Omnicom to stop voluntary pay cuts by year-end, posts $313.3 million in net profits in Q3

Omnicom Group, on Thursday, reported its third-quarter financials, declaring $313.3 million in net income, compared to $290.2 million of the corresponding quarter last year. Diluted net income per share for the third quarter of 2020 was $1.45 per share compared to diluted net income per share of $1.32 for the third quarter of 2019. John D. Wren, Chairman and Chief Executive Officer, also said during the earnings call that voluntary pay cuts will be phased out across the groups by the year-end.

Net income - Omnicom Group Inc. and diluted net income per share - Omnicom Group Inc. in the third quarter of 2020 included a net after-tax increase of $52.3 million and $0.24 per share, respectively, related to reimbursements and tax credits under government programs in several countries where it has operations. Primarily due to the negative effects on its revenue arising from the coronavirus disease 2019 ("COVID-19") pandemic, Omnicom's worldwide revenue in the third quarter of 2020 decreased 11.5% to $3,206.5 million from $3,623.8 million in the third quarter of 2019. The components of the change in revenue included an increase in revenue from the positive impact of foreign currency translation of 0.5%, a decrease in acquisition revenue, net of disposition revenue of 0.3% and a decrease in revenue from negative organic growth of 11.7% when compared to the third quarter of 2019.

Organic growth in the third quarter of 2020 as compared to the third quarter of 2019 in its five fundamental disciplines was as follows: Advertising decreased 11.7%, CRM Consumer Experience decreased 19.3%, CRM Execution & Support decreased 19.4%, Public Relations decreased 3.4% and Healthcare increased 3.8%

Across its regional markets, organic growth in the third quarter of 2020 as compared to the third quarter of 2019 was as follows: the United States decreased 11.4%, Other North America decreased 7.6%, the United Kingdom decreased 12.5%, the Euro Markets & Other Europe decreased 9.6%, the Asia Pacific decreased 12.8%, Latin America decreased 22.3% and the Middle East & Africa decreased 21.4%.

Operating profit increased $28.1 million, or 5.9%, to $501.4 million compared to $473.3 million during the third quarter of 2019. Its operating margin for the third quarter of 2020 increased to 15.6% versus 13.1% for the third quarter of 2019.

Salary and related service costs for the third quarter of 2020 include the reduction in operating expenses related to reimbursements and tax credits under government programs in several countries where it has operations, including the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in the U.S., the Kurzarbeit program in Germany, and other programs in the U.K., France, Canada and other jurisdictions. The impact of these items reduced salary and related service costs and increased operating profit by $68.7 million in the third quarter of 2020.

For the third quarter of 2020, its effective income tax rate increased period-over-period to 26.7% from 26.5%.

Year-to-Date

Net income - Omnicom Group Inc. for the nine months ended September 30, 2020 decreased $376.8 million to $547.3 million compared to $924.1 million in the same period in 2019. Diluted net income per share - Omnicom Group Inc. for the nine months ended September 30, 2020 decreased $1.64 to $2.53 per share compared to $4.17 per share for the nine months ended September 30, 2019.

Net income - Omnicom Group Inc. and diluted net income per share - Omnicom Group Inc. for the nine months ended September 30, 2020, included a net after-tax decrease of $133.9 million and $0.62 per share, respectively, as a result of repositioning costs and a net loss on dispositions during the second quarter of 2020 as well as the credit related to reimbursements and tax credits under government programs in several countries where it has operations, as discussed further below.

Primarily due to the negative effects on its revenue arising from the COVID-19 pandemic in the second and third quarters of 2020, worldwide revenue for the nine months ended September 30, 2020 decreased 12.9% to $9,414.1 million from $10,812.5 million in the same period of 2019. The components of the change in revenue included a decrease in revenue from the negative impact of foreign currency translation of 0.9%, a decrease in acquisition revenue, net of disposition revenue of 0.4% and a decrease in revenue from negative organic growth of 11.7% when compared to the same period of 2019.

Organic growth for the nine months ended September 30, 2020 compared to the same period in 2019 in its five fundamental disciplines was as follows: Advertising decreased 13.2%, CRM Consumer Experience decreased 15.8%, CRM Execution & Support decreased 15.6%, Public Relations decreased 5.8% and Healthcare increased 5.3%.

Across its regional markets, organic growth for the nine months ended September 30, 2020, as compared to the same period of 2019 was as follows: the United States decreased 10.3%, Other North America decreased 12.7%, the United Kingdom decreased 11.1%, the Euro Markets & Other Europe decreased 14.4%, the Asia Pacific decreased 10.2%, Latin America decreased 17.5% and the Middle East & Africa decreased 29.7%.

Operating profit decreased $491.8 million, or 33.3%, to $984.1 million from $1,475.9 million for the nine months ended September 30, 2019. Its operating margin for the nine months ended September 30, 2020, decreased to 10.5% versus 13.6% for the same period of 2019.

Operating profit for the nine months ended September 30, 2020, includes a net decrease aggregating $160.1 million due to repositioning costs recorded during the second quarter of 2020, comprised of incremental severance charges, right-of-use asset impairments and other real estate costs of $252.8 million, and a net loss on the disposition of certain subsidiaries and other charges of $25.1 million, partially offset by reimbursements and tax credits under government programs in several countries where it has operations, including the CARES Act in the U.S., the Kurzarbeit program in Germany, and other programs in the U.K., France, Canada and other jurisdictions, which reduced salary and related service costs by $117.8 million.

Its effective tax rate for the nine months ended September 30, 2020, increased period-over-period to 28.5% from 26.0%. The non-deductibility in certain jurisdictions of a portion of the repositioning costs and net loss on dispositions recorded in the second quarter of 2020 had the effect of increasing its effective tax rate for the nine months ended September 30, 2020 from 26.6% to 28.5%. In addition, in the same period of 2019, income tax expense was reduced by $10.8 million, primarily from the net favourable settlements of uncertain tax positions in certain jurisdictions. As a result, its effective rate for the nine months ended September 30, 2020 would have approximated the rate in the same period in 2019 after considering these items.

COVID-19 Business Update

The COVID-19 pandemic has significantly impacted the global economy, its business and the results of operations. Public health efforts to mitigate the impact of the pandemic include government actions such as travel restrictions, limitations on public gatherings, shelter in place orders and mandatory closures. These actions have negatively impacted many of its clients' businesses and in turn, clients have reduced or plan to reduce their demand for its services. As a result, it experienced a reduction in its revenue beginning late in the first quarter of 2020, as compared to the same period in 2019. The reduction in its revenue continued during the second and third quarters of 2020 and is expected to continue for the remainder of the year. Such reductions in revenue could adversely impact its ongoing results of operations and financial position and the effects could be material.

While it expects the pandemic to affect substantially all of its clients, certain industry sectors have been affected more immediately and more significantly than others, including travel, lodging and entertainment, energy and oil and gas, non-essential retail and automotive. Clients in these industries have already acted to cut costs, including postponing or reducing marketing communication expenditures. While certain industries such as healthcare and pharmaceuticals, technology and telecommunications, financial services and consumer products have fared relatively well to date, conditions are volatile and economic uncertainty cuts across all clients, industries and geographies. Overall, while it has a diversified portfolio of service offerings, clients and geographies, demand for its services can be expected to decline as marketers reduce expenditures in the short term due to the uncertain impact of the pandemic on the global economy. During the second quarter of 2020, it realigned its agencies' cost structures, which included severance actions and furloughs to reduce the workforce, right-of-use asset impairments and other real estate costs, a net loss on the disposition of certain subsidiaries and other charges. These actions were taken to tailor their services and capabilities to changes in client demand.

As previously reported, during the first half of 2020, Omnicom took numerous proactive steps to strengthen its liquidity and financial position that it expects will help mitigate the potential impacts of COVID-19, including:

• The amendment and extension of its $2.5 billion credit facility to February 2025,
• The suspension of its share repurchase program,
• The issuance in February of $600 million 10-year 2.45% Senior Notes, which were used to finance the early redemption of the remaining $600 million of 4.45% Senior Notes that were due in August 2020,
• The issuance in early April of an additional $600 million 10-year 4.20% Senior Notes, and
• The completion in early April, of a $400 million 364-day revolving credit facility, which is in addition to its existing $2.5 billion revolving credit facility that expires in February 2025.

They have no long-term debt maturing until May 2022.