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

Hello, everyone, and thank you for joining us here today. We are appreciative that everyone could hop on the video conference, given everything that's going on and spend some time with us today. We're particularly thankful to have Michael Roth, the Chairman and CEO of Interpublic Group here with us today. Looking forward to the conversation, Michael. Thanks so much for joining us.

My pleasure to be here.

I realize it is a busy time. So thanks for taking the time out. Maybe just a good place to start for everyone here on the line and maybe for folks who may be new to IPG or might be more familiar what the old IPG is, could you describe for us what the team has built that we see at IPG today?

It was kind of interesting. Years ago, we had 4 holding companies. They were all pretty much the same. There were a series of roll-ups of different types of agencies, siloed operating in their own world, and I mean, really differentiation between the holding companies was somewhat located more in certain geographic areas, some were larger and so on. But today, there is a clear distinction between the holding companies. Obviously, we embarked on repositioning IPG some 14 years ago. And our basic philosophy of IPG from the other holding companies was, and it continues to be, to invest in our brands. We are strong believers in the agency brands that we have. And certainly, the global brands that [ the people ] are familiar with, McCann, Worldgroup, FCB, MullenLowe. Then we have on the PR side, Weber Shandwick and Mullen. And then we have, obviously, Mediabrands in Kinesso. And then we have independent agencies like Hill Holliday and Deutsch, Campbell Ewald and Carmichael Lynch. And we basically structured our company. We eliminated a number of our businesses to focus on a strategic portfolio. We have, of course, our event businesses as well, Jack Morton, Octagon and Momentum. And basically, our focus is to focus on the need of our clients. We used to be that -- in this business, only the different agencies were focused on their own P&Ls and eat what you kill and so on. IPG embarked on what we call [indiscernible] Open Architecture, which is where we go to market on the basis that our clients are focused on the best of IPG that we can bring to the table. And I think that's an [indiscernible] in us and our competitors. And frankly, our competitors recently have been trying to copy what we started 14 years ago. That is to put together a model that offers the best of IPG, whether [ it's ] creative agency, PR agency, our media capabilities and analytics, all sitting at the table, focusing on the client. And our clients have reacted to that extremely well. And I think evidence of that is that we've outperformed our sector now for some 5 years, both in respect to organic growth and margin expansion. And the reason for it is that clients really like the idea of them being first and us focusing on their business with [indiscernible], not on our own particular silos. But we approach it on a totally collaborative basis. And we may have, for example, historically at McCann and [ Kinesso ] maybe competing on the same pitch under our Open Architecture models. They are sitting at the table together and bringing the best that we can bring to the clients. What's kind of interesting is clients now have adopted the notion of Open Architecture with us, and I get [indiscernible] kind of our clients when they tell me they believe in Open Architecture. We like your model. And so a lot of our big global clients now are operating under this Open Architecture. Now some of our competitors are putting together all of their brands under one umbrella, go-to-market under one [indiscernible] offering, finds [indiscernible]. That doesn't work for a number of reasons because our brands have different go-to-market strategies, different cultures and different capabilities. Plus the individuals within those agencies have career paths within the agency [indiscernible] standpoint. More importantly, if one of the particular agencies are not performing on their Open Architecture, we can basically replace them with another agency. So we've been very successful [indiscernible] existing clients, particularly the global clients in Open Architecture as well as the new business opportunities that we have. And a significant addition from the old IPG to the new IPG, of course, was the acquisition of Acxiom and bringing our data capabilities and have a strong seat at the table, coupled with [indiscernible] So it's [indiscernible], if you will. And I think if you look at the results of our company, the -- it resonates well, both with respect to retention of our existing clients as well as our new business. We're net new business positive through the year. And I ascribe our ability to use Open Architecture, the talent that we have within our various brands [indiscernible] reason for our success.

Right. That's -- no, that's -- obviously, lots that we want to get into and unpack there. I definitely want to talk a little bit about Acxiom. But you've talked about this kind of 14-year period here where you've been investing in the business and then all of a sudden, we get to 2020. And 2020 has been quite a year in more ways than one. What would you sort of call out as maybe the 1, 2 or 3 big things that IPG has cared about and been investing ahead of 2020 that have really shaped the competitive positioning that you're seeing today in the world that we live in?

I think the important thing is to point out is that we're up and running. Even though we're working remotely, we're pitching new business. In fact, our client relationships probably haven't been better because we communicate on a daily basis using whatever form. We like to use Microsoft Teams because, frankly, Microsoft's a client of ours and Teams is a client. But...

That make sense.

Yes, yes. It's important to everyone to understand that we're open for business, and we're actually working with our brands. And what we're doing is focusing on how our brands could compete in this world that we're in right now. And it's so important now for our brands to be strong because, let's face it, the world is transforming into a digital -- certainly, we're more digital than we have ever been. We've always known that the digital world was accelerating under the -- what's happened now, it's accelerated even more. E-commerce is a critical component of brand reputation. And how do you compete in an e-commerce platform with respect to the efficacy of products, brand reputation and culture. And it's basically the relationship between the consumer and the brand that drives business. And frankly, that's what our business is, is to help our clients focus on their brands and how can they differentiate themselves in the marketplace. And we use all the resources we have within IPG to help them do that, starting with the strength of our brands and then leveraging the data capabilities that we have that give us the additional advantage of finding high-value consumers and targets and to use our media expertise. The media business has become so complex these days that clients need the guidance. And I might add an independent view of where they can allocate their media dollars, so that they can be efficient and reach the right targets. And that's why our media business, coupled with our data capabilities, position us to attract and find those high-value audiences and execute on a technology part using our capabilities at Kinesso. We formed a company called Kinesso, which is on the optimization of addressable media channels that we get through Acxiom and providing a value proposition to our clients that differentiates ourselves from the competitors and frankly, offers an opportunity for us to get paid on performance as opposed to just an employed-based compensation.

Sure. No, that makes a lot of sense. And you started to talk about the focus on the clients. What are you hearing from clients today? How are those conversations? Where is sentiment? I mean I would imagine you're seeing a pretty full spectrum across the industries that IPG focuses on and its clients. And so yes, maybe just give us a sense of where sentiment is, at least based on some of the examples at both ends of that spectrum that we're seeing.

Well, it depends on -- some clients are actually not getting out of the park. Amazon is a client of ours and -- on the media side. And clearly, there are certain companies that are positioned for the -- working from home and remote access that are doing quite well. And there are certain sectors, for example, obviously, health care is a big part of our portfolio. It represents about 30% of our portfolio now. Health care is performing quite well for us. In fact, health care and retail were up in the quarter. Even though, overall, our performance was a organic negative 9.9%, retail and health care were up. Food and beverage is interesting. It depends on the products, if you will, on food and beverage. So some of them were up, and some of them were down. But the sentiment from our clients is -- again, we have clients that are in the airline business. And obviously, that's not performing very well. We have clients who are in the cruise line business. And so we have the full spectrum, if you will. [indiscernible] and transportation is an important sector. So what you get with IPG is a full spectrum of sectors that are doing well as well as sectors that are challenged. But the key sentiment from our clients is, how do you drive revenue? And are the consumers out there going to have money to spend? So I would say that the shift in the sentiment of our client base has been on the macroeconomics, not so much COVID-19. Obviously, COVID-19 dictates how the macroeconomics is going to work. But without the consumers having money to spend and getting back to work, it's going to be hard for certain sectors to recover. Obviously, restaurants are going to be challenged. Obviously, travel, event business, almost 5% of our business is the event business. And clearly, sports and event businesses are not what it was before. And we're innovative in that market to do what -- virtual sports, and we're participating in that. But there's nothing like a fully packed stadium that is up and roaring and having demonstrations of autos and things like that [indiscernible] events. So our business now is really focusing on how do we get our clients to generate revenue in an environment that is challenged by the consumers and whether they have disposable income that they can...

Right. And do you get the sense from clients who might be sitting in some of those more challenged industries that they're optimistic and they're gearing up for Q4, maybe in a somewhat more normal way? Or is it still very much wait and see and no one wants to get too far ahead of themselves, given sort of the macroeconomic outlook and uncertainty there?

One of the reasons we took -- we can't give guidance is because we don't know, right? And for us, we continue to outperform in the second quarter and the first quarter. In the first half, actually, we outperformed our competitors. Everyone's looking to us to say what's going to happen next. And it's still very difficult to predict. I'd say if you look at the stock market, which is not the same as business, we know that. But the sentiment is certainly a little bit better. Our clients are more willing to talk. And again, it's a function of what sector the clients are in. And it's up to us to show the value of what we can bring to the table, no matter what sector they're in. So I think the sentiment is somewhat better. We just came out today with our MAGNA forecast on media spend, and it shows the second half of the year better than the first. It doesn't necessarily convert to total revenue that goes with it, but that's encouraging. And frankly, it indicates next year, it looks like it will return to growth in terms of media spend. That's -- we are repositioning our company in many ways, so that when '21 rolls around, we are optimized in terms of our ability to capitalize on the recovery. So we're taking all the actions, as you saw in the second quarter to position IPG, so that we can leverage our expertise and really be in position to respond when they kind of [indiscernible]. That said, the fourth quarter is a big quarter for us. And Christmas spend is still up in the air. And sports is always a big item, project-based businesses in the fourth quarter. So that's why we're somewhat reluctant to say the worst is behind us. But I look at it this way. If my competitors are saying the worst are behind them and we continue to outperform our competitors, then I think we should be able to continue to outperform our competitors. So without me saying that, I'll let the chips go as they like. But I'm not in a position to say the worst is behind us nor am I in position to say anything other than we continue to have great relationships with our clients. We are net new business positive, and we're working everyday. The efficiency of working from home is real. Although I was in the office today, and we actually did our earnings call from our office the last time. It's probably getting back to the office. And again, in some of the -- the countries are back in offices. So things are starting to come back. And when that happens, then, obviously, our business -- it's better for our business.

No. That's all helpful to hear and get your context on. Maybe turning from some of the more qualitative discussions around revenue and how you're driving that for clients. On the IPG side, earlier in the year, you'd announced some restructuring actions to take $80 million to $90 million in permanent costs and introduce savings into the business. How and where have those cuts positioned IPG for the back half of the year?

We approach that restructuring charge as permanent savings. I know some of our competitors put out big savings numbers, but they currently hired everybody back. We said we had about $80 million or $90 million of permanent savings. If you think of it in terms of '19 results, that's -- it's 100 basis points of margin. And it's real, and it'll start taking into effect in the third and fourth quarter. We took 500,000 square feet out of our portfolio. In the second half of the year, we expect to take another restructuring charge, roughly in the $100 million range, principally on the real estate side, not as big as savings as the $80 million to $90 million, but not far from that. So we are looking at nonclient-facing individuals, obviously, a repositioning of our reporting lines and how many levels of reporting we have. In that restructuring, we took maybe 700 people out. We're not revenue-facing individuals. We're relying a lot on our back office and shared services. We're consolidating wherever we can within certain geographic areas. So we're really spending a lot of time on focusing on what we're going to look like. So when we hit '21, we're well positioned to capitalize on that. [indiscernible] restructuring charges are permanent. A lot of it is real estate. We've learned that a lot of people don't have to be in the office everyday, and we can work on a flexible basis. We're not demanding individuals to come into the office if they aren't comfortable [indiscernible] vaccine. But some locations are in better positions than others. New York City, frankly, [indiscernible] positioned [indiscernible] a lot of our employees are concerned about mass transit, and so we're [indiscernible]. Those individuals coming into the offices now are on a pure voluntary basis. But we're starting to see us trying to get back to normal, which is great. But normal is not going to be the same as it was before. We don't know -- we don't need as much physical space because we will have a certain percentage of our workforce permanently working from home. And that's what we're looking [indiscernible] company.

No. That makes a lot of sense. I do just want to let everyone know who's participating, we will be pulling or taking audience questions through the chat function. So please feel free to send those across, and we'll throw those to Michael a little bit later in the conversation. Switching over to kind of this idea of competition. I mean, obviously, a lot has changed this year, but a lot has changed for IPG in terms of what the competition has looked like in the last 14 years or so. So what do you see when you look out at the competitive landscape? Recognize you've been outperforming your direct peers, but anything that you see on the competitive horizon that's worth noting?

Yes. Everyone was always afraid of the consultants. And they bought advertising agencies and so on. We don't get to see as -- the consultants as much as the press says they're there. Now the reason for is consultants have already had clients. And so we don't get to see -- get to pitch against them because sometimes they're already there and they're picking up business. That -- so they are picking up business. But when we compete against the consultants, we typically do better. And the reason for it is we have a full suite of top talent and offerings like the data and analytics, the media component, the creative part of our business. We have the best talent in the business on the creative side. We continue to win all the awards there is out there. We continue to outperform our competitors on the creative side in terms of effectiveness of our offerings and our campaigns. So it's pretty hard to -- for consultants to compete against that when we bring in the Open Architecture and we bring in all these capabilities. What they have going for them is they were already there. They're obviously focusing on system integration. And a lot of what they do, they level into production and things like that. So that's where we principally run up against them. But in terms of an RFP, a full-service RFP, we do quite well against them, given the fact that we have all these resources under Open Architecture. And we have the talent. And I think the other thing that distinguishes IPG from the talent point of view is our culture. IPG, we were the first company to release a population in terms of minority women and people of color in terms of our organization. We've taken a very hard stand on transparency. Particularly on the media side of the business, we don't take [indiscernible] on our own behalf and sell to our clients. We're totally agnostic on the media side of the business. Our culture is one of high ethical standing. We take -- I take a very strong position on events of the world that I'm not bashing about in terms of going out there. And so people like to deal -- our goal is to have IPG as the company people want to work for and do business with. Part of that is the culture versus the [indiscernible] focus that our company has been focused now for [ 10 ] years or more. We hold our individual [indiscernible] accountable for diversity, and so -- and that's not [indiscernible] but we are at above [indiscernible] in terms of culture [indiscernible] certainly part of it is [indiscernible]

That makes sense. And sort of going along with this idea of talent and culture is the way that it's being positioned with clients. And you've talked about it a little bit with your Open Architecture structure. But could you maybe talk a little bit more about how this transition to Open Architecture has allowed you to give your clients more flexibility? Is it giving your clients better access to the suite of your services in a more seamless way? Sort of what's the -- what are the client wins coming from in that Open Architecture time line?