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

Good morning, everyone, and welcome to day 2 of the UBS TMT Conference. I am Richard Eary, and I head up UBS' media team in Europe. This morning, I have the great pleasure of hosting Michael Roth, Chairman and CEO of Interpublic. Welcome, Michael, and many thanks for being with us today and what has been an extremely challenging year, to say the least. Firstly, I'd like to say thank you very much for your support over the years at this conference, as this may be the last time we hear from you directly as you sort of relinquish your CEO role to Philippe.

So I just thought that before we sort of jump into talking about -- of the impacts of COVID and potentially current trading, I thought maybe we could sort of step back a little bit and get you to sort of maybe reflect on your time as CEO and sort of highlight what you think is maybe the biggest misconceptions about IPG and the industry? And ultimately, as we step forward, where do you think people and investors will potentially be proved wrong or right?

All of that? Well, first of all, it's good to see you again, Richard. And yes, I'm -- we're pretty excited with Philippe taking over as of January 1 as the CEO. I move into an Executive Chairman role, which is still -- has responsibilities both with the Board and working with management and Philippe. So you're not getting rid of me totally as we go forward. So I look forward to potentially talking to -- with you again. But it's been interesting. I think I came from the outside of the industry. And when I joined the industry, what was clear was that everyone viewed the industry the same, like all the holding companies were the same, and everyone got put together in a single box. So what one holding company was doing, this -- the other holding company was doing. I think what we've proven is that, that's not true. And I think the thing you look at foremost is our performance, certainly, over the last 5 years, that IPG has been operating at a higher level, both with respect to organic growth, and frankly, its margin expansion as well. So if you just look at the results, then all the holding companies are not the same. And I think we see that, in particular, with respect to our go-to-market strategy and how we invest in our brands and the various offerings that we bring to the table with respect to our clients. And a number of our competitors have started to restructure. You remember, a number of years ago, we repositioned IPG coming out of 2008 into '09. So we eliminated a lot of the nonprofitable businesses. We focused on the strategic areas that we wanted to be in. We embedded digital into all of our agencies. We made a big bet in terms of growing our Media business, which we'll talk about a lot, I assume, in this fireside chat. So -- and we developed an open architecture model, which is different than the rest of the industry. So I do believe that one of the misconceptions is that, first of all, we're all not the same. And second of all, that IPG, in particular, went from, frankly, in the early days from the beleaguered IPG to now sort of someone has called us the darling of the industry. But I think the industry is misunderstood as well. And I think the ability of our industry to pivot and deal with this pandemic has proven that the industry is more resilient to deal with these changes. And in particular, IPG, because of its go-to-market strategy, its talent and the various assets and capabilities that we have under this open architecture model, really is an example why we're all not the same. And our performance proves that.

Maybe, Michael, if you step forward and you get your crystal ball out and you look at a lot of what has been written about the agency space and yourself, what do you think are the big things that will be proved wrong as we step forward?

Yes. Well, first of all, I don't think there's any question that this pandemic has accelerated. We had already started this. As I said, we embedded digital in all of our agencies. We've created an integrated offering, which includes our Media as well as we formed a company called Kinesso. And we bring all the resources of IPG within a consolidated collaborative model to the marketplace. And I think the acceleration to digital was clearly an area that has transformed our industry and, in particular, IPG. We embedded it within our agencies, and we made big bets, in particular, on Media and Kinesso. And in May, we offered Matterkind. And when you look at our open architecture, where we can put all of these resources, both the strong creative capabilities we have; the strong brands; the PR capabilities; some experiential, although not as much now; coupled with the Media and value proposition that Kinesso; working with Acxiom, which we acquired a couple of years ago, distinguishes where we are in the marketplace. And it principally is the reason we continue to outperform our peer set because we made those big bets in those growing environments that are necessary. Clients want to be able to reach the consumer across all platforms and digital capabilities and media capabilities and insights and first-party data are critical to that. And you, of course, need very strong creative capability that knows how to navigate through that digital environment and the media environment to make it a seamless collaboration to help our clients in this, particularly in the digital environment we're operating in.

Michael, if we look at sort of COVID and how that sort of impacts the agency model, I mean, we had a number, basically, in the ad panel yesterday talking about acceleration of shifts to e-commerce, accelerated shifts to digital, accelerated shift to video-on-demand. And we've also got this accelerated shift to work-from-home, which will be interesting to see how exactly we come out the other side of it. Can you just talk through, if you're looking at work-from-home, shift to digital, shift to e-commerce, and potentially, shift to video-on-demand, what that actually means for your business and the agency subsector?

I think, certainly, in IPG's case, it's made us much more relevant to our clients. So let's just talk about working remotely. We don't have to get on a plane to be with clients now. We work remotely. We have much more in-depth conversations with our clients and our capabilities. And everyone has now become accustomed to Microsoft Teams. Obviously, Microsoft is a client of ours, so we tend to use Microsoft Teams as opposed to any of the other providers that are out there. But it enables us to have a constant dialogue with our clients on a regular basis without having to get on a plane to go there. What's clear is that in the early stages of this pandemic, it was unclear what clients are going to do. Everyone basically had no idea what was going to happen. So if you look at the second quarter, that was a disaster because clients weren't spending. They were hunkering down. They were bolstering their balance sheet. They wanted to protect their margins. So spending, obviously, was cut back, and that had an impact on us and the rest of the industry. What became clear to our clients is that, wait a minute, we still have to invest in our brands. And now we have to invest in our brands in a different way. And certainly, e-commerce, everything -- you'll have to be hating to see how important e-commerce is right now. So fortunately, for us, we have the capabilities on e-commerce because of our data insights. And we can find the consumer where they are. We can cross platforms. We can understand their likes and dislikes. We can tailor our offerings on value-based offerings through a combination of our Media offerings, Kinesso and Matterkind. So think of it as the technology part of Kinesso and the activation part of Matterkind and the first-party and third-party data that Acxiom brings to the table coupled with our special offerings. For example, in Kinesso, we launched a number of products, particularly APIs, that enable us to provide value-added services in terms of reaching those audiences with value propositions that we weren't able to do before. And in e-commerce platform, investing in your brands and what your brand stands for becomes critical because you're competing either direct-to-consumer or through different video components. You need a brand proposition, which is where our creative and our PR capabilities come into the place. So think of how strong the offering is from IPG when we put all of these resources together on a single table. And we have the insights. We have the first-party data. We have third-party data. We have technology. We have activation across platforms and the value services that we bring. And then on top of that, we bring the brand purpose, which is necessary now to compete on an e-commerce platform with the right messaging to the right consumer at the right time. And we are well positioned. And I think, if you just look at our results so far for this year, even in the pandemic, we're outperforming our peers. And the reason for that is it's a very client-centric offering, where we're able to bring the best IPG to the table. If you look at some of our competitors, they've sort of given up on the brand proposition within the agencies themselves. So we continue to invest the talent in our various offerings, whether it be McCann, FCB, MullenLowe or our independent agencies. And these are very important pieces to the puzzle in terms of our go-to-market strategy. And when you couple that with the insights and capabilities of our Media and Kinesso and Acxiom offerings, we have a full robust way to compete on an e-commerce platform and that's what clients are looking for. And we're very well positioned to meet the needs of our clients.

Can you just talk about the Media business in terms of the accelerated shift to digital? Obviously, people view that in different ways in terms of impacting your business. Obviously, the agency models or the media agencies have been dealing with this for some time. But it'd be interesting to hear your thoughts in terms of what that means? Or does it create opportunities or does it create headwinds or tailwinds?

Oh, it clearly presents opportunities for us. A number of years ago, when we would look at our portfolio, it was clear to us that our Media offerings needed to be strengthened. So a number of years ago, we invested, and we looked at buying companies on the Media side or investing internally. And we chose to invest organically and bringing the top talent. So we have 2 major -- we have Media brands, and then we have the UM and initiatives sitting under that. And these are 2 global offerings that are performing quite well in the marketplace, and they have the ability to leverage the Kinesso and Acxiom transactions. So when we bought Acxiom, clearly, that was the missing piece in terms of data analytics and first-party data management that we saw from a strategic point of view that was necessary to bring in a robust offering to the -- to our clients to compete in the new world, which is digital driven. Just look at -- we just announced MAGNA in terms of the forecast for the year, and it's pretty clear that digital is -- continues to grow double-digit, whereas linear, this year at least, is down. Next year, we see a little bit of return to linear. But again, a continuation of the growth in digital. So at IPG, because of our Media and because of Acxiom and because of Kinesso and because of our brands, which work very closely with our clients, we're really well positioned to bring these offerings to the table on an open architecture basis that makes the difference. We're net new business positive for the year, and it's not by accident.

So is it fair to say that you think that -- not to put words in your mouth, Michael, but if you look at COVID and coming out the other side of it in terms of cost efficiencies in the system, shift to e-commerce, the way the business is being positioned within Media, with Kinesso and Acxiom, potentially the business could have come out stronger depending on the shape of the recovery as we come out from [ the COVID ]?

Yes. Our goal was to take this pandemic and use it as an opportunity to really focus and reposition our business. So as you know, year-to-date, we've taken some significant restructuring actions to get our cost profile. And we've taken $110 million to $130 million out, which will convert to about 140 basis points off of 2019 revenue increase in potential margin for us. So we've taken very strong actions to reposition our company so that when we come through this pandemic, we are well positioned from a cost profile to continue to expand margin and -- as well as obviously our capabilities that I just talked about, particularly using our data analytics and insights, coupled with our creative capability to drive revenue with a cost profile that is greatly enhanced as a result of the actions we've taken. And just take a look at the third quarter, right? We took a $47 million restructuring charge. Most of it was noncash. We took some 900,000 square feet out of our portfolio in terms of subletting and repositioning our agencies. We expect to do more of that a bit more in the fourth quarter so that when we come into '21, we will be poised to -- from a margin point of view, to really expand based on our revenue growth that we expect using our offerings to really be positioned to come out in 2020 and continue to outperform our sector and expand margin and revenue.

So of the 140, in terms of basis points of saving, I mean, if we look into '21, I mean, how realistic -- how much of that do you think you can actually keep versus how much do you actually invest back into the business?

Well, first of all, those are permanent savings. So...

Okay.

We -- all right. When you talk about investing, we're not talking about hiring all these people back. Obviously, part of that was the repositioning on a year-to-year basis. Obviously, I think we were down 5% to 7% in headcount. We're not anticipating bringing all those people back, okay? These are permanent savings. And frankly, the real estate savings are permanent savings. So when we -- however, we will continue to invest in our offerings, okay, in terms of using the data analytics and bringing new products to the marketplace. But the savings that we're talking about are permanent savings, and they're not temporary.

If you look at the -- let's say, I mean, there's been some sort of conversation about how your end clients would like to, let's say, push down on those cost savings in terms of pricing or down. But if you look at the change in revenue mix as we probably go into '21 when Media comes back and with Media probably being a higher margin, are you still very confident that 140 is permanent? And we're not going to see any sort of shift or pressure from end clients on those numbers?

Well, yes. Well, first of all, the 140, that's permanent, okay? The question of pricing, which is a separate question, okay, that's the whole purpose of us using our open architecture model and leveraging the expertise of Acxiom and Kinesso and Matterkind to offer value -- different products. We're using -- we're offering IP. We're selling products. We're compensating based on performance as opposed to FTEs. And these are higher-margin products. And frankly, that was the whole purpose of repositioning our assets so that we can prove to our clients that we add value, and we're prepared to put our money where our mouth is in terms of the performance. So one of the drivers here is that it has resonated quite well with our large clients. The other thing that's resonated quite well is our larger clients are performing better than the overall results of the company. We have a very strong client base. The sectors in which we operate are performing pretty well. Obviously, health care, for example, is -- 30% of our business now is in health care. That includes consumer as well as pharma. And pharma brings some unique capabilities that we have, whether it be at the McCann Health Care Group or FCB and its strong global footprint. So we are very strong in this sector that is performing quite well. And we have the data and analytics and the creative capabilities that go with that. And what's interesting in our health care offerings? These offerings are typically on the larger group -- we do pretty much most of the major global companies in that space. And they're pretty much operating under our open architecture model. So yes, there's always pressure coming from the cost side in terms of pricing, but we've been able to show that the value we offer bringing in all the different resources within IPG resonates and performance-based compensation based on, certainly, our data analytics, the Acxiom and Kinesso and Matterkind capabilities and the new products coming out of there, bode well for us in the future in terms of our ability to add value to our clients. This is -- clients right now are: a, yes, they're very cost-conscious because of their own margin pressures. But more importantly, they're very conscious of the competitive set that they're in, the brand recognition and why should they use -- consumer use this brand versus the other. And you need to have insights as well as creative capability to develop that brand, particularly on the e-commerce platform. We've invested on the e-commerce platform now for a number of years. And McCann, for example, and MRM, we did an acquisition, which really does global 35 countries' integration and implementation. And we leveraged that on the e-commerce platforms significantly. Reprise has launched e-commerce capabilities using both the Acxiom and Media and Kinesso capabilities. And our digital agencies, Huge and RGA, have very strong e-commerce capabilities as well. So we've invested in these resources so that in the areas that are necessary for our clients to compete, we have the kind of talent and resources that add value and, frankly, we get paid for. If you look at the other sectors that we're in, retail, for example, is a very strong strength of ours. And that continues to perform well. Technology is another sector. Obviously, we have some sectors that aren't quite performing as well. We do have auto, which although came back a little bit in the third quarter, and of course, leisure travel and airlines are areas that are not doing as well. But the sectors that we're in and we have strong capabilities like health care, retail, technology and consumer goods, by the way, obviously, that's a strong part of our portfolio. We have a constant dialogue with our clients, and we continue to bring value to our offerings.

Michael, can you talk about the pitch activity this year? What's changed? What nuances have come through? And how you think that changes as we go into 2021?

Well, obviously, for us, one of the big factors was a number of our big media clients, for example, we were able to successfully renegotiate without a pitch and renew our contracts. So that bodes well for us in terms of the pitch activity that's out there. You can assume that of the big pitches out there, which typically right now is on the media side of the business, if we're not conflicted out and we're participating in it and we don't have any really big clients that are up for review. So we view these as opportunities for us right now. We have a couple of there up for review. But of the magnitude of the reviews that are out there, most of them are opportunities for us as opposed to risk. So based on our business performance, you can assume that we believe we'll continue to do well in that environment because we're net new business positive.

Can we just sort of switch gears a little bit and go back to looking at the business in Q2 and Q3, where actually the business seemed to be a lot more resilient than, let's say, commentators, including myself, probably thought that -- typically, back in sort of like the bad days of April. I mean what do you think sort of led that sort of better performance? I mean -- and is there any insights that we can take from that into Q4 and potentially into Q1 next year?

Look, I think our performance, clearly, the second quarter was hopefully the worst. And certainly, everyone has been sort of indicating that, hopefully, the second quarter was the worst. The fourth quarter is a big quarter for us. And obviously, it's a lot of project business in the holidays season. But the Media, we just announced on the MAGNA that the Media business is doing better than it was expected for the year. So I think you can assume that, that in turn translated into somewhat of a better performance, but it's still -- it's the fourth quarter. But clearly, what we showed in the third quarter is our resilience and our capability to compete and drive revenue even in a difficult -- it was negative, but it wasn't as negative as people such as yourselves and other analysts thought it was going to be. And that just shows that our offerings are relevant and clients -- when things are crazy, clients need help, right? And that's what our business is and to have this suite of products and services and talent that we have within IPG. Just look, Adweek just announced it's global agencies of the year and U.S. agencies of the year. We won both of those. FCB and the Martin Agency. And of course, McCann continues to win awards all over. And our health care agencies are winning best-in-class awards. So we have the resources, we have the talent, and clients need that. It's -- in this environment, it's the expertise that we bring to the table that drives their business, which drives our business. So I think where everyone got this wrong was the fact that we're not a dinosaur. We are relevant to the marketplace right now. And the expectations that the -- that our offerings were out of date and not relevant were totally wrong. Now of course, we're -- what's happening now in terms of the resurgence of COVID and what impact that's going to have in the fourth quarter and in the first quarter remains to be seen. But I think if you look at the history of IPG throughout the last 5 years, we outperformed our sector. So if our competitors are viewing the fourth quarter as being better, I think you can assume we continued to outperform, and that's our goal. And we're certainly positioning ourselves more for '21 given the restructuring actions that we already have taken and what we will take. But I'm comfortable very much with respect to our competitive positioning and the value that we bring to our clients in the marketplace. And clients, I've heard clients talk about our offerings and what we bring to the table. And this -- the open architecture and the fact that we are able to bring our top talent on a silo-free basis is resonating well and the fact that we bring the data and insights into the picture, even when it's not a Media offering, we bring -- the insights are relevant not just on the Media side. Obviously, it's relevant to the creative side of the business. So we do have those kind of offerings, and I'm very comfortable with our competitive positioning. And hopefully, in the fourth quarter, it will work out, and we'll hit '21 strong and continue to outperform our sector and return to growth, what a concept, as well as margin expansion.

So if I read it right then, if you're -- if we're looking at lockdown 2.0 in the Northern Hemisphere, am I getting a sense that you're not -- there's not really much of an impact on the business as yet? Or you're not having...

You don't know -- I mean, here's the problem. You don't have the kind of visibility. Obviously, when this whole thing started, all of us basically said that the visibility into the business is nothing like where -- it was hard enough to predict this business when things were going well. So the visibility just isn't there, and we just don't know where lockdowns are going to have come and what impact it will have. What we have seen is a demand for our products and services. And what we have seen is our ability to compete against the competitors quite well. And what we have seen is that we add value to our clients in a very difficult environment. And on the consumer goods side, on the health care side, on the retail side, these are all relevant offerings that are -- that clients need. And now more than ever, clients need help. And that's what our business model is, to help our clients navigate through this. So I think we're very well positioned to continue. And the only other issue we have in the fourth quarter is last year, we had a -- we were up 5%. So it's a pretty difficult comp in the fourth quarter. But frankly, we look at this on a longer-term basis, and we continue to outperform our competitors. And we hope, and given the actions we've taken from a structural point of view, our new products that we're offering and our ability to work with our clients even in a remote environment, we're excited about what the opportunities for 2021 will be given the status of our business and our capabilities.

Just on '21, MAGNA came out with some quite upbeat forecast yesterday, plus 8%, which was obviously above what Zenith and GroupM were putting out there. I'm not sure how we should read that from an IPG perspective. But I presume that the Media business is going to be in pretty good shape for next year and e-commerce is going to be elevated and, therefore, the business should be -- have a pretty good year in '21 with the cost savings coming through as well.

Yes. Look, if you follow it, obviously, we believe in the MAGNA forecast, it's ours. And if you believe that, 2021 we should return to growth. And since we've been outperforming our peer set all these years, I don't see any reason why that shouldn't continue. If you take a look at how we're positioned, and more importantly, if you look at the actions we've taken to position IPG for the future in terms of our restructuring, the future of our agencies and the space that we use as well as the working-from-home model, all changes our business dramatically, and we've been ahead of the curve in terms of making the changes that are necessary for us to be in a position to hit '21 very strongly. We did it in '08 and '09. By the way, this is the same management team that delivered pretty good performance once we came out of '08 and going into the '09 and '10. And so we know how to do this. We know how to manage our cost profile. And we know how to value our products and add value to our clients and get paid for it. So I'm very comfortable and -- where we are from a competitive point of view.

Michael, just sort of conscious of time, just maybe sort of one more strategic sort of question. Is -- it's now 2 years on since the Acxiom acquisition. Where do we go next? And if you look at the portfolio of the business, is there other significant M&A down the pipe that you need to do to change the business? Or is it more sort of bolt-on M&A to make capabilities in?

Yes. I mean for years -- for a number of years, when we look with and work with our Board in terms of what was missing from a strategic point of view, we always had Acxiom up there. And certainly, the first-party data was a critical piece that was missing. So when Acxiom came (sic) [ became ] available, we kicked the tires, and obviously, saw that this was a critical part of the future of our industry and our business, and of course, IPG. So we're very pleased. Remember, 2/3 of Acxiom's business is managing first-party data, period. And that's a solid recovering -- a recurring client base that gives us an opportunity to work on a day-by-day basis with some of the most biggest companies in the world in terms of helping them manage their first-party data. When you couple that with our Media offerings and Kinesso and Matterkind and the offerings we're developing there, I think it's a game changer, which is why we acquired Acxiom. Acxiom continues to perform the way we felt it should, and certainly, in terms of them managing first-party data and the ability to integrate Acxiom with Media and Kinesso and then slotted into our open architecture model is compelling. And that's the reason, candidly, I believe, we're performing the way we are. And there's no reason to think that this won't continue. We made some management changes at Acxiom. And I'm happy to say that Acxiom now is fully integrated into IPG and the offerings and the open architecture and the new products that we're bringing. And it's not only brought to our Media capabilities, it also brought to our creative and PR capabilities, the data analytics sets that we have. Plus on the health care side, they have their own data capabilities, which leverage the Media and Kinesso as well. So I'm pretty excited about the opportunity for IPG in terms of how we're positioned.

And maybe just lastly, if we look at headwinds, which is obviously a lot of the investor base is focused on for the subject in general. I mean how do you [ best be guided to ] manifest in 2021?

Well, the biggest headwind is COVID and the macroeconomic environment. That's a pretty big headwind. In terms of the existing clients, like I said, we're net new business positive, and we hope to go into the 2021 with that intact. And hopefully, given some of the reviews that are out there, some additional clients added to our base. Since I said, a lot of them are opportunities for us, particularly on the Media side of the house. So going into '21, I think the only issue that I see that is really relevant is where we stand from a macroeconomic point of view. And when do the vaccines and the therapeutics that we know -- we now have, fortunately, when they take effect and when it has an impact in terms of getting money back into the hands of the consumers, consumer spending, client spending to reach those consumers. And if that's the case, they need our services to help them reach those consumers with their relevant messages. And that's our game plan going forward. So I -- and certainly, all indications are that because of the vaccines and the therapeutics that are on the horizon, and which is why MAGNA has put out its forecast for '21, I believe that should hold true. And therefore, we are well positioned to continue our outperformance in the marketplace.

Michael, thank you very much indeed. And thank you very much indeed for all your support again for all the conferences over time. Hopefully, we'll stay in touch.

Yes.

And wishing you and your family, the very best of Christmas, and stay safe as well. Thank you so much indeed.

And I appreciate it. This has been a pleasure. Thank you very much.

Cheers, Michael. Take care.

Bye.

Bye.