Omnicom Group Inc. (OMC) Q2 2017 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to the Omnicom's Second Quarter 2017 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. At this time, I’d like to introduce you to your host for today’s conference, Vice President of Investor Relations, Shub Mukherjee. Please go ahead.

Good morning. Thank you for taking the time to listen to our second quarter 2017 earnings call. On the call with me today is John Wren, President and Chief Executive Officer, and Phil Angelastro, Chief Financial Officer. We hope everyone has had a chance to review our earnings release we have posted on our Web site, www.omnicomgroup.com, this morning’s press release along with the presentation covering the information that we will review this morning. This call is also being simulcast and will be archived on our Web site. Before we start, I’ve been asked to remind everyone to read the forward-looking statements and other information that we have included at the end of our investor presentation, and to point out that certain of the statements made today may constitute forward-looking statements, and that these statements are our present expectation and that actual events or results may differ materially. I'd also like to remind you that during the course of the call, we will discuss some non-GAAP measures in talking about Omnicom’s performance. You will find the reconciliation of those measures to the nearest comparable GAAP measures in the presentation materials. We are going to begin this morning’s call with an overview of our business from John Wren. Then Phil Angelastro will provide our financial results for the quarter, and then we will open-up the line for your questions.

Thank you, Shub. Good morning and thank you for joining our call. I am pleased to speak to you this morning about our second quarter results. We had a solid second quarter. Organic growth was 3.5% in line with our expectations. We also met our margin targets for the quarter and remain on track to deliver 50 basis point margin improvement for the balance of the year. For the second quarter, EBITDA margin was 15.7% versus 15.2% last year. In the second quarter, total revenue was down 2.4% compared to the prior year. As we discussed on our last call, we had several dispositions during the past few quarters. As a result, net acquisition disposition revenue for the quarter was negative 4.4%. in addition, FX reduced revenue for the quarter by 1.5%. We don’t expect any additional significant dispositions in 2017. Excluding the impact of any future acquisitions, net acquisition disposition revenue will continue to be negative in the second half of the year. Phil will provide more details on this during his remarks. Geographically our results for the quarter were mixed. Outside North America we saw very strong growth across markets in Europe, Asia-Pacific, Latin America, and the Middle East. Our total organic growth outside North America was 8.1%. In North America, organic growth was just 0.2% in the quarter. The quarter was drag down in large part by weak performances in our PR, shopper marketing and branding businesses. Branding business, which is largely project-based continue to struggle in the quarter. Although we have corrected some of the operational and management issues, we encountered and expect the business to begin to stabilize in the latter part of the year and move back into a growth mode. Our other operations were impacted mostly by client-specific events. These declines offset positive performances in other parts of our business. Turning to markets outside North America, the U.K grew a very healthy 9.3%. Our agencies in the U.K had solid results led by advertising and media, healthcare and shopper marketing. Organic growth in the rest of Europe was 7.8%. In Euro markets, Germany and France were in mid single digits, while Italy, Portugal, and Spain had double-digit growth. The Netherlands was the only noticeable exception to Euro regions strong performance. Outside the Euro markets, the Czech Republic, Poland, Russia, Sweden, and Switzerland had very positive results. Looking at Asia Pacific, second quarter organic growth was 7.1% led by Australia, India, and Japan. Latin America was up 5%. Operations in Mexico continue to outperform, while Brazil had negative growth after a positive first quarter. At this stage it is difficult for us to predict when performance in Brazil will consistently improve, but we remain cautiously optimistic. While the region is still relatively small, I should also point out that our agencies in the Middle East had another outstanding quarter. Looking at our bottom-line, EPS increased 2.9% to $1.40 per share for the quarter versus a $1.36 per share for the same quarter a year-ago. In the quarter, we generated $800 million in free cash flow and returned approximately $730 million to shareholders through dividends and share repurchases. Our use of cash remains consistent with past practice, paying out dividend, pursuing accretive acquisitions, and repurchasing shares with the balance of our free cash flow. Our Board will be evaluating a dividend increase during our next meeting. Our cash flow, balance sheet, and liquidity remained very strong. Overall, I am pleased with our performance for the quarter and for the first half of the year. Let me now turn to how we are continually improving our organization and operations to address the changes that are affecting our industry. As I look across a broad range of industries, from consumer products to food and beverage, automotive, healthcare, telecom, energy, retail and financial services, each is undergoing major changes driven by advances in technology, changes in consumer behavior, and new disruptive competitors. Against this backdrop, we are ensuring that we are organized in a manner that allows our management people and agencies to affect change, act in a nimble and agile manner and to use the latest technologies available. To do so, Omnicom remains laser focused on our strategic priorities, growing and developing our talent with a focus on diversity, simplifying our service offerings through our new practice area and client matrix structure, making investments in our agencies and through acquisitions to expand our capabilities in digital data and analytics, and continuing to execute our operational efficiencies. On the talent front, our commitment to hiring and developing the best people is unwavering. The type of individuals we hire and the training programs we put in place are continually evolving. For the past 23 years, Omnicom University has focused on building the leadership muscle of our most senior leaders using Omnicom cases to address real-world challenges and opportunities in a -- our rapidly changing business. We have put thousands of students in Omnicom University programs and have written hundreds of Omnicom real-world cases. In addition to Omnicom University, we have many different training and development programs in place at our practice area groups. These programs ensure the people in our agencies continue to learn in advance their skills in this rapidly changing environment. In today's battle for talent, this isn't a nice to have, but a must. In the face of new technologies, fragmenting media and the explosive growth of consumer data, many clients are looking to simplify their agency relationships. To better address this need, we continue to evolve our organization with our practice area and client matrix structure. Practice areas are now in place for healthcare, PR, and national brand advertising, and planning is well underway for other areas. As a result, our agencies are increasingly working together in a network and fluid fashion. We are also organizing our agencies to best service clients in the manner in which they are organized. As an example, for AT&T, BBDO, Hearts and Science and other agencies have unified client leadership and our people are co-located in multiple offices. In the case of McDonald's we are unlimited as over a dozen Omnicom agencies collaborating with technology partners all in a single location based in Chicago. For Nissan, we again have multiple agencies from Omnicom working together across geographies, led by a dedicated global client leadership team that is a response to the clients desire to be more integrated and nimble. Underlying these multiple agency teams is the use of data and insights to inform creative content and deliver that content to consumers in the right place at the right time and in the proper context. AT&T, McDonald's and Nissan are just some of the many examples of how our people and agencies are aligned to meet the organizational and marketing needs of our clients. Our practice area and client matrix structure is also creating benefits through better sharing of expertise and knowledge, creating more career opportunities for our people, strengthening our new business development efforts, and leveraging our internal investments in the identification of acquisition opportunities. Most important, this structure is making us more agile and responsive, so that we can adjust quickly as our clients' needs change. I'm very pleased with the progress we've made to date through this matrix organization. I also want to point out that while many agencies are now part of new practice areas, consistent with Omnicom's philosophy, these agencies will continue to work as independent brands and businesses. Across our practice areas and portfolio of agencies, we continue to actively make investments and pursue partnerships to enhance our data digital and analytical capabilities as well as identify acquisitions that meet our strategic objectives. As an example, to arm our network of agencies with more data and analytical tools, Annalect recently launched an internal AI tool called AUBI. In simple terms it utilizes artificial intelligence to make Annalect's data and algorithms readily available to anyone with an Omnicom, from creative to media buyers [ph], to strategies and across all of our disciplines to quickly find data driven insights that matter to their clients. We also continue to be first movers in employing the latest media, technology, data, and e-commerce tools. We have more than a 100 partnership agreements with technology companies from the likes of Google and Facebook, to start up and nascent businesses in areas such as virtual reality and artificial intelligence. Our strategy is to use open standards and transparency to enable us to work with any clients technology and data preferences rather than betting on any specific platforms that may not be the best fit for our clients needs or that can become obsolete. On the acquisition front during the quarter, TBWA acquired mobile strategy in the Netherlands, a digital agency specializing in mobile e-commerce engagement and loyalty. At the conclusion of the quarter, Clemenger BBDO acquired Perceptive Group in New Zealand, an agency that specializes in customer experience, insight led strategy and data driven decision making. Operationally we continue to make very good progress on our real estate, information technology, back office, accounting services, and procurement initiatives. Through these programs we are enhancing our platforms, systems and controls, and driving cost improvements across the group. Overall, we're very satisfied with our progress on our strategic initiatives. And our investment and challenge along with our continuing efforts in data and analytics, creativity, collaboration and technology partnerships are paying off in terms of industry recognition. I am pleased to report that at this year's Cannes Lions Festival, Omnicom agency has continued their record of being the most creatively awarded in the industry. In total, a 152 Omnicom agencies, or nearly 360 lines from approximately 35 different countries across more than 20 communication disciplines. BBDO claim both network and agency of the year titles, following a record year with 19 agencies winning a 144 lines across 24 categories. It's the sixth time BBDO more than any other network has been named network of the year. Clemenger BBDO Melbourne was presented with the agency of the year title on the strength of winning 56 lines. And OMD was recognized as media network of the year after a strong performance across a broad spectrum of client categories in regions around the globe. I want to congratulate everyone who helped us win these awards. Finally as part of our Board refreshment process, Omnicom's Board of Directors appointed Gracia Martore as an independent director. Gracia's experience in business transformation, as well as running the nation's largest local media company, I think Cars.com will add great value to our Board. I'm thrilled to welcome her as our newest Board member. Gracia's appointment expands the Board to 13 Directors, a 11 of whom are independent. It also strengthens our commitment to a diverse and inclusive workforce starting from the top with Omnicom's Board of Directors now including six women and three African-Americans. In closing, we're pleased that our financial performance continues to reflect the excellence of our people and agencies. We've had a strong first half of the year and are well-positioned to deliver on our internal targets for the full-year 2017. I will now turn the call over to Phil for a closer look at second quarter results. Phil?

Thank you, John, and good morning. As John mentioned, Q2 was a solid quarter for our businesses. Our agencies continue to execute and deliver on the ever-changing marketing needs of our clients, as well as meeting the challenging financial and strategic goals that we set for them. Total revenue for the second quarter was $3.79 billion with organic revenue growth of 3.5%. Regarding FX, currency rates continue to be a negative drag on our revenue in the quarter although at lower levels than we saw last year. The largest negative driver continue to be the weakness of the British pound. Overall in the quarter the FX impact reduced revenue by 1.5% or about $57 million. As we mentioned during our Q1 call, as part of our ongoing evaluation of our portfolio of businesses, during the last few quarters we disposed several agencies, including those in the field marketing and events area, as well as our specialty print media business. These dispositions along with our acquisition activity over the past 12 months reduced our quarterly revenue by $172 million or 4.4%.I'll go into detail regarding our revenue changes in a few minutes. Looking at the income statement items below revenue, operating profit or EBIT for the quarter increased to $566 million with operating margin improving to 14.9%, 40 basis point margin improvement versus Q2 of last year. Q2 EBITDA increased as well to $594 million and the resulting EBITDA margin of 15.7% represents a 50 basis point increase over Q2 of last year. The main drivers of our margin improvement continue to be related to our continuing efforts to seek out opportunities to improve the operational efficiency of our businesses on a global basis. These efforts are focused on the areas of real estate, back office services, and procurement and to date have driven savings throughout the organization, as well as the positive impact on relative margins from the continuing evaluation of our portfolio of businesses which resulted in several dispositions, principally in the last several quarters. As we noted last quarter, for the balance of the year, we expect this disposition activity to negatively impact our reported revenue and EBIT dollars. And we also expect a modest benefit to our overall EBIT margins. Now turning to the items below operating profit. Net interest expense for the quarter was $45.3 million, up about $0.5 million versus Q2 of last year and up $5.7 million versus the first quarter of 2017, versus Q1 interest expense increased $3.3 million primarily driven by an increase in interest rates. All interest income decreased $2.4 million due to lower balances held by our treasury centers relative to Q1, which is typical for our working capital cycle, versus Q2 of last year the increase in interest expense of $2.5 million was primarily driven by the increase in rates on our commercial paper activity. This was substantially offset by an increase of $2 million in interest income earned by our foreign treasury centers. Turning to income tax expense. As a reminder, at the beginning of the year we were required to adopt ASU 2016-09, which changed the way income tax expense is recognized on share-based compensation under U.S GAAP. The new standard requires that the difference between the book tax expense and the cash tax reduction recorded on our tax return from share-based compensation be recorded to income tax expense. This difference is generated as a result of our stock price on the date of the award compared to the stock price on either the date that restricted stock vests or the date that stock options were exercised. For the second quarter, we recorded an additional tax benefit on share-based compensation of $2.3 million, which reduced our effective tax rate for Q2 2017 by 40 basis points. The standard requires prospective recognition and does not allow restatement of prior periods. Prior to the beginning of 2017, on the U.S GAAP this difference for us was recorded directly to equity and not to the P&L. As a result, our effective tax rate for Q2 was 32% and the year-to-date tax rate was 30.8%. Excluding the benefit from the adoption of the new accounting standard, our year-to-date effective tax rate would have been 32.5% which is a little lower than last year's rate of 32.6% and is in line with our expected full-year 2017 tax rate. Earnings from our affiliates were $1.6 million during the second quarter, down $1.2 million from $2.8 million in Q2 of 2016, and the allocation of earnings to the minority shareholders in our less than fully owned subsidiaries increased 700,000, $26.5 million. There was no single notable driver of these changes and FX did not have a significant impact on these amounts. As a result of the previously mentioned items, our reported net income for the quarter increased to $328.6 million, up $2.5 million or just under 1% when compared to last year. Turning to the calculation of earnings per share on Slide 2, net income available for common shareholders for the quarter was $328.1 million. Our diluted share count for the quarter was $234 million, down 2.1% versus last year as a result of net share repurchases made over the past 12 months. And as a result, our reported diluted EPS for the quarter was $1.40, up $0.04 or 2.9% versus diluted EPS of $1.36 from Q2 of last year. For Q2, 2017, the impact of the new accounting standard increased our diluted EPS by about a penny. Just as a reminder, as we said last quarter regarding the impact of the new accounting standard that we were required to adopt in 2017, because the final income tax benefit is based on Omnicom's share price at the future vesting date for restricted stock and at the exercise date for stock options. It is not possible to estimate with any degree of certainty the impact the new accounting pronouncement will have on our income tax rate, our net income, or our diluted EPS for the full-year. Please note that in future periods this impact could be positive or negative based on movements in our stock price. For 2017, the bulk of our share based awards are restricted stock vested in the first quarter and as a result the impact in the second half of the year is expected to be less than the first half's impact. On Slide 3 and 4, we provide the summary P&L, EPS, and other information for the year-to-date. I will just give you a few highlights. While organic revenue growth was 3.9% during the first six months of the year, the FX headwind reduced revenue by 1.3%. The net impact of acquisitions and dispositions reduced revenue by 2.7%. For the year-to-date period revenue totaled $7.38 billion, a slight decrease when compared to the first six months of 2016. EBIT increased 2.3% to $975.5 million or EBITDA totaled just over $1 billion. As a result of the cost savings initiatives we've mentioned over the last several calls, both our EBITDA and operating margins have increased 30 basis points on a year-to-date basis compared to last year. And on Slide 4, you can see our six month diluted EPS. It was $2.42 per share, which is up $0.17 or 7.6% versus 2016. Turning to Slide 5, we shift the discussion to our revenue performance. During the quarter, the negative impact from FX was 1.5% or $57 million. As has been the case since the Brexit vote in June of 2016, British pound continued to be the major driver of the FX weakness. On a standalone reported basis, the pounds decline reduced our revenue by $43 million in the second quarter. For the second quarter on a reported basis, we also saw the dollar strengthened against the euro, the Canadian dollar, Chinese yuan, the Japanese yen, and the Turkish lira. However, the dollar weakened against the Brazilian real, the Indian rupee, the South African rand, and the Russian ruble. Currencies stay where they currently are based on our most recent projections. The net impact of FX is expected to be slightly negative for the third quarter of 2017 and positive 0.0125% for the fourth quarter. However, for the full-year we are still anticipating the FX impact to be negative by approximately 30 or 40 basis points. Revenue from acquisitions net of dispositions resulted in a decrease to revenue of $172.1 million in the quarter or 4.4%. As planned and as we have discussed, we completed several dispositions in the past few quarters including the disposition in early April of Novus, our specialty print media business, which operated in both the U.S and Canadian markets. While we will continue to evaluate our portfolio of businesses on a continuous basis, we do not expect to complete any meaningful dispositions during the second half of 2017. On the acquisition side, TBWA closed on the acquisition of the majority interest in Mobile Strategy, an Amsterdam-based digital agency and we continue to cycle through the impact of acquisitions that closed during the previous 12 months, including in the U.S., the U.K., Colombia, and Switzerland. The current expectations or the impact of our completed disposition activity net of the acquisitions completed through June will reduce revenue by approximately 5.5% in the third quarter, approximately 4.5% in the fourth quarter, and as a result by approximately 4% for the year. Organic growth was positive $135 million 3.5% this quarter. Some highlights of our growth this quarter include geographically each of our regions had positive organic growth in the quarter. And similar to Q1, we saw our strongest organic revenue performance in the U.K., Continental Europe, and the Asia-Pacific region. Our media businesses including PhD and Hearts and Science continue to perform very well as did some of our advertising agency brands. This performance was partially offset by the effect of some recent losses by OMD. And Omnicom healthcare group led by the performance of its agencies outside the U.S had another strong quarter. And our events business also performed well in the quarter. On Slide 6, we present our regional mix of business. And you can see during the second quarter the split was 57% for North America, 9% for the U.K., 18% for the rest of Europe, 11% for Asia-Pacific, 3% for Latin America, and 2% for Africa and Middle East. Turning to the details of the performance by region on Slide 7. In North America, organic revenue growth was up slightly by 0.25%, primarily by declines in the quarter in our branding, PR, and shopper marketing businesses, which were offset positive performances in some of our other CRM businesses. In the U.K., we continue to see excellent performances by our agencies across all of our disciplines with organic growth just over 9%. The rest of Europe was up just under 8% organically for the quarter. Within the Euro zone, we continue to see solid performances from our agencies in Germany and in Spain. We also saw strong performance by our agencies in Italy, Ireland, and Portugal. France's improvement continued with organic growth this quarter just over 5%, while the Netherlands continue to lag with negative growth in the quarter. Growth in Europe, outside the Euro zone, was strong across most markets. The Asia-Pacific region was up just over 7% with organic growth well dispersed across most of our major markets and disciplines in the region, including in Australia, India, and Japan. Latin America had positive organic growth of 5% for the quarter. After a solid performance in Q1, Brazil experienced negative organic growth in the second quarter. Although the environment is still challenging and we can't be certain about when that may change, we're cautiously optimistic about the future prospects for our agencies there. Elsewhere in the region outside of Brazil, our agencies in Mexico and Colombia continued their strong performance. And finally, Africa and the Middle East, which is our smallest region, had a strong performance again in the quarter. Slide 8 shows our mix of business by discipline. For the quarter, the split was 53% for advertising services and 47% for marketing services. As for their organic growth performance, our advertising discipline was up 4.2%. Growth continues to be led by our media businesses, particularly by our international agencies, as well as solid performances from certain of our full-service advertising agencies. DRM was up 3.7% for the quarter, but we continue to see mixed results across our businesses. DRM was positive organically this quarter in all of our regions. Within CRM, our events, point-of-sale, and digital direct agencies delivered strong performances this quarter, while our branding agencies were down again. PR was slightly negative this quarter and specialty communications was up 2.2% organically. The performance of our healthcare agencies, especially internationally was partially offset by our other specialty marketing agencies. Turning to Slide 9, we present our mix of revenue by our clients' industry sector and comparing the year-to-date revenue for 2017, 2016, you can see there were no major shifts in the percentages each industry contributed towards our total. Turning to our cash flow performance on Slide 10, you can see that in the first six months of the year we generated nearly $800 million of free cash flow, including changes in working capital. As for our primary uses of cash on Slide 11, dividends paid to our common shareholders were $261 million. The year-over-year change reflects the effects of the 10% increase in the quarterly dividend that was approved last year, which was partially offset by the reduction in shares outstanding due to our repurchase activity. Dividends paid to our noncontrolling interest shareholders totaled $67 million. Capital expenditures were $68 million. While we've seen a decrease in CapEx, we've also seen a planned uptick in activity in our leasing programs, while on total basis our capital spend is relatively flat versus last year. Acquisitions including earn out payments and net of the proceeds received from the sale of investments totaled $73 million. And stock repurchases net of the proceeds received from stock issuances under our employee share plans totaled $468 billion. All-in, we outspent our free cash flow by about $140 million during the first half of the year. Turning to Slide 12, regarding our capital structure at the end of the quarter, our total debt at June 30 was $4.9 billion. This is down about $85 million from this time last year. This change is primarily driven by the decrease in the non-cash fair value of our debt of about $75 million over the past year, which is directly related to an offset by the non-cash changes in the fair value of the respective interest rate swaps on our debt, as well as additional non-cash amortization impacting the carrying value of our debt as required on the U.S GAAP. Net debt at the end of June was just under $3.1 billion, an increase of about $1.15 billion since the beginning of the year. This resulted from the use of working capital that normally occurs in the first half of the year, which was approximately $1.1 billion, as well as the use of cash in excess of our free cash flow of approximately $140 million. These increases in net debt were partially offset by the effect of exchange rates on cash over the past six months, which increased our cash balance by about $130 million. As for our ratios, our total debt-to-EBITDA ratio was 2.1x, and our net debt-to-EBITDA ratio was 1.3x. And due to the year-over-year increase in our interest expense, our interest coverage ratio decreased to 10.8x, but remains very strong. Turning to Slide 13, we continue to manage and build the Company through a combination of development initiatives and reasonably priced acquisitions. In the last 12 months, our return on invested capital ratio improved to 19.9%, while our return on equity increased to 51.8%. And finally on Slide 14, we track our cumulative return of cash to shareholders over the past 10 plus years. The line on the top of the chart, those are cumulative net income from the beginning of 2007 to June 30 of 2017, which totaled $10.5 billion. While the bar shows the cumulative return of cash to shareholders, including both net share repurchases and dividend, which during the same period totaled $11.2 billion, all resulting in a cumulative payout ratio of 107% since the beginning of 2007. And that concludes our prepared remarks. Please note that we've included a number of other supplemental slides in the presentation materials for your review. But at this point, we're going to ask the operator to open the call for questions. Thank you.

[Operator Instructions] Our first question today comes from the line of John Janedis representing Jefferies. Please go ahead.

Hi, thank you. John, you’ve been through a few cycles. From what you see, do you view the U.S as being on maybe the slower side of the cycle or is there something emerging here, given that the headlines around competition in the technology?

Thanks. Well, there are -- where our domestic revenue is muted this year, but this time -- at this time, especially for the quarter were really in three principal businesses in -- and for the most part the project businesses. First, I will do branding, where we have just completed a management change, where we had an executive leave us in January and it was very difficult to replace him. And that executive and some of his colleagues who left us were really the people who were selling the product. So we -- it was a setback. It was a management problem. I think we solved the problem at this point. Second area is kind of in shopper marketing. There was two things that have happened there. In one instance, a very large client that's -- that will be competitive with AT&T after the Time Warner merger is completed was uncomfortable being in the same holding company, so they tossed -- they quit using that that shopper marketing company. And I'd say that the projects associated with some of the things which would have happened in the past have shifted a little bit, because of the difficulty that the retailers are going through. We will cycle through those problems and changing our product to be more adaptive to the current environment. And the third area was in PR, which was domestically down across the board, principally from projects not being executed. If you were to put 2% growth, which is what our hope and expectation was for the domestic business, that would have been an incremental $35 million to $40 million worth of revenue. Those three operations drag down strong performances in some of our other areas to get us to the net 0.25%. We are unhappy with it. We’ve forensically identified it and we’re taking actions to do something about it. So it's that not necessarily all the current chatter of competition from consulting firms. We are not really seeing them in the pitches that we are engaged with. I don’t know if that answers your question.

Yes, that’s helpful. Thanks. And then maybe on a related topic then, now if you could kind of call that retail, but as you know some of those categories maybe retail CPG, they would seem to be under pressure maybe for -- or maybe I don’t know couple or few quarters, at least here in the U.S. Are the things within your control to mitigate the impact? And maybe to what extent you see an opportunity to gain share of wallet?

Sure. Globally our CPG business is probably about 10% of our revenue and it's pretty -- which is when compared to our competitors probably a small percentage as we were always the smaller player. We've seen pressure as they've been under pressure in their operations. We've also seen pressure as a result of some of the divestitures that won very large companies going through. So we are trying to mitigate. We're trying to become more useful and meaningful to those clients. We have won some recent assignments, which are not yet reflected in revenue, because of the quality of our work. But I think when your client suffers, you suffer along with them a bit.

Okay. Thanks a lot.

Next we will go to the line of Alexia Quadrani with JPMorgan. Please go ahead.

Thank you. John, thank you for all that color on the weakness in the CRM business. If I could just follow-up with a sort of clarifying question. I know the sales marketing has been a drag, you would highlighted in previous quarters and I understand you divested most of those or at least the businesses you had highlighted to divest. And we didn’t yet see any kind of benefit or any kind of improvement in the U.S organic following those divestitures. Is it because the delta like PR got worse or branding still got worse that kind of offset the benefit of not having those field marketing. I’m just trying to see why we didn't see a little bit of an improvement following those divestitures?

You know we had field marketing in the first quarter, we still owned it. It did provide a drag to our organic revenue.

But in the U.S field marketing actually isn't that -- we never had that big of a presence in the U.S. The businesses that the primary dispositions happened outside the U.S and we still do own a business that's largely European-based and we are certainly not out of the business entirely. So the business we’ve European business we have -- is doing fine, but it is a challenging segment and we certainly spent a lot of time focused on that -- on that area.

Yes, the biggest business we disposed of in the United States was the print media business. And we disposed of it not because it was hurting us from an organic growth basis -- on a current basis, but we saw a very dark future for the needs that company -- the services that company provided. And so we took the decision that while it was still viable to sell it on to management who would have more flexibility in trying to run it and expanded services and that's what we actually did. So there was -- not a different reason other than just a quarterly organic growth calculation for motivating that disposition.

I guess that Phil, maybe it would be helpful, do you have a number of what organic growth would look like in the second quarter exit of exodus position in the U.S., just to give us a sense if they were impactful at all. And then -- and John, maybe just a follow-up on the strength that you’ve seen recently in Europe and the U.K., is that a real sort of healthier underlying growth in the market or is it really these mix business and the fact you’re gaining share? Just trying to get a sense of how sustainable that very healthy growth you’re seeing in Europe is going to be?

Sure. Well, some of it is directly attributable to client wins like Volkswagen and brands Fiat in addition to the Volkswagen media. So there was a great deal of effort and a great deal of revenue associated with those taking over that account. Otherwise, in the U.K., we have some of the most excellent brands in the world -- in the U.K., and we’ve been taking a little -- we’ve been taking share that’s contributing to the growth and it depends on the month you go there. From a business confidence point of view even as they muddle through Brexit, the Europeans are more positive about their governments and what their future is, then I'm hearing in the United States I tried not to focus on the United States in my prepared remarks, but all the nonsense that’s been gridlocked that goes on in Washington does cause CEOs in the U.S to cut back on investments that they make. So Europe has been very strong for a few quarters for us and so we don't see that changing near-term.

Just to try and touch on your earlier question, Alexi, we don't really do a pro forma of what are our organic growth would have been, had we not done the dispositions were, what the impact would have been otherwise. I’m not sure if that answers your question, but …

I guess so. Without giving us the number, what you have said the dispositions helped organic growth or hurt organic growth in the quarter?

I think they might have been neutral to help slightly had we not done those dispositions, yes.

Okay. That’s helpful. Thank you very much.

Our next question is from the of Peter Stabler with Wells Fargo Securities. Please go ahead.

Good morning. Thank you. Kind of a high-level question for John. You know we’ve long believed that creating assets for digital campaigns and spending digital media dollars has been more labor-intensive and thus kind of generally accretive to the agency model, really the complexity is our friend argument. Do you think that these inefficiencies have been running out of the system at this point and kind of move the digital now be looked at as a way to not just be more effective, but also a way to save money for clients? It seems that some large CPG companies are telling their investors that digital marketing is a path to cost savings? Then I got a quick follow-up for Phil. Thanks.

I -- my guess would be theoretically at some point in the future, there will be truth to that. I don't think it's the immediate situation. There is still a lot of controversy going on around brand safety where your message is going to appear where it’s running on the YouTube or somewhere else. And the testing that we've done and marketers have done indicates that there are still challenges there, and we believe that those challenges will get resolved over a period of time, but they’re not -- we’re not finished with all that at this point. Automation AI, all that as you go into the future is going to change the cost equation and better targeting as it happens allows you to do different things. But we're still in the very, very early stages of gaining nirvana.

And then, Phil, is it possible to estimate what percent of total company revenues are project-based and not tied to AOR contracts or regular recurring fees?

I imagine it's possible. We just don't collect the data in that fashion. And when you get down to individual client contracts, individual change orders, individual projects, it's pretty challenging to cut it that way and we’re not focused on it at that level of detail to kind of say X percent of the business is project-based. I think certainly some of the businesses we have are much more project-based than others. So we've pretty good sense of that. We don't have those -- I don’t have those numbers off top of my head though, but we don’t exactly cut it up that way.

Thanks very much.

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

Good morning. Thanks. A few questions. I guess, first your sense John on the U.S economy here, is that a drag on your business right now or do you play nearly a 100% of it, with flat growth in the U.S and branding shoppers and then the PR businesses? I asked that just given the slow, I guess, 0.7% real GDP growth in the first quarter we will see here shortly, what happened in the second quarter, but it is the U.S economy slowing at all versus given what you’re seeing from the clients?

It certainly feels that way, but I don't have the empirical data to confirm it for you. There was, I guess, the Trump bump and that has waned a little bit as that old gridlock that you had in the capital and the simple thing is that they said they were going to focus on -- and the difficult things they said they were going to focus on haven't really materialized. And I think depending on the industry that you’re in, you’re seeing different challenges. If you’re in the retail industry, you’re seeing a set of challenges, because you’re getting disrupted by new competitors. If you're in food and beverage business, there are different challenges. All these without clarity on regulation and where the governments moving cause people just to not invest more than they know that they can get an immediate return on. There is nobody who can look out two or three years at this point, they would certainly that they’re going to know what tax policy is, but healthcare costs are going to be. And so, I think it causes many companies to cause in terms of the investments that they're trying to make, and advertising and marketing is part of what suffers along with other businesses as that occurs. Now in our particular case, I can claim that that influenced some of why we didn't perform to the level we wanted to, but it won't be so bold, I will take it on us, because these are things that we can remedy. We’ve identified where the issues are, but we didn’t identify them soon enough from my perspective, but we're working on them now. So the combination of all that, but I am optimistic we will crack this and crack them pretty soon.

This might be tough to answer, but in the U.S your branding shopper and PR businesses, what is your sense on when that shortfall in the operations there sort of annualized? I mean, what is your best sense when your North American operations may pick up here?

I’m very hopeful that they start to pick up certainly by the fourth quarter and hopefully in the third. You know in branding I’m fairly confident with new leadership. There is a period of time that you go through to get the projects and the assignments, but we’ve people working on that. In case of shopper marketing, half of the setback was because just one client didn't want to be in the same family after we won the AT&T and supposedly AT&T Time Warner business, because they felt uncomfortable not because of anything AT&T said to us. We will cycle through that. And in PR what we're doing is adjusting some of the leadership we -- typically you can take our people and you see that we have hunters and farmers, sometimes we get too many farmers in a place. We got to grab a few new hunters to start the place up. So these are all actionable areas. I can't promise you the day or the week that it's going to get fixed, but it's been identified and there are people working on it currently.

Certainly though -- overall our expectations for the year haven't changed. We still expect growth to be in the range of 3%, 3.5%. And as we sit here today and we look out they pass the third quarter into the fourth quarter, we got the typical amount of -- we had a little bit of lack of visibility into the fourth quarter as we always do. But in terms of the overall expectations they haven't changed.

But we’re drilling down into regions and its very important to us, but I would remind you that the way Omnicom is built, it was built with the services, diverse number of services across its many geographies so that as a result of what you see this quarter when one region isn't performing we’ve been able to compensate it with growth that we've seen in other regions with the intention in the design of the company and the constant revisions that we make in the company. So -- yes, what I feel better if I had 2% growth in North America which yielded 3.5%, 3.7% growth overall, I think everybody would be relaxed that’s on this call. But because of the way it is -- but the system was designed to generate consistent growth and we're pointing out some of the [technical difficulty].

Great. Thank you, Phil, John.

Okay.

And next we will go to line of Tim Nollen representing Macquarie. Please go ahead.

Well, thanks. If we look at your first half performance, I think the organic growth was around about 4% and I think you're saying -- you said early this year expect something like 3% organic for full-year. There is quite a disparity between the U.S kind of 0 to 1 and the rest of the world very high single digits. I heard your comments have hopefully U.S in those specific areas improving by Q4, and I think you said Europe remains quite strong. So are you remaining somewhat conservative on the overall 3% figure for the year or is there some kind of a rebalancing with maybe U.S picking up offset by maybe Europe and Asia-Pacific slowing in the second half. How should we think about the breakout between the two for the end of the year?

I think you should just think that we remain cautiously optimistic, but conservative. And our internal targets probably exceed with our overall public confidence.

We will take the growth wherever we can get it.

Okay. Thanks. Can I ask one more question, a broader question on the U.S media market. In general, it looks like we had quite a strong TV upfront or maybe bit stronger than some people were expecting. It also seems like digital growth if you look at Facebook, YouTube etcetera, etcetera, there are revenues seem to be still quite strong. Is there decent hope for maybe some second half being a bit better overall, give that back drop because the two by far dominant media looked to be doing quite well and why shouldn't we look to a better growth rate in the second half in the U.S?

You know what in speaking to our media people, so this isn't as far all the response as you want to that question. We saw the forecasts for the upfront budgets go up somewhere between 3% to 5%, but it's a -- what it is when compared to the prior year is they pulled forward out of last year's -- last year they were lower and went into the scatter market. They were kind of disappointed with the inventory that was there. So this year, they went into the upfront wanting to lock in the programming that they saw. So that that's our sense. So it's more of a movement of upfront and probably a weaker scatter market in the back half of this year. In terms of some other things I think because of the brand safety and some of the other issues, money that would have been diverted and gone into video, many large advertisers held back a bit in their commitments in that area. And then when you look at the pricing, the audience continues to erode and pricing has stayed high and that's why you’re seeing higher pricing. So you should see mid to high single-digit increases as this rolls out, I would say.

Okay. But the things I’m talking about --- I hear what you’re saying on some of the brand safety issues and I guess probably some measurement issues for digital media is well, but I'm guessing when we numbers from Google etcetera, this season, they will be looking pretty good. So the thing to say, I guess, digital remain quite strong, right? So it's a decent set up it looks like in terms of U.S media for the second half. I hear what you’re thinking in the upfront not being blow out, but on balance it seems kind of okay, no?

It would be hard to -- I can't bet how Google and Facebook nor Amazon or so I agree with you in that respect.

Okay, thanks.

I think we’ve time for just one more call operator before the markets open.

Okay. Our final question today will come from the line of Ben Swinburne with Morgan Stanley. Please go ahead.

Thanks. Good morning. Thanks for squeezing me in. John, could you talk a little bit about shopper marketing's role long-term and just generally how you’re thinking about sort of what Amazon is doing in the retail landscape to a lot of your clients and there has been some debate I think between yourselves and other holding companies about sort of how relevant and important those kinds of marketing services are long-term and just thinking about how you position your portfolio? And then, Phil, I’m just wondering if you could come back to capital allocation. You guys had a pretty big buyback number in the quarter, nice first half just sticking should we be sort of taking about the second half buyback level similar to the first half and then I think John intimated that there is a dividend discussion coming up at the Board meeting. So maybe you just round that out, it sounds like we may be getting some nice return of capital numbers this year. Just any comments on that would be great?

First Amazon, it's an incredible company. And I think it's changing the attitudes of how retail is done and they’re also fearless in their exploration of doing retail in different ways. I think it changes the landscape considerably from just a few years ago in terms of taxes, thoughts, services, and the -- that the shopper marketing companies that we have will provide. A lot of what shopper marketing for us is sitting in strategically planning with major advertisers, how they’re going to go to market and how they’re going to attract consumer either by someone putting in a basket for Amazon or Walmart's online services and different approaches in need. So it's gone from a business that a few years ago had probably an equal number of thinkers to doers to primarily thinkers who are sitting down and strategically planning with their clients how they’re going to move their products. So the business has changed, but the business and the expertise is still terribly important.

Thank you.

On the capital allocation front, I think you see a little bit of an increase in buybacks certainly year-over-year. Our acquisition spending during that same period, first six months of '17 versus '16 is down as well. The mix of the two are not as different as just looking at the buyback number this year versus last year. I think you can expect to see us be consistent in terms of our approach in our policy. John did refer to dividend being on Board's agenda at its next meeting. And as soon as that happens we will certainly let everybody know. Of course buybacks in the second half I think depending on what acquisitions we're able to close, that’s largely going to drive whether there is an increase in the second half versus last year second half.

Thank you, both.

Sure. Thank you all for joining the call.

Thank you.

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