Omnicom Group Inc. (OMC) Q3 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the Omnicom Third 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 would like to introduce you to your host of today’s call, Vice President of Investor Relations, Shub Mukherjee. Please go ahead.

Good morning. Thank you for taking the time to listen to our third quarter 2018 earnings call. On the call with me today is John Wren, Chairman 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 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 archived on our website. Before we start, I have 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 this morning. I am pleased to speak to you this morning about our third quarter 2018 results. It’s been a very busy quarter as we successfully executed many of the repositioning plans and dispositions that we discussed on our last call on July 17. On August 31, we completed the previously announced disposal of Sellbytel. In addition, during the third quarter, we disposed of 18 other companies, which were primarily in our CRM execution and support discipline and to a lesser extent in our CRM consumer experience discipline. These businesses were no longer aligned with our long-term strategy. The disposition activity resulted in a net gain to our P&L in the quarter which Phil will cover during his remarks. With respect to the company’s results, we reduced headcount by approximately 7,000 people. We also accelerated certain planned cost reduction and real estate consolidation activities in the quarter. During the quarter, we took actions to reduce our staff in our ongoing operations by over 1,400 people with annual payroll of approximately 135 million. These staff actions fell into three general categories. Approximately 500 positions will be replaced as we refresh and upgrade our talent to meet our agency’s current needs. The retirement of a number of senior executives in our networks, practice areas and at Omnicom corporate, these retirements ensure that our succession plans are up-to-date and that we are creating opportunities for upcoming leaders and the savings from the remaining reductions in the headcount will contribute to our goal of offsetting the EBIT loss from the dispositions we completed in the quarter. During the quarter, we also accelerated our real estate consolidation plans by creating more large open and modern campus style hubs, encouraging greater cross-agency collaboration. This move has resulted in efficiencies by allowing us to vacate more than 400,000 square feet in several cities, including Atlanta, Dallas, New York and London. In addition to discussing the net gain from our disposition activity, Phil will address the repositioning costs we incurred in the quarter associated with the staff and real estate actions. Looking forward we expect that the reduction to our EBIT from the dispositions we completed will be substantially offset by savings achieved from our cost reduction and real estate consolidation actions. We continued to evaluate the portfolio of businesses to identify areas for investment and acquisition opportunities as well as to identify non-strategic or underperforming businesses or potential disposition. Turning now to our third quarter results, prior to the end of the second quarter we began to hold discussions with interested buyers and the managers of many of the companies we disposed during the third quarter. As you would expect given the activity related to preparing for the dispositions the managers for these businesses were distracted causing a decline in the performance of these businesses during the quarter, the impact of the dispositions reduced overall organic growth by 0.40% in the quarter and reduced organic growth in the U.S. by 0.60% in the quarter. Assuming all of our third quarter dispositions had occurred on July 1 we had total organic growth of 3.3% for the quarter and 1.2% in the U.S. for the quarter which better reflects the performance of the portfolio companies that we now have. Third quarter EBIT margin excluding the impact from the net gain from dispositions and the repositioning cost was 12.7%, up 10 basis points versus the same period in 2017 and EPS excluding these same items was up 9.7% to $1.24 per share for the quarter. Looking at our third quarter organic growth across disciplines we had positive results in almost every area of our portfolio. Advertising and media were up 4%, CRM consumer experience was up 5.5%, healthcare was up 2.9% and PR increased 2.4%. CRM execution and support was down 3.6% in the quarter. The majority of our dispositions were in this area. By region the U.S. was up 1.2% in the quarter, CRM consumer experience and healthcare performed very well, advertising and media as well as public relations had positive results. In CRM execution and support was negative. Looking forward to 2019, we will benefit from some of our recent new business wins which I will discuss later in my remarks. I am cautiously optimistic that our growth in the U.S. will continue to improve. Canada was down 6.4% for the quarter driven by a decline in our media operations as well as weak performance in our advertising agencies. The UK was down 0.30% in the third quarter. CRM consumer experience and PR performed very well while healthcare was also positive. Offsetting this growth were declines primarily in CRM execution and support, particularly in research and field marketing. Overall growth in the euro and non-euro region was very strong at 6.9% led by France, Italy, Spain, Russia and the Czech Republic. Germany had negative growth for the quarter. Asia Pacific third quarter organic growth was up 14% as Australia, China and New Zealand had double digit growth and most of the markets in the region performed well. Latin America increased by almost 2% for the quarter, Mexico and Colombia led the way with middle single-digit growth. Brazil was flat for the quarter. Our smallest region the Middle East and Africa was nominally negative in the quarter. Looking at our cash flow, in the nine months of 2018 we generated $1.1 billion in free cash flow and returned $930 million to shareholders through dividends and share repurchases. Our use of cash remains unchanged, paying our dividend, pursuing accretive acquisitions and repurchasing shares with the balance of the free cash flow. Lastly, our balance sheet and liquidity remain very strong. We are pleased with our financial performance in third quarter and remain on track to achieve our full year objectives for 2018. Turning now to our operations, we continued to restructure our organization to keep pace with the structural changes in our industry and the needs of our clients. At the same time, we remain very focused on the areas that differentiate Omnicom from our other competitors. Omnicom houses some of the industry's most iconic brands like BBDO, DDB and TBWA, as well as many others. Our philosophy is that individual agencies driven by strong cultures will continue to exist as incubators of creativity. We are deploying digital data and analytical tools to enhance the delivery of our services from strategy to creative to media to PR and precision marketing, so that we can deliver meaningful personalized messages at scale. Today virtually all of our businesses are improving their services through the utilization of new technologies and data. And finally, we continue to focus on our agility and being able to offer our services to clients in a manner that is consistent with their go-to-market strategies. This means having a flexible and nimble organization that aligns our people and assets that serve the specific needs of our clients. The actions we took in the quarter that I discussed earlier will further streamline our operations and allow us to act in an even more agile manner. I'm pleased to report that we're in a very strong competitive position. We have remained focused and are making progress on our key strategic objectives, growing and developing our talent while increasing the diversity of our workforce, simplifying our service offering and organization through our new practice area and client matrix structure, making investments in our agencies and acquisitions to expand our capabilities in data analytics and precision marketing, and maintaining a relentless focus on improving our operational efficiencies throughout our entire portfolio. We’ve made good progress on enhancing our capabilities in digital transformation, data-driven solution and customer-centric services in the third quarter through acquisitions and investments. In July, Omnicom Precision Marketing Group acquired Credera, a full-service management and IT consulting firm with offices in Dallas, Houston and Denver. With a core focus on marTtech and ecommerce platforms, the company deliver solutions that increase consumer engagement and drive sales growth for its clients. Credera with Omnicom Precision Marketing Group’s global presence and leadership in data and analytics creates compelling offering for Omnicom's existing clients and prospects. In August, Clemenger BBDO purchased the majority stake in Levo, a leading marketing services and technology business with offices across Australia and New Zealand. The company helps its clients expand and transform their organizations by designing and deploying marketing automation and ecommerce platforms. Combined with Clemenger's existing digital and data capabilities, Levo will enable the Group to have one of the most advanced business transformation capabilities in the market. And on October 1, we acquired the media and marketing performance business of United Digital Group in Germany. The business is one of the largest performance marketing providers in the market with a suite of offerings including SEO, SEA, Affiliate Marketing, Social Media Advertising and Digital Analytics. We also continue to invest in our data and analytics platform during the quarter. As I discussed on our last call, we recently launched a people-based precision marketing and insight platform called Omni. Omni is an enterprise-wide platform to connect creative CRM and media across a single audience definition. By the end of the year our goal is to have all of our agencies using Omni to create, plan and execute campaigns for our clients. Now let me turn to some of our recent new business wins, which reflect the talented people that represent Omnicom every day. In early October Ford named BBDO as its global creative agency. The Ford win reinforces our view that clients continue to recognize the increasing importance and the power of big creative ideas will differentiate customer experiences and transform brands. In naming BBDO as its agency, Ford specifically mentioned the importance to them of world-class creative and that’s what we can deliver. And as was disclosed last week, AT&T’s newly formed Warner Media Group is in the process of consolidating the entirety of its U.S. media business with Hearts and Science. When the consolidation is completed, the agency will handle both the traditional and digital media for all Warner Brothers, HBO and Turner Properties in addition to its existing AT&T relationship. This win is a testament to the confidence that one of our very largest clients as in our people. We believe our longstanding commitment to hiring and developing the best talent in the industry, is key to our new business success. As a result, we continue to make substantial investments in education from programs that will address new digital technologies and data platforms all the way through our advanced Omnicom University programs for current and future leaders. I am proud that our efforts are paying off as Omnicom was recently recognized by Forbes as one of the world’s best employers in 2018. It is a significant recognition for us and what’s more we are the only advertising and marketing firm on their list. Our dedication to having the best talent in the industry was again recognized by the industry this quarter. After winning big at the Cannes Lions Festival seeing our agencies continue their winning streak at the 2018 Spikes Asia Festival of Creativity was especially gratifying. Here are a few of the highlights. For the fifth consecutive year, BBDL received the night’s top honor by winning Network of the Year with DDB placing second. DDB Australia was runner up for Agency of the Year and PHD placed third for Media Network of the Year. In total, over 20 Omnicom agencies in 15 countries contributed to nearly 120 Spike awards with work from 40 different clients. I am also very proud that [indiscernible] was honored with the best PR Firm Diversity Initiative at PR Week’s Diversity and Distinction Awards. I am a true believer that more diverse teams create even better work. I want to recognize and thank the people at our agencies for the world-class integrated campaigns, outstanding new business wins and the great work that enable us to deliver these results. In closing, we had good financial performance and made meaningful progress on our strategic and operational initiatives in the third quarter. I will now turn the call over to Phil for a closer look at the results. Phil?

Thank you, John and good morning. From John’s remarks, you can tell we had a very active third quarter. As our businesses always do, this quarter they continue to focus on responding to our clients’ needs while ensuring that they proactively manage their own cost structures. And as we mentioned and as we expected back in July, during the quarter, we closed on the disposition of Sellbytel, our European-based sale support business. That transaction, along with 18 other smaller dispositions we completed during the third quarter, resulted in a net pre-tax gain of $178 million. In addition, during the quarter, we recorded charges of $149 million for repositioning actions primarily resulting from severance and lease terminations in connection with ongoing efforts to enhance the strategic position and operating effectiveness of our businesses. Lastly, we recorded additional tax expense of approximately $29 million resulting from adjustments of the provisional amounts originally recorded in connection with the 2017 Tax Act. We will discuss our 2018 results both with and without the impact of the net gain from dispositions, repositioning charges and the tax adjustments in connection with the Tax Act. The non-GAAP adjusted results on Slides 5 through 8 presents our results excluding these items and show how our underlying businesses performed year-on-year on a comparable basis. For the third quarter, our organic revenue growth was 2.9%. Organic growth was 3.3% for Q3 of 2018 after adjusting to reflect the pro forma impact of third quarter dispositions, which reduced organic growth in the quarter as if they occurred on July 1. FX negatively impacted revenue for the first time since Q2 of 2017. The decrease to our reported revenue for the third quarter was $62 million or 1.7%. Regarding the impact of our acquisition and disposition activity that John spoke about during his remarks, we completed a number of dispositions during the third quarter, the largest of which was Sellbytel. We also made a pair of acquisitions in the quarter, complement our precision marketing businesses in the U.S. and Australian markets. The net impact of these activities reduced third quarter revenue by about $35 million or 0.90%. Based on activity completed prior to and during the third quarter, the projected reduction in revenue from net dispositions and acquisitions will be approximately 2.5% for the fourth quarter which would result in a net decrease for the full year of 2018 of approximately 2.3%. And lastly as a reminder, we were required to adopt the FASB’s new revenue recognition standard known as ASC 606 effective at the beginning of this year. The impact of applying the new revenue recognition standard reduced our reported revenue by approximately $17 million or 0.4% in the quarter. As a result our reported revenue decreased marginally to $3.7 billion. I will discuss in more detail the components of the changes in revenue in a few minutes. Moving to Slide 5, our reported operating profit for the quarter was $502 million, an increase of 6.8% versus last year. Our non-GAAP adjusted operating profit or EBIT which excludes the impact of the net gain from dispositions and the repositioning charges for the quarter increased to $473 million or 0.7%, resulting in an operating margin of 12.7% which was up 10 basis points over our Q3 2017 results. On a reported basis Q3 EBITDA increased 5.9% to $528 million. The non-GAAP adjusted Q3 EBITDA and EBITDA margin amounts were effectively flat with Q3 of last year at just under $500 million and 13.4% respectively. Net interest expense for the quarter was $56.7 million, up $4.3 million versus last year’s third quarter figure and up $4.2 million versus the $52.5 million reported in the second quarter of 2018. Gross interest expense in the quarter was up $4.4 million compared to last year’s Q3, primarily due to the impact of increased rates and interest expense on our floating rate swaps, while interest income in the quarter increased slightly versus the prior year. When compared with Q2 of this year interest expense in the third quarter increased by approximately $3 million due to the increase in interest expense on our floating interest rate swaps and interest income decreased by $1.2 million. Turning to income taxes, our reported effective tax rate for the third quarter was 25.9%. Primary driver of the lower effective rate was the lower U.S. tax rate resulting from the enactment of the 2017 Tax Act, which reduced the Federal statutory tax rate to 21% as well as a lower tax rate on the gain from dispositions of subsidiaries in the quarter. The decrease in the effective tax rate in the quarter was partially offset by additional tax expense of $29 million resulting from adjustments to the provisional amounts originally recorded in Q4 of 2017 related to the enactment of tax reform at the end of last year. As of now we expect that our effective tax rate for Q4 of 2018 will be approximately 27% excluding the impact on our 2018 effective tax rate from share-based compensation items which we cannot predict because of the subject to changes in our share price and the impact of future stock option exercises. Earnings from our affiliates totaled $1 million for the quarter, down slightly versus Q3 of last year. Regarding non-controlling interests in connection with the sale of Sellbytel, part of the gain was allocated to minority shareholders. Excluding the impacts of the gain the allocation of earnings to the minority shareholders in our less than fully owned subsidiaries was $25.5 million, up $2.2 million when compared to Q3 of last year. So for the quarter, our reported net income was $299 million, an increase of $35.3 million. The net impact of the gain on the dispositions, repositioning charges and the additional tax expense recorded in connection with the Tax Act increased our reported net income by $18.2 million. Excluding these items, our non-GAAP net income of the third quarter increased 6.5%, $280.7 million. Now, turning to Slide 6, net income available for common shareholders for the quarter was $298.9 million, while our non-GAAP adjusted figure was $280.7 million. Our share repurchase activity over the past 12 months decreased our diluted share count for the quarter by 2.9% versus Q3 of last year, 225.9 million shares. Diluted EPS for the quarter was $1.32 per share, up 16.8% versus Q3 of 2017. Our non-GAAP diluted EPS for the quarter, excluding the impact of the net gain from dispositions, the repositioning charges and the tax expense adjustments recorded in connection with the Tax Act, was up $0.11 or 9.7% to $1.24 per share. On Slides 3 and 4, we provide the summary P&L, EPS and other information for the year-to-date period. We have also provided the non-GAAP adjusted presentation for the 9 month results on Slides 7 and 8, which excludes the third quarter items that we identified. Since the year-to-date results are in line with our Q3 performance, I won’t review the year-to-date slides in detail. Returning to the details of our revenue performance in the third quarter, starting on Slide 9, as we discussed in detail during previous calls this year after a comprehensive review of the impact that new revenue recognition standard would have on our businesses, including detailed reviews of our client compensation arrangements, we determined that the adoption of ASC 606 did not have material impact on our revenue or our operating results. However, ASC 606 did change the timing of the recognition of certain performance incentive provisions included in our client arrangements. Because we adopted the new standard by the modified retrospective method of adoption, prior year results are not comparable. In the supplemental financial information section in the presentation, we present revenue for the quarter and year-to-date periods for 2018 without the impact of ASC 606. We estimate the impact of applying the new revenue recognition standard, reduced our reported revenue in the third quarter of 2018 by $17 million and by $109 million for the first 9 months of the year, 0.25% and 1.0% for the two periods respectively. The impact on EBIT and our results from operations as well as the balance sheet and cash flow were not material. Based on our latest projections, for the full year, we are still estimating reduction of revenue of approximately $150 million related to the adoption of ASC 606. Because of the dollar’s continued strengthening over the past year, the FX impact on our reported revenue created a headwind in the third quarter. The impact of changes in currency rates decreased reported revenue by 1.7% or $62 million in revenue for the quarter and the strengthening was widespread. On a year-over-year basis in the third quarter, the dollar strengthened against every one of our major foreign currencies. The largest FX movements in the quarter were from the Brazilian reais, the euro and the Australian dollar. Looking forward, the currency stay where they currently are. We anticipate that the FX impact will again reduce our reported revenue by approximately 1.5% to 2% for the fourth quarter. For the full year, we are currently estimating that the FX impact will still be slightly positive at about approximately 0.50%. The impact of our recent acquisitions net of dispositions decreased revenue by $35 million in the quarter or 0.9%. We completed the disposition of Sellbytel effective August 31. So, the impact of that disposition is only reflected for the month of September. Similar to Sellbytel, most of the other dispositions were completed late in the third quarter. We also made two acquisitions in the third quarter to strengthen our precision marketing and digital transformation capabilities, Credera, which is based outside of Dallas and Levo which operates in Australia and New Zealand. As a result, we expect the net reduction to revenue from our acquisition and disposition activity of approximately 2.5% to 3% in the fourth quarter and 2.3% for the full year 2018 as well as a reduction of approximately 3% in the first half of 2019. And finally, our remaining mix by geography and by discipline, organic growth for the third quarter was up 2.9% or $108 million, organic growth was 3.3% for Q3 2018 after adjusting to reflect the pro forma impact of third quarter dispositions, which reduced organic growth in the quarter as if they occurred on July 1. Geographically, Europe and Asia-Pacific regions continued their strong performances. The U.S. was slightly positive by 0.6% or 1.2% after adjusting to reflect the pro forma impact of third quarter dispositions, which also reduced organic growth in the quarter as if they occurred on July 1. From our service disciplines, we once again saw strong results in our CRM consumer experience businesses, while advertising was up in our CRM execution and support businesses for the majority of the Q3 dispositions occurred were down for the quarter. Slide 11 shows our mix of business by discipline. For the second quarter, the split was 54% for advertising and 46% for marketing services. As for the organic growth by discipline, our advertising discipline was up 4%. Media once again paced the discipline’s organic growth. And while our global and national advertising agencies continue to experience mixed performance, we did see some improvement when compared to earlier quarters this year, including in the U.S. CRM consumer experience was up 5.5% for the quarter. Precision marketing had a very strong quarter, but we also saw solid performance from our experiential agencies. CRM Execution & Support was down 3.6% driven by lackluster performance in the U.S. PR was up 2.3% based by the performance of our UK-based agencies. The healthcare was up 2.9% with positive growth across all regions. On Slide 12 which details the regional mix of business, you can see during the quarter, split was 54% U.S., 3% for the rest of North America, 10% for the UK, 18% for the rest of Europe, 12% for Asia-Pacific, 3% for Latin America and the rest for the Middle East and Africa markets. Turning to the details of our performance by region on Slide 13, organic revenue growth in the U.S. was up 0.6% or 1.2% after adjusting to reflect the pro forma impact of third quarter dispositions as if they occurred on July 1, so a positive performance for most of our disciplines. CRM consumer experience led the way, while CRM Execution & Support was the only discipline that decreased domestically. The UK was down slightly at 0.3% and the rest of Europe was up 6.9% organically in the quarter with positive performance across all disciplines. Geographically, France, Italy and Spain continued to turn in strong performances this quarter, while Germany underperformed overall. Organic growth in Europe outside the Eurozone was positive as well. Asia-Pacific region had a very strong quarter, with organic growth over 13% led by Greater China, Australia and New Zealand, which all had double-digit organic growth this quarter, while Japan was once again down in the quarter. Latin America had organic growth of 1.7% in the quarter. As has been the pattern, Brazil after a positive second quarter returned to slightly negative organic growth and was down about 1%. Offsetting Brazil, we continue to see positive performance from our agencies in Colombia and Mexico and Middle East and Africa, which is our smallest region, was down slightly for the quarter. Turning to Slide 14, we present our mix of revenue on our clients’ industry sector. In comparing the year-to-date revenue for 2018 to 2017, you can see there were some minor shifts in the distribution of our client revenue by industry, but nothing particularly significant. Turning to our cash flow performance on Slide 15, you can see that in the first half of the year, we generated $1.1 billion of free cash flow, including changes in working capital, the first 9 months of 2018 and excluding the proceeds of $308 million from the dispositions of businesses in Q3. As for our primary uses of cash on Slide 16, dividends paid to our common shareholders were $414 million, dividends paid to our non-controlling interest shareholders were $105 million. Capital expenditures increased by about 7% to $116 million. We reconfigure our real estate footprint to be more efficient. Acquisitions, including earn-out payments, totaled just under $432 million primarily as a result of increased acquisition activity this year and stock repurchases net of the proceeds received from stock issuances under our employee share plans totaled $518 million in line with the first three quarters of last year. All-in, we have spent our free cash flow by about $450 million year-to-date. Turning to Slide 17, 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 $2.76 billion, down $350 million from this time last year and up $1.9 billion compared to year end December 31, 2017. Over the first 9 months of the year, the increase in net debt was a result of typical uses of working capital that historically occur as we progress through the year. The use of our cash in excess of free cash flow of approximately $450 million, which excludes the impact of the cash received on our Q3 dispositions and the decrease in our cash balance related to the effect of exchange rates, which reduced the cash on our 9/30/2018 balance sheet by approximately $150 million. As for our debt ratios, they remain solid. Our total debt to EBITDA ratio was 2.0x and our net debt to EBITDA ratio was 1.1x, while our interest coverage ratio was 10.2x down due to the increase in interest expense over the past year. On Slide 18, you can see 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, 20.6%, while our return on equity was 48.2%. And finally on Slide 20, we track our cumulative return of cash to shareholders over the past 10 plus years. The line on top of the chart shows our cumulative net income from 2008 through September 30, 2018, which totaled $10.9 billion. And the bar show the cumulative return of cash to shareholders, including both dividends and net share repurchases, the sum of which during the same period was $11.5 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 have included a number of other supplemental slides in the presentation materials for your review. But at this point, we are going to ask the operator to open the call for questions. Thank you.

[Operator Instructions] Our first question comes from the line of Alexia Quadrani with JPMorgan. Please go ahead.

Thank you very much. Nice to see some improvement in U.S. organic growth in the quarter. I know you spent a lot of time talking about the dispositions and the repositioning, but I am curious if there were other drivers for the better growth that you saw in the U.S. in terms of are you seeing a pickup in some client spending, is the new business maybe more of a tailwind in the quarter than it’s been the headwind, I mean I guess anymore color you can give us on the changes sort of gives the confidence that the type of repositioning we are seeing the underlying business getting a little bit better?

Yes. Alexia, we have cycled through number of count losses from over a year ago. A lot of clients are in fact spending, not huge sums more, but they are spending money and I think that’s the trend that will continue as we go forward. And new business I mean we have been very successful just at the end of this quarter which is going to benefit 2019 greatly. We are still waiting a few more pitches which will be big contributors if successful with regard to those and those are supposed to get announced in November sometime. Though I am feeling good about the business, we have a lot of work to do. We are feeling good about it.

And then on the – I think the press report said that the Ford business may come online as soon as November that seems a little early for me, I know transition usually take longer, do you think you will see any – you don’t address Ford directly, but do you think you will see any of the benefits of the recent wins in general benefit Q4 or they are really 2019 like you mentioned and then I have a quick follow-up for Phil?

Yes. I don’t know what information the reporter had been reporting what the reported did, but I am expecting the contribution to revenue in 2019 from those particular wins.

Okay. Thank you. And then just Phil, just a question on the restructuring charges or severance expense, I know you said you continue to evaluate your business and you are constantly repositioning and looking at it, should we assume further charges in the fourth quarter or do you think this is sort of a particularly big quarter in terms of these expenses flowing through and you won’t necessarily foresee them coming in the next quarter?

We would this quarter I think we view as have a lot more activity for sure than we typically do. The numbers, severance number that is essentially carved out in the non-GAAP column is the incremental severance number. So we typically expect to have and do have severance every quarter. Essentially that numbers in excess of our average severance, average quarterly severance that we have had in the last couple years, that’s in the $20 million or $20 million to $25 million range every quarter, so that numbers in excess of the average, it’s just the incremental amount. I think going forward as a business it’s always been continued to part of our business, it’s turn over, it’s changing our talent, etcetera. But certainly this quarter was much more extensive than our second quarter.

Thank you very much.

Sure.

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

Yes. Hi, thank you very much. Let me start with in Europe if I could please, you mentioned that Germany was down, I was wondering if that was client specific or more economics from your balance sheet point. And then also can just touch on the UK slightly down than second quarter, was that more economics driven uncertainty on Brexit and I have couple of follow-ons? Thank you.

I think you know I will take Germany first. So no we don’t see there is a broad economic issue in Germany in terms of what’s happened in the last couple of quarters actually. But I think Germany was on – our businesses in Germany were on a good run for quite a long time with quite a good growth rate. And I think that was just kind of natural slowdown there have been a couple of client losses, couple of businesses that have struggled that we have been working with through our networks and local management teams. So I think Germany itself in terms of our performance hasn’t been I wouldn’t chalk it up to the German economy slowing as opposed to the businesses that we have got and the client portfolios to be regenerated a bit and we are working with them to do that.

Similarly, with the UK, the clients that we have had there were pretty specific to businesses that we have and they are no longer real mainstream businesses. We have a standalone research business that declined and we have pretty expensive field marketing operations still up in Northern England [ph]. And there was a slight decline in those that’s what contributed to that, didn’t have anything to do with the baseline economy.

And then also John in the U.S., I guess making the adjustments you had the two dispositions done at the beginning of the quarter, you will be up 1.2% in the quarter we just finished here, when you think about that versus the U.S. economy, it seems like you probably grew 4% again third quarter I guess we will find out in a couple of weeks for sure and you add maybe a couple of percent for inflation to get to 6%, can you just walk us through in your mind right now why that’s the large gap of 1.2% organic number just based in the U.S. versus what it looks like maybe nominal GDP of about 6% and normally you would be how much closer to align with that is it, I would just like to hear your thoughts around that please? Thanks.

Yes. Normally when I start – in years passed when we compare to GDP we always did that on an annual basis not a quarterly basis. But I think there is a number of reasons that that’s happening. One, there are some structural changes which have occurred in the business which were especially in 2018 been adjusting to. What do I mean, programmatic business that was done by us outside in the past and had a fairly high revenue associated with it. Clients have decided to take that in house. They are doing it. Now we have gone in house with them, in most cases in the case of programmatic. We are still making roughly the same amount of money when you look at profit or EBIT, but the revenue number is different. There were a couple of client losses in the past and recycling through them, what else, some of our non-advertising businesses have individually suffered. Those are the ones that we have been looking at and selecting 18 this quarter that which we sold and there are still one or two more that we weren’t able to complete during the quarter because the buyers didn’t have proper financing. So when that occurs, they will occur, but there is nothing to concern yourself with because there will be some more properties associated with both, that’s about as much of a reconciliations I had in my head.

John, in your mind do you feel your organic growth that you put up this quarter sort of versus behind you here in the last couple of years or it’s too hard to tell?

No. I remain cautiously optimistic, especially again especially as we go into 2019 and my optimism is based primarily on two things – three things, one is we haven’t lost any large clients, so we are not – we don’t have any automatic headwinds going into the year. We have had some pretty handsome wins which should start to kick in, in the first quarter of next year. And our clients are – certainly most of them are not still looking to cut back, but they are looking to invest in their own businesses, so that’s what makes me optimistic.

Great. Thank you.

Thank you. Our next question comes from the line of Julien Roch of Barclays. Please go ahead.

Yes, good morning. Thank you very much for taking the question. Look, first one quickly for Phil, could we get the impact of Acuren [ph] on Q3 organic. My second question is do you expect more disposition to be announced next year, John in you introductory remark you said you were still identifying non-strategic underperforming businesses for disposition, but any initial idea on what the impact could be next year on top of the 3% in the first half, are we talking an extra 2, an extra 4? And then the last one is the impact on margin from disposition to the business sold are lower in line or higher margin than the group? Thank you very much.

Sure. So, the impact of acqu in this quarter was – it was down $7 million in the quarter, most of that was international and the U.S. was basically flat. As far as – I’ll take the margins and then maybe John want to touch on the disposition. So, we can – we continue to focus on EBIT dollars not the margin percentage. And I would say that the – overall, the expectation given dispositions that the revenue base is going to be down in our goal and target is to replace that EBIT through the actions we've taken in the third quarter, you can expect that the percentage will increase. And as a basket I think the smaller – the smaller dispositions beyond Sellbytel will probably a lower margin than our average and the bigger business was probably equal to or a little bit higher right around our average. So overall, even though we’re focused on the dollars, I think the net result is going to be the percentage would go up.

And finally, with respect to dispositions, as I mentioned a minute ago or two that we’d originally identified that didn’t get completed in the third quarter because the buyers didn't have financing in charge, but those conversations continue, they’re not very large, there won’t be much – they won’t impact the past numbers that Phil gave you. And as we look at the portfolio, there is nothing in the portfolio that I have a burning desire to dispose off. Most of our companies have been streamlined and we’re very happy with their performance or the future performance, but there will always be exceptions that pop up from time-to-time, and when we can get a fair price for companies that we no longer feel are strategic, we’ll act on it.

Yes, I think similar to acquisitions, we don't have a disposition target or bogey that we then have our folks chase around to meet that target. So we’re going to continue to be opportunistic in the future.

Okay. Thank you very much.

Sure.

Thank you. Our next question comes from the line of Peter Stabler with Wells Fargo Securities. Please go ahead.

Good morning. A couple for Philip I could. Just going back to the severance numbers he gave us, just want to make sure I got this right. About 1,400 heads, 500 to be replaced, he mentioned $135 million salary run rate. Could you give us a sense of what the total impact after the replacements come in, what the total impact to savings might be for 2019? And then I have one follow-up after that. Thanks, Phil.

So, the savings I would say is going to be impacted by an awful lot of things. Certainly, we expect the net result of this take out some costs because ultimately we’re going to continue to pursue all the efficiency initiatives we've been pursuing, but we’re going to continue to look at what we need to invest to grow the business and some of the new business wins which we’ve recently – which have recently come in the door are also going to impact what the net savings are going to be. So, we don't have a specific number that we've carved out, there’s still quite a few moving parts to get to the ultimate savings number, but certainly, we've done this because the intention is to lock in those savings and pursue them in the future, we just don't have a quantified number to give you.

Okay, great. And then quickly moving on to the commentary around dispositions in the 40 bps of organic growth impact. We understand the distraction issue as you go into negotiations and divestiture. Can you give us a sense though how those divested businesses had been tracking let’s say over the full course of the year, have they been a significant weight on prior quarters as well or was this really an issue where performance really fell off quite abruptly in this quarter and then we didn’t see a similar impact leading up to this? Thank you.

Sure. So, if you took a similar approach to say what are the businesses that we disposed off during 2018, what was their growth while they were part of the portfolio. So for the – somewhere between six to nine-month period that they were part of the portfolio, they declined as a group probably in a similar fashion to what they did in the third quarter, somewhere I think not quite 40 basis points, but probably closer to 30 basis points. And probably three quarters of that where the vast majority of it impact our U.S. business, probably three quarters of that impacted the U.S. business or came from the U.S. businesses that were disposed in the third quarter.

Great. Thank you. That’s helpful.

Sure.

Thank you. Our next question comes from the line of Michael Nathanson with MoffettNathanson. Please go ahead.

Thanks. So, I have one for John and one for Phil. John, I hear you talk about the acquisitions you’re doing, they’re all a lot more technology-focused, lot more data-driven. Can you talk a bit over time whether these deals come more expensive and less accretive to you in the beginning versus what you may have done prior – previously? And then for Phil, could you just give us a sense of your philosophy on working capital, I know it’s pretty volatile by quarter, but when the year is all set and done, is working capital still a benefit for you guys or a modest headwind. So, how are you thinking about working capital for a fall of ‘18?

Yes. I have to say that we – to-date we’ve only done accretive acquisitions, and if I’m comparing the price that prices of multiples we pay in 2018 than say 10 years ago, they’ve gone up a little bit, because you’re competing amongst not so much your typical competitors, but there’s a lot of PE money that has been out there. Now as the Fed starts to tighten up some of that money will start to dry up. So, should be at least stable as we move forward.

On the working capital front, I think certainly expect it to continue to benefit to the business. I think there’s no question as we’ve indicated in prior calls, it’s certainly as challenging as it’s ever been or more challenging than it’s ever been. Through the nine months we’re about flat in terms of working capital performance and that’s a hiccup in the most recent quarter, most recent two quarters from some negative performance earlier in the year. But I think neutral to benefit is where we see it going forward, but it does require quite a bit of work.

Okay, thanks, guys.

Sure.

Thank you. Our next question comes from the line of Ben Swinburne with Morgan Stanley. Please go ahead.

Thank you. Good morning, guys. Just going to be focusing more on acquisitions or continue with the conversation on acquisitions. John, can you put this Credera deal in context for us, is IT consulting, marTtech, strategic focus for the company? How do we think about that shift for you guys either in terms of the competitive set that you are going to battle with every day or the opportunities sort of transform Omnicom from a technology perspective?

At this point what we’re doing in that regard is not trying to reform say a sapient that’s not our intention. Our intention is to make sure that we have embedded as employees within the company in the right areas, the skills of any one of the major consulting firms that we can deploy to the benefit of our clients and future clients. That’s really it. And people that are skilled in the transformation of businesses as things will come only more digital as we move forward and people that we are looking to acquire are established people with their own reputations in the marketplace.

Certainly complementary as opposed to – we don’t think we have a skills gap at all. We are looking to supplement and complement the businesses and disciplines and services that we currently provide our clients.

Is there a pipeline for more deals like this and does this – if you were to execute more of these kind of acquisitions, does it expand the kind of pitches that you guys are kind of business you can go after?

Well. Yes, we do have a list, no I am not giving it to you over the phone. And it certainly is complimentary to other skills that we have within the company as we talk to our various clients, close to 5,000 and their challenges in transforming their businesses.

We don’t see ourselves being excluded from currently or in the future key pitches at our largest clients and largest prospects because we don’t have the capabilities and we are looking to fill them. I don’t think we view it that way and are looking at the acquisition pipeline to kind of fill that gap.

Okay. And then let me just one last one this has been a pretty active year – 2 years for you guys on the disposition front, you mentioned management or talent distraction, do you feel like you have had a broader impact from all of the reshuffling of that I think over the last 2 years we are looking at almost $1 billion of dispositions for the organization, has that something that you think you have been able to manage through more broadly or has that created uncertainty that may have weighed on performance outside of the stuff that you have actually disposed?

I am pretty certain that it hasn’t disrupted in any way our mainline business that we are keeping. As I go through all the things we have disposed they weren’t part of our main skill sets that really are at the core of what Omnicom is and each one of them has been a standalone type of operation. So you are not impacting the managements at our subsidiary level.

And certainly our senior most managers that run our networks and groups have been part of this process with us and part of determination of where we need to invest and where we need to move on.

Thank you.

I think we have run out of time operator since the markets now open. So thank you all for joining the call and we will talk to you again soon.

Thank you. Ladies and gentlemen, that does conclude your conference for today. We thank you for your participation and for using AT&T teleconference service. You may now disconnect.