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

Good morning, everyone, and thanks for dialing in. My name is Laurie Davison, and I cover the advertising agency holding companies here at Deutsche Bank. Very pleased to have Michael Roth, CEO of Interpublic, here for this session to address some of the issues for the group and the broader advertising market.

So Michael, let's start off. When you reported on the 12th of February, your results were strong, but we are only to realize as the other agencies reported later just how much Interpublic had outperformed this year. Can you help us understand what drove your 3.3% organic growth over 2019 and why this was above the other agency groups? Is it business mix, different geographical exposure? Or do you have just less integration issues?

Well, I think we're just better than everyone else. But anyway, it's good to be here, Laurie. Thank you. I know this is a bit different for us, so I hope those who are listening will understand that -- why we had to do this. Yes, you're right, Laurie. We did outperform last year. But I think I would be remiss if I didn't point out that we've outperformed pretty much over the last 5 to 6 years. We've averaged 4.5% organic growth, which is pretty significant over our peer group. And we continue to do that on a regular basis. So your question is a fair one, but not just with respect to one quarter. I think the question is, how are we outperforming for an extended period of time? And yes, I don't think it's a geographic mix, and I don't think it's an integration issue. Frankly, I think it's a strategy issue, and it's an execution issue, and it's really talent and how we go to market, which is, I think, the key differentiator for IPG versus our competitive set. I've said this before, years ago, all the holding companies were pretty much similar. We all had global networks. We all had media offerings. We all had PR agencies. We had experiential and we're very similar in that regard. I think right now, it's clear that is a differentiator between the holding companies and I think that's what accounts for our performance versus our peer companies. We approach our go-to-market strategy differently than the other holding companies and our tools and resources are also different versus our competitive set. We clearly continue to have strong brands on the creative side and the global network side. We have McCann, FCB, MullenLowe as -- each of whom have different go-to-market strategies and we leverage that with respect to a client-centric model where we put together the best of IPG to meet their needs with what we call open architecture. And of course, we have a data management company recently acquired called Acxiom and we really look at data-driven marketing as a differentiator for us. First, we have Acxiom, which focuses on data management. And then we formed a company called Kinesso, which is basically using the data and technology to target audiences and individuals with very specific objectives in mind. We have a global production capability and we put all the martech, adtech and services together in an integrated offering on an open architecture basis to really meet the needs of specifically what our clients are looking for. And we've tapped into all these different resources on a unified basis under the open architecture model. And we could talk about the open architecture model later if you'd like. But basically, we've been doing this now for some 14 years. It gets hard -- in the beginning, it was a lot more difficult given the silos that our industry has focused on, but I believe it turns out to be a key differentiator for us when we're dealing with the global clients and the needs that clients are looking for with respect to the various services that we provide.

Great. And just -- let's dwell on the open architecture now, just why we brought it up. Can you help us, the investors here, which -- who perhaps don't follow Interpublic as closely, just to understand exactly what that open infrastructure network offers and how it's actually constructed?

Yes. The goal here is to really be a client-centric model, and our clients are entitled to the best that IPG has to offer. And that includes utilizing our global creative networks, our PR work networks, experiential, sports marketing and, of course, our data-driven analysis and marketing expertise as well as the execution and activation, for example, Cadreon, which is part of Kinesso, which activates against the market using the resources that we just talked about. And what's key to us is -- with us is we didn't put all of our companies together under one umbrella. We actually work on a collaborative, transparent basis. So for example, if one market is not performing the way it should under open architecture, we can replace a particular agency as opposed to being stuck with a single offering. And what that does, it works beneficially to both the client and us because as recognition of strong brands, we're able to develop different strategies in terms of going to market. We're able to recruit and develop these individuals within those because they have an identity with an agency, not just this one gigantic offering that some of our competitors have put together. I think you actually referred to one of our competitors in terms of the power of none. And I just -- we actually interchange our offerings. And so for example, it's conceivable. Of course, we recognize conflict, and we have ways to deal with conflict. But I've been at open architecture meetings where we've actually had McCann and FCB and Weber and Golin and Kinesso and Acxiom all sitting around the table, meeting the needs of our clients. And historically, our agency doesn't operate that way. And I think, as I said, the way we're differentiating ourselves is having an impact in terms of the marketplace.

And does that include actual individual groups within your network as you compete for pitches?

Yes. I mean, nowadays, global pitches are coming into the holding company. They're not coming into the agencies. And they're basically saying, you tell us how you're going to put together an offering that meets our needs, and we approach it on an open architecture basis. What I appreciate is that when I sit in some of these meetings, I have clients talking to me about open architecture, which is fantastic. So we would put together -- depending on the expertise, for example, health care, which has a number of our open architecture models, and it was obviously an important sector for us. FCB and McCann have multiple health care agencies, along with Weber Shandwick. And some of our creative agencies like Hill Holliday and Deutsche have expertise on the consumer side. These have -- agencies have very specific data, very specific expertise in pharma versus consumer. And we can tap into all of these different agencies and bring them to meet the specific needs of these clients and we can interchange them. And sometimes one agency has an expertise in schizophrenia. And that may be a McCann Health and maybe an FCB Health offering. And we have experts and we have a Med Ad expertise that we can bring to the table. So it really enables us to collaborate within ourselves to meet the needs of our clients on a pure expertise basis that really collaborates and focuses on the specific job at hand. And clients shouldn't have to worry about where the revenue gets allocated. That's a holding company problem, it's not a client problem. And clients have -- resonates very well with clients. Historically, clients had to pick and choose which agencies they should use and whether they bring in a PR firm, whether they bring in experiential firm. We have the ability to bring all of those experts to sit at the same table on a collaborative basis. And the culture of IPG is that the individuals, we have workshops that focus on how you collaborate on an open architecture model because it's not the same as like you said, historically, these agencies compete with each other. And this model is exact antithesis of that and that they're collaborating to meet the needs of the clients and what a great concept that is, if you're sitting from the client side of the business as opposed to the holding company side.

Yes. It's clearly playing out very strongly. Your exit rate for fourth quarter last year was 2.9% organic. You set out guidance for 3%, which was pre-coronavirus. We'll cover coronavirus in a moment. But what are the tailwinds and headwinds you factored into this assessment when you set it in February? Which disciplines, in particular, did you expect to lead to growth? And how are you thinking about new business wins after Bank of America loss?

Well, first of all, the Bank of America loss, let me just talk about that. This was Hill Holliday, which is one of our independent agencies. We were not the agency of record of Bank of America. We were very much project-oriented. Nonetheless, it was a nice client for us, and we're not happy that we lost it. But the client chose to consolidate that part of the business with their agency of record. That said, we have a number of client wins that have offset that. So that's the nature of our business. Sometimes you win, sometimes you lose. We continue to win more than we lose. We did have some tailwinds -- headwinds, excuse me, in 2019. For the full year, the U.S. impact, we used a 4% number as an approximate number in the U.S. And those headwinds -- we delivered 3.3% after those headwinds. Now of course, if we were able to add the headwinds onto our 3.3%, we would obviously outperform our competitors even more. But we don't get to do that. And those headwinds will roll into 2020. In the first quarter, about 4% in the U.S., about 3% overall, but it tails off in the second quarter of 2020. So we're aware of how this rolls off. So when we put together our forecast for 2020, we do it on a bottoms-up basis. All of our agencies submit their pipeline, their agency of record, their contracts, what they think they will see for the full year and what their own headwinds are in terms of their business. And we come up with a number which will be the consolidated number that you see, which this year was 3%. Now you're correct, at -- when we put together that number, the coronavirus was sort of in its early stages. We didn't have a handle on what impact that's going to be. But we were conservative in the number that we put out there for a number of reasons. One, if you look at us historically, we have a tendency to beat the numbers that we put out as guidance as we did on organic -- our guidance was 2% to 3% in '19, and we came in at 3.3%. And the year before, we beat even more with respect to the guidance. So we're fairly conservative in the numbers we put out there because we understand that our analysts such as yourself use this for modeling purposes. And we do build in some conservatism in these numbers, both with respect to the organic growth as well as the margin numbers that we put out there. That said, the issue of the coronavirus has obviously changed dramatically since we did that. But I did want to put out there that we do have some conservatism in the forecast that we did, and it's based on a bottoms-up number. It's not -- it doesn't go top down. Some companies take last year's performance and just provide a factor of increase over that. That's not the way we do it. We start with 0 and we have our agencies build up what their numbers will look like.

And so within the disciplines here, which are expected to really draw -- to outperform? And where are you expecting more modest rate of growth?

Well, good news is for '19, we had a good performance virtually for most of our agencies, including our global networks. And of course, our media businesses outperformed, both with respect to organic growth as well as margin. And that continues to be a very big contributor to our success because, frankly, in this world out, media and targeted data-driven marketing is a critical part of media, and we have the expertise to really address those issues. So we continue to expect our media businesses as well as our Kinesso business, if you will, to continue to outperform. And that's built-in there. Plus we continue to build into our creative and our other special services like PR and experiential and sports marketing continued growth into 2020.

Okay. And let's discuss coronavirus then because your guidance was set before that. You said that China is under 2% of revenues for you, but since we've had results, you've seen this move to become more of a global issue. What impact are you seeing right now in marketing budgets? And how should we think about quantifying the impact for the next year for a global agency yourselves?

Yes. It's clearly too soon to tell what the direct impact is. Obviously, we're very much focused on the safety of our people, of our clients, our providers and our communities. So I mean that's what we're focusing on first. You're correct, 2% is our exposure in China. The likely -- and we have seen some impact in the event side of our business. So we do big conferences. And needless to say, some of these conferences have been canceled. That said, that -- the size of that business is less than 2% as well. And if you look at our overall percentage of where our business is, if you look at the U.K., which is around 8%, and the United States, which is around 62%, 70% of our business is pretty much within those 2 countries. And then you can add another 9% for Continental Europe, obviously. Italy is much smaller for us, less than 1%. So geographically, we're in the right countries right now. Who knows what's going to happen after that, but right now, the geographic exposure for us is good, if you want to call it that, as opposed to the -- having an overweight in Continental Europe or in Europe, in general. And frankly, yes, we've seen cutbacks before on the project side of the business. And it's been a pretty resilient business. And it -- some of it is timing and some of it comes back, and we have experience with that. And that said, we do have some offsets in terms of breakup fees. If they have to cancel, which offset it, it obviously doesn't count to total recovery. But right now, we don't really know the specific. Obviously, the biggest concern for us and all companies will be the supply chain impact because that will affect our core businesses more in terms of the marketing. On the other side of that, clients are going to need our expertise in allocating media dollars where the clients are, whether they're working at home or whether the consumers are working at home and how you address a marketplace that's different. And there, you really need data-driven marketing to move the needle. So we're working very closely with our clients because they know we have that type of expertise. So I think it's too soon to put a dollar value in front of it. If you start out with our forecast being conservative, if you take a look at our exposure by country, I think we're positioned reasonably well. And with respect to our businesses, I think we're positioned reasonably well, even with respect to the project side of our business that we do see some impacts on right now. So your guess is as good as mine in terms of how this long -- how long this will last. I think the important issue for us as well is how strong our balance sheet is. When we -- we're investment-grade. When we did the Acxiom transaction, we borrowed in the marketplace. Since that transaction, we paid down about $500 million of that debt. Our goal for '20 is to continue to pay down debt. And with that, we have a very strong balance sheet. We just announced a 9% increase in our dividend and we continue to see the financial strength of our company as a critical component of return to our shareholders. And depending on the outcome, we hope to get back to a good mix between buybacks and dividends once we get our balance sheet in line, in the direction that we're doing in terms of taking down debt. So financially, I think we're very well positioned to deal with anything the market can throw at us. And today, frankly, they're throwing a lot at us and everyone else. But we're very conservative, and we're well positioned financially.

Understood. Understood. I realize it's still quite early time for asking about the exact impact. But in terms of just the broad shape of -- or from your experience of previous episodes where advertisers have faced a huge amount on zesty about demand levels and some of the demand, both demand and supply shock, would your anticipation be that spend here is deferred or that spend is canceled? So are we going to see a bounce back and sort of a V-shaped recovery in that sense? Or more of a kind of U or L shape if spend is actually canceled?

Well, if you start with the premise that what we do really helps move the needle, you have to view it as a timing issue. Clients, even -- when the market does turn around and they get more comfortable, if that's the issue, they're going to need to spend marketing dollars to move the needle. And who is better served to help them move that needle? So I think from that respect, you can view it as more timing. The ones that -- questionable, was it a timing, are some of the project parts of the business. Now I can tell you one of the big projects that was canceled. We've been in discussions with them to do 5 regional conferences instead of one gigantic conference. That's just an example of ways we can work with our clients to get around those issues. But I think the bulk of it is -- ultimately will be timing. Now don't ask me -- I used to work with someone who used to say, the market will go up, the market will go down, just don't ask me when. And I do think that the marketing dollars, in general, will bounce back because we're required, if you will, and we add value to our clients. If I didn't think we added value, then I couldn't answer the question that way. But clearly, clients -- for example, in the auto sector, which is one of our important sectors, if they're going to launch new cars, they're going to have to spend marketing dollars on launching new cars, and we have to be there to help them do that. The same thing, if you're losing market share in a market, you have to spend market dollars -- marketing dollars to gain share. And so that will always be there. And when the spending takes place will be a function of when this thing gets dealt with in terms of at least people comfortable that is a bottom on it. But our business is pretty resilient, and we've seen that in the past. So I think the bulk of it, it will be timing. There'll be some impact. But like I said, we've had some conservatism in our numbers, and we've shown an ability to really move the needle when the markets are difficult.

Understood. With regard to the Olympics, I realize your exposure here is still modest. But is your anticipation still that, that's going to be proceeding?

Yes. I don't have the answer to that, obviously. You certainly would indicate that it's a good question mark as to whether and will. Again, it's a project-based business for us. It's not material to our numbers. And if the Olympics doesn't take place, the dollars that have been allocated to the Olympics, I think clients will still have. And if there are other ways to spend those dollars, we'll certainly be in front of those clients showing them where they can allocate these dollars.

Sure. Sure. How do the changes in organic impact your target for 20 basis points of margin improvement? If we saw, let's say, rather than your 3% target for organic, if we saw 2%, so a percentage point worse, how much of that -- of your margin target could you deliver? How much of the 20 bps?

Well, we do have a variable cost model. And obviously, the biggest variable cost is salaries and related. And we've shown, for example, in 2008, when the market -- this is nothing like 2008 when the market's really dried out that we had the ability to rightsize our businesses. And rest assured that we are already looking at our cost profiles in all of our businesses right now to make sure that we're protected in terms of where we're spending our money and where we're -- if at all, where we're adding people. So we know how to do this. We've been doing it now for quite a while. And that said, though, we need organic growth for us to expand margin. The days -- the early days of our turnaround, we were able to expand margin without organic growth. We've already repositioned our assets. We're focusing on getting rid of nonproductive assets. We always do that. In '19, we disposed of a number of agencies and we converted them to contractual relationships, affiliations instead of ownership to minimize the impact on margin. But efficiencies are always there and we continue to focus on it. And if the revenue numbers aren't there, we have the ability to rightsize our businesses to meet the revenue number that we're looking at. So I think we've had good success with that. And obviously, we will continue to focus on that, and we're not waiting for it to happen. We're taking actions now to assure that if and when there is an impact on our organic growth, that our cost profiles are in line with whatever that organic number will look like.

Is there any simple rule of thumb which investors could use just to model a -- this -- of top line equals this on the U.S.A. and whether that's quantifying it in terms of the percentage drop-through thinking about the exact -- thinking about the margin uplift or lack of it would -- that would come through at different organic growth rate levels? Is there any simple math to which you could help investors get a head around that sensitivity?

No. I think you have to just look at the buckets. We have a performance-based compensation, right? So the first bucket you can look at is incentive comp, right? We compensate our people based on organic growth and margin expansion. So to the extent either of them are not there, then our incentive comp numbers affect that. And you actually saw that in '19. '18, we had a tremendous year in terms of outperforming our targets, and our incentive numbers were that much higher than '19. So you can see that performance-based compensation works. Even when you're making money and beating your targets, it's on a slope. So I would just take a look at -- if your assumption is organic growth isn't there, part of the levers that you're going to see is less of incentive comp that has to be paid out. But other than that, there's no formula. A lot of it has to do with which businesses are adversely affected, where does the margin come from, where are the efficiencies. And frankly, the issue from an investor's point of view is, is this a company that has shown that it knows how to manage costs in both a good year as well as a bad year. And if you look at our performance over the last 5 years, I think you'll see we know how to do this. And we've already put in place whatever governors there have to be to make sure we maximize both the organic growth as well as the margin improvement.

Understood. You spoke about more buybacks. While -- and we've got rising acquisition payments next year, which you put into your guidance. What level of leverage is appropriate right now for a global agency? And how much flexibility on the balance sheet do you need given the macro uncertainties and potential need for further digital acquisitions? Just so we can help -- so we can think about exactly when buybacks and more dividends could be kicking in.

Well, we didn't stop paying our dividends and doing increases. Obviously, in '19, we increased by 9%. Over the years, we've returned $4 billion with a mix between buybacks and dividends. If you look at pre-Acxiom levels of debt, we were at investment-grade. We put $2 billion of debt on our balance sheet, and we used our revolver. And even with that, we maintained our investment-grade rating. So we certainly have flexibility on the levels that we can maintain. I indicated on the last call that we're closer now than we were before in terms of when we return to buybacks. I suggested that 2020 would be a year we expect to be at those levels given the cash flows and the fact that we paid down $500 million already post Axiom. So let's assume we're in the 2% range of ratios. We don't set that as a target, but directionally, that's an area you could look at.

Understood. When you're comparing the quality of data within Acxiom, one of the issues which investors wrestle with is the quality of data compared to some of the other AMPs. So if we took BlueKai or eXelate, how can investors get their heads around -- or compare the relative performance of data assets sitting within the agency given this is becoming so key?

Well, first of all, I'm referring to us as data. You have to understand the Acxiom company. When we bought Acxiom, we made it pretty clear, Acxiom, first and foremost, is a data and first-party data management company. So it's -- basically 2/3 of its business is managing first-party data for 50 of the top 100 fortune companies. So I think when you refer to data, you're not referring to that kind of data. So it sort of brings me to 1/3 of their business, which is the InfoBase part of the business, which is third-party data and basically data that can be utilized with respect to the target marketing of our clients and by our agencies or third parties, if you will. And that part of the business is available. We can do what we're doing both with InfoBase or without InfoBase. We already had our own -- prior to the Acxiom transaction, our own database. And we've been working with Acxiom actually for a number of years with respect to the InfoBase as a source. InfoBase has 60 countries and all sorts of different inputs in terms of data and third-party data and addressable markets and that's the piece that I think you're referring to. And we have a reputation of that data being very strong in terms of privacy, transparency and we update those levels on a regular basis as compared to some of our competitors that aren't dealing with very specific individuals and the type of rigor that Acxiom uses with respect to InfoBase. But again, the bulk of Acxiom is first-party data management. And their clients there, they have relationships for 20, 30 years. And it's a very sticky business. And they're noted, Forrester rates them 5 stars in terms of their privacy and they're viewed as best-in-class in terms of what they do.

Great. Well, Michael, that, I think, brings us up to the time limit. So thank you so much. We could carry on for a long time here, but it's a very busy day for everyone. So thanks for dialing in today. Very much appreciate your flexibility around the changing conference schedule. And thanks to everyone that was on the line. Good afternoon.

Thank you very much. Bye now.