Omnicom Group Inc. (OMC) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Omnicom Fourth 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, Vice President of Investor Relations, Shub Mukherjee. Please go ahead.

[Technical Difficulty] 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'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 the call this morning. I'm pleased to speak with you about our fourth quarter and full-year 2018 results. 2018 was another year of ongoing change for the marketing and advertising industry. We continue to see many of the world's top marketers transform their marketing organizations to adapt to changing consumer behaviors and new disruptive competitors. For Omnicom, change provides opportunities, challenges and ample room for differentiation. I'm pleased to report that in this rapidly changing environment, our strategies, talent and execution have allowed us to continue to deliver solid financial results. For the full-year 2018, we achieved our internal organic growth and margin targets. Organic growth for the quarter was 3.2%. For the full-year 2018, organic growth was 2.6%. Our EBIT margin for the quarter was 15.3%, an increase of 30 basis points compared to the fourth quarter of 2017. For the year, our EBIT margin, excluding the effect of our third quarter dispositions and repositioning actions was 13.8%, an increase of 20 basis points versus the prior year. EPS for the fourth quarter was $1.77 per share, which compares to a $1.55 per share in the prior year, excluding the charge related to the U.S. Tax Act that we took in the fourth quarter of 2017, an increase of 14%. We achieved these goals by growing our strong base of talented people, investing in technology and analytic capabilities as well as continuing to differentiate our organization structure, so we can deliver custom integrated solutions that drive business growth for our clients. Taken together, these strategic steps have helped us grow both our top and bottom line. In the quarter, we grew organically in every geographic region of the world with broad participation across our agencies, disciplines and client sectors. Looking at the fourth quarter growth across disciplines, advertising and media was up 4.4%, CRM Consumer Experience was up 4.2%, Healthcare was up 7.6%, PR increased 1.5%. As we expected, CRM Execution & Support was the only exception, it was down 3.7% in the quarter. By region, the U.S. was up 2.6%, driven by solid results in media, healthcare and PR. The U.S. benefited from better than expected year-end project spend as well as spending related to the mid-term elections. CRM Execution & Support had negative growth and weighed down the performance in the U.S. Overall growth in the UK was 2.4%. Media and Healthcare performed very well. Offsetting this growth was a decline in CRM Execution & Support, particularly in field marketing. Overall growth in our European region was 5.7% led by France, Italy, Spain and the Czech Republic. Germany again had negative growth due to specific management and operational challenges at some of our agencies. We've taken actions to address this performance and expect to see improvements. Asia-Pacific growth slowed in the quarter to 2.9%. While most of the markets in the region, experienced positive results, the region faced tough comps relative to the prior year. Lastly, Latin America posted growth of 1% in the quarter. Strong results in Mexico were offset by negative growth in Brazil and Colombia. In 2018, we remain focused on executing our plan to drive efficiencies across our organization, which contributed to the increase in year-over-year margins. This performance was a result of our agency management teams remaining laser-focused on controlling their cost structure, our ongoing Omnicom-wide operational initiatives to leverage our scale in areas such as real estate, accounting and IT, and the benefit from the disposition of lower margin non-core businesses during 2018. Importantly, we've been able to improve our margins while continuing to invest in our talent and our data and our analytic capabilities. Turning to our cash flow, in 2018, Omnicom generated $1.6 billion in free cash flow and returned $1.1 billion to shareholders through dividend and share repurchases. Approximately $475 million in cash was used for acquisition-related spend during the year. Our plans for the use of free cash flow remains unchanged; dividend, acquisition and share repurchases. As we recently announced, our Board of Directors increased the Company's quarterly cash dividend to $0.65 per common share. This represents an 8.3% increase in our quarterly dividend. With this increase, our dividend payout ratio is 45%. Lastly, our balance sheet and liquidity remained very strong. Turning now to our strategy and operations; 2018 was a year of significant accomplishments for Omnicom. We finalized the expansion of our Global Client Leaders Group organization and our practice areas, which have been aligned within our global networks. We continue to realign and optimize our portfolio of agencies through acquisitions and dispositions. We've made investments in technology, data and analytics, and as I mentioned, we continue to streamline our operations in real estate, accounting and IT. In 2016, we began the formation of 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 specials and specific marketing disciplines. With strong leadership in each of our practice areas, we are now positioned to better grow with existing clients, strengthen our new business efforts, better target our internal investments as well as create more career opportunities for our people. We began with Omnicom Health Group and Omnicom PR Group and now have practice areas in precision marketing and CRM, global advertising, national advertising, brand consultancy, experiential marketing, shopper marketing, media and specialty marketing. Each of these areas has strong leadership who can quickly mobilize our assets to create customized solutions for our clients. With the ability to create nimble, flexible and integrated agency models, our streamlined structure helped us win some of the biggest new business pitches in 2018, including Ford Creative, Duncan Creative and Volkswagen Creative, which we retained in key markets. We also closed the year with a few major wins. After a long, highly contested review, the U.S. Army selected Omnicom agencies to deliver an integrated offering, managing their marketing and PR activities over the next 10 years. On the media front, Daimler AG awarded its global media account to Omnicom Media Group. The Group will handle media for all of Daimler's divisions; Mercedes-Benz cars and vans, Daimler trucks and buses, as well as Daimler Financial Services in 40 markets worldwide. A significant part of Omnicom's success is driven by our investments in technology, data and analytics. These investments started over a decade ago with the formation of Annalect. In 2018, we took another leap forward with the launch of Omni, a first of a kind people-based precision marketing and insights platform. Today, I'm happy to report, many of our agencies have deployed Omni to create, plan and execute personalized customer experiences at scale with some of our largest clients. The platform is also transforming the way our teams work by providing a single view of their client's consumers enabling them to drive precision marketing across Creative, CRM and media. This personalization at scale is providing enormous value to our clients. As important as the client wins I mentioned earlier, is the way in which we achieve our success. It wasn't about collapsing our agencies into one, but rather investing in our agency brands and connecting them through our practice groups, Global Client leaders and platforms like Omni, which allowed us to leverage our scale in an agile, fluid and diverse way. The growth of our business in 2018 underscores the distinctive talents of our people and the strength of our agency brands as well as our differentiated structure and service offering. We know our clients today are looking for greater simplicity from their partners as they are demanding award winning creativity alongside deep expertise in technology, data and commerce in a single organization. A barometer that we use to measure success is the performance of our work in award shows as well as recognition by industry publications. Our performance helps us retain and recruit the best creative talent and blue-chip clients. In addition to winning more than our fair share of Cannes Lions as well as Spikes earlier in 2018, here are the few of the more recent highlights. Omnicom was named Holding Company of the Year by MediaPost, TBWA was named Global Agency of the Year by Adweek, The Drum's Big Won Rankings of the world's most awarded agencies ranked 10 Omnicom agencies among the top 20 from around the globe, more than any other holding company, and for the second year in a row, BBDO Worldwide, won the most awarded network. Omnicom's media and creative networks won 75 Agency of the Year titles across four key cities Mumbai, Tokyo, Shanghai and Singapore, during campaigns Asia Agency of the Year Awards. In Europe, PHD, won Eurobest Media Agency of the Year. While making sure we offer our clients and prospects the latest in advertising and marketing technology, during 2018, we continued to realign and invest in our portfolio of agencies to ensure they are positioned to deliver services in line with our clients' changing needs. As part of this process, we completed numerous dispositions of companies that were underperforming or no longer aligned with our long-term strategies. In all, we disposed more than 20 companies in 2018. At the same time, we continue to focus our investment strategy on expanding our service capabilities in high-growth areas, such as CRM and direct marketing, media, healthcare, data and analytics. We acquired several companies in 2018, each of which strategically aligned with one of our practice areas. With these bolt-on acquisitions, we can offer our clients more integrated, end-to-end marketing services. Before handing the call off to Phil, I'd like to make a final commentary on diversity. Our commitment to a diverse and inclusive workforce starts at the top. In 2018, we completed the Refreshment process of our Board of Directors. Omnicom's Board now has 10 Independent Directors, including six women and four African Americans. I'm proud to say, we have one of the most diverse Boards in corporate America. These changes strengthen Omnicom's governance structure and demonstrate our commitment to onboarding exceptional candidates, who bring a wealth of experience and diverse point of view. In addition, Omniwomen continues to grow organically around the globe and there are many initiatives planned to celebrate women in management positions, leading up to International Women's Day on March 8th. OPEN Pride, our employee resource group dedicated to Omnicom's LGBTQ community has extended its global reach with 10 chapters across India, China, Philippines, Australia, UK along with U.S. cities, including New York City, Chicago and St. Louis. In addition, new chapters are in development for Mexico City, San Francisco, Barcelona, Auckland and Los Angeles. It's also worth noting, thanks to our many diversity initiatives, Omnicom now has the most diverse workforce in its 30-year history. It is these hardworking talented people, more than 70,000 worldwide that help Omnicom post another winning year. Looking forward to 2019, we are optimistic about our prospects and we continue to stay focused on our strategic objectives that have served us well. We continue to hire and develop the best talent in the industry; we will be relentless in pursuing growth by meeting and exceeding our clients' expectation, expanding our service offerings to our existing clients and winning new business. We will continue to pursue high growth areas and opportunities through internal investments and acquisitions and we will remain vigilant on driving efficiencies throughout our organization. In closing, we are very pleased that our strong financial performance continues to reflect the excellence of our people and agencies. And I thank everyone for their efforts. I will now turn the call over to Phil for a closer look at the results. Phil?

Thanks, John and good morning. As John just described, the fourth quarter results represented a strong end to Omnicom's year. As is essential in today's business climate, our agencies remain focused on responding to our clients' needs in an ever-changing marketplace, while at the same time, they continue to manage their internal cost structures to efficiently deliver their services. Our business has continued to execute on both objectives. We also continue to see the benefit of our Company-wide efforts to increase our operational efficiency. Regarding our revenue and starting on Slide 5, for the fourth quarter, we had organic growth of 3.2% or $132 million, as our agencies overall did well to improve upon last year in capturing year-end project spend. FX again negatively impacted revenue, reducing our reported revenue for the quarter by 2% or $83 million. Regarding acquisitions and dispositions, as we spoke about during our last call, we completed several dispositions during the third quarter, the largest of which was Sellbytel, our European sales support business. We also completed several acquisitions over the past year, including this quarter's acquisition of the Media and Performance Marketing division of UDG, a Strategic Digital Media Group in Germany. The net impact of our acquisition and disposition activities reduced fourth quarter revenue by about $101 million or 2.4%, in line with our expectations. And lastly, as a reminder, we were required to adopt the FASB's new Revenue Recognition Standard, known as ASC 606, effective with the beginning of 2018. The impact of applying the new revenue recognition standard reduced our reported revenue by approximately $38 million or 0.9% for the quarter. As a result, our revenue in the fourth quarter decreased to a little under $4.1 billion when compared to Q4 of last year. Later on, I will discuss the components of the changes in revenue in more detail. Turning to Slide 1, our operating profit for the quarter was $627 million, up slightly when compared to Q4 of 2017, while our operating margin of 15.3% represented a 30 basis point increase over last year's fourth quarter. EBITDA was $650 million and our EBITDA margin of 15.9% was also up 30 basis points when compared to last year. Our ongoing internal initiatives to increase our operational efficiencies, focusing on real estate, back office services, procurement and IT, continue to positively impact our operating income and margin performance as well as the benefits of the restructuring actions we took last quarter. We also benefited from the disposition of several non-strategic, lower margin agencies, which was partially offset by the reduction in margins caused by the negative impact of FX in the quarter. Net interest expense for the quarter was $53.1 million, up $3.1 million versus last year's fourth quarter figure and down $3.6 million versus the $56.7 million reported in the third quarter of 2018. Gross interest expense in the quarter was up $6.6 million compared to last year's Q4, primarily due to the impact of increased interest rates over the past year, particularly impacting our floating rate swaps, while interest income increased $3.5 million due to an increase in cash held by our treasury centers when compared to a year ago. When compared with Q3 of this year, gross interest expense in the fourth quarter decreased by $1.1 million, primarily driven by the reduction in our commercial paper activity during the fourth quarter. And interest income increased by $2.5 million over last year, resulting from higher than average cash balances that we typically carry at year-end. Turning to taxes, our reported effective tax rate for the fourth quarter was 26.1%, bringing the full year tax rate to 25.6%. The primary driver of the lower effective tax rate year-over-year was the lower U.S. tax rate resulting from the enactment of the 2017 Tax Act, which reduced the federal statutory tax rate 21% from 35%. The effective rate for the year was slightly lower than what we previously anticipated for 2018. Going forward, we anticipate our effective tax rate for 2019 will be 27%, which approximates our actual full year rate 2018 after excluding the following items; tax impact of the repositioning actions taken in Q3, the additional tax expense recorded in Q3 resulting from the provisional amounts originally recorded in Q4 of 2017 in connection with the Tax Act, the successful resolution of foreign tax claims during the first quarter of 2018, and after excluding the impact of the tax benefit realized from share-based compensation items, particularly in Q4, which we cannot predict because it is subject to changes in our share price and the impact of future stock option exercises. Earnings in our equity method investments was $5.3 million for the quarter upon the strength of the performance of our affiliates in Asia and Europe. The allocation of earnings to minority shareholders in our less than fully-owned subsidiaries decreased by $2.9 million to $30.5 million, primarily a result of our disposition activity and the negative impact of FX since a large number of our less than fully-owned subsidiaries are located outside the U.S. As a result, our net income for the fourth quarter was $399 million. As a reminder in Q4 last year, we recorded a net increase to income tax expense, $106 million related to our preliminary assessment of the impact of the passage of the 2017 Tax Act just before last year-end. Although, net income increased $145 million versus last year's reported net income of $254 million, excluding last year's additional tax charge, net income increased $39 million or 10.7%. Now turning to Slide 2, net income available for common shareholders for the quarter was $399 million. Our diluted share count for Q4 was 225.6 million, decrease of 2.9% versus Q4 of last year due to the impact of our share repurchase activity over the past 12 months. As a result, diluted EPS for the fourth quarter was $1.77 per share. That's up $0.68 versus our reported Q4 2017 amount of $1.09 per share and up $0.22 or 14.2% after excluding the impact of the $106 million charge tax reform, which we took in Q4 of last year. On Slides 3 and 4, we provide the summary P&L, EPS and other information for the full year results. As a reminder, in the third quarter, we closed on the disposition of Sellbytel. Along with other dispositions we completed during the third quarter that resulted in a net pre-tax gain of $178 million. In addition, during the third quarter, we recorded charges of $149 million for repositioning actions, primarily resulting from severance and lease terminations. Lastly, in Q3, 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. The non-GAAP adjusted results on Slide 22 in the supplemental section of our presentation present our full year results, excluding these items. Since the full-year results, without these items, are in line with our quarterly performance, I will highlight just a few of them. The reported operating profit for 2018 was $2.13 billion, an increase of 2.4% versus last year, with the resulting operating margin of 14%. And finally, our full year reported EPS was $5.83 per share compared to $4.65 a share in 2017. Excluding the impact during the third quarter of the dispositions, the repositioning actions and tax reform adjustments, 2018's EPS would have been $0.08 lower at $5.75 per share, that's up $0.65 in comparison to 2017's adjusted EPS of $5.10 after excluding the impact of the additional $106 million in tax expense recorded in connection with the Tax Act at the end of 2017. Returning to the details of our revenue performance in the fourth quarter; on Slide 5, as we discussed in detail during previous calls, this year we adopted ASC 606, the new revenue recognition standard and the impact of applying the new revenue recognition standard reduced our reported revenue by approximately 1% in the fourth quarter and for the full year. The impact on EBIT was not material. Because of the dollar's continued strengthening over the past several months, the FX impact on our reported revenue created headwinds in the fourth quarter. The impact of changes in currency rates decreased reported revenue by 2% or $83 million in revenue for the quarter. And the strengthening again was widespread. On a year-over-year basis in the fourth quarter, the dollar strengthened against every one of our major foreign currencies except for the Japanese yen. The largest FX movements in the quarter were from the Australian dollar, the Brazilian real, the euro and the UK pound. As for a projection of the FX impact for 2019, any assumption on how foreign currency rates will move over the next few months let alone the rest of the year, for us is highly speculative. However, as we begin the year, currencies stay where they currently are. Based on our projection, FX could reduce our reported revenues by approximately 2.5% to 3% in the first half of 2019 and 1.5% for the full year. The impact of our recent acquisitions, net of dispositions, decreased revenue by $101 million in the quarter or 2.4%. As we enter 2019, we expect the impact of acquisitions, net of dispositions completed through year-end will continue to be negative; approximately 3% to 3.5% for the first half of 2019 and 2.5% for the year as we cycle through the Sellbytel and other dispositions from 2018. Finally, while remaining somewhat mixed geographically and by discipline, organic growth for the fourth quarter was up 3.2%, primarily reflecting the positive effects, client year-end project spending. Geographically, the U.S., European and Asia-Pacific regions had the strongest growth. Regarding our service disciplines, our healthcare agency group had excellent growth this quarter, as did our CRM Consumer Experience agencies as well as our advertising discipline, primarily driven by the strength of our media businesses. Slide 6 shows our mix of business by discipline. For the second quarter, the split was 57% for advertising and 43% for marketing services. As for the organic growth by discipline, our advertising discipline was up 4.4%. Media continues to pace the disciplines organic growth and while our global advertising agencies continue to experience mixed performance, our national advertising agencies performed quite well this quarter. CRM Consumer Experience was up 4.2% organically with our precision marketing agencies leading the way in that category. CRM Execution & Support was down 3.7% this quarter as we again saw sluggish performance, particularly domestically from certain businesses in that discipline. PR was up 1.5% with the strongest performances coming from our domestic agencies, which included a small year-over-year benefit from work associated with the mid-term elections. Lastly, healthcare was up 7.6%. As has been the case recently, the disciplines strong performance was broad-based across all regions. On Slide 7, which details the regional mix of our business, you can see during the quarter, the split was 52% in the U.S., 3% for the rest of North America, 9% in the UK, 19% for the rest of Europe, 11% for Asia Pacific, 3% for Latin America and the balance from the Middle East and African markets. Turning to the details of our performance by region, on Slide 8. Organic revenue growth in the fourth quarter in the U.S. was 2.6%, led by our advertising and media, healthcare and PR agencies with our CRM Execution & Support agencies lagging. After a negative third quarter, our UK businesses rebounded with positive organic growth of 2.4% led by our healthcare and media agencies. The rest of Europe was up 5.7% organically in the quarter. In our Europe markets, France, Italy and Spain, continued to turn in strong performances across disciplines this quarter while Germany again underperformed. Organic growth in Europe outside the Eurozone was positive as well. Organic growth in the Asia Pacific region was 2.9% with positive growth in all disciplines. Geographically, we saw solid performances from our agencies in Greater China, India and New Zealand this quarter and Japan returned to positive growth. Latin America had organic growth of 1% in the quarter. The ongoing macroeconomic issues in Brazil continue to impact our businesses in the marketplace. For the quarter, they were down again at just over 1%. Offsetting Brazil, we continue to see positive performance elsewhere in the region, particularly from our agencies in Mexico. The Middle East and Africa, which was our smallest region was up 4.2% for the quarter. Turning to Slide 9, we present our mix of revenue by our client's industry sector. In comparing the full-year revenue for 2018 to 2017, you can see there were some minor shifts in distribution of our client revenue by industry, but nothing particularly noteworthy. Turning to our cash flow performance, on Slide 10, you can see that we generated $1.64 billion of free cash flow during the year, including a positive effect from changes in working capital as well as the proceeds of $308 million from the disposition of businesses, which primarily occurred in the third quarter. As for our primary uses of cash on Slide 11, dividends paid to our common shareholders were $549 million, up due to the 5% increase in our quarterly dividend that was effective with the January 2018 payment, partially offset by the reduction in share count year-over-year, resulting from our repurchase activity. Dividends paid to our non-controlling interest shareholders were $135 million, up $33 million year-on-year. Capital expenditures increased $40 million to $196 million as we continue our real estate reconfiguration efforts to increase operational efficiency. Acquisitions including earn-out payments were $477 million, up $392 million due to an increase in acquisition activity in 2018 as compared to the prior year. And stock repurchases, net of the proceeds received from stock issuances under our employee share plans, totaled $568 million, roughly the same as in 2017. Excluding the $308 million of proceeds from our dispositions during the year, we outspent our free cash flow by about $283 million this year, primarily driven by our acquisition activity in 2018. Turning to Slide 12, regarding our capital structure at the end of the year, our total debt is down $33 million over the past year at just under $4.9 billion. Our net debt position at the end of the year was $1.23 billion, up $105 million compared to December 31 of 2017. The increase was principally due to the overspend of our free cash flow of $283 million and the negative impact of FX on our cash balances at year-end, which totaled approximately $200 million. Partially offsetting these, was the positive change in operating capital of approximately $80 million and the cash proceeds received from the sale of subsidiaries during the year of $308 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 0.5x, both consistent with the ratios from this time last year. While our interest coverage ratio was 9.9x, down a little over the past year due to the increase in interest expense, it remains very strong. On Slide 13, 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, 29.6%, while our return on equity was 51.4%. As we anticipated, both ratios were positively impacted this year by the lower U.S. corporate tax rates enacted at the end of 2017. And finally on Slide 15, we track our cumulative return of cash to shareholders over the past 10 years. The line on the top of the chart shows our cumulative net income from 2009 through 2018, which totaled $10.3 billion and the bars show the cumulative return of cash to shareholders in the form of both dividends and net share repurchases, some of which during the same period was $10.7 billion. This resulted in a cumulative payout ratio of 104% over the last decade. And that concludes our prepared remarks. Please note that we've included several 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] We go to the line of Alexia Quadrani with JPMorgan. Please go ahead.

Thank you so much. Just a couple of questions if I may. First, I guess, how should we think broadly about organic growth in 2019? And can we continue to see this improvement in the U.S.? And then just a second question really is on the CRM execution business, which remains weak. I think you highlighted field marketing was particularly soft. I guess, are you planning to add any other divestitures similar to the ones we saw in Q3? Thank you.

Good morning, Alexia. This is John. In terms of organic growth at this point, we are – what will start tomorrow is the process of sitting down with our companies and going through their final profit plans for 2019. So at this point, if I was making a prediction, I'd say organic growth is probably going to come in somewhere between 2% and 3%. I think it's similar to what we said in the past. Some of the wins that we've received, to your second question of domestic growth, I'm optimistic. Some of the wins that we had in the fourth quarter of 2018, specifically Ford and the U.S. Army, they're not going to make too much of a contribution, I don't think in the first quarter and half of this year, but after that, they should start to contribute rather significantly to our performance as domestically and in other parts of the world. I don't know, Phil, you want to add?

Yes. Just to clarify, I think the 2% to 3%, which was our internal target last year is for the year. So that's where we're seeing 2019. At the moment, we don't have the best visibility given it's early February, in terms of what the year is going to shake out to be and certainly a lot of things can change between now and the balance of the year. But I think that's our current set of expectations.

I can promise you, if we can do better, we will. With respect to your other question about CRM execution, we are constantly going through – we did do a lot of disposals during the year, but consistent with, I think what we've been telling the shareholders, we've been looking at our portfolio of companies and those that we don't think will contribute to our growth as we look forward, where we are considering disposal. We did quite a bit of work in the third quarter and earlier in the year that review constantly goes on, and as we will continue to go on, especially as we go through the next three or four weeks worth of proper planning for 2019.

And then just a follow-up if I may on your earlier comment, I don't want to nitpick too much about organic growth in any one quarter because I know it's a small dollar amount that makes a change, but just maybe a broader comment about the Q4 performance. You mentioned project business in Q4 came through well, which was a benefit for the better U.S. organic growth in Q4. But did you get a sense of sort of the underlying feel of the business also showed some improvement or am I trying to split hairs here that is too difficult to answer?

Well, you might be trying to split hairs a little bit. As I think, we've said rather consistently, I know, I have for the last 20 years, when we get to the fourth quarter, there is a lot of activities that go on. There are a lot of budgets, which clients haven’t spent that they accelerate activities on. There are a lot of opportunities to sell additional products, which motivates clients to do so. And then there are some clients who try to hold back that spending to increase their P&Ls. This year, I think if I'm remembering correctly, 18 of the last 20 years, the fourth quarter has come through with that project spending. I think those one or two years during the great recession.

Yes, last year was realistically, a little bit easier for the comp and we've had 10 years before, because we didn't do as well frankly in picking up that project spend as we did this year.

Thank you very much.

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

Yes. Good morning. I have three questions. My first one, just a follow-on to Alexia. Your organic outlook this year of 2% to 3%, what is your preliminary thought on margins for the year? Flat or what are you thinking right now, please?

Phil and I maybe thinking differently. Again, we haven't finished our profit planning. At this point, if I had to make a prediction, I'd say, I'm looking at them to be flat. The primary headwind we have in margins is the strength of the U.S. dollar. We more or less predict for you what the impacts are going to be on the topline and we tell you that, but we don't predict for you what the impact is going to be on the EBIT line and that's always – that always create some pressure. So right now, I'd say margins should be flat.

Yes. I mean, I wouldn't disagree. I think, we're certainly going to be working hard, yield a different answer and yield some improvement. But we do expect, let's say, we do expect to achieve some benefits from our continued operational efficiency efforts. We do expect some improvement from a change in mix achieved by some of the dispositions we did in 2018, businesses which are in balance little bit lower margin than our average. But FX in the fourth quarter, which was negative 2% on revenue for the first time in quite some time, did have a headwind on our margins in the fourth quarter. And we expect FX, certainly in the first half and for the year in 2019, will likely be much more of a headwind. How that will shake out our margins is tough to tell depending on where those FX movements happen.

And my second question is net new business wins in the fourth quarter, what was that number please?

Phil, you know it?

Yes, it was a little over $1.1 billion.

Okay, great. And then my last question, your performance obviously for the last year was much better than your two large European peers, although it wasn't as strong as it's been historically. And I'm just curious, John, it's been nowhere near nominal GDP growth per se. What would you say, John, is the three biggest factors in your mind that held it back to up 2.6% for the year and maybe what your outlook is for each of those factors for this new year? Has anything significantly changed on each of those three? Thank you.

I think that the industry itself has been going through some changes in terms of the way the acceleration of digital and how that gets you rather than traditional forms of media. Some of the portfolio companies that we've had, which always contributed EBIT, especially in the areas of CRM Execution businesses like field marketing and other things, companies like Amazon and online delivery, eliminated the need for the same type of activity that has happened on a retail level, that's happened in the past. So it's been the last – I'd say two years have been years of transition. When we look at our portfolio, when we look at the companies that we believe will contribute to our growth going forward, we're looking at those factors and other changes in technology, which are going to impact the services that we've traditionally provided. And so far we've been able to do a pretty good job I think of identifying those areas and taking action on them where we can still get value where other people still have interest in those areas. So I think that's way down a bit in terms of some of the growth. The other thing that sitting and running a company, you don't mind when your competitors are weak, you really don't like it when your competitors are wounded because they tend to do things that they wouldn't do if they were simply weak and so it's been a rather competitive environment the last six months or so.

Great. Thank you.

Next we have a question from the line of Julien Roch with Barclays. Please go ahead.

Yes, hi there. My first question is, can we have the impact of Accuen on organic in Q4? The second question is I feel several times you said that disposition had a positive impact on margin, FX had a negative impact on margin and your cost as well had a positive impact on margin. So could you break down the margin increase in 2018 between those three things? And then the last question is, in Q3, you kind of offset your capital gain of $178 million by a provision for restructuring of $149 million. Well, I assume that's mostly a provision. How much of that provision did you use in Q4? Thank you.

Sure. While I'm answering the first two, we need to get the answer on the third number, but that will be in our 10-K filing. So on the first two, I think, well the Accuen number was $6 million growth in the fourth quarter and it basically was largely in the U.S. On the margin front, I can tell you, FX in the fourth quarter was a negative headwind of about little over 20 basis points. It's hard to split out and we don't, what was the exact impact of our operational efficiencies and what was the exact impact of the dispositions, but FX for the first time was negative in, I'm not sure I recall 20 basis points or so a meaningful difference, but I think some of the listener certainly are interested in that number. So that was that rough estimate. And then on – can you just give me a minute on the restructuring front, I think actually, I'm going to have to give you that offline Julien, because – we have the number, but I want to make sure I answer your question directly. So we can give you some clarity on that offline.

Okay? Sure. Thank you very much.

Sure.

Next we go to the line of Dan Salmon with BMO Capital Markets. Please go ahead.

Good morning, everyone. John, you've done a ton of work over the last couple years continuing with divestitures and changing your portfolio of assets, you've done the reorganization around practice groups, when you look across your base of business. I'm curious how do you think it rolls up into exposure by vertical – by client vertical, do you think about it that way at all looking to have maybe exposure to verticals with better secular growth over the long-term? And then, just related to that is sort of maybe mix of your largest clients versus how important it is to you to engage some of the more up and coming innovator brands maybe what we call the direct to consumer brands, more broadly. We would love to hear some more thoughts on that. And then, Phil, just quickly M&A was obviously considerably higher this year versus 2017. Maybe that's you also outspent free cash flow. Would you say 2018 is more reflective of what you would consider a quote unquote, "normal year" in that 2017 was unusually conservative and how we think about that to frame your thinking on your uses of free cash flow this year coming up? Thanks.

A couple of questions there, I think if you look at the verticals, I think it's Slide 10, so I referred to it earlier, kind of give you an indication of the industry sectors that we service. Since the formation of Omnicom, excuse me, it's Slide 9, since the formation in Omnicom, we've always been focused on serving one, blue-chip clients, two, globally not concentrated in any one area or in any one industry and I think if you look at this slide, plus we've provided it in the past, if you put a few of these years not only 2018 and 2017 together, you'll see that that's been the case for quite a while. So that's in one instance. If you take a look at our top 25 clients, our matrix area covers up to 100 of our top clients now, but just the top 25, it represents just some of the formula $4 billion of our revenue and we service them in many, many areas and it's a concentration – it's not a concentration of any particular industry, hash tag, there is auto, there is Pharma, there is financial services, it goes across the Board, very consistent with let's depicted on Slide 9. In those areas where we've been able to do that, during the year those same clients contributed about 4% growth to our overall organic growth for the year. So we are proving that as we have these practice areas; number one, focusing on skills and crafts the clients need, plus a matrix system of practice areas where we bring everybody servicing that client together, we're able to identify more quickly, needs that clients have and adjust our portfolio and services as quickly as we possibly can. So it's all moving again it's been going on for close to three years, but we are very satisfied with the progress that we're making. We think it will contribute to our progress going forward.

On the M&A question, I think it's hard to say what 2019 is going to be, because we don't put together internal target with a dollar amount for our targeted M&A spend and then set our M&A focus and network as off to find deals to meet that target, end up doing deals that you otherwise probably would have been better off not doing, but you might have met the target. So we don't plan to change that approach. I think our preference would be to do more M&A similar to what we accomplished in 2018, more accretive deals if they're available, if they have the right strategic and cultural fit. We don't want to do more than less. So we prefer to do more deals like we did in 2018 as opposed to a pretty low level in 2017, but it's hard to predict. I mean we've got a number of them in the pipeline that we've been working on and continue to work on. Some of them end up having a long cycle of discussions. Some of them we don't ultimately get close. So it's hard to predict, but we would certainly prefer to look more like what we accomplished in 2018 and 2017.

Great. Thank you, both. Very helpful.

Sure.

Next we go to the line of Tim Nollen with Macquarie. Please go ahead.

Good morning. Thanks. Just like – just one question like to follow up on the outlook for 2019. If you could maybe give us a little bit of color on how clients are approaching spending this year, just in general terms given some big macro issues such as possible slowdowns in China and Brexit risk and so on. Just kind of how are clients thinking about ending this year versus other years and if it's possible to break down kind of an underlying client spending impact on the 2% to 3% versus new business flowing in place?

The clients that I've spoken to and we'll get greater insight as we talk to some of our network heads over the course of next 10 days, they are cognizant of the fact that there is a lot of change going on in the world. These are Brexit, you got China slowing down, is the Fed going to raise interest rates, is it going to stay on hold. There's quite a number of factors. Having said that, I believe I'm speaking for most of our clients and they know that they're in the business of selling products and growing their top lines. So they're going to continue to do whatever activities are necessary to accomplish those tasks. So there's no fear – I don't get a sense of fear. I don't get a sense of this is going to be – everything is fine and there are no geopolitical or other risks out there. It's just going to be another year, similar to the ones we've had in I think the last two. And your second question, I think I missed.

Yeah, if you could just help us understand how much of the 2% or 3% preliminary outlook is just underlying client ongoing spending versus inflow of new business, because you had some nice wins toward the end of the year?

Yes. At this point in the year, we don't calculate that. Typically what makes up our organic growth is growth from existing clients, new business wins and losses that we might have. It's been net of those. Yes, it isn't a single number and it isn't that easy to kind of capture it. From a definition perspective it might down pretty straightforward and simple, but when you collect the data at the detail level and roll it up that there's quite a bit of judgment in terms of how those things fall into each of those buckets. So we don't have that kind of information readily available this morning.

Okay, sure. Thanks a lot.

I think the market is about to open. We have time for one more call, operator.

Very good. It’s the line of Jason Bazinet with Citi. Please go ahead.

I just had a quick question. You were very kind to talk about the headwind next year, acquisitions and net of dispositions on the topline, to talk about those disposed assets also having lower margins. I just wondered if the disposed assets also had slower growth and might sort of help your organic growth or maybe indeed they were faster growing, it might be a headwind, but any color on the impact your organic growth would be helpful from the dispositions.

Personally, I'm not anticipating it is having a significant, statistically measurable type of impact on our overall performance in terms of organic growth. What we were doing, the reason we got paid value I think for the companies that we did dispose off was because of we were projecting out several years and saying that unless we became tremendously larger in these particular areas, we probably wouldn't be able to sustain the growth that we had. And so therefore, we made a decision that somebody else could do a better job with those assets and that's why we got rid of them. So I don't have that calculation for you.

Yes, I think we did that calculation in Q3, but it's not one that we've kind of baked into our internal processes and systems, because we typically try not to carve out all the bad stuff, leaving all the good stuff. But I think it's safe to say that as a portfolio, as we look at 2019, the businesses we disposed of in 2018 were not growing faster than our overall organic growth profile in 2018 for the rest of the business, exactly how much from a dollars or percentage perspective by quarter, we don't think the numbers are going to be that meaningful and we don't have them at hand.

Okay. Very helpful. Thank you very much.

Sure. Okay, well thank you everybody for joining the call and we'll talk to you again soon.

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