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

Okay. We're going to get started. Okay. My name is Ben Swinburne, Morgan Stanley's media analyst. I'm excited to welcome back IPG. The man to my left is Michael Roth, Chairman and CEO. For those who may not be aware, Interpublic is one of the world's premier advertising and marketing services companies, owning agencies like McCann, FCB and MullenLowe. Michael, thanks for being here.

Good to be here. The premier agency.

Right.

Not one of.

Not. Right. Exactly. Welcome to the premier conference. And then a lot going on. I wanted to maybe start, obviously, a lot of uncertainty going on with the macro front, particularly concerns over how the virus might impact sort of business confidence and spending. Where would you -- how would you tell us to think about the volatility we're seeing in the market and what it might mean for your business as you look out over the course of the year?

Well, obviously, there's concern, particularly with conferences like the one we're at right now. And we've seen somewhat of an impact. Obviously, we're in the conference business. Jack Morton does conferences and events. And we've seen some pullback there. But I think you have to look at the overall positioning of our company. In China, we were affected like everyone else, and it represents 2% of our business. And if you look at the project parts of our business, again, it's less than 2% of our business. So overall, we don't see a material impact to our businesses. Now when it -- when issues on supply chains and things like that come into play, then obviously, there's some level of concern. But right now, we have not seen anything like that. And in the past, when we had SARS and Ebola, it was a short-term impact. And frankly, our business came back after that. So we're hoping that's the same here. And I just think what we have to do is just be -- we're concerned about our employees. So in those locations, our employees are working from home. Our clients and our suppliers are doing the same. And business continues. And we just hope this is a short-term issue for us. But if you look at our overall business, 70% of our business comes from -- 62% from the United States and another 8% from the U.K. So I think we're very well-positioned with respect to our geographic reach and protecting us from the exposure.

Imagine the project, this is probably pretty Q4-heavy, right, within that 2%?

Exactly. And a lot of the projects, what we're seeing is some large projects are going to be broken up and done regionally in a different time of the year. So I think we'll see some recovery there. And some of our clients have already made statements that although the -- like in China, they're seeing an adverse impact on their e-commerce business. But they're comfortable that once we're through this, that business will come back. So I'm cautiously optimistic, but obviously, there's areas of concern out there that we have to be careful about.

It feels like you reported your year-end like years ago.

I know, exactly.

But you had another strong year, the business accelerating. Can you talk a little bit about sort of the relative share that you guys have been consistently picking up, even through account losses? What's driving that? In particular, talk about your media and kind of the data side of the business where you've made some acquisitions. How is that all helping you guys continue to grow faster than your peers and your competitors?

Well, yes, as you pointed out, we continue to beat our sector, both in terms of organic growth and margin. And we were particularly proud of our fourth quarter. We saw -- particularly in the United States, a recovery in the United States. So -- and it was pretty much strong across the board. Obviously, our media business continued to perform extremely well. But in the fourth quarter, we saw our global networks, McCann, FCB, MullenLowe, contribute as well as our CMG assets in terms of Octagon and Jack Morton. So it was pretty much across the board and, frankly, across sectors that we saw positive results, so we are excited about that coming into 2020. Clearly, the acquisition of Acxiom, when we did the acquisition of Acxiom, I said that we thought it was going to be a game changer in terms of positioning our company, having a competitive advantage. And we, in fact, have seen already contributions by Acxiom. And the follow-up, we formed Kinesso, where we took some of the parts of Acxiom and coupled with parts of media brands to create Kinesso, which has martech, ad tech and services altogether, providing some value-based offerings, which we'll talk about later. But we've seen an impact there, not only with our existing clients, but they certainly added to our new business wins and expanding client opportunities, when we bring all the different collaborative agencies we have on an open-architecture basis. And I've said this on the call, this is the first time that I believe that there is a clear distinction between the holding companies in terms of the go-to-market strategy. It used to be all the holding companies had the same assets, the same great brands and so on. I think one of the main reasons that we're outperforming is that our go-to-market strategy is different. And that is we use the open-architecture model, where we bring in the best of IPG. We support our brands. We don't put all of our brands together. And we collaborate by bringing these brands together to meet the needs of our clients. So sitting at the table, we have Kinesso, we have media brands, we have Weber Shandwick, we have Golin, we have McCann, FCB, MullenLowe, all the different assets that can help our clients move the needle on a collaborative open-architecture basis. And it's resonating extremely well with our clients. So I think the fact that this go-to-market strategy basically puts our money where our mouth is in terms of offering a distinction between us and our competitors and quality offerings is paying off. And I think that's one of the primary reasons we've been outperforming.

Is that, in your mind, a barrier? Is that -- are there barriers to replicating that, another holding company?

Apparently, they must -- it must be because I've been talking about open architecture now for 14 years, when we first put the management team together. So it's not a secret in terms of our go-to-market strategy. We just apparently know how to do it better than others. And our competitors, their definition of open architectures, they just put their businesses together and they call it by a single name. And that's not what open architecture is. Open architecture is collaborative, where our best of our agencies work together. They have their own go-to-market strategy. They have their own identity, the quality, creative capabilities. And apparently, it is hard to replicate because we seem to be the only ones doing it.

Where are you guys investing this year? You guys guided to 20 basis points of margin expansion. I mean to some extent, you kind of spoiled us over the years with more than that. But the margins have -- you've really closed that gap with the peers. But where are you guys reinvesting back in the business? And is the competition for talent driving up -- extends it a little bit, all else equal?

No. I think the issue -- look, eventually, you can't keep expanding margin at 40 to 50 basis points. I'd like to, and who knows maybe we will. It's a business mix issue in terms of where you get your revenue. But we put together our guidance for the year. I might also add that when we put together our guidance for the year in terms of the 3% organic, we had been fairly conservative in terms of setting our guidance. So there is a built-in conservatism in that number.

Some cushion.

I don't like to call it a cushion. I like to call it conservatism, so that we have some leeway. So to the extent there is some exposure on this coronavirus, hopefully, we may have that covered in there as long it's a short-term focus. But when we do that, we look at our business mix, and one of the things we're doing with Kinesso is we're bringing out new products. And these products are very value-based products. And the compensation for these products is based on the value created and therefore, it carries with it higher margins. So to the extent we roll out these new products and other products that we have in our other businesses, to the extent we're successful with that, we expect to see added margin as a result of that. So we were conservative on the margin number, and 2020 is just beginning. So talk to me later on in the year in terms of our ability to expand it. But we don't view that we peaked out in terms of our margin expansion. It's a variable cost model, and we see efficiencies. We've sold -- we had a number of dispositions in 2019, where we saw that in certain markets we were competing in, we didn't have to own those businesses, we can have affiliations. So we disposed of those businesses. And we'll take another -- we continue to look at deficiencies throughout the year. So we'll see some of those in 2020 as well.

I was planning to ask you about the health care vertical anyway, it just so happened, which I think was one of your strongest last year. Maybe you could talk a little bit about the trends in that sector that's driving growth for your business. Why are you guys so well positioned in that vertical? And then why don't we start there? And we'll go from there.

Well, health care has grown to 27% of our business, which is pretty impressive. Actually, for 2019, it was not our best-performing sector. Our retail and financial service sector actually performed better. But that said, it was a very high-performing sector for us. And it's a great example of the open architecture. We have multiple agencies that have great global expertise in health care. McCann Health, FCB, Weber Shandwick, media brands, a couple of our independents, whether it be Deutsche or Hill Holiday, have unique consumer health care expertise. And included in that world of expertise within IPG, we have Med Ad, we have farmer, we have consumer. We have professionals by disease, by discipline. So we really cover the gamut of what our clients need. And some of our best open-architecture structures are in the global health care side. And I can tell you how rewarding it is to sit at these top to tops with these clients and have FCB, McCann, Mediabrands, Weber Shandwick and Golin, all sitting around the table, working on a particular client, and the client not even know which agencies everyone works for, focused on it. So the health care expertise that we bring to the table as well as the data capabilities that we have in health care is best-in-class, and it's really resonating in the global marketplace. So we're pretty excited about what we bring to the table there and using open architecture in that environment. It's pencils down when you get through these reviews because the capabilities that we bring are just incredible.

You must have implemented an incentive structure at IPG and in particular, health care, that incents people to collaborate across agencies that don't have to worry about their own P&L or their own comp.

Yes. I mean that's what open architecture is all about. In fact, one of our major open-architecture health care clients, we actually have a separate P&L, we have a separate incentive plan for those individuals, and they work for different agencies. So the old days of my silo, and what does this mean to my silo is starting to disappear. And it's very client-centric. And our people -- and the reason we do it so well is because our people realize that we're going to be -- they're going to be rewarded on their performance, not whether it goes into their own agency silo or not.

Let's just talk about Acxiom. And I promise we're not going to spend the whole time with that. Otherwise, you'll get upset. But it was a significant acquisition for the company. It seems to be performing as or better than you guys had expected. Where are you today on the integration process? And when you think about new business activity, how much are you leveraging the Acxiom assets?

Well, the integration is basically done. And the real -- the ultimate test of an integration is incentive comp. And we just got through Board meetings on our incentive comps and roll the incentive plans, and everything went pretty smoothly in terms of that. So the infrastructure integration, the financial systems, but more importantly, the go-to-market strategies have been pretty well-established right now. So there's really not much more we can do with respect to the integration. And it's quite an accomplishment to be able to do that in 1 year. So we're really proud of our teams for doing that. And when you look at Acxiom, when we did the acquisition, what we said was 2/3 of the Acxiom business is, first, part of data management. And they're the best-in-class in doing that. And they represent 50 of the top 100 Fortune 100 companies. So that business continues to do well. As I said on the call, they performed as expected, certainly based on our business plans for them, probably a little bit better than that. And so we're really pleased with not just the integration, but the business performance of Acxiom. The other 1/3 of their business is in the info base side, which is where we had more experience with them working before the acquisition.

That's third-party data?

That's the third-party data. And that basically is utilized in connection with the Kinesso and AMP third-party data. And it's that where we use that third-party data in connection with the capabilities of Kinesso in terms of bringing the activation, the services, the applications of the data that we have from Acxiom to life within Kinesso and offering these new products. So we're very pleased with the performance of both Acxiom and Kinesso, and they've made a definite impact in new business wins as well as servicing open-architecture platforms with our existing clients. And when you sit in a room and you see the capabilities that they bring to the table, working with our creative capabilities and our PR capabilities in addition to media, I mean, it's really what this business is all about.

Yes. I think when you guys closed on the deal, I could be wrong, I think about 90% of the business was domestic or U.S. Are you guys having any success? Or is there a big push to try expand their revenue base?

It was clearly on our agenda in terms of opportunities with Acxiom. There were 2 parts of the opportunity -- 3 parts of the opportunity for Acxiom that we were looking at. One are these new services, which I referred to in the Kinesso offering, and we have a certain amount of revenue synergies already baked into our plans for 2020, and we're rolling that out, principally on our media brands clients. And then next year, we'll start rolling that out to our creative agencies as well. The other opportunities are in the sectors. We're at 27% in health care. Frankly, they're more financial service-oriented than health care. So we see that as an opportunity. So we're starting to introduce Acxiom to our very strong global health care client base. So they're being brought in to see what they can provide. And we're also starting to see some project-based opportunities there. And then the final expansion would be on the global footprint. And we're not quite there yet. But again, in these open architecture structures that are on global clients, we are introducing Acxiom and Kinesso. So we see that on the horizon as well. So we're quite pleased with the transaction. And I do believe it will continue to be transformational to our business and really gives us a competitive advantage.

You've mentioned it a number of times, and I meant to ask you, but I want to ask for those of us who are not in your business, Kinesso? The agency business loves rolling out new fancy names with big fanfare, and this is clearly important to your business. So explain to us why you guys created it, what it does? Is it a media set of products? How does it fit into the client...

It's actually a combination. Think of Kinesso as parts of media brands, parts of Acxiom and other parts of our business, service-oriented part of the business where they do -- they can do insights. They can do media plans. They do applications, and they do activation. You're familiar with Cadreon, which is our programmatic side of the business. Acxiom -- Kinesso houses now Cadreon. It's run by Arun. And Arun brings unique capabilities to bring all these assets together. And it's thought process of creating Kinesso was candidly in the marketplace, the market didn't view advertising agencies as having the technology, the martech or, ad tech capabilities that maybe some other third parties are out there. So we felt by creating a new entity, giving it a fancy name that doesn't sound like an advertising company, we will be viewed in the marketplace as frankly more of a technology company than an advertising. And Acxiom is not an agency either. So -- and it's really resonating quite well in the marketplace, and it's growing significantly. So, so far, it's working as intended. But more importantly, the output and the capabilities that they bring to the table are just mind-boggling. You can see what they can deliver in terms of insights and reaching the consumers, the right consumers with the right message and the analytics that goes into that. And if you look at our client base, they're some of the top analytic companies in the world, and it is resonating with those clients, which is pretty impressive when you can impress those clients.

Sure. Let's talk a little about sort of the new business activity. A couple of years ago, we had sort of what seemed to be a highly elevated level. How would you describe the current pace? And then also, can you just talk a little bit about when -- how we should think about this year in terms of account loss headwinds that you're working through?

Well, we're still cycling through the losses that we had in 2019. And as I said at the call, in the first quarter, we still have headwinds. In the U.S., it will be close to 4% overall, so like 3-change-percent. And then they will go down to about 1% or less than 1% overall in the second quarter, and then we'll be through the headwinds. I might add that our performance in 2019, the 3.3% organic growth was net of those headwinds, so in case I didn't tell you that. So the performance was that much more impressive when you factor in the headwinds that we had. But -- so we'll cycle through those headwinds by the second half of the year of 2020. And Mediapalooza was a couple of years ago. So everyone was expecting a lot of new pitches out there. We haven't seen a lot of them.

No. Why do you think that is?

Well, candidly, some of our contracts we've renewed, which is always the best way to do it.

They could have taken them...

They could have gone out and review it, but they're so happy with the services they're getting from us that they've been renewed.

But I think at the industry level, it's maybe a little bit less manic deals?

Well, we'll see. I mean anecdotally, there are a number of big pitches that are coming. We hope it's not from our clients. So it will be opportunities for us. But we make it a point of working with our existing clients, so that when the time comes, when our expiration of our contracts, that we would be able to sign them and renew them. So you don't read about that in the papers. And the reviews that we did have in '19, we were pretty much successful on. So -- but I haven't -- right now, frankly, the only big media pitch that I'm aware of is Diageo, and we're not participating in that by our choice. And so we got a lot to grow this year. So hopefully, we'll see a lot of more opportunities for us.

Got it. I've got a few more questions, but I want to make sure the audience has an opportunity. So if you have a question for Michael, please raise your hand and wait for a microphone. Before we do that, just on the media side of the business, in this conference, we've got the Googles and a lot of the big platforms, media platforms. Where do you see the incremental ad dollar going these days? And how are marketers dealing with the declines of television ratings, which have really -- I don't know, they've been there, but they're sort of accelerating to the downside lately.

Well, I mean, the ratings have gone down, but pricing hasn't. All right. So the -- again, the dollars are going to trace -- track content. And if the content is good, then the dollars are going to be allocated there. And frankly, for us, that's good because you need someone to help navigate through all of this. But there's no question that with the advent of all these different OTT platforms that are out there, there are real opportunities to reach the consumers in efficient and novel ways. And we add value, both with respect to the arrangements we have with those providers, the knowledge we have and the insights that we can bring to our clients to show them where their dollars are best spent, whether it's Facebook or Google or AT&T or Comcast, NBCUniversal. There are so many different outlets there that clients need the agnostic, independent view of where they should spend their media dollars, and we can add value in that regard. And so this is -- this all bodes well for our business. But it also bodes well for our clients because the opportunity to reach that consumer based on a data-driven offering is compelling.

Yes. Does the fragmentation of audiences slow down this trend towards in-housing that we've been seeing a lot of?

Well, it depends on what they're in-housing. The big thing of in-housing was programmatic. So we actually helped our clients' in-house programmatic. And why? Because, frankly, you need some unique capabilities to do it, but more importantly, they need the insights that go with it. And that's where we add the value. So you're not going to see clients developing internal capabilities that have the breadth and insights that we bring to the table. And to the extent they bring it in-house, that's fine, but they're still going to need our input. And any time you get us in front of the client, we can add value and show how the services we provide can enhance their ROI. And that's what we have to do.

Yes. Go ahead.

While we're on the subject, there's a lot of regulatory scrutiny or shall I say, political scrutiny of the big tech platforms. And if you kind of parse out the projects and the more tangible business critique, one thing that emerges is questioning the vertical integration of advertising inventory and the buying tools, if you like, the exchanges that are often vertically integrated. For an outsider, it's very hard to judge whether this integration just occurred historically and is like value neutral, or there's some kind of over-earning going on. So if there was to be an unbundling of ad tech platforms that are currently owned by those big tech firms and the inventory that they sell through that, is that sort of a needle moving big, good news for you guys? Or are you just sort of a tool is a tool is a tool?

Well, we -- a number of years ago, we were the first ones in our industry to unpack that and provide the transparency. We do not take inventory. And we're transparent with respect to our clients that we only buy inventory on behalf of our clients. So you will not see us selling inventory-owned. And frankly, that is one of the reasons that we have the relationship with our clients and the fact that our media business is performing so well because we are a trusted adviser. Our economics are open to our clients. They know where we're making our money, how we're making our money. And when you go to these value offerings that I was talking about, it's all based on trust and transparency in terms of how you determine that. So I do believe that the lack of transparency in some of these platforms does not bode well for them because it raises an issue of this black box, where is there money going, how much are they paying for it, and why, in fact, aren't they getting the transparency that they should get.

Maybe connected with that. There's a lot of technical, as far as I understand it anyway, there's a lot of technical changes that sort of degrade target ability of a digital inventory buyer and external third-party, whereas cookie is being degraded as an instrument of targeting. And it sort of feels like it prioritizes logged-in platforms at the expense of an independent third party, which is some of the spend that you represent. How do you think about that? Is that a meaningful headwind and especially given that you bought some assets that were built in the cookie world, if you like?

Well, look, I think what you're saying is the -- I think what clients have to leverage is their own first-party data. The richest audience they have is their own data, which is why Acxiom is such an important part of the future of what we do. Think of the power of really analyzing and cleansing first-party data for major corporations, where they can target their own clients, their own customers with a message that is consistent with the likes and dislikes of that particular customer. So you don't have to go through all these other walled gardens, if you will. And we see the opportunity to leverage that first-party data as a critical component of maximizing the return on investment for our clients, which is one of the reasons we bought Acxiom.

Did you have one right back there? Same question, a popular question. Go ahead. To the back, Michael, right there. There you go. Okay.

Just on the potential slowdown with corona. What areas of spend, be it TV, outdoor, digital, we should expect to see any impact come through first?

Yes. I wish I knew the answer to that. Well, in our case, it's the events, the outdoor stuff, conferences such as this, things like that. We already know that there's some global conferences that have been canceled. We provide the services for those conferences. So that's the first impact that we're going to see. In terms of allocating media, where it's going to affect, frankly, I can't really answer that. But if they're working at home -- we had this conversation in one of our breakout sessions. If everyone starts working at home, we do have the ability to reach everyone in terms of the consumers at home, which is -- which will go to the digital allocation of media because we'll have a better way of finding where they are and what they're doing and getting messages to them. But that's kind of a layman's view of that. I would have to defer to my experts in that side of the business to answer it, but that's just the gut reaction to it.

Probably got time for one more if there is one out there. Maybe I'll wrap up, Michael. You guys announced a dividend increase, high single digits in that zone, 9%? 8%. It was that?

Yes, I was pushing for 10%, but we will settle for 9%.

Right? But that just seems to be a more consistent part of your capital allocation philosophy. Maybe just talk about why you guys feel dividend growth is important to the business and the investors and sort of the free cash flow outlook for the company.

Well, any company looks at free cash flow. And the first place to look is reinvesting in our business, which we do. And we don't see any big transactions out there that we need to do from an acquisition point of view. So the excess cash belongs to our shareholders. And the only remaining question is do you do it in the form of dividend increase or do you do it in the form of buybacks? Because of the Acxiom transaction, we have debt on our balance sheet, which since acquisition, we paid down about $500 million of it. So our goal is to start paying that down, continue to pay that down. So we're back at the levels where we're comfortable with from investment-grade, pre-Acxiom, if you will, and get back to a stage, probably sometime next year, where we can look at both buybacks and dividends in terms of how we allocate our cash to our investors. And frankly, the best source of where that goes is from our investors. So we meet with our investors, we get their views on whether they prefer buybacks versus dividends. And we take action. But the important point is that our free cash flow belongs to our shareholders. And that's -- I think if you look at the history of IPG, that's what we, in fact, have done. We've returned over $4 billion to our shareholders in the form of dividends and buybacks.

Okay. Well, that's a good thing to note -- end on. Thank you, everybody.

Thank you.

Thanks, Michael.

Good to be here.