in, and, you know, how does it position the company to grow more quickly?
Sure. Phil and I both are perpetually looking at the portfolio to make sure, in our view, that we're typically looking five years out, looking at the portfolio, and saying, "Are we happy with it? Is it client-facing? Are we still getting the same return? Do we have the right people?" A whole bunch of criteria. And what type of investments do we think we need to make internally or externally for that company to be the proper company for the next 60 months?
That is the way we're constantly going about examining the portfolio. What you've seen recently, and if for how to answer the exact question, we're probably in an acquisition mode. That doesn't preclude that we might not sell the odd thing if we make a decision about it, but certainly in the acquisition mode. The Flywheel acquisition is terribly important.
Flywheel is a company that is—and not making this up—is the only company in the commerce space that is fully integrated and will assist clients in selling and improving their standings and therefore their performance in a digital store. And if you look at recent surveys, just look at Americans, they spend about two and a half hours a day on the computer through either social media or shopping.
And we're of the belief that that's an area that's only going to expand and grow quite significantly as we go into the future. And not, the brick and mortar's going to go away, not by any means, but every new store you see, you know, it's going to be a disproportionate amount that's built digitally rather than physically.
And we're the only ones that now can service clients and their needs in selling in that environment, and also in a very measurable way. It also fits and integrates very well with our Omni Assist and Omni platform, which we've been building for the last 15 years. And it really complements it and doubles the size of data that we have to optimize every day. When we've completed the deal on January the 2nd, we were ready to go by mid-January of fully integrating the information that's on this platform so they can be used from end to end.
What that means is we can use the data that we have in the platform that we've created to not only build your brand and reach, reach you who your potential customers are, but we can also evaluate and decide whether we should be investing in a particular area or whether or not you as a client have distribution and supply in that area if we create the demand that you're looking for. We're the only ones that can do it.
It really is a major step in the development of Omnicom. Now, I'm a pretty old hand. I've been around Omnicom for a very long time. If I look at quarterly calls, I've probably done 116, 117 of them. That's how old I am. But for the fourth quarter, I would have described in those conference calls Omnicom being an advertising and marketing company.
What I did this past fourth quarter, in anticipation of closing the deal on January 2nd, is I started defining Omnicom as it is now, which is a marketing and sales company. So and in doing that, it's more than just a subtlety of words.
Typically, most clients are struggling constantly with their marketing budgets, traditional marketing budgets, and also what used to be expenditures that retailers would require a certain expenditure to get positioning in a store, that has since converted itself to spending money on their media platforms, be it Walmart or whomever. And clients are increasingly looking. Those have been separate budgets, separate investments that the client had to make and were optimized individually. We're capable now of optimizing the joint budget and getting the most efficient and effective spend for the client.
Anytime I can measure it and prove it to a client, I found that if I can prove to you that a dollar brings in two, I found that most clients will actually spend more money with us because we're able to tap those budgets which here, up until now, we've had very limited access to.
So, so I'd say in acquisition mode, and so we're, we have a lot to do in, a lot of opportunity in making investments to enhance that existing platform, which nobody else has. And then we have our typical areas that I think we say most calls or we have recently in precision marketing, we're continuing to make investments and, some fill in, in different areas, you know, specialty areas. I don't know, Phil, do you want to add anything?
Yeah, the areas we're focused on as far as acquisitions are the ones we think have the most growth potential. Clearly, e-commerce and retail media with Flywheel, and precision marketing, healthcare, and, you know, PR as well. Those will be the areas we're mostly focused on.
Got it. John, you look great for them in the earnings call.
I'm sorry, yeah.
In the fourth quarter, Omnicom saw a reacceleration of organic growth and guided to a, you know, higher than expected 3.5%-5% organic growth rate for 2024.
Mm-hmm.
What makes you confident you will be able to achieve this growth, and what are your long-term growth expectations?
Sure. At this point, I'm very confident about achieving those objectives. What, two things have occurred within the company. We won quite a bit of new business in the end of the third quarter, the beginning of the fourth quarter. And because of the client notice periods, those revenues will start accruing to us April 1st because of notice periods to the, to the predecessor. So you have that.
We have no significant clients that are of any threat to us. And it's also an election year, which is very beneficial for a company like ours. And it's an Olympics. So you add those macro factors, offset by some caution because of the geopolitical situation. And we sit like everybody waiting, not dependent upon it, but the Fed to act at some point. Those are the mitigating factors before you get the client-specific or vertical-specific opportunities or concerns.
So we're very comfortable with the forecast and the guidance we've given. And we'll probably revisit it when we do our second quarter call, next month.
So we also expect our Precision Marketing Group to kind of rebound from its performance in 2023 and have a pretty robust 2024.
That's great. On that macro point, you know, what sort of macro environment is baked into the guide?
Well, you know, everybody's watching the Fed, right? And there was a lot more caution in terms of when people would release budgets and spend, this time last year than there is now because no one knows when they're going to act, but they know they're done increasing rates, or at least they believe they are. So they're looking at those opportunities differently than they were a year ago, for the most part.
And this is a generalization. So that is a macro trend. We need some kind of a ceasefire or settlement in the Middle East, and even though there's some returns there, we're moving in that direction. So that's a macro factor. But that makes us a bit a little bit cautious, not overly cautious. And as, as a company, we tend to be, in moments like this, cautiously optimistic.
That's how I would describe the guidance we gave at the end when we were disclosing our year-end numbers. So.
That's, that's great. It's helpful. You know, we're into March now. How would you say the tone of client conversations have been trending? How are they talking about the next 12 months? And are there any specific vertical ad category trends to call out, either positive or negative?
I would see green shirts in just about every vertical we service. Clients are considering many of the clients are considering the same things we are. Certain industries have different pains and adjustments that they're making. Clients who are dependent upon China, for instance, for being the largest market to sell their product or the second largest market, have shifted their objectives for those markets back to the U.S. for the most part.
That shift is not a terrible thing for our business either because it's more established. You look at the auto industry, for instance. China was going to be the place that they sold the most. China has dampened some of those expectations. If you look at Europe, you look at China, Vietnam, some other markets, they're trying to flood the European markets with cheap electric cars.
So that's just a rebalancing in terms of that vertical. Tech, I think, has gone through the pain that it suffered last year and is back on its feet again with no real anticipated large cutbacks. And they're making investments now that they've sorted that out. Pharmaceutical, the healthcare industry remains strong and I think will remain strong for the foreseeable future. The other categories and verticals that we're operating in are all no one's negative, I guess, is the way I'd put it. So they're either planning to spend what they did or they're planning to increase their investments.
Is the tech vertical, are they reinvesting in marketing, or is that more of a stable?
Yeah. Well, tech as a category, I guess, got called out by my competitors last year who suffered from it and continue to probably suffer from it. If I look at tech as a percentage of Omnicom, it was 8% of our revenues last year. Every quarter last year remained about 8% of our revenues. So we never saw the deprecation that some of my competitors did.
There is more optimism, I guess, in the tech sector, whether or not my competitors get back and solve the problems that they faced last year or not this year or it takes a little longer. That I can't project. But we see a steady state. And the key to Omnicom also, which I try to sell, but to what effect I don't know, is you have to take a look at the balance and geographic diversity of our portfolio.
Typically what's happened over our history, certainly over a business cycle, is as one sector suffers, something else grows to compensate for it. And we've intentionally built a portfolio so we're not overly dependent upon a particular vertical, a particular industry to sustain the overall growth that we promised to show. So, so it's all a long way to say it's all upside for us.
Definitely. Well, that's good to hear. Let's focus. Let's shift to some of the key areas of your strategic objectives. In particular, you know, you're investing in growth areas in CRM, precision marketing, performance media, commerce, data and analytics, digital transformation. Could go on. First in media.
Sure.
You know, how has the acceleration and shift to digital during the pandemic years impacted Omnicom's ability to add value to your clients?
It's a good question. Omnicom, when it comes to media and where we're spending our media dollars or deploying clients' dollars, is pretty agnostic to the platform that we reach the consumer through. We have an extraordinary amount of data, probably a leading position in the industry, which is hard, if not impossible, for anybody to replicate.
And what we're constantly doing is targeting using the data that we collect in conjunction with clients' first-party data in clean rooms, for the most part, to target and identify audiences so we can sell clients' products. When we added Flywheel, we doubled the amount of data that we have available to us on a daily basis, making us more efficient that way.
That and then optimization capabilities that we've built into these platforms to find out whether or not the dollars we're planning and then spending on whichever platform is most effective is realizing we're realizing ROI for the client is what we're looking to do. So the amount of data that Omnicom possesses and the platform that we've built, is an extraordinary base, which leaves us in probably an industry-leading position.
The optimization tools that we've developed and we continue to develop get better and better every day. The objective is to be able to make certain that every dollar spent, no matter where the media is, we, you know, results in a positive return on investment and a measurable return on investment.
People can claim that different ROI models do different things, but we have greater and greater confidence with the additional data and influence that we have over Flywheel and our ability to measure things now in terms of retail and what's sold on a, you know, on a distribution basis.
So, and that added to that is our capabilities and platform and precision marketing and some of the products that we're developing there, which is more directed towards automation of the creative process, which makes it more efficient. And you can move faster to succeed and double down on the things that are working and sell faster and redeploy those dollars with the ability we have to target and measure.
Got it. Well, that's helpful. If we think about, you know, creative broadly, you know, it's a large part of the ad agency holding offering. Could that become a growth driver again? Or, you know, when we think about that, the deflation in the business, given some of the expensive production infrastructure that's been replaced with lower-cost solutions, you know, how are you thinking about your creative offerings?
Sure. It's a multifaceted question. So I'll deal with it as best I can, and then Phil can add to it. So creative is our IP, all right? And what you call advertising has always been a central part of our ability to service clients. Now, if I went back five years and I looked at a client and the crafts and areas that they focused on in terms of spending, advertising had general media advertising, general advertising would have been a greater share of wallet.
Technology that we've introduced, creative automation that we've introduced, has probably shrunk that in terms of the dollars associated with it because we can do things better, faster, and cheaper. Having said that, creative IP, the, the creative IP that we have is still at the center of most of our larger relationships and will continue to be so.
Now, production is an interesting aspect in that we are just about, and there's more to come on this, centralizing for the first time our production capabilities. Now, other competitors have done that in the past, and it's already embedded in a large part of what their revenue base is.
What we're tapping into with what the moves we're going to probably announce in April formally and then focus on is we are centralizing it, which will make it more efficient in terms of the way and the number of people that are required to deliver the produced product. It allows us to predict manpower levels to offshore certain things that we currently can't offshore. Using that money, we can invest in areas that heretofore we really haven't focused on.
And that becomes important because there's a disconnect between what runs through our balance sheet, which is largely the production budgets of the clients, and to a large extent, we administer that expenditure, but it doesn't hit our P&L. So as we make production a central area, gaining the efficiencies of that, that frees up dollars for us to acquire and to, to expand the crafts and capabilities that we can.
We're heretofore administering how it goes to a third party. With the client's permission, we'll be able to capture that spend. And it's always been a nagging issue that we've had, always been an opportunity, which we never fully exploited. And one of the side benefits of there are a lot of reasons for that. Most of them turn out to be excuses.
COVID, that's one of the blessings that's come from COVID in that my creative community, which is pretty large and very important to me, we'd rather spend time pre-COVID down in a great high-end production studio, rubbing elbows with stars and directors that were going to do shoots. COVID and stay-at-home kind of broke that cycle.
I always had the ability to demand that we capture it centrally, but it required changing people's behavior, which has built up over many years. Now, as they're returning to the office and only doing it a couple of days a week, it's that behavior of wandering into your office and then wandering downtown to some fabulous studio where you can maybe get to meet somebody that you wouldn't otherwise get to meet. That's gone.
So not only can I mandate it and then I can operate it more efficiently. I can get much greater buy-in because people now have the alternative of not spending five days a week in the office. And the days that they're spending in the office, they need to optimize so they're not so hell-bent on floating downtown with their idle time to meet Taylor Swift.
They want to do their work and get back to whatever the hell they were doing when they were working from home. So we could have done it years ago. Never did it efficiently. This is the grand opportunity. And so we're exercising it. So, it'll, that is, going to add to our organic growth, you know, for the balance of this year, but increasingly as we get into next year.
And we've acquired the way we get to acquire and then integrate those talents that were never part of our portfolio, but part of the dollars we were administering. It's a very long explanation, which I apologize for, but.
The only other thing I would just add is when it comes to creative, as Jonathan said, you know, it's part of our IP. It's part of our DNA. Without a compelling creative idea, you can have all the technology solutions in the world, but you've got to compel the consumer to buy the product. And creative can come in many different forms, not just what we think of as traditional creative, but there's creative in almost all of the disciplines we have, whether that's PR, healthcare, media even. So creative is truly part of all of what Omnicom is comprised of.
With the exception of accounting. There's no creative accounting.
AI continues to draw a lot of interest, especially at this conference, and I would be remiss to not ask about it. Can you talk about Omnicom's use of artificial intelligence? How it's, you know, how you're using it, how it's being used to improve data analytics, but also in terms of financial impacts, both from a, you know, a top line and margin perspective?
Sure. Well, AI is something that we've been using probably for the last decade. I think what's new to the scene and offers great opportunity is generative AI. And I, we believe that we're in a pole position, one, because we have that platform that's almost impossible for anybody to replicate as a base from which to further enhance with open, you know, generative AI enhancements to the product. But you have to go back to a year ago.
There were two companies that were invited to partner with and beta, with Microsoft, their investment in OpenAI. And, it was Disney and us. And we're in the process of doing that. Now, every one of my competitors, everybody else is going to claim, well, they have a relationship with them, and they probably do. The differentiation is we were first and we have unlimited tokens.
So we're a full-time partner in terms of betaing these products to see how we can each benefit our clients through the use of them. Others who have relationships with them have, for the most part, limited tokens, which is a technical way of explaining that the amount of effort and time that they can spend is limited by Microsoft's limitations of how much time that it can spend developing these products and opportunities.
We're in the process of betaing quite a number of areas that I believe will ultimately lead to us becoming more efficient because some of the lower-level work that's done currently will become more readily available to our knowledge workers or our creative workers. But even though the tech exists even today, that'll only improve as time goes on.
There's still a question as to the deployment of how we use that enhanced product because of copyright rules and things that haven't been fully addressed. So if you were an art director and you had an idea today, if you wanted a setting of whatever you were about to do, say, in Tokyo during autumn blossom time at dusk with a beautiful couple.
If you were in an ad agency five years ago, it would take you a while to get that setting set up. With OpenAI and our platform, you can generate that in minutes. That will only get better and better and faster and faster, which will mean fewer people will be required in the mundane work of compiling that basic, you know, thought or area.
But then the knowledge worker, the creative individual, be them a social specialist, be them a creative excellent social media, whatever it is, they'll have more time and they can test things, succeed faster, fail faster than ever before. And so I think it'll have a huge impact on our business.
I think it's just not ready for prime time just yet, as many of you saw in the mistakes that were made with Google's Gemini last week. And that's only one problem. The other thing is you don't want to utilize somebody's copyrighted information in the wrong fashion or expose a large client to the misuse of that. So, but we're at the forefront of it. We have been selected by, I think, the tech leaders who are out there developing it in conjunction with how we would utilize it for the benefit of our clients.
We're committed to that.
That's helpful. Any other just, I guess, to follow up there, any thoughts on the, you know, financial impacts just from a if you think about margins, going forward or, you know, top line?
Sure. I mean, we are. The industry has gone through transitions of how we've been paid and what we've been paid for in the past. And fortunately, I was working at that time. So I have very firsthand knowledge. We used to be based on commissions. There's no one way that we're paid. But that transition in the 1980s, early 1990s to fee-for-service. Now, when you look at the possibilities four years out, three years out of what generative AI can do, taking out a lot of the more mundane work, you could easily reach a conclusion. Oh, that's fewer hours for you to get paid for.
Well, what we will increasingly get paid for is that platform that I've indicated that we have, and it's in place and it's functioning today, which rather than spending our time on how we're going to create the platform or get access to the platform, we are not focused on that because it exists and it's already integrated. But how can we use Generative AI to enhance the value of that platform?
Charging clients for the efficiencies that we can generate. Charging a premium for our knowledge workers who are able to act quickly and very efficiently and the algorithms that we can use to measure whether or not we're selling the client's products or not. And through all of that, what all that means, rather than go through deep, is the industry is moving.
What I think the next way, as these things get deployed and utilized by people, is we're going to be focused getting paid more on outcomes than we are today. That's the transition, which will occur over time. There'll be winners and losers in that battle. I'm already worried, worried enough about it. We're taking the actions that we need to take, I believe, that we're certainly going to be one of the winners. So.
Yeah. If you look at the Flywheel acquisition as well, it's a perfect example. I mean, Flywheel essentially gets paid on outcomes. It's not a fee-for-service business. That platform is a good example for us, you know, going forward for how we transition the business.
Got it. I'd like to go back to Omni.
Sure.
You know, it's an insights orchestration platform rather than a data management business that doesn't own data. You know, curious how you two are thinking about ownership versus renting of data when it comes to AI and training, internal models? You know, what are the advantages or disadvantages to either approach?
I think our approach is the best one. So, so it's pretty simple. But it's not true to say that we don't own data. Through Flywheel, I think we have an enormous amount of transactional retail data, which is not PII. It is first-party. And it enhances the information that exists in our Omni platform. So you can even though we'll use different language of Commerce Cloud platform and Omni platform, it's really now all integrated in its one. That's one thing. We do have proprietary data in Omni. But for the most part, it's third-party data.
And the way we've approached the marketplace and the way we've built our products, especially in a cookieless world, is through the utilization of clean rooms, where we'll take our third-party data, our Flywheel data, and the client's data and put it in a clean room and enhance the client's data with the information that we have on behavior and actions and then help use that data, which the client owns.
We don't we don't claim ownership of utilizing the client's data. We use companies like InfoSum, and others, which we have a minority interest in, to ensure that those things are executed properly. So we're enhancing the client's data, which the client owns and will continue to own, and, then targeting and doing all the things that we can vis-à-vis our platform and our optimization, tools and capabilities.
One thing to be clear about, you know, as we peer into this, you know, scary generative AI environment, you know, if you just look at the example of someday, I'll be able to say, I want to spend $10 million in the New York metropolitan area and I want to achieve these six KPIs and build me a media plan. Right now, that takes a lot of work and effort, to do.
Someday, somebody who doesn't even know how to type in a computer will be able to ask generative AI to build that. And they will. But you won't be in any better position than you are today if you have competitors selling that product.
That takes but knowledge workers and the insights that we can develop to enhance that, to differentiate how you execute that plan or and how you measure your success and failure of that plan. That's what we'll get paid for in the future.
Our ability to measure that, to add insights, to differentiate the information that in the old days now, it took a long time to just get to ground zero and create. In this future state, hopefully in the next certainly before 2030, but in that future state when you can do all that stuff which used to take a lot of hours, just by querying a computer, you still have to now differentiate yourself because all that's done is get you to ground zero.
And we're positioning Omnicom for that day where we can depend upon proving to our clients that we can improve their outcomes and we should be paid differently for it. So that's the mission. And we're on the path already.
That's great. Phil, I had a question for you on the guidance.
Sure.
You expect adjusted EBITDA margins to be close to flat with last year. Just curious what close means to you. And then if you could just walk through an update of the current puts and takes of the margin guide for 2024.
Sure. I, you know, I think my definition of close and yours are probably similar. So, so for the year, we expect margins, you know, they might be slightly higher. They might be slightly lower than last year's margins, but not, not meaningfully higher or meaningfully lower in any, you know, direction. So, you know, there's a couple of things going on. Flywheel, we have integration costs of bringing them into the Omnicom family.
We also have some synergies, though, from bringing Flywheel in, both on the cost side and the revenue side. We're working through that. We expect, as we said in our guidance, that, you know, our EBITDA, adding back the amortization related to the Flywheel business and acquisition.
We expect EBITDA to be positive for Flywheel and Omnicom, or Flywheel will be equal to or better than Omnicom's average EBITDA margin by the fourth quarter. We expect the same thing with diluted EPS. So adjusted diluted EPS, we expect will be accretive by the fourth quarter of 2024. And then, you know, beyond that, certainly strategically, we're very comfortable and confident and optimistic about what Flywheel is going to allow us to do in the future. But we expect it to be a positive contributor from there on. No question.
Got it. That's helpful. Just to, you know, add another on, you know, you reduced your share buyback level in this year, in 2024, compared to 2023, with a healthy balance sheet and over $4 billion in cash and equivalents. You know, why lower your buyback, especially given how accretive it is to buyback shares here?
Well, you know, I think we're going to be flexible as we always are, as we look out at, you know, how the year is going to transpire with respect to how we use our free cash flow. Flywheel did close in early January. It was a significant expenditure. We used cash on hand, about $845 million, to pay for the deal in early January.
Last week, and it'll close tomorrow, we raised EUR 600 million at 3.7% to essentially do what we said we were going to do, which is finance about two-thirds of the purchase price from the Flywheel deal. That'll give us more flexibility to deal with both the refinancing of a bond that's coming due in November. We'll have the flexibility to see how things evolve in the rate environment and whether we do and when we need to refinance that debt.
We'll reevaluate what we're going to do with our free cash flow and whether we're going to buy back more shares or not. I think from a conservative perspective, we indicated we were going to reduce the amount of buybacks for 2024. That's still our current intention. As the year goes by, if there are opportunities to increase those numbers, we'll certainly consider doing that.
Great. I think we are out of time.
Okay.
Thank you both, Phil and John. Great to have you guys.
Thank you.
Thank you.