Good morning, ladies and gentlemen, and welcome to the Omnicom Fourth Quarter 2020 Earnings Release Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I'd like to introduce your host for today's conference, Senior Vice President of Investor Relations, Shub Mukherjee. Please go ahead.

Good morning. Thank you for taking the time to listen to our fourth quarter and full year 2020 earnings call. On the call with me today is John Wren, our Chairman and Chief Executive Officer; and Phil Angelastro, our 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 we will review this morning. This call is also being simulcast and will be archived on our website. Before I start, I've been asked to remind everyone to read the forward-looking statements and other information that we have included at the end of our investor presentation, and to point out that certain of the statements made today may constitute forward-looking statements and that these statements are our present expectation and that actual events or results may differ materially. I 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 material. We are now 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 the line for your questions.

Thank you, Shub. Good morning. I'm pleased to speak to you this morning about our fourth quarter results. I'll first discuss our financial results, then we'll cover our performance with respect to our strategic priorities and operations, and we'll end with our expectations for 2021. We finished 2020 with organic growth continuing to improve sequentially. For the fourth quarter, organic growth was a negative 9.6% as compared to a negative 11.7% in the third quarter. The fourth quarter organic growth decline of $398 million included a decrease in third-party service costs of approximately $150 million. The U.S. decline was 9.4%, an improvement of about 200 basis points from third quarter. In the U.S. PR helped by election year spend and healthcare performed better than average, while CRM consumer experience underperformed as continuing headwinds in events and shopper marketing offset relatively better performance in precision marketing. Third-party service costs represented more than half of the total decline in organic growth in the United States. Europe continued to face significant challenges due to COVID in the fourth quarter. The UK was down 12.4% and the euro and non-euro markets were down 9.2% similar to the level of performance that we experienced in the third quarter. Asia had an organic growth of negative 3.9%, down from negative 12.8% in Q3. Australia and New Zealand saw a mid single-digit growth in the quarter as those countries have managed the pandemic relatively well. Japan also saw a strong improvement sequentially, although was negative overall. We're also pleased to see positive growth in our events operations in China during the quarter. Latin America experienced negative 9.2% growth in Q4, a significant improvement due primarily to better performance in Brazil, our largest market in the region. As we have experienced since early in the year, the hardest…

Thanks, John, and good morning. As John said, during the fourth quarter, we continued to see a moderation and the decline in business conditions when compared to the peak of the pandemic in Q2 of 2020. As a result, we saw less of a decline in our organic revenue performance when compared to the previous two quarters. Our operating margins improved compared to Q4 of 2019 benefiting primarily from the active management of our discretionary addressable spend costs, the repositioning actions taken in Q2 of this year and the alignment of our cost structure with the current realities of the economic environment. Turning to Slide 4 for a summary of our revenue performance for the quarter, organic revenue performance was negative $398 million or 9.6% for the quarter. The decrease again represented a sequential improvement from the unprecedented decrease in organic revenue of 23% in the second quarter and 11.7% in the third quarter. And while we continue to experience declines across all regions and disciplines, most showed sequential improvement when compared to what we experienced over the previous two quarters. The impact of foreign exchange rates increased our revenue by 0.8% in the quarter, slightly above the 50 basis point increase we anticipated entering the quarter as the dollar weakened against some of our larger currencies compared to the prior year. And the impact on revenue from acquisitions, net of dispositions decreased revenue by 0.5% of a percent in line with our previous projection. As a result our reported revenue in the fourth quarter decreased 9.3% to $3.76 billion when compared to Q4 of 2019. I'll return to discuss the details of the changes in revenue in a few minutes. Turning back to Slide 1, our reported operating profit for the quarter was $615 million, down approximately 5% when…

Thank you. [Operator Instructions] Your first question comes from the line of Alexia Quadrani from JPMorgan. Please go ahead.

Hi. Thank you. And thanks for your comments on the outlook. But I just wanted to clarify on a couple of points. And for Q1, understanding of likely still be negative, but are you seeing ongoing improvement? I mean, can the declines continue to moderate? And just to clarify Q2 should return to positive growth at any color, I guess you can provide us on the full year, our clients – how clients approach spending? Are you seeing the pent-up demand? If there's a range, you can give us for how we think about potential organic growth for the full year? Thank you.

Sure. I'll take a stab at it and then Phil will add to whatever need out. The first quarter we still see as challenging, but sequentially probably better than what we saw in 2020. We fully expect based upon the plan reviews that we've done, even though they're not final with our operating companies. That will return to positive organic growth in the second quarter and for the balance of the year. I saw this morning that there was some possibly some confusion out there in some of the writings that were there, but that's what's really going to happen. In terms of specific industries and specific responses, we see an improving positive attitude, but COVID is still here. Progress is getting made with the vaccine as it rolls out, but it's going to take a little bit of time and I don't think anybody's baked in the stimulus payments into their spending habits, but if that occurred, I'm sure they will only have a positive effect on what happens as we get into the second quarter and beyond. I don't know what you want me to add, Phil.

I don't have too much to add. I think that clarifies things certainly in the first quarter, given COVID didn't really hit our business till kind of mid-March and any meaningful way the comps in the first quarter were challenging. So while there's still some uncertainty in the first quarter regarding COVID, first quarter in particular, we do expect some improvement relative to Q4s performance in terms of organic decline. But at some point in the second quarter, we do expect to rebound, especially given the comps in the second quarter are much easier as well as the third quarter. So, I think we definitely expect to return back to growth mode in Q2 and likely for the first six months based on that Q2 performance. We'd be back in growth mode and more optimistic about the rest of the year. Although there are some things that are still out of our – certainly out of our control with COVID and the vaccination take rate, et cetera.

Sorry, I assume it's a bit too early given all that's going on to give us a range for the full year. And then just, I'm also following up on maybe on margins. So you've done a great job in terms of cutting costs and keep surprising us on the upside and on the profitability. I'm wondering if the benefits of the restructuring actions you took in 2020 are enough to kind of offset maybe more costs coming online as business picks up, or how should we think about margins for the year?

I think the way we're looking at internally is 2019s margins are the best proxy for what we expect in 2021. We continue to try and be more efficient all throughout the organization. So we're certainly striving to do better, but we think that's a good proxy in terms of the underlying operations of the business. We believe some of what we did back in Q2, especially as it related to our real estate portfolio will be – will generate meaningful, sustainable cost savings. But as we get back into growth mode we're going to welcome back the variable costs that come with it because we're going to be growing. So there may be increases in people costs and maybe some traveling related costs that go up. We don't think we're going to be back to traveling like we did in 2019 as a proxy, but some costs are going to come back because we're growing, and that'll be fine.

I'm just crossing the line into Phil's area here a little bit. And if you look a little longer term, we're in the process of planning and looking at our staff, how we house our staff and support our staff. It's not going to be Earth changing, but some of the experiences that have occurred during the last 11 months will continue well into the future and should provide some benefit on the cost side. Thank you.

Thank you.

Your next question comes from the line of Craig Huber from Huber Research. Please go ahead.

Great. Thank you. John, I guess in your judgments, as you think out beyond COVID-19, and once we've stayed more than a year has gone by once we end this storm pandemic. In your judgment, what do you think is a reasonable expectation for your revenue growth long-term and obviously there is a lot of debate out there. Is it positive 3%, 4%? Is it negative? I'm kind of get to in your mind, do you think there's any permanent damage to your business going through this pandemic, it's putting you in a worse position on the back end of this or the opposite? It’s the first question. Thank you.

Sure. I certainly don't see anything that's specifically going to make anything more difficult than any time in the past. I still firmly believe Craig that the company will return to on an annual basis, a GDP plus 1% or whatever; that's the objective. I know that that is not only an objective of mine, but that of my entire management team, in terms of the way we view our business and review our responsibilities. So that's how – that's the only goal I focus on. Anything less is something that we take action against. I don't know if that...

John, when you say GDP just to be clear to tell on real GDP or nominal GDP on a global basis?

Hi. I think if we carve out FX that's what we're focused on.

So nominal excluding FX global basis, if you exceed that. Okay. So sort of get back to your historical growth rates and stuff, okay. And then yet, if you want to ask you, John, if I could please with all the movement out there in the marketplace to more and more e-commerce and some moving away from brick and mortar, of course. Are you viewing that as a net positive neutral or the opposite due to your business? Thank you.

Sure. We see it as a real positive. The executional parts of our business were getting smaller over the last several years prior to COVID that trend certainly contained into COVID and probably the slowest part of returning everybody, almost every single one of our clients sped up invested more in their digital transformation, as did we. And in that environment, we're deploying more strategic, more talented people to resolve issues and create opportunities and insights for our clients. So this change, which I do believe is permanent, will be very positive for the organization.

Great. Thanks, John.

Thank you.

Your next question comes from the line of Julien Roch from Barclays. Please go ahead.

Yes. Good morning, John, and, Phil, good morning, Shub. Apologies, I've probably – I don't know, I'm the only one who created confusion, but reading your statement. So when you said negative, that was versus 2020 and it's clearly versus 2019. So I blamed my poor mastery of the flowery English language. My first question will be how much of your 2019 revenue needs an open economy to function sort of like field marketing events. So any business impacted by the virus from a lockdown and reduced mobility? So we can have an idea because I would think that your percentage is higher than other agencies and therefore when things recover you should go faster than the others. That's my first question. The second one is you generated good cash flow in 2020, but – and you end up with not a lot of at – on net debt of $0.2 billion. So you do have $5.8 billion of debt and $5.6 billion of cash. And the debt clearly cost more than the cash yields. So anything you can do to reduce gross debt and gross cash and benefit the P&L through lower interest. That's my second question. And then the last one is anything you can tell us about media performance in 2020, I assume it's better than the average of the group, but some colors will be appreciated. Thank you.

Phil, do you want to?

Sure, I'll start. So, specifically with respect to events and field marketing, they've certainly been challenged in events for certain even more so in 2020. And I think we saw a slow pickup in China, which got hit first, which is when we saw it first in the first quarter of 2020. We saw a little bit of a pickup in the fourth quarter of 2020 as well, but our events business is somewhere around 3.5% or 4% of the business and field marketing might be 2% to 3%. So those certainly are two of the most affected. I think many of our businesses though, even the creative agencies and throughout the portfolio, branding businesses, et cetera we rely on project work. We think that will pick up more as the economies come back. But I think the most sensitive to an open economy no travel restrictions, those kinds of things, and being able to go to live sports and things. Events is going to be on the top of that list. Field marketing because much of it happens in day-to-day life, grocery stores, et cetera, we expect that will come back sooner. And as far as debt and cash and reducing interest, I think our performance certainly has been very good from a cash flow perspective or a cash management perspective during the pandemic. We took out the additional $600 million of debt in early April as kind of a liquidity insurance policy. We will be evaluating internally and with our board our approach as we get past the first quarter and things stabilize more as to what alternatives we're going to pursue. And from a cash perspective right now we're comfortable where we are, but it is on our list to address what the alternatives might be to more efficiently and effectively use that cash. And then in terms of media as far as 2020 goes, I think the media business certainly sequentially improved throughout the year Q4 versus Q3 and versus Q2. We do expect improvements as we head into 2021. But I think we're optimistic about the business in 2021 and certainly we've won more than our fair share pitches and we're in more as we head into the early part of the year here. So our expectations are certainly positive.

Just one thing I might add on the media answer is we clearly think 2021 is going to be better. Some of our clients and this is quite understandable are committing for shorter durations because of the experiences they've had in the last 14 or 15 months. But as things improve, there is a vaccine, there are positive things occurring some slower than not. We think that unless something drastically changes everything will be more positive.

Okay. Very clear. Thank you.

Thank you.

Your next question comes from the line of Steven Cahall from Wells Fargo. Please go ahead.

Thank you. Maybe first just to follow up on margin. So if 2019 is a good proxy for 2021, I guess that assumes that margins are a little higher. So as we think forward to next year, when you'll have revenue that might look more like 2019, does that higher margin hold through? Or do you expect to be investing some of that savings as you roll into higher growth mode? And then maybe just to follow up on the cash question, you are sitting on a lot of cash as the board think about something like an accelerated buyback, your shares have underperformed some of your peers this year, I know you look at return on equity and the total share price performance. So maybe just help us think about return to share repurchases and any potential uses there. Thanks.

Yes, sure. Let me take the cash, the buyback question from me first. I just saw last evening, we – our board increased our dividends 7.7%. That's part of an ongoing process. Our traditional uses of cash have been to increase, protect and defend and pay our dividends. Second is using our funds for acquisitions, which will add to our growth in an accretive fashion. And last but not least has been the repurchase of our shares. Those are the – that capital structure and approach has served us very, very well over the last 30 years. So at this point I don't see us tempted by short-term moves to accelerate or disproportionately look at buybacks in advance of looking at the other two priorities the company has. And in all manners we're always looking to protect and defend our investment grade rating. So that's the context in which these conversations occur. So I don't see any, at this point, acceleration of – what would have been a normal program. Phil may add.

And as far as your margin question, I think, we will – we expect and did frankly in 2020 as well to continue to invest in the business and invest in our data and analytics capabilities in particular Omni platform and the components of that platform. So that will continue, I think, to the extent that our performance exceeds 2019 from a margin perspective hopefully that will be the case. And if that's the case, we'll deliver more. But at this point, we think 2019 is the best proxy as the business comes back into growth mode we're going to continue to invest, most of our investments have runs from our P&L over the years. But I think if the performance is there, we may have some opportunity for margin improvement, but certainly right now our goal and our targets are using 2019 as a proxy.

Yes. And let me just going to pile on there. It's a proxy. If we were at the beginning of 2019, we'd be endeavoring to improve the prior margins we experienced. So we're just simply looking at proxies and saying when the business fully restores that would be a good north star to start from.

Great. Thank you.

Thank you.

[Indiscernible] We could probably do one more.

Yes. I think we have time for one more call, operator.

Okay. That question comes from the line of John Janedis from Wolfe Research. Please go ahead.

Great, thanks. John just maybe to wrap up, you talked about digital adoption being compressed in the market growth. As that continues or accelerates, how does it impact organic growth over the long-term? And is that an area where you're seeing competition from non-traditional players?

That does contribute to growth over the long-term because the more complex the problem, the smarter the people and solutions are that we are able to offer to our clients. And we've prepared the foundation for and tool set that we've been asked for a long time, we probably talk about it on every call, but that's because it's legitimate. And for an organization of the size to be functioning based on the same tool set is quite an accomplishment. And it will add to our abilities as we move forward. Will competition come from different areas? Absolutely. I think one great differentiation we have from the normal big players, who are out there, is that we don't own the – analyze and tell you the solution. You should go away and implement. We have the creative horsepower and the people that climb into the trenches with our clients along the journey. And we feel responsible for not only its design and intelligence, but for its execution. So, we're adapting and we adapt very, very quickly or an increasingly quickly because of COVID.

Yes, I mean, our approach has always been about generating ideas or people in our business generating ideas for our clients. And our focus has always been on insights and outcomes as it relates and that applies as it relates to technology and data, not data management or compilation. So I think idea generation and insights and outcomes is what adds the value and that applies to whatever the level of complexity of the solution. So we think we're in a good place competitively as a result.

Thank you.

The market is already open.

Thank you all for taking the time to join us today.

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.