Philip Angelastro
Executive Vice President and Chief Financial Officer at Omnicom Group
Thanks, John. 2023 is off to a solid start in what remains an uncertain year. All of our disciplines and geographies grew organically in the first quarter, and we continue to invest in our operations and took strategic steps to reduce our real estate footprint. And we continued our balanced capital allocation, dividends, acquisitions, and share repurchases.
Let's begin with a high-level review of the quarter on Slide 3. As John mentioned, the transition to a flexible working environment with a hybrid model, which allows for partial remote work has resulted in changes to our real estate strategy. And we made the decision to exit certain leases and reduce our office space. While there will be some investments we'll be making in existing and new locations, the net impact over time will result in lower rent and occupancy costs. In the first quarter of 2023, we took a charge of $119 million related to this reduction in our office lease portfolio. The charge is primarily related to the non-cash impairment of a portion of our operating lease right-of-use assets, and the write-off of the net book-value of leasehold improvements at the affected locations.
As a result, rent and occupancy expense will be reduced in the future, and substantially all of the charges will be paid out of the remaining lease terms over the next few years. This slide shows our reported results, followed by certain adjustments, which make the periods comparable, and the resulting non-GAAP adjusted amounts for both periods. In addition to the real-estate charge I just discussed for 2023, operating expenses in the first quarter of 2022 include a $113 million charge arising from the effects of the war in Ukraine. In summary, reported revenues were up 1% and non-GAAP adjusted operating income was flat. Both were negatively impacted by foreign currency translations.
Moving down the income statement. Net interest expense improved due to higher interest income than we expected. In Q2, we estimate that interest expense will increase a bit, primarily due to an increase in the interest rate applied to our pension and post-retirement obligations. This will be offset by an expected increase in interest income in Q2 of 2023, relative to Q2 of 2022. Although we do not expect as much interest income in Q2 of '23, as we had in Q1 of '23, due to our working capital cycle.
In the second half of 2023, we expect that net interest expense will be flat to up slightly relative to the second half of 2022. In Q1 of 2023, the effective tax rate was somewhat lower than our annual guidance of 27%, due to a lower effective tax rate related to the real estate repositioning charge, and the realization of certain tax benefits and NOLs. We still expect a tax rate of 27% for the balance of the year as indicated on our February 2023 call. Non-GAAP adjusted net income increased 9%. As a result of share repurchases, our diluted share count declined by 2.5%, and non-GAAP diluted EPS was up 12.2% on an adjusted basis. Without the headwind from negative foreign currency translation, non-GAAP diluted EPS for the quarter increased by approximately 16%.
Now let's review the quarter in more detail, beginning with the components of our revenue change on Slide 4. Our organic growth was 5.2%. The impact from foreign currency translation was negative and reduced reported revenue by 3.2%, which once again was a bit less than the preceding quarter. Looking-forward, we still estimate that the impact will moderate for the remainder of 2023, and will be approximately flat for the year. The impact of acquisition and disposition revenue was negative 1%, primarily reflecting the disposition of our businesses in Russia, announced near the end of the first quarter of 2022. Given the recent disposition of our small Research businesses earlier in April, we expect a similar reduction of about 1% for the balance of the year, prior to any acquisitions we expect to complete later this year.
Moving on to Slide 5, let's review our revenue growth by discipline. During the first quarter, Advertising and Media posted 5.1% organic growth. Once again led by strong performance in our media businesses. Precision Marketing had strong growth of 7%, organically. We continue to invest in this area and we see opportunities for future growth in the market for digital customer experience, data analytics and digital transformation services. Commerce and Brand Consulting grew organically by 3.3%, primarily on the strength of our branding and design agencies. Experiential organic growth was 8.4% led by Europe, the U.K. and the Middle-East.
Execution and Support returned to growth at 3.6%, led by our merchandising and support businesses and offset by a reduction in our research businesses. Public Relations was strong at 5.8%, coming off a challenging double-digit growth comparable in Q1 of '22. Finally, healthcare grew 4.8%, and we continue to see good growth trends in this business, 2023 supported by new client wins last year.
Please note that we made some adjustments to reclassify certain agencies among our disciplines to reflect changes where an agency's current and future capabilities better aligns with our new discipline. Prior periods have been restated to the current presentation. No changes were made to total revenues, or total organic growth. For your reference, we've included a slide in the appendix of updated 2022 quarterly and annual revenue by discipline. The impact of the changes on the 2022 presentation by discipline was minor. The only notable change resulting from reclassifying our digital communities agency, which has been more closely aligned with our research capabilities. From the Commerce and Brand Consulting discipline, to our Execution and Support discipline.
Turning to Slide 6 for revenue by region, you can see the growth was about 5% everywhere except Asia-Pacific, where we saw some regional performance challenges impact results. In the U.S., our 5.1% quarterly organic growth was led by Advertising and Media, Precision Marketing and Public Relations. International organic growth of 5.4%, is led by Advertising and Media, Precision Marketing and our Experiential businesses had strong growth outside the U.S., but were flat in the U.S. Regionally, we had positive growth across our top 10 countries with the exception of China.
Looking at revenue by industry sector on Slide 7, compared to the first quarter of 2022, we had higher relative weights in food and beverage and auto offset by a lower relative weight in technology, other categories were broadly stable.
Let's now move down the income statement and look at expenses on Slide 8. Our total operating expenses were flat at $3.1 billion. Salary and related service costs were flat. The increase resulting from organic revenue growth and additional headcount was offset by the effects of foreign currency translation. As a percentage of revenue, these costs decreased 1% year-over-year. Third-party service costs, which include third-party supplier costs when we act as principal in providing services to our clients, increased due to an increase in organic revenue. These costs are an integral part of our service offering to our clients.
We provided additional operating expense detail this quarter, with the addition of the third-party incidental cost line, which primarily consist of client-related travel and incidental out-of-pocket costs, that we go back to clients directly at our cost, and we are required to include in revenue. These costs were previously included in the third-party service cost line and they tend to increase when revenue increases, and decrease when the revenue decreases. In Q1, they increased due to an increase in revenues.
We hope this incremental disclosure will assist in your analysis of our results. Occupancy and other costs were down a bit, they increased slightly due to growth in general office expenses, as our workforce continues to return to the office, which was offset by the effects of foreign currency translation. SG&A expenses decreased primarily due to lower professional fees and the effects of foreign currency translations. We will reference Slide 16 in the appendix presents our operating expense detail on a constant currency basis.
Similar to the income statement highlights slide we discussed earlier, Slide 9 presents both the reported and non-GAAP adjusted results of 2023 and 2022, by removing the Q1, 2023 real estate repositioning charges and the Q1, 2022 charges arising from the effects of the war in Ukraine. Our first quarter 2023 adjusted operating income of $466 million was flat with the first quarter of last year. The related adjusted operating income margin was 13.5%, compared to 13.7% in the first quarter of last year.
Please turn now to Slide 10 for our cash flow performance. We define free cash flow, as net cash provided by operating activities excluding changes in operating capital. Free cash flow for the first quarter of 2023 was $429 million, up 26.3% from last year, which included the cash impact of charges, arising from the war in Ukraine. The changes in operating capital was typically negative in the first quarter, and the level for the first quarter of 2023 was similar to the last few years. As we look forward, for the full-year 2023, we continue to expect changes in operating capital to be a source of cash again.
Regarding our uses of cash, we used $142 million of cash to pay dividends to common shareholders and another $13 million for dividends and non-controlling interest shareholders, both similar to last year. Our capital expenditures of $23 million were at normal levels and flat with last year. Acquisition spend net of dispositions and other items was $38 million, and related to the acquisition of additional non-controlling interests. And lastly, our net stock repurchases for the quarter of $279 million, roughly in-line with last year's first quarter level and well on the way toward our annual expectation of $500 million to $600 million.
Slide 11 is an overview of our credit liquidity and debt maturities. At the end of the first quarter of '23, the book-value of our outstanding debt was relatively flat at $5.6 billion, compared to the same period, last year. There were no changes in outstanding balances during the quarter, and our $2.5 billion revolving credit facility, which backstops our $2 billion U.S. commercial paper program remains undrawn, and our cash and cash equivalents were $3.3 billion.
Turning to Slide 12, our operating capital discipline, consistently drives above average returns on both invested capital and equity. For the 12 months ended March 31, 2023, we generated a solid return on invested capital 24%, and a strong return on equity of 45%. The strength of our business delivers attractive returns on a relative basis in both strong and weaker macroeconomic environments.
In closing, as 2023 begins, we continue to review our costs to better align with our estimated revenues in an uncertain economy, and our decision to exit certain real estate in Q1 is consistent with this approach. Our Q1 performance was solid and a first step toward delivering on our full-year guidance of an operating income margin between 15% and 15.4%, excluding the impact of the real estate repositioning charge. We expect to be at or close to the top of that range. Our approach always includes the opportunity for strategic and accretive acquisitions. And if those opportunities are not immediately available, we will continue to use our free cash flow to boost total shareholder returns through dividends and share repurchases.
Operator, please open the lines up for questions and answers. Thank you.
