The Interpublic Group of Companies, Inc. (IPG) Earnings Call Transcript & Summary

Mr. Roth, thank you for coming, as always.

My pleasure.

I've got some prepared questions. But of course, if I had my druthers, it would be incredibly interactive. So if you do have a question, just raise your hand and you just hit the button and we'll squeeze you in there, and I'm sure Mr. Roth will be happy to answer your questions. We do have disclosures in the back of the room, if you'd like those.

So let me start with this high-level question. I was going back and looking at my questions from the last year, and you were the only ad agency that had positive returns in terms of your stock price. And this year, among the major ad agencies, you were sort of just behind WPP, but had another incredibly good year. And yet when I look at your multiple, your multiple doesn't seem to reflect sort of this consistent performance year in, year out. It's almost like pulling teeth from the buy side to get any sort of equity performance. It's like you have to earn it on the E, but we don't really get it on the multiple. So can you just -- do you disagree with anything that I've said? And can you just provide some context around your level of frustration with that dynamic, if that makes sense?

Yes, I think our multiple should be higher.

Okay.

If you outperform your sector for 10 years, and that includes ups and downs in the sector and our competitors going through all sorts of challenges in terms of leadership and issues, other issues surrounding the company, and we continue to be consistent. As you said, we continue to outperform on the organic side. We continue to expand margins. We executed a transaction that we believe is game-changing to IPG in terms of the Acxiom transaction. We integrated it in basically 1 year as we promised. And we're in the market already with new products working through Kinesso, which is an organization we formed using parts of media brands and Acxiom in terms of Cadreon. So we have ad tech, martech and services all in one location. Aside from headwinds this year, we're net new business positive for 9 months. We're 3.5% organic growth. So we're outperforming our sector on 9 months. For the quarter, we were a little bit behind a competitor. But again, we had these tailwinds -- headwinds, if you will, that affected our results. So I think given our competitive set and where we are in the marketplace, I was telling the group beforehand that I've never felt better about our collective offerings, whether it be on the media side of the business, whether it be on creative, multinational and independent agencies. If you looked at FCB and McCann alone, last year, in Cannes, they had more Cannes Lion wins than the other holding companies. So our creative capabilities are second to none. Our PR businesses are best-in-class. Our experiential and sports marketing and our media are all best-in-class, and we create an open architecture integrated offering that we have executed in the marketplace, which has led to us, a, retaining some big clients that were in review and adding to that, being net new business positive. We've already given Kinesso and Acxiom a seat at the table in our open architecture, and it's resonating very well in the marketplace. The Acxiom business themselves are operating as expected in terms of their own performance and margin and growth. So right now, I think IPG is positioned better than it's been before. Our brands are very strong. Our transparency and all the things that distinguish IPG from our competitors, including diversity and inclusivity, are all resonating in the marketplace in terms of our ability to retain talent and recruit and have clients want to do business with us. So I guess we'll just have to keep putting numbers on the board and provide opportunities for investors.

So I sometimes joke with investors that if there was a simple way to allocate capital as a buy sider, if you just sort of went along what the market perceives to be disruptors and you sort of sold everything that was perceived to be disrupted, that have probably been the most successful investment strategy of all, right? Because you don't have to make it more complicated than that. And I think that the marketplace just wants to put the ad agencies in the disrupted bucket even though you don't really see evidence in terms of the organic growth that you have been disrupted. And so how -- what is the thing that you can do to sort of shake that broad perception on the buy side from sort of putting you in that disrupted bucket? Because that's what I think the root cause of your low multiple is. It's no more complicated than that. So what is the simple answer to get out of the ditch, I guess?

Well, I think we're a disruptor in a disrupted industry.

Okay.

And I think we have to look at it that way. I mean, by the way, we were 1 of the 250 best managed companies in the United States. IPG was on that list. So we must be doing something right.

Wow. What list is that, that you're saying?

Was it the -- was it -- Wall Street Journal.

Wall Street Journal.

Yes. And so I look at it as do we have the most competitive offerings and do we add value to a marketplace that is going through a lot of change. And I think with the acquisition of Acxiom, and you look at the strength of our brands, our philosophy is to invest in our brands and bring to the table the strongest brands with the go-to-market strategies, each of our brands have different go-to-market strategy to the table on a collaborative basis, in an open architecture environment, where we bring the best of IPG to the table, and we're prepared to put skin in the game in terms of performance-based pricing, if you will, in contracts. And we believe we add value to our clients and unlike some of our competitors. It's kind of interesting to see IPG being listed as one of the more stable, consistent companies. In the early days, that wasn't the case. It was the beleaguered IPG, and everyone is kind of rooting for IPG. So it's kind of interesting to be in a position now where everyone looks at us and says, "Why are you outperforming your sector?" And I think the answer is we've invested in the right talent. We've invested in the right resources. We've disposed of all the businesses that we shouldn't be in. Frankly, our competitors are doing that now. So they're going through what we went through a number of years ago. I think it's the right thing for them to do. But in the meantime, there are issues in terms of their ability to execute, I guess, and we don't have those issues. So I would argue that if you're looking to our sector as a solution-based, data-driven company that is able to make sense out of a very competitive, confusing marketplace where you have media outlets that are springing up brand-new, which have very interesting offerings, and if you're a CMO looking to allocate media dollars and move your needle in terms of the marketplace, where better place should you go than a company that has the creative capability, the media capability, the execution capability and all the resources that we can bring to help you move the needle. And so I would argue that we are the disruptor in our sector.

So you mentioned that some of your rivals are beginning to follow you in terms of disposing those non-core businesses. How close would you say they are to embracing the open architecture model? How much progress have they made?

I don't think they will ever embrace open architecture the way we do it. We already see some of our competitors putting all their agencies together in one offering. I don't think that makes a lot of sense. Because each of our brands have a different go-to-market strategy and our clients like the idea that in the open architecture model, if one of the offerings is either not performing or not what they need in the marketplace, we can bring in another agency to replace that, and we've seen it in action recently and it worked tremendously. And in fact, the client is the one that generated it, which is the way it's supposed to work.

When you say generate, do you mean it was their idea?

They said that under the model, what happens is we get an e-mail, and these are global companies, that under the model, we're seeing we're having some problems in this location. How do you solve it? And put our teams together, and we say, "This is the team that we think can solve it," and we present it and we solve it. Now under -- if you didn't have an open architecture model, we couldn't be able to do that because all the teams are already ready to roll. And so the other approach by our competitors that have these dedicated agencies -- now we have a couple of dedicated agencies, but our dedicated agencies also have open architecture to support them. And dedicated agencies have it placed in the marketplace. But I believe the open architecture provides the best vehicle to meet the needs of our clients and our people. Our people have a career path with our brands, and that's who they associate it with. Clients don't look to bring in IPG, although some do. They're looking to bring McCann, FCB, MullenLowe, Hill Holiday, the Martin Agency because they have -- they're aware of their brands, they're aware of the work that they do. And it's up to the holding company to put all the resources together on a collaborative basis so that the client really isn't involved in that decision other than the results. And so we believe our structure is -- provides -- we're the company that people want to work for and clients want to do business with. And the transparency and diversity and inclusion culture that we have, I think, is a differentiator in the marketplace.

Helpful. So about 6 months ago, I would say the buy side got very, very nervous about a recession. It seems to have moderated quite a bit, I would say, in the last 6 months. But if you were one of our clients that's sitting here around the table or someone on the webcast and we're trying to pencil out what a reasonable 2020 number is for in terms of growth, and I'm not going to ask for a percentage, but what do you think will be the biggest swing factors that they should at least think about as they're trying to pencil in a reasonable number? And I'm thinking about things like macro, account wins, losses, strength of verticals, all the sort of big swing factors. What -- how would you help our clients frame that?

Obviously, from a macro point, if we go to war, I think there would be a difference. No. I think, look, some -- they always ask me, "What do you worry about? What keeps you up at night?" And it's always macroeconomics. Our business is driven in a macroeconomic environment.

Okay. Sure.

So to the extent it's not strong, then it affects our business. And -- but right now business is okay. And yes, everyone was talking about it. I don't see as much talk about recession as there was before. But that can change as...

You're talking about from the buy side or from your clients?

From everybody.

Okay.

And I think it's -- are clients concerned about macroeconomics? Yes, they always are concerned. So they want to make sure that they spend their dollars efficiently and that they can show results, and we have the offerings to do that. That's why we have a data-driven offering that could show the effect in how you reach the consumers and whether it's working. So it's relevant to the question of whether they should spend money. And it's incumbent upon us to come up with ideas and prove that it actually works in the marketplace and we have the resources to make that happen. So -- but clients have capital. 2008, clients didn't have capital, they weren't spending money and business stopped. I don't feel that at all. Now geographically, there are pockets in the world that are having some issues. I mean I think China, Hong Kong and Singapore are areas that we are seeing an impact. For us, it's 2% of our business. And we're there. We have good resources to meet the needs of our clients. But that's been a bit of a drag, and I think this -- the trade wars there have an impact. So it would be nice if we can solve that. Yet India has been performing well for us. So Asia Pac, which makes up 10% of our business, was down a little bit in the last quarter. But for 9 months, all of our geographic regions were up. So whether it's up or down, usually with us is dependent on specific client spends here and there. CPG, 8% of our business, is up and mainly because of some client wins. Health care, 27% of our business, is very solid on a global basis. We have a number of open architecture engagements there that are working well. Continental Europe and the U.K. have been performing okay with us. Each was 8% of our business. Latin America has been performing quite well, double-digit growth in Latin America for us. And the U.S. is 64% of our business. And we have some headwinds in the U.S. But absent those headwinds, our business in the U.S. is pretty solid. So overall, I think, geographically, we're well positioned. Sector-wise, our strongest sectors are where you want to be. They're health care, they're retail, they're tech and telecom and financial services. And those are good sectors. Auto is a bit down for us because of the headwinds, but we see that recovering. Obviously, 2020, there'll be new automobile offerings in the marketplace that I hope we'll participate in. So I think if you look at...

So even if auto sales are down, do you think you could do okay if there's enough new models that are coming out?

Well, I think the one thing about the auto industry they know is they have to spend marketing dollars to get people in the car. And frankly, that's the objective of advertising on the auto sector, get people to get behind the car. Most people, once they get behind the car and drive it, they're going to buy it. So our goal is to put people in the seat. And we can do that either through experiential, sports marketing, advertising, all the CRM stuff. And we're very strong in that marketplace. And obviously, we have some great clients in that market. So in 2019, like I said, we had the headwinds. And hopefully, in 2020, with new offerings, we'll see a bit of recovery, but they have to spend marketing dollars to sell cars. I mean it's pretty clear. Frankly, most of our clients have to spend marketing dollars to sell products. So I'm a firm believer in spending marketing dollars. And it's our job to come up with the ideas, the creative ideas and the media placement and where to put those dollars and to measure how effective it is, and that's what we do.

Interesting. Any questions from the audience? Yes.

I had a question about competitive intensity, in particular with the consultancies. Obviously, Accenture won a relatively decent chunk of the Kimberly-Clark business. I know that was away from WPP. But is that a sign of things to come? Are we going to see even more competitive intensity from the consultants? And is there any amount of time before they start taking some really big consolidations on the [indiscernible]?

I don't know the size of what they won. But we don't see a lot of it. Obviously, some of the consultants have done acquisitions on the creative side. The companies that they're buying, we've been competing with for years, and we usually outperform. So I don't necessarily -- if they're up against us on the creative side, I think we've more than hold our own in that environment. And frankly, we haven't seen as many of those companies on creative pitches. And we certainly don't see on media pitches because they don't have media capability. So on the integrated offerings, we don't see them. Where we do see them is on the one-offs on the digital side of the business, and they try to leverage their system integration business and offer some digital capabilities that they have and they'll throw in some creative capabilities as a result of their acquisitions. But when it comes to head-to-head competition and when we can bring in the integrated offering, both creative, media, PR and experiential, we don't have much problems in terms of prevailing. So yes, I think we're going to see them, but they're not the ones who we see day-to-day in terms of the competitive set.

In terms of uses of cash, I think through the third quarter of '19, you paid off about $300 million of the debt related to the Acxiom acquisition. And at least in our model, we've got about $500 million of debt reduction next year. And then the year after, we have you returning to buybacks. I think, Jerry, you can sort of wince if I get this wrong. You guys don't really have a formal leverage target, right? So we're a little bit -- sort of a little bit in the dark relative to most of the other companies. But does that seem like a reasonable time to resume...

I haven't done your $500 million number. I've got Ellen Johnson, our CFO, sitting here. She would yell at me if I answered that. But I just think you have to look at the history of IPG, okay? In the early days, we had a lot of cash on our balance sheet because, frankly, we weren't investment-grade. So we used to use the cash on our balance sheet to show our financial strength. And we said it's a goal for us to get back to being investment-grade. So we weren't doing buybacks. Frankly, in the early days, we weren't doing dividends. So it wasn't until -- it was in 2011 that we started being back in the game in terms of dividends and buybacks, and we started with investment-grade. And we view investment-grade as an important factor. But the other side of it, there's no need for us to use our excess capital to do any more transactions. So the Acxiom transaction was it for a while for us. And the reason for it is we don't need any offering in the marketplace. So from an M&A point of view, we set aside $100 million, $150 million for tactical transactions. So if you look at our cash flow during that period, we paid back $2.5 billion in buybacks and we've spent $1.8 billion, I think, in dividend. So we recognize that our goal to enhance shareholder value is to be back in the market on buying shares and continue our dividend performance, and that's our intent. So whatever we do in terms of paying out debt is with a view towards being back in the marketplace. Now I can't tell you whether it's 6 months from now or 1 year from now. But if you look at us historically, I think you should get a degree of confidence that we're very supportive of buybacks and dividends. And therefore, that will continue for us.

Okay. And you mentioned the Acxiom acquisition, and you said you did a good job sort of integrating it on time. If this goes as well as you hoped when you completed the transaction, what would be the KPI that The Street should look at to say that, "That really was an extraordinarily good use of capital"?

Well, first of all, you should see we had -- when we announced the transaction, we set a target of about 5% organic growth. And we should see that on plan in terms of moving forward. But more importantly, it would be the additional services and revenue coming from the Kinesso structure and new products. And we hope to start seeing that in 2020. So that would be something. Again, it ramps up slowly because you can't inundate the marketplace. But more importantly, what you see is our ability to have Acxiom have a seat at the table on our new business pitches, our existing clients. So we already have a list of clients of both Acxiom, who want to see what IPG can do to them -- help them, and IPG clients to see how Acxiom could help them. And as we unfold that and bring those offerings to our existing client base on both sides, we see very strong opportunities in terms of products and opportunities to enhance return on investment for our clients. So what I would hope you would see, and we've already seen it on new business pitches, a number of our retention clients as well as new business wins, Acxiom played a very important role with respect to those wins and retentions. So I would expect to see that continue in 2020. And as new business opportunities are created, our open architecture, including all of our resources, including Acxiom, will be very busy and active. And what we see right now is there are more opportunity. There are more opportunities out there than risks with respect to pitches that are out there. So we hope to continue to have net new business positive. So I think the core business of Acxiom in terms of data management, first-party data management is 2/3 of their business. It's a solid business. We see that to continue to grow and provide nice margins. And the info base and third-party data parts and all the products and services to Kinesso, we see opportunities there. So we're pretty excited about it.

Okay. That's great. Now what about -- there's so much going on in the privacy world now with this California law and even rumblings about the U.S. potentially doing a U.S. version of GDPR. Does any -- should investors be worried about any of that in the context of what Acxiom does? Is it just sort of you're just compliant and we don't need to worry about it? Or is it one of those risk factors that investors should think about?

Well, we're in the business of helping clients with those issues. So I think clients should be worried about it.

Okay. All right.

And they should use our services to help them. But seriously, Acxiom has as far as a 5-star rating in terms of privacy. So they are best-in-class in terms of how to deal with it. We went through GDPR without a glitch, which is good. I've received the -- I was telling the other group, I got a note from my general counsel during the holidays that we're locked and loaded on the California implementation. We're all set and everything looks good there. So we're very comfortable with our offerings there, and we expect to see a lot of our clients looking to us to help them with respect to solving those issues. Right here in Nevada, there's a new law in Nevada similar to California. I personally believe that we should have a federal rule on privacy. The Business Roundtable has a proposal as an example of what we should do. It's crazy for us to have state-by-state privacy rules. Each one of them are different. It's going to be very cumbersome and costly. So I hope we can -- we're supportive of that. But we have the expertise both to handle our business as well as our clients and help them with it moving forward. So we view it as an opportunity for us in terms of adding value to our clients.

If you had to handicap the likelihood of us having a federal law that sort of supersedes a lot of these state-by-state laws, would you give it a pretty good likelihood?

Right now, Washington has its hands full on a couple of other issues. I would like to see them solve that before they solve the privacy issue. But the first thing they should do after they solve the war and the trade war is to solve the privacy issue. But until we see a resolution of all those things going on, I don't see a rush to pass a federal privacy act. But I think they should.

Okay. So you guys have had a very, very strong track record of expanding your margins over time very gradually and consistently. But we're now almost getting to the point where it feels like that part of the narrative is sort of behind us. And then the question sort of turns to what level of top line growth do you think you need just to maintain the margins that you have? Or maybe -- or correct me if I'm wrong, if you think that I'm being too bearish or conservative in my view, and that there's still a margin story here, please correct me.

Well, I don't think there's a margin story. But for '19, we put out 40 to 50 basis points of margin expansion. We cannot continue to do that absent significant organic growth. So I do believe the days of creating margin expansion without growth are behind us. In the early days, when we're repositioning IPG, we were able to do that. But now we would need growth to expand more. And it's hard to expand margin 40 to 50 basis points. That said, we do believe there's opportunity to expand margin with growth. And a lot of that has to do with our ability to reposition our offerings in the marketplace. And I think Kinesso is a good example of creating products that are based on value creation and being compensated based on value creation. And we have a number of contracts at IPG that are based on that, and it's been very successful. And we'd like to see that as a model going forward. It enables us to provide opportunities to expand margin. It enables clients to -- because of our transparency, our clients work with us on that because they -- we don't take inventory. We don't have hidden pockets of profitability that they're not aware of. It's right out there on the table. These are the savings. This is what we're going to be providing. This is your share. This is our share, and let's go forward. And we can document it and they could bring in third-party verification. And I think that's the model for our business, particularly on the media side of the business, and that provides opportunities for margin. Clients don't care if we make margin as long as we can show that they're making their share. I mean that's where a lot of these issues came from and that is clients didn't have confidence in their ability to understand how much money we were making versus acting on their behalf. And for years now, we've had this transparency part of our DNA that has resonated well in the marketplace because it's true, and we've been able to convert that to contracts that are based on performance.

So can you -- without naming a client, can you give us an example of like a Kinesso-type contract? Like what would that look like in the real world?

Well, I'll put it on a very simplistic basis, and that is if you were spending $100 and getting x return on investment, we can spend $90 and get the same reach with the same effectiveness and you've saved $10, that could be the savings. Or you can take the $10 and reinvest it in other opportunities. We prefer you to do that. But the $10 savings is real, it's measurable, and we can participate in those savings.

Okay. Go ahead.

I've got a question on margins, actually just following on from Jason's point. Probably an unfair characterization, but I kind of think about the old agency model as being you win, you hire, you lose, you fire. That's the end of it. With products like Acxiom, does that change the dynamic? Has your business become naturally more operationally geared such that obviously in a positive way, revenue growth drives margin expansion? But also even on the digital side, I mean, some agencies like R/GA, do they have sort of big sort of cohorts of sort of consultants sitting there that have to be paid regardless of whether there's throughputs of activity?

Again, it depends on what the engagements are. Obviously, on the production side, the production side of the business requires staffing in terms of the ability to code and create a product. And obviously, we see that in our production businesses, which are global, they run 24/7 and they're very -- they're labor-intensive. And to the extent that the business isn't there, then obviously the labor. That's one of the aspects of our business. It's a variable cost model. So if the revenue isn't there, then the cost are -- could be reflected, which is your point on you win the business, you add people, you lose the business, you lose people. So parts of our business still are like that, okay? On the media side of the business, it's a little different in that when you're looking at the savings, it deals with pricing and distribution and savings. And that isn't quite as labor-intensive as the production side of the business. So there are opportunities there. Plus we look at our efficiencies overall. We don't have big rooms with a lot of people sitting around doing nothing. And in the early days of this business, that's what it was like. You would come in and if there was new business, you just go to the bullpen and you bring in people and you put them to work. Now when we have new business wins, we actually have a recruiting plan that's part of the pitch because we have to add 100 people. And so that's become part of the business. And it leverages -- it's good for us in that it leverages the variable cost model aspect of our business. So I think it's a mixed bag on it. But nonetheless, our biggest cost is salaries. And that's why -- and one of the things you can see from IPG is that we've been pretty good in managing our cost profiles. And so all of our businesses have governors, if you will, on them in terms of their ability to recruit and add people. We don't add people unless they're revenue-facing. And all of our businesses, including myself and senior management, are compensated on revenue and margin. And the revenue has to be profitable revenue. It's not just adding revenue. So we have a mechanism that shows that to the extent the revenue was not profitable, the incentives are affected accordingly. So we're pretty good at managing our cost and making sure -- and that's why we've been able to expand margin the way we've been doing it, and I don't see any reason why we shouldn't continue to be able to do that. But I have to tell you, 40 to 50 basis points a year, I wish that I could say that, that's in the cards, but that remains to be seen.

What do you think the most important sort of developments are in the advertising ecosystem going forward? I'll give you some examples of things that come up with our clients all the time. Targeted television advertising, it comes up all the time. Roku comes up all the time. Amazon comes up all the time. What do you think is most important that's happening out there in the marketplace? And are those the right 3? Or are there others?

I would say all of the above. I mean if you think about last year at CES and this year at CES, we have new players in terms of OTT, right? We have subscription models. We have advertising-driven models. We have all sorts of different opportunities to reach the consumer. And that's why I think our business -- and we get a bad rub on our business because we get paid to help our clients navigate through all of this, and it's not easy. And you need to have the data-driven capabilities. You need to have the contractual relationships with all these big players. You need to have an understanding of what's good for your business, what's not good for your business. So the answer to your question is all the above. Amazon is obviously a significant force in the marketplace as is Roku, okay, as is Hulu, as is in Peacock. And all of these are just opportunities for us to work with our clients to reach the right consumer with the right message. So I think that's all good for our business. And to the extent there are more competitors out there, it's good for our clients because obviously they have to be able to price it correctly in a competitive environment. And they need someone who's agnostic to help them navigate through this. You can't rely on the provider to provide the analytics as to whether it's working. And I'm not saying they're not going to tell you the truth.

But they all say they're the best.

Right. If you go to Facebook, all your money should be spent on Facebook. If you go to Google, all your money should be spent on Google. Our job is to say, "Wait a minute, there are other outlets. There are new outlets. There are exciting outlets that have a better reach for your consumer." So we can tailor that messaging and we can tailor the reach and how they're reached all at one time. That's the beauty of the integrated offering. We can come up with a creative idea, we can execute against it and we can reach the right consumer because of our data-driven capabilities and we can measure it, and you can get paid for it. So I used to be a client, and I wish I had all of those opportunities in terms of deciding instead of just giving them an agency of record compensation and say, "Go do some 30-second TV ads for us." Those days are gone. And by the way, TV audiences with the set-top box now are measurable. So I think that's an opportunity. I mean TV isn't going away. And to the extent you can get better measurement of TV and the product, the problem with TV is the ratings have been terrible. So to the extent the products are better, then there's no reason why we shouldn't -- they shouldn't be right up there in terms of looking at where they should be placed in any media player.

Yes.

So I think it bodes well for our industry, and it particularly bodes well for us at IPG.

One last question for you in the minute we have remaining. If you had to come up with some predictions that would be contrarian for 2020, what would you offer us?

Jerry always tells you, "The answer to that is my handicap, my [ mouthing ]." But I'll stay away from that. I think the importance of data and analytics to our business is just going to grow exponentially. And that's why we did Acxiom, and that's why we've developed our products and Kinesso and our open architecture around our ability to leverage those capabilities.

Okay. Very good. Very informative conversation as always. Thank you.

Thank you.

Yes, absolutely.

Thank you.