Omnicom Group Inc. (OMC) Q2 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Omnicom Second Quarter 2018 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, Senior Vice President of Investor Relations, Shub Mukherjee. Please go ahead.

Good morning. Thank you for taking the time to listen to our second quarter 2018 earnings call. On the call with me today is John Wren, President and Chief Executive Officer; and Phil Angelastro, Chief Financial Officer. Also on the call with us today is Jonathan Nelson, CEO of Omnicom Digital. We hope everyone has had a chance to review our earnings release. We have posted to 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 the archived on our website. 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 expectations and that actual events or results may differ materially. I would also like to remind you that during the course of the call, we will discuss some non-GAAP measures in talking about Omnicom’s performance. You can find the reconciliation of those measures to the nearest comparable GAAP 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 review our financial results for the quarter. And then, we will open up the line for your questions.

Thank you, Shub. Good morning. Thank you for joining our call. I’m pleased to speak to you this morning about our second quarter 2018 results. We had a good second quarter. Organic growth was 2%. Second quarter EBITA margin was 15.8%, flat versus the same period in 2017; and EPS for the quarter was up 14.2% to $1.60 per share. Looking at our second quarter organic growth across disciplines, we saw positive results in almost every area of our portfolio including Advertising and Media, CRM, Consumer Experience, Healthcare and PR. The one exception to this performance was CRM Execution & Support, which was down 4.4% in the quarter. The agencies in this discipline provide services in various specialized areas including field marketing, sales support and merchandising, point of sale, as well as other specialized marketing and custom communications. Certain businesses in our CRM Execution & Support disciplines have been part of our ongoing evaluation of our portfolio companies to ensure that they align with our long-term strategies. As part of this evaluation, we recently entered into a definitive agreement to sell Sellbytel Group to Webhelp Group, a global business process outsourcer. Sellbytel is a provider of outsourced sales, service and support with centers located primarily in Germany, Portugal, Spain, and Malaysia. Whilst Sellbytel has been a good profitable business, we determined it is not a core operation for Omnicom and will be better aligned with Webhelp Group. The Sellbytel transaction is expected to close in the third quarter of 2018. We are continuing to evaluate our portfolio of companies to optimize our service and service capabilities in line with our strategic plans. As part of this process, we are making internal investments in our agencies and in new capabilities and pursuing several acquisition opportunities, particularly in the areas of data analytics, digital transformation, and precision marketing. We also expect several of the dispositions to be completed in the third quarter in areas that are not consistent with our long-term strategies. Looking now at our organic growth by region, North American revenue was down 0.9% with the U.S. down about half a 0.5%. CRM, Consumer Experience, Healthcare, and PR all performed well with combined growth in North America of almost 12% in the quarter. This positive result was weighed down by negative performance in CRM, Execution and Support as well as by North American Advertising and Media, where we face declines from several Advertising and Media client losses that occurred in the prior periods and reductions in scope. In addition, certain clients continue to change the way they are purchasing media in the programmatic business, although this trend is slowing. We expect these headwinds to partially subside in the second half of 2018. The UK was down just over 2% in second quarter. Advertising and Media, and PR performed very well, while Healthcare was flat. Offsetting this growth were declines in CRM, particularly in Execution and Support services due to weak performance in our field marketing and research business. Overall growth in the euro and non-euro region was very strong at just over 11%, led by France, Italy and Spain as well as Russia and Czech Republic. Germany and Portugal had negative Europe. Asia Pacific second quarter organic growth was 8.5% as Australia, China, Korea and New Zealand had double digit growth and India also performed well. Latin America increased 2.5% for the quarter, Mexico led the way with mid single digit growth while digital continued to improve sequentially and moved to positive growth for the quarter. Our smallest region, the Middle East and Africa declined 8% for the quarter. Africa performed quite well while the Middle East declined relative to challenging comps last year. Looking at our cash flow in the first half of 2018, we generated over $815 million in free cash flow and returned $740 million to shareholders through dividends and share repurchases. Our use of cash flow remains unchanged, paying our dividend, pursuing accretive acquisitions and repurchasing shares with the balance of our free cash flow. Lastly, our balance sheet and liquidity remained strong. Let me turn to how we are continually improving our organization and operations to address the changes that are affecting our industry. The key topic that is keeping many of the world’s top marketers up at night is how to manage disruption in their business whether it’s threats from new competitors or keeping pace with changing consumer behaviors. Our agencies are working with them to reinvent their marketing and communication strategies with an ever increasing focus on placing our clients’ customer at the center. For this reason, Omnicom for many years has been investing in data, analytics and precision marketing. While audience data and effective targeting is a key element for marketing and communications, equally important in our view is delivering inspiring, motivating and compelling, creative content. In fact, at the recent Cannes Lions Festival of Creativity, I was pleased to hear from our clients that data and technology should be in service to creativity and content. At Omnicom, it’s always been a priority to have effective content that is a blend of creativity and technology. It is this unique culture of creative solutions and ideas that our agency is excelling. And while data and technology thrive at scale, creativity thrives in triads. For that reason, we believe individual agencies driven by strong cultures will continue to exist as incubators of creativity supported by the latest data and technology tools. That is why Omnicom is staying true to our roots of recruiting and developing the best creative minds in our industry and respecting the individual cultures of our agencies. With this in mind, we continue to transform the way we are organized in a manner that allows our management, people and agencies to effect change by offering clients the most creative solutions with access to the latest tools in the marketplace. As you know, two years ago, we started the formation of individual practice areas together with our Global Client Leaders group to deliver to clients a single point of access to our network of thousands of industry specialists in specific marketing disciplines. With strong leadership in each of our practice areas, we can better collaborate and execute growth strategies across our key client metrics organization, strengthen our new business development efforts, share expertise and knowledge, create more career opportunities for our people and target our internal investments and acquisitions. We have now substantially completed our transition to this new way of operating. Practice areas are in place for precision marketing and CRM, Healthcare, PR, global advertising, national advertising, brand consultancy, experiential marketing, shopper marketing, media and specialty marketing. I’m pleased to report we continue to see terrific results from our practice areas. Omnicom Health Group for example recently launched the centralized powerful new database, called Insights 360. This data tool which is available to all of our clients through any of our health group agencies, combines information from over 15 healthcare data sources to establish a unique profile of nearly 2 million healthcare professionals in the United States. It enables our pharma and biotech clients to deliver personalized messages at scale to their key healthcare providers. We believe our healthcare offering is well ahead of our competition. On the business development front, Proximity, one of our agencies within our precision marketing group teamed up with BBDO to win Bear’s [ph] global companion animal business. The Global Client Leaders group played an integral role in orchestrating our agencies’ efforts on this win. The assignment which includes several brands will be led by an integrated team based in Dusseldorf with additional local support from a number of BBDO agencies across Europe and the U.S. The win reflects the expanded capabilities we can offer to our clients by aligning our GCLs and practice areas to create personal and scalable experiences for their consumers. We are also continuing to expand and strengthen our Global Client Leaders group with the focus on our top 100 clients. These leaders support our largest accounts fueled by programs that increase our ability to share intelligence and connect with partners. We recently expanded this team with new senior talent to increase coverage to our Healthcare clients and our multinational clients based in Europe. Our practice areas and Global Client Leaders all access our data, analytic and technology capabilities, many of them centrally developed by our Annalect unit, which are being used by our agencies to develop more effective communication strategies for our clients. Over the past decade, we’ve made substantial ongoing investments in Annalect, which now numbers more than a 1,000 professionals dedicated to developing superior analytical tools. In doing so, Annalect has become the foundation for developing transformative data base capabilities across the entire group. Recently, we unveiled the enterprise-wide capability called Omni, our first of a kind people based precision marketing and insights platform. The Omni name speaks to the depth and breadth of the platform across marketing communication functions and across our enterprise of agencies and practice areas. We expect it to be a central part of our group strategy in moving forward. Simply said, it is designed to identify and define personalized consumer experiences at scale in order to drive superior business outcomes for our clients. It transforms the way our teams work, collaborate and deliver value by providing a single view of the consumer in order to drive precision marketing at scale across creative, CRM, media and our other practice areas. Its functionality provides insight generation applications, audience building, planning at a strategic and tactical level, content inspiration, dynamic creative activation, optimized media inventory matching and reporting and an attribution all in one platform, supported by a single view of the consumer. At the core of Omni, our identity sources from leading providers like Experian, LiveRamp, and Newstar among other large data providers and the platform can also plug into Omnicom’s precision marketing group’s first party data. This data can be used to build an audience at the most granule level and to identify content and consumption patterns in a way that is unique to any category and brand. Importantly, Omni continues our strategy of neutrality with no ownership interest in data or tech partners, in a fast-moving space and one with evolving regulatory and compliance requirements, the platform provides us with the agility to tap into whatever data or assets that work for our clients at any given point and make changes as required. We’ve talked a lot about delivering the right message to the right person at the right time to achieve the right outcome. We’ve also talked about the highly personalized experience for the consumer. Omni gets us a leap closer to this promise on behalf of all of our clients across our entire enterprise accessible through a cloud-based open model. Turning now to new business, we are extremely pleased that Dunkin’ Donuts has chosen BBDO to be its creative agency partner, overseeing advertising strategies and creative development across a broad range of platforms including broadcast, digital display, outdoor, print, social media and more. PHD won the global media planning and buying business of HSBC. In commenting on the win, HSBC said they had selected PHD for its strong strategic skills and advanced digital transformation capabilities. We’re also proud that Pizza Hut recently selected Austin-based GSD&M as its creative agency of record following a review launched in March. Our success in developing new solutions for our clients is a result of our best-in-class talent. With this in mind, I’m very pleased to report, at this year’s Cannes Lions Festival of Creativity Omnicom agencies continued their record of being the most creatively awarded in the industry. We swept the agency of the year category with Adam & Eve DDB at number one, AMV BBDO at number two, and BBDO New York at number three. BBDO won network of the year; DDB was number three; and TBWA was number four. In total, 137 agencies from 34 countries won nearly 300 alliances across more than 25 communications disciplines. And as a result of the combination of our agencies’ work, Omnicom won Holding Company of the Year. I want to congratulate everybody that helped this win in a big way at the Cannes this year. Our investment in talent and technology and partnership are the differentiator for Omnicom and our agencies. They are critical to our success. We will continue to strategically invest in these areas as the marketing communication environment only gets more complex. Turning to our operational initiatives. We remain focused on delivering efficiencies across the group. We are constantly challenging our people to find ways to manage their costs agency-by-agency. On a regional and global basis, we’re making good progress on our real estate, information technology, back office accounting services and procurement initiatives. These initiatives, which are complex and take multiple years to execute are ongoing. However, we do expect to take additional actions to accelerate progress in some of these areas during the third quarter. In closing, we’re pleased with our financial performance in the second quarter and remain on track to achieve our full-year 2018 targets. And as we said last quarter, we’re cautiously optimistic that the second half of the year will be stronger than the first. I will now turn the call over to Phil for a closer look at our second quarter results. Phil?

Thank you, John, and good morning. As John said, our results for the second quarter of 2018 were in line with our expectations. Our agencies continue to meet our clients’ needs and manage their costs in an ever-changing and highly competitive marketing landscape. Starting on slide five. Our reported revenue for Q2 grew by 1.8% to a little under $3.9 billion. The components of that growth included organic revenue growth, which was 2% in the quarter or $77 million, bringing our six-month growth rate to 2.2%, which was closer to the lower end of our expectations for organic growth, 2% to 3% for the full year. In regard to FX, the net impact of changes in currency rates increased reported revenue for the quarter by $79 million or 2.1%. The impact of dispositions net of the acquisition activity over the past year was slightly negative in the second quarter as we completed cycling through the disposal of Novus this past April. Acquisition revenue also included the recent acquisition of EMC Group in Japan. The net impact reduced our second quarter revenue by $38 million or about 1%. We continually evaluate our portfolio of businesses to identify areas for investment and acquisition opportunities as well as to identify non-strategic or underperforming businesses for disposition. We are currently in the process of completing several potential dispositions, primarily in our CRM Execution & Support discipline, the largest of which is Sellbytel, a European-based sale support business. We are also in the process of pursuing certain acquisitions, primarily in our CRM Consumer Experience discipline. Although this disposition in acquisition activity has not yet been completed, we expect revenue from disposition activity to exceed revenue from acquisition activity for the remainder of 2018. Based on activity expected to be completed prior to September 30, 2018, the net reduction in revenue would be approximately 1% to 1.5% in the third quarter, 3% in the fourth quarter, and 2.5% for the full year. We’re also in the process of accelerating certain operating efficiency and cost reduction activities which we expect to complete during the third quarter. We expect the reduction to our earnings from the disposition activity we’re considering to be substantially offset by the savings achieved from these operating efficiency and cost reduction activities, as well as an incremental earnings from new acquisition activity. The timing of the currently contemplated dispositions, acquisitions, and operating efficiency and cost reduction activity is subject to change. And lastly, as we discussed in detail during our first quarter earnings call, we were required to adopt the FASB’s new revenue recognition standard, known as ASC 606 effective beginning of this year. The impact of applying the new revenue recognition standard reduced our reported revenue by approximately $49 million or 1.3% for the quarter. I will discuss in more detail the drivers of the changes in revenue a little later in my remarks. Turning back to slide one and the income statement items below revenue. Operating income or EBIT for the quarter increased to $582 million or 1.9% with operating margin of 15.1%, which was flat versus Q2 of last year. Our Q2 EBITA increased to $609 million or a 1.6%. And the resulting EBITA margin of 15.8% was also leveled with Q2 of last year. ASC 606 did have a minor impact on our operating profit due to a change in the timing of recognition of some of our incentive compensation from our clients. Had we followed the same revenue recognition rules as last year, our EBIT would have been higher in Q2 by about $7.5 million. But as we said in our Q1 call, because this change is principally timing related, we expect the net impact for the year to also be minor. In addition to the adoption of the new revenue recognition standard, on January 1st we adopted ASU 2017-07, which reclassifies a proportion of our pension and post employment expense, primarily the interest related components from salary and service costs below operating income as part of interest expense. New accounting presentation requires us to restate the prior periods, so that they are comparable. The amount reclassed for both Q2 of ‘18 and Q2 of ‘17 was approximately $6 million. The reclassification of this expense does not have an impact on our pre-tax profit or net income. Net interest expense for the quarter was $52.5 million, up $1.2 million versus the second quarter of 2017, and up $5.6 million versus $46.9 million reported in the first quarter of 2018. As previously discussed, beginning of this year, we adopted ASU 2017-07, and as a result, a portion of our pension and post employment expense is now included in net interest expense. And the prior year has been restated to be consistent with the current year’s presentation. The impact of the reclassification in the second quarter of 2018 and 2017 is approximately $6 million. Gross interest expense in the second quarter was up about $3.6 million compared to last year’s Q2, primarily due to the impact of increased interest expense on our floating rate swap, while interest income in the quarter increased $2.4 million versus the prior year due to higher interest earned on cash held by our international treasury center. When compared with Q1 of this year, interest expense in the second quarter increased by approximately $4.1 million with increased interest expense on our floating-rate swaps as well as increased rates on our commercial paper borrowing, and interest income decreased by $1.5 million. Turning to taxes. Our effective tax rate for the second quarter was 25.8%. Primary driver of the lower effective rate is the lower U.S. tax rate, resulting from the enactment of the 2017 tax act which reduced the federal statutory tax rate to 21%. In addition, the decrease in the effective tax rate was favorably impacted by a reduction of $12 million in the expected incremental U.S. tax applied against Omnicom’s overall foreign earnings. As of now, we expected that the benefit from the tax act will reduce our effective tax rate by about 5% or to approximately 27.5% compared to our 32.4% rate in 2017, which excludes the net increase in tax expense recorded in 2017, the impact of the tax act and the reduction in tax expense resulting from the tax benefits realized in ‘17 from share-based compensation. We cannot predict the impact on our 2018 effective tax rate from share-based compensation because the subject changes in our share price and the impact of future stock option exercises. Earnings from our affiliates totaled $1.7 million for the quarter, up slightly versus Q2 of last year. And the allocation of earnings to the minority shareholders in our less than fully owned subsidiaries $30.6 million, up $4.1 million when compared to Q2 of last year. As a result, net income for the second quarter increased 10.8% to $364.2 million. Now, turning to slide two. Income available for common shareholders for the quarter was $364.1 million. And our diluted share count for the quarter decreased 2.5% versus Q2 of last year 228.1 million. As a result, our diluted EPS for the quarter was a $1.60, up $0.20 or 14.3%. On slides three and four, we provide the summary P&L, EPS and other information for the year-to-date period. I’ll just give you a few highlights. Organic revenue growth was 2.2% during the first six months of the year. FX increased revenue by 3.1%. The net impact from acquisitions and dispositions reduced revenue by 2.6% and the impact of the adoption of ASC 606 decreased revenue by 1.2%. So, for the year to date period, revenue totaled $7.5 billion, an increase of 1.5% compared to the first six months of 2017. EBIT increased to just over $1 billion and our year-to-date operating margin of 13.4% was flat versus the first six months 2017, and our six-month diluted EPS was $2.73 per share, which is up $0.31 or 12.8% versus 2017. Turning to slide five, we shift the discussion to our revenue performance. As we discussed in detail during our Q1 call, after comprehensive review of the impact standard would have on our business including detailed reviews of our client compensation agreements, we determined that the new standard would not have a material impact on our revenue or operating results. While not material, the new standard did change the timing of the recognition of certain performance incentive provisions included in our client agreements. Previously, performance incentives were recognized as revenue when our performance against qualitative goals was acknowledged by the client or when specific quantitative goals were achieved. This often occurred on a lag, resulting in recognition of these incentives late in the year or early in the subsequent year. The new standard requires these items to be estimated and included in the total consideration in the year that services are performed and to be evaluated throughout the contract period. Additionally, the new standard resulted in a reduction of revenue and operating expense in Q2 of ‘18, approximately $40 million in one of our CRM Consumer Experience agencies. Because we adopted the new standard by the modified retrospective method of adoption, prior year results are not comparable. Accordingly, on slide 20, we present revenue for the quarter and year-to-date periods of 2018 without the impact of ASC 606. We estimate the impact of applying the new revenue recognition standard reduced our reported revenue in the second quarter of 2018 by $49 million and $91 million for the first six months of the year or 1.3% and 1.2% for both periods respectively. The impact on EBIT and our results from operations as well as the balance sheet and cash flow were not material. For the full year, we continue to estimate a reduction in revenue of approximately $150 million. And as we mentioned earlier, had we followed the same revenue recognition rules as last year, our EBIT for Q2 would have been $7.5 million higher. However, because the impact on EBIT is principally timing related, we expect the net impact for the full year to be minor. Turning to FX. While we saw the dollar strengthen against more currencies over the past three months, overall the U.S. dollar was weaker year-over-year against the basket of foreign currencies we operate in. The impact of changes in currency rates increased reported revenue by 2.1% or $79 million in revenue for the quarter. The largest FX movements from the quarter were from our euro and UK markets. Additionally, dollar weakened against the Czech koruna, Chinese renminbi, and the Canadian dollar. Partially offsetting those movements, dollar strengthened against the Brazilian reais, Russian ruble and the Turkish lira. Looking forward, if currencies stay where they currently are, we anticipate that the FX impact on our reported revenue will turn negative during the remainder of the year, creating a headwind to our revenues of approximately 1% during the third quarter and the fourth quarter. For the full year, we’re currently estimating the FX impact will remain positive by approximately 1%. The impact of our recent acquisitions net of dispositions decreased revenue by $38 million in the quarter or 1%. Early in the second quarter, we cycled through the disposal of Novus, a print media business which we sold in the second quarter of 2017. Part of our continuing evaluation of our portfolio of businesses, we recently announced the disposition of Sellbytel, our European sale support business. That transaction is subject to regulatory approval and is expected to close in the third quarter of 2018. In addition to the Sellbytel disposition, we’re currently considering other smaller dispositions in the third quarter as well as pursuing certain acquisition opportunities. As a result and as previously discussed, we expect the net reduction to our revenue of approximately 1% to 1.5% in the third quarter, 3% in the fourth quarter and 2.5% for the full year of 2018. And finally, while mixed by geography and by discipline, our organic growth was positive on a global basis for the quarter, up $77 million or 2% for the second quarter. Geographically, our European and Asian regions continue to lead the way. While the U.S. was slightly negative by about 0.5%, sluggish performance by our Canadian agencies negatively impacted our North American performance in the quarter. From our disciplines, we saw strong results in our CRM Consumer Experience and healthcare businesses while our CRM Execution & Support businesses faced difficult comps to Q2 of 2017, lagged in the quarter. Slide six shows our mix of business by discipline. The second quarter, the split was 54% for advertising and 46% marketing services. As for their organic growth by discipline, our advertising discipline was up 1.6%. Advertising’s organic growth continues to be led by our media businesses, while our global and national advertising agencies continued to experience mix performance. CRM Consumer Experience was up 7.1% for the quarter on a continuing strength of our events businesses in the U.S. and in Europe. Direct digital marketing and shopper marketing were also positive while branding lagged. CRM Execution & Support facing a difficult comparison to Q2 of 2017 from organic growth with 6.2% was negative for the quarter, sluggish performance from our research and specialty production agencies partially offset by solid growth in our not for profit consulting agencies. PR was up 2.7%. Solid performances by our agencies in the U.S. and the UK led the way this quarter. Elsewhere, Continental Europe was also positive, while both Asia and Latin America were down again this quarter. And Healthcare was up 4.8%, continuing the improvement we’ve seen since the beginning of the year. While this quarter’s growth was driven by strong performances domestically and in Asia, we also saw positive growth across all regions. On slide seven, which details the regional mix of business, you can see during the quarter, the split was 54% for North America, 9% for the UK, 20% for the rest of Europe, 11% for Asia Pacific, 3% for Latin America, and the remainder in the Middle East and Africa markets. Turning to the details of our performance by region. Organic revenue growth in North America was down 0.9% due to marginally negative performance from our U.S. businesses and weakness from our Canadian agencies. So, we saw strong positive performances from our CRM Consumer Experience, PR and Healthcare agencies. The advertising and CRM Execution & Support disciplines in the region continued their softness. The UK was down 2.2% organically that was facing a difficult comp to Q2 of 2017 when organic growth in the market was over 9%. While advertising, media and PR all were up for the quarter, decreases in our field marketing, research and events businesses offset those performances. The rest of Europe was up 11% organically in the quarter. In the region, France, Italy and Spain all had strong performances and we also so solid performances in Netherlands and Ireland while Germany continued to lag. Organic growth in Europe outside the Eurozone continued to be positive as well. The Asia Pacific region was up 8.5% and we continue to see organic growth across our major markets in the region, including Australia, Greater China, India, New Zealand and South Korea, with Japan the only meaningful market underperforming this quarter. Latin America had organic growth of 2.5% in the second quarter. Brazil continued its modest improvement, returning to positive organic growth for the first time since Q1 of 2017. However, the ongoing political turmoil presents a significant hurdle in that market. Elsewhere in the region, we saw solid growth in Mexico and Colombia. And Middle East and Africa, our smallest region, was down. As was the case last quarter, the decrease was driven by a reduction in media activity by our clients in the region and non-recurring projects within the events businesses in the region. Turning to our cash flow performance. On slide 10 you can see that in the first half of the year, we generated almost $860 million of free cash flow including changes in working capital, an increase over the first six months of 2017. As for our primary uses of cash on slide 11, dividends paid to our common shareholders were $278 million; dividends paid to our non-controlling interest shareholders, $57 million. Capital expenditures totaled $90 million, primarily reflecting increased spending as we reconfigure our real estate footprint to be more efficient. Acquisitions, including earn-out payments totaled just under $300 million. And stock repurchases net of the proceeds received from stock issuances under our employee share plan totaled $463 million and were in line with our repurchase activity during the first half of last year. All-in, we outspent our free cash flow by about $324 million year-to-date. Turning to slide 12, regarding our capital structure at the end of the quarter. Our total debt is just a shade under $4.9 billion. Our net debt position at the end of the quarter was $2.97 billion, up $1.8 billion compared to yearend December 31, 2017. The increase in net debt was a result of typical uses of working capital that historically occur in the first half of the year. The use of our cash in excess of free cash flow of approximately $324 million and decreasing our cash balance related to the effective exchange rates, which reduced cash at June 30, 2018 by $114 million. Compared to June 30, 2017, our net debt is down a little over $100 million. Decrease was primarily the result of generating $75 million in free cash flow and by the changes in operating capital which positively impacted our cash by approximately $45 million over the past 12 months. This was partially offset by the effective exchange rates on cash over the past year, which reduced our cash balance by about $15 million. As for our debt ratios, they remain solid. Our total debt to EBITDA ratio was 2.1 times and our net debt to EBITDA ratio was 1.2 times. And due to the year-over-year increase in our interest expense, our interest coverage ratio decreased 10.3 times, but remains quite strong. Turning to slide 13. We continue to manage and build the Company through a combination of well-focused internal development initiatives and prudently priced acquisitions. For the last 12 months, our return on invested capital ratio was 20.2%, while our return on equity was 50.1%. Both ratios, particularly return on equity impacted year-over-year due to the additional tax charge we took in Q4 in connection with the passage of the tax act. But, we expect that impact to be more than offset by the positive impact the lower tax rate will have on our results as we move forward. 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 shows our cumulative net income from 2008 through June 30, 2018, which totals $10.6 billion. And the bars show the cumulative return of cash to shareholders including both dividends and net share repurchases, the sum of which during the same period was $11.3 billion, resulting in a cumulative payout ratio well in excess of 100% over the last decade. 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] And our first is going to come from the line of Alexia Quadrani with JPMorgan. Please go ahead.

Hi. Thank you very much. I guess, first off, how much will the divestitures of the CRM execution businesses allow for some improvement in organic growth in the U.S.? I think, Sellbytel is mostly a European business. Maybe you can clarify that. But it sounds like there is other big businesses you hope to divest to sort of alleviate some of the pressure on U.S. organic growth. So, I guess any color on that. And then, I have a follow-up.

Yes. I think, Alexia, Sellbytel is an international business, not really U.S. presence. But some of the disposals that we’re contemplating certainly have a U.S. presence. And if we look at the actual performances on the second quarter and the first quarter of this year, if the disposals that we’re contemplating had been completed at that time, we would have better growth in North America. We don’t have an exact number. It probably wouldn’t have been that significant. But, we’re looking at and contemplating these disposals just like Sellbytel not just because of current performance but because of our expectations in the future as far as whether we’re going to invest or where we’re going to invest and what we think strategically these businesses mean for our longer term clients. So, it’s both or it’s primarily strategic reevaluation, but it’s also current performance in many of these cases as well.

The other thing I might add to that Alexia is that on some of the acquisitions we hope to close, they tend -- for the most part they are domestic in nature and they have growth rates which will contribute to our overall performance in North America.

And then, when you look at your guidance for the back half of the year, hoping for some acceleration organic growth, I know that sort of -- I believe that’s a global number, not specific to U.S., but I think, it does mostly imply some improvement in the U.S. I’m wondering what the puts and takes are. Is there better new business tailwind in the back half of the year? I guess, any other color you can give us why the U.S. organic might begin to improve aside from the contributions of acquisitions or the benefit of divestitures?

I know that new business for the quarter was probably was higher than -- or has been recently at $1.5 billion, I haven’t done the work, maybe Phil knows, to look to see what part of the world that comes from.

We don’t analyze it that way. So, we expect it to be kind of distributed consistent with our global operations, but we haven’t broken it down by region.

If some of the things like -- some of the pressure that we’ve had in programmatic area has been primarily in the United States where we are going from bundled to unbundled, that pressure abates a bit as we get into the second half based upon all the information that we have currently. So, there are a couple of -- there are quite a number of puts and takes in being cautiously optimistic about the second half. But, we tend to look at the whole enterprise, not just a particular region.

Okay. And anything specific on U.S. advertising that you might not have highlighted that was particularly soft in the quarter. The advertising itself, business?

I think, it’s a combination of things. I think we certainly have some agencies in the U.S. that have done well and did well in the quarter. We’ve got some others that have lost some clients recently and others that perhaps is timing in terms of clients scaling back in the current quarter and moving their spending to future periods, although we’re not certain and definitive that those numbers are for sure going to be significantly better in the second half. I think we’re cautiously optimistic. But at this point, we don’t anticipate changing our expectations for the year.

And we also have a question from the line of Craig Huber with Huber Research. Please go ahead.

Thank you. I have a few questions. Let me start off over Europe if I could. I’m curious to hear your updated thoughts on this GDPR or regulatory change over there in terms of clients or change in their behavior in terms of how much digital advertise replacing in Europe. In particular, I was curious to hear if any major changes going on with spend through Facebook and Google on behalf of your clients. Has that changed much in say the last two months with this regulatory change?

I’m going to turn it to Jonathan Nelson.

Hi, Craig. Thanks for the question. We have not seen a huge change in terms of GDPR and how it’s affected our business. Of course, we’re complying with all the regulatory issues. But, we expect our Google and Facebook spend to continue and our systems are built to work fully with GDPR compliance situation.

Okay. Then also, while we’re still talking about Europe, it had very strong growth there for a while and for continent and stuff. Is much of that being fueled by net new wins over there or just some more meat on the bones if you would?

I think it’s a combination of things. I think we’ve got some strong agencies in many of those markets that have been performing really well, ultimately. Some of that’s due to wins, some of that’s due to projects, some of that’s due to good management. But, I think there are still going to be ebbs and flows as we saw in the UK this quarter. The UK has had some strong performance for quite a long time now, and they were up against some difficult comps, but I think overall it’s a number of factors.

There’s probably a higher concentration, larger revenues in our CRM execution side of the business in the United States, to some extent in Northern Europe, and those are the ones we’re taking a critical look at in terms of what they’re going to contribute to our business strategically going forward. And correspondingly, we’re looking to make acquisitions in CRM precision side of the business because we think that will benefit us as we move forward in helping our clients.

And then, also, maybe just talk about, not individual clients but sectors of clients and how they performed in the quarter? Curious in particular to hear about CPG companies and food and beverage guys collectively on an organic basis, and what your sort of outlook is collectively for that group? Do you see any material maybe optimism there at all, is it still quite a ways out?

Well, fortunate for us that it’s not a very large portion of our revenue base but they’ve certainly been under an incredible amount of pressure in terms of what’s happening to their business in terms of new competitors, both directly on the product side but also in the distribution side. So, it’s -- I don’t see any -- any immediate turnaround in that area. I see just continuing pressure for the foreseeable future and specifically in that sector.

And there hasn’t been -- overall, there hasn’t been that much movement in terms of our revenue by industry group. So, certainly some clients and some of our businesses have done better than others, depending on mix of their clients. But it’s pretty broad, diverse portfolio. And we haven’t seen dramatic swings one way or the other in the types of industries that our clients are in that are driving our growth.

So, would you include auto in that comment as well?

I would. I think, there’s currently a few opportunities that we’re pursuing in auto. So, I think we look at that vertical as certainly an opportunity for us in the future.

Our next question will come from the line of Julien Roch with Barclays. Please go ahead.

Yes. Good morning. My first question is, could we have the impact of Accuen on organic in Q2?

Sure, worldwide Accuen was down about $7 million in revenue, $5 million of that was in the U.S.

Okay. The second question is on the assets you’re selling. I assume that the impact on 2019 will be about 3% in Q1 and Q2, and 1.5 in Q3. Can you confirm that?

I think that’s probably not too far off. I think we’re at a point right now where we typically don’t comment unless we close transactions whether they’d be acquisitions or dispositions and project what those numbers are going to be. But, I think that’s assuming we do the acquisitions and dispositions that we currently planned, although there is no guarantees. That’s probably the reasonable estimate.

Okay. And then, following up on your answer to Alexia. You said that if you had already sold those assets, organic would have been higher. But, is it possible to know are you talking about couple of tens of basis points higher, are you talking about 1% higher? I mean, some idea of the impact on group organic. And I guess also, all those businesses with higher or lower margin than the group average?

So, on the growth point, I think if you look at the current quarter, the number probably would be less than 50 basis points was the impact. And then, with respect to margins, dispositions, couple of points, I guess. Dispositions, we’re considering and Sellbytel being the largest, which we expect to close by the end of August. Margins overall are probably consistent with Omnicom’s overall average margin. Although, it’s a little bit too early, because we’re not certain exactly when and which deals we’re going to close as well as what the impacts for certain of acquisitions is going to be. However, I think as you look to Q4 and beyond, given we’ll have a lower revenue base and we expect to be neutral from an earnings perspective, given the operating efficiency and cost reduction efforts that we’re planning. I think, the math works that there will be some margin improvement due to the disposals and due to the fact that we have a lower amount of revenue. We typically focus and continue to focus on EBITA; it’s not a margin percentage. And we’ll continue to do that. But in terms of a range, we don’t really have one yet, but it’s -- there will be some benefit we would expect. How significant it’s going is to be to be determined.

Okay. And final question on the disposals. So, two years ago, you sold about 5% of Omnicom; this year you’re selling 3%, so that’s about 8% already. Once you’ve redone completely your review program, what percentage do you think of the Company you would have sold? Are we talking 10%, 15%, to have a sense of what will happen in the next couple of years?

I think, it’s hard to predict. I think, if you look at ‘17, the net disposition number was about 4%; ‘18, our current expectations, our estimate is 2.5%. We’re going to continue to pursue the same strategy. And to the extent there are opportunities that make sense for us, do acquisitions that are accretive, we’re going to do that; to the extent there are disposition opportunities that we think strategically are the right thing to do for the business going forward, we’re going to take advantage of those opportunities. We don’t really have a bogey in mind just like for acquisitions, we don’t have an acquisition bogie and then have people chase deals to meet the target and they’re not the right deals from a disposition perspective, our approach isn’t very different. So, I can’t tell you right now exactly how it’s going to play out. We are going to continue to revaluate portfolio and the reality of that is, given the nature and the speed of the change that’s been occurring in the industry, it’s been an ongoing process that will continue to be an ongoing process. Whether it results in more executed dispositions or not, it’s to be determined.

And last one, your working capital was $300 million worse in the first half. Do you expect the deterioration for the full year, or will blocking and tackling means no change to working capital for the full year?

I think, the number was, I think 300 to a little high, there was a one-time acceleration of U.S. bonus payments that we made in Q1 that we otherwise would have made in Q2. I’d say Q2 was relatively flat in terms of our performance after adjusting for that. So, we’re still down through six months. Our goal is certainly to make up for that in the second half. But, I think we’re also making -- we’re also trying to make sure from a day-to-day perspective that we don’t lose any more ground. But, I’m not sure sitting here today whether we’re going to make up the number from the first half or from the first quarter or not fully by the end of the year. But that’s certainly our goal.

And we have a question from the line of David Joyce with Evercore. Please go ahead.

Thank you. If you could just help to frame for us related to your Omni suite and announcement there. Where are you on the predictive data analytics and in terms of that competitive offering vis-à-vis the more technology oriented competitors that have a predictive capability?

Jonathan?

Thanks for the question, David. In regards to Omni, essentially what it is, is we’re using customer data to profile customers and to predict what kind of information they want to see from a creative and messaging point of view, and then connecting that to where they are in the media landscape. We’re using multiple artificial intelligence and machine learning algorithms to do both of those things. And we believe that it is a state-of-the-art for the buy side. And we are working with many of our sell side partners, Amazon, Google to incorporate some of their algorithmic technology as well as adding our own. So, all-in, it’s an open platform that incorporates some of the best technologies available in the marketplace.

And operator, given the market is just opened, I think we have time for one more call.

And then, our final question will come from the line of Michael Nathanson with MoffettNathanson. Please go ahead.

Thanks. I have obviously one quick for Phil and one for Jonathan. Phil, could you size -- I think you’re trying the size the impact of those cost actions. And when is the first quarter that will see the benefit of those class reductions?

I think, from a timing perspective, we expect to complete the bulk of the actions by the end of the third quarter. So, we certainly hope to see and expect to see the ongoing benefit starting in Q4 at some point. We may not be done right at the end of Q3, but certainly we’ll see it in Q4 and then on into 2019. And in terms of the dollar amount, I think I don’t have the exact dollar amount to give you other than from a target perspective, based on the dispositions we actually get done. And the overall profile from an Omnicom perspective of our margins, you can probably do the math and assume that the goal is to keep our EBIT dollars consistent to the extent that we can take advantage of the actions that we’re pursuing right now.

Got it. And then, quick one for Jonathan. I guess, the big news over the past month was IPA2 [ph] exit from Axiom. [Ph] I wondered did you guys look at acquiring that asset. And how do you see this in general, the strategy of building your own data versus maybe renting it? So, can you just talk us through philosophically how do you see, deals like Axiom and what’s your strategy been relative to that?

Yes. We did look at it. We have fallen on the side of renting the data versus buying the company that compiles the data. We see data as commodity. In fact when you look at the Omni platform, we announced deals with LiveRamp, with Newstar and with Experian, all of which have similar first party style data,. We just believe that this enhances our position of neutrality and removes any perceived conflict we might have with our direct clients.

Okay. Thank you.

Thank you. Thank you all for joining the call.

Ladies and gentlemen, that will conclude the conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.