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

Okay. Well we're here live. I'm Jason Bazinet, Citi's Internet and media analyst. We're very fortunate to have Michael Roth, CEO of IPG. Mr. Roth, thank you.

It is good to be here. Thank you.

Very, very good. [Operator Instructions] Before we get any questions from the audience, I'll just start with maybe a high level, very basic question, which is when we chat with investors across sort of the broader ecosystem, there is this pervasive narrative that COVID is just accelerating all of the changes that were happening anyway. More e-commerce, more digital ads, more streaming, and the market feels that very strongly, both you can see it in the stock prices and the commentary. Is that just a Wall Street narrative? Or are you picking up the same sort of tenor from your clients?

Well I don't think there's any question that everything has been accelerated, particularly the movement to digital and streaming and, actually, cultural relevance is also fairly important here. And what we've always said, and we saw it in the media spend as digital overtook linear TV, for example, that the acceleration to digital is going to be ongoing. And I think what COVID has done is accelerated all of that in a big way. For IPG, we were fortunate in that we already saw the digital movement and technology movement on its way. So we have structured our offerings to directly be relevant to what's happening in the marketplace right now. And so if you just take e-commerce, e commerce is, obviously, people are working from home and staying in home and buying from home. So therefore, the relevance of e-commerce and digital capabilities becomes that much more important. It certainly becomes much more complex, and clients need professionals such as ourselves to help them navigate, how do you compete on an e-commerce platform, and how do you reach the right consumers with the right message which is exactly what we're structured to do. And in order to do that, when you compete on an e-commerce platform, if it's not just price, you have to develop a brand purpose and a brand relevancy. And that is exactly what we do and what we're structured to do in terms of our open architecture model that brings in not only the media part of it, but also the creative part of it, and the data and analytics part of it in terms of reaching the right consumer with the right message. And the issue of what's the right message is -- involves our PR people as well as our normal advertising capabilities and potentially other aspects of what we do on the data analytics part of it. So this has accelerated what we had seen from a strategy point of view. And we've been, for example, embedding digital in all of our offerings for years now. We've always said that. We did the Acxiom transaction to bolster our capabilities on data and analytics. We formed Kinesso to bring it all together, so we can find the right consumer and an audience that's relevant than a high-value audience and with the right message and offering. And as far as the brand goes, given what's happening in the cultural environment, brands have to be very careful in terms of what they represent, frankly, even what they call their products. And so we've been heavily involved and working with brands along those lines. So this is all playing into what IPG is actually structured to be able to do.

So there's almost -- there's 2 things going on. There's the recession, which is obviously difficult for your numbers, but then the shift is actually positive, right? And so the implication is as the economy gets better, do you think IPG will be in a better position than it was? Is that a fair summation?

Yes. We've been doing pretty well versus our competition already. And I don't see any reason why that shouldn't continue, given the investments we've made in our talent and in our offerings. And frankly, that's what has given a rise to the fact that we've been outperforming our competitors.

Right. So let me ask about the cadence of recovery because if I had to summarize what most of what I heard from the corporates, it was that things bottomed in the second quarter, got better every month. But maybe the uptick when things got better were a bit more muted than a lot of the corporate sort of anticipated that have advertising exposure. Is that sort of consistent with the way you would describe the cadence of recovery?

Well clearly, I mean, the -- our second quarter results, we had 9.9% negative compared to our competitors, which were 15% and 20%, right? So we outperformed in the second quarter. And when your competitors are saying that, that's the -- why it was at 15% and 20%, I'd like to say the worst is over also because the continuation of that trajectory is not good. So what we said about the 9.9% in the second quarter is, yes, we outperformed our competitors. The visibility continues to be difficult in this environment. And so, therefore, we're very comfortable with our competitive positioning in terms of our offerings and our ability to outperform our competitors. So I don't -- what they say is their business. I think we're very well positioned to continue to be relevant in the marketplace and to continue to outperform. Frankly, the visibility, there are green shoots out there. I don't think there's anyone questing that. And what's happened, people have gone back to work, okay? Our offices, some of our offices have opened. Some of our clients' offices have opened. But still, we're not 100% open for business. So there's still -- there's a lid, if you will, on what can be produced, if you will. And -- but we're structured to do that. And it's -- the visibility is by sector, and needless to say, there are certain sectors that are outperforming others and we happen to be well placed in sectors that are doing well. So that bodes well for us. But we still have, for example, in the fourth quarter, which is a big quarter for us in the holiday season, in project-based businesses and sports, almost 5% of our business is advanced. And obviously, in the second quarter that didn't perform well at all. And we're seeing some recovery, if you will, in terms of trying to do sports, the NFL and golf, which I happen to watch. So there's that out there. But again, this is a consumer-driven recession. And it's not a capital-driven recession. And to any extent there isn't a recovery in terms of cash available to the consumer. It's going to be very difficult to see a big recovery in our industry without money in the pockets of the consumers to spend and notwithstanding the fact that there may be green shoots in certain aspects of our sectors, which is good news for us. For example, our health care business, our retail business and our food and beverage actually are performing. We still need to get the global economic environment stronger so that the consumer can be in a position to return to the marketplace in a big way. So that's the uncertainty that's out there.

That makes sense. If you look at that 2Q organic growth where you performed far better than your peers, how much of that, if you had to take a slag at it, was a function of the exposure to different verticals where you might have been in a better position versus the digital positioning that you talked about at the beginning of our conversation and may make IPG a little bit better positioned than rivals?

Yes. Well for the full year, health care is 30% of our business, and that's an amazing number. And it's not by accident. We have a full suite of offerings on the health care side of the business that encompasses our PR business. They have a very strong health care presence. Our creative business, FCB, McCann, MullenLowe, Hill Holiday and our media business have very strong capabilities in health care, and it's all coming together. And it's pharma expertise and it's consumer expertise on the pharma side. In fact, we've -- we're very strongly represented. We have a couple of new wins on the pharma side. We have a couple of potential wins in the pipeline. So to be 30% represented on a full year and 27% last year is a very strong position to be in. And then we have financial services and tech and telecom and food and beverages are all strong offerings for us. And those are the places that -- where we're going to see consumers spending their money. On the other side of it, obviously, auto has not been the strongest, and that's a pretty big sector for us, and it's 10% of our business. But even there, we're starting to see some good news. So it's a function of our agencies and where their client base happens to fall. So we do airlines. And obviously, the airline business is not performing well. We do cruise lines, and those are having difficulties. And yet you offset it with the positive results that we're seeing. In the second quarter, we had retail and health care, both positive, which is great. So I think we are well positioned in terms of the sectors that we are represented. And again, it's not by accident. And to the extent there's a recovery in the other sectors, then we're well positioned there as well.

That's great. What about the nature of competition? You've always described this space is very, very competitive. But it seems like the competitive landscape is getting more complex. We're even starting to get questions about S4, as an example, sort of the new digital upstart. Does any of this matter if you're an investor in IPG or prospective investor? Or would you describe the landscape is changing, but largely similar?

Well when people talk about the competitive landscape and before COVID, the issue was the consultants. The consultants are coming, okay? And everyone was talking about the consultants being in a position to take business from us, they actually bought a few creative agencies. We still haven't been seeing significant competition from the consultants. In fact, a number of our digital agencies, Huge, R/GA and our media businesses have consulting businesses of their own. So we haven't seen huge competition from the consultants. I think the traditional competition is the competition that we're dealing with. And there, we hold ourselves pretty well. And we've averaged 4.5% organic growth over the last 5 to 6 years, and that's pretty impressive given what our competitors have done. And I think it's indicative of the fact that we've made investments in Acxiom and tech -- and technology and talent on creative and in the sectors that we need the expertise, particularly health care. We have professionals that know health care. In fact, I would call them up and ask them about particular drugs and so on. And we're well represented, in fact, in the vaccine environment that everyone is looking at. And we've had a couple of new wins on the pharma side there.

That's great. So I could be wrong on this. So feel free to correct me. And maybe it's not something that you look at often. But for all of the years that I've covered IPG, I never remember a moment where your PE multiple was actually above not just the European peers, that's happened for a while, but also some of your U.S. competitors. Is that something that you look at? And is that -- I mean, it seems very positive, and it's a passive recognition on the part of the market that you are a different IPG, a better IPG than in the past and even better than your competitors. Do you think that's true that this is a...

You're the expert on that, right? You're supposed to be the one to determine that.

Okay.

Which is why I assume you have a buy on us, right? So frankly, I think the higher multiple is justified given our performance. I mean when you look at our performance versus the competition and more importantly, if you look at our positioning in terms of our assets, I mean Acxiom transaction, the formation of Kinesso, the ability to integrate of these transactions, these companies with all of our offerings across the board. When we go to market, we go under open architecture, and we have a powerful group of experts sitting in the room. And we have media, we have Kinesso, we have creative, we have PR, all with expertise that work on a collaborative basis with no silos on the consideration. In fact, I just got a note this morning, we're moving forward on a pitch that's out there. And the comment from the client to me and the team was the open architecture relevancy was impressive in terms of our ability to bring in what was necessary for what they were looking for. And we've been doing open architecture now for 14 years. And we value our brands. So it's important that sitting in the room is not just IPG. What's sitting in the room as McCann, FCB, MullenLowe, whether it be Hill Holliday, Campbell Ewald, Deutsch, these are expertise that we bring together on a collaborative basis and the clients understand. And then when you bring in the media and the capabilities of finding the addressable audiences and the value propositions, putting them all together on a single proposal, it's impressive. And so we're structured now to really take advantage of the capabilities that we've invested in over these years, and that's frankly why we've been outperforming. So I think your multiple -- I think it should be higher. But of course, our sector is not viewed as the strongest sector in the world. But when you look at us versus in the sector, we're performing the best. And therefore, we should have a higher multiple, in my view.