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

Good morning, everybody. I'm Ben Swinburne, Morgan Stanley's media analyst. And welcome to day 1 of our 2021 TMT conference. We're really excited that you're joining us even if it is remote, and we're looking forward to a great week. First, just some administrative items. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear in the handout available in the registration area and on the Morgan Stanley public website. Well, I'd like to welcome to the conference Philippe Krakowsky. He is the CEO of Interpublic Group. Most of you, I'm sure, are aware, but Interpublic is one of the world's premier advertising and marketing services companies with agency brands covering the spectrum of marketing disciplines and specialties. And Philippe is a recently appointed CEO at IPG, although he's been at IPG for quite a while. Philippe, it's great to see you, and thank you for being with us.

Hey, Ben. Thanks for having me.

Absolutely. Well, why don't we start there? You and I were just chatting about your first year in the CEO seat. What are your strategic priorities for IPG, especially as we, hopefully, emerge from this pandemic that's been happening for the last year and change?

Well, it's interesting, as you said. I mean I think our announcement was late last year. And so I've been in the chair for grand total of since January 1. Interesting times, right. But my tenure with the company goes back a long time, right? So as you know, I led strategy for the group and talent and collaboration at corporate for probably a good decade or so; and then sort of separately on top of that, for 3 or 4 years, ran the media operations, which is where there's probably the greatest focus on incorporating technology and data and where a lot of the really dynamic things that are happening in the business kind of have been getting the most traction. And then last year, in a sort of transitional period, I was Chief Operating Officer. So I think that what you got is a senior team from Michael; our CFO, Ellen; and I that have worked together for a long time. And I think that that's there's a lot of continuity. So I'd sort of break the strategic priorities down into 2 buckets. There's things that largely stay the same or where we're going to kind of stay the course. And on those, I'd sort of say see everything through the lens and the eyes of the client. And so that kind of client-centric solving marketing problems for clients but then, we believe, over time getting line of sight into a broader range of problems or a broader range of opportunities with clients. Talent is going to be a key part of the strategy regardless of the range of talent going from that, as you said, the marketing services expertise. And we've been adding technology, data. So talent is clearly going to be a big part of it. And then I think the third carryover, holdover is that sort of getting the various pieces of the portfolio collaborating. So that in essence we can kind of be the marketing services integrator for clients, right? So that's what we call open architecture, the solutions where we're delivering a range of the talent. And then I think operationally the things that stay the same were kind of a discipline on costs and a solid balance sheet, a balanced approach to capital allocation. And in terms of what changes, sort of kind of the "new stuff," I think we've been sort of telegraphing the answer for the last 3, 4, 5 years. And it's what's helped us outperform the sector. And if you think about all the what you've been writing recently -- I was listening to some of your prep for this. Kind of the degree to which the pandemic has been accelerating changes that we were already anticipating. So I don't think we're going to change direction. I think we're going to maybe quicken the pace and [lead in]. So it's about prioritizing the data and technology layer that we've been building in the company is a foundation for everything that we do. So that we can be more precise and more accountable. And that kind of becomes like the GPS for the company. It positions us to help clients make these decisions to drive a growth agenda. Then -- and another thing that you call out a lot, in your writing, which is spot on, is just sort of disruption, right? And so everything in media is going to become more addressable. And the way you can activate across channels is clearly going to become more addressable. So what we then need to do, to do that sort of strategic priority is really understanding audiences at a very granular level, whether that's existing or potential audiences. So that we can personalize messages and we can make experiences richer. And we can also kind of -- when we advise clients on their investment, kind of max out the efficiency as well as the effectiveness. And then before I kind of shut up and let you get to the next question. I think the only other 2 things I'd add are data ethics and data privacy, I think, are going to become more important particularly in our space but for every company. So our tech and data solutions, if we can help marketers navigate that complexity and connect in a way that drives their business but does so in the right way, that could be, I think, a differentiator or a further differentiator. And look, content clearly continues to matter, right? So getting the balance right between the things that we've traditionally done very well in areas where around creativity and all the marketing disciplines are strong and then integrating that side with the tech and the data side of things. So I think that's -- sort of at a macro level, that's the strategic view of kind of how we're going forward.

Yes. Well, that's helpful. Philippe, you mentioned, in the last 3 or 4 years, a lot of the themes you guys have been talking about and your acquisition strategy has been around driving the business. From outside the company in terms of investors and analysts, it's not easy for us to look at your business and understand the sort of micro drivers. It's -- from the outside, but I often get asked why -- or how IPG continues to sort of consistently outperform the industry from a growth rate point of view. And you touched on that before. Maybe you can talk a little bit about what you think, from where you have been and now in the CEO role, has driven IPG's fairly consistent multiyear, even in 2020, outperformance of the industry. I'll give you a chance to brag a little bit.

No, I mean relative -- everything is relative in 2020, yes. I don't think -- I mean I can't speak to decisions that, say, our competitors have made. And I'm not sure I could kind of give you a really precise rank order list of where the difference lies, but I mean I can definitely unpack for you kind of what we've done and what's central to our performance. And then the fact that it's differentiated is obviously something, to your point, that we feel good about but that we got to just go out and keep delivering on. So I'd say that's like top talent as a -- sort of our talent strategy or our approach to talent, where we want the agency brands to be strong. And I think that's because top talent wants to be part of an agency that's known to be kind of outstanding or a leader in whatever their area of expertise is, right? And so I don't think they're drawn to working at a holding company level. I don't think they're particularly interested in kind of being in a siloed sort of single-client team. They want challenge and they want the breadth of client problems. So I think one of the things we've done is we've invested in the agencies. And I think we're pushing them, and I think we're going to push them more, to get really focused on the 3 or 4 core capabilities where they can excel, all right, because the nature of problems is getting more complex. I think you have to be clear about what are the few things you're really, really good at. And then during the first kind of waves of digitization that were hitting media and marketing and all industries, we didn't silo those skill sets, right? And so we embedded them into every one of our units. And I think that, that also kind of gave them a bit of a leg-up in their specific area. And it gave us a way to wire stuff together because people had some kind of a common language and a common level of like base expertise. And then we incubated some of the more sophisticated digital capabilities, whether that's an R/GA or huge acquisitions; small which have grown from kind of single-agency offices to sort of mini networks. MRM, which is inside of McCann, was an old-school kind of direct agency. And then they've built up large-scale kind of digital asset management capabilities, CRM work. They did website builds. Then the CRM work is embedded, kind of informed by all the consumers' digital habits. And then health care is the -- is a sector that's strong for us. It's a vertical that's really strong, and that's another one where maybe that more technical set of skills and expertise is required, so we kind of build that out. And then inside of Mediabrands, which is kind of our sub holding that has media, we focused on search, then we built the tech. We really kind of build a software layer inside of there to support programmatic and then we started to build our data stack. And then Acxiom has been a key partner as we were building our data capabilities and data solutions for clients. So when that process came along, even though we hadn't been big, we've sort of done a lot of build-your-own, sort of DIY and then very targeted acquisitions. We knew them well. And we kind of asked ourselves scale, very deep know-how, kind of credibility, yes. Those were benefits that would come with. And so was this a case where a buy would really get us that much further along? And if you think about the speed at which this is all happening. So that's 2.5 years in and they've been a big part of our success. So I'd say that it's kind of sticking to what we kind of came to the party with and being really focused on talent and on getting the right skill sets and then adding this layer of more tech-enabled kinds of services to the mix. That's kind of where -- what I think has worked for us.

Yes, makes sense. You mentioned, speaking of technology, Philippe, on the last call, I like this line, the velocity of change has picked up even further in the digital space. Everyone in the market is trying to figure out how COVID and the acceleration of technology adoption is going to impact marketing. And I'm sure you guys are as well. What does this acceleration mean to IPG? And if you can take it back to growth and profitability, that would be helpful as well, but just to think about what these trends which many people, I think, debate, whether this is good or bad, to use some crude words, for the agency business. Clearly, you think they're positives. Maybe you can help us think about why.

Yes. Look, I think there are opportunities, right? I mean it's funny because, again as an industry observer, you kind of chronicled a lot of what is kind of impacting. What I meant on by that is so the shift to streaming and on demand in terms of how media is being consumed was coming, anyway. It was kind of starting to accelerate. Last year put it on kind of on steroids. So you're going to see more ad dollars going to digital channels. So the question is are you provisioned to basically help clients feel that you're the person they want to -- they both trust and rely on to help them make smarter decisions around that. Another big shift is kind of the growing adoption of e-commerce, right? And so what's interesting is that, even clients for whom that was not as much of a priority and categories where that's kind of a heavier lift, say, like CPG, they've been really, really looking at and thinking hard about kind of what's going on there. And then I guess the last bucket, I'd say, is kind of digital business transformation, where you want to understand what's going on with platforms in tech. And it's going to kind of inform how you go to market overall. So what does that mean to us? It's -- means that kind of we can show up, engage with clients. There's a kind of a bigger addressable universe of briefs that we can raise our hands, kind of qualify for. And so whether that's our media offering that we've built, which has got kind of -- I'd say, kind of more of a consultative -- we've never been kind of a just the volume. Or by virtue of the volume, we suggest to clients that that's what is going to help us get them kind of the best deals in the market. We've always been a -- it's the intelligence that you bring to those investment decisions. And then on e-com and MRM, as I mentioned, inside of Mediabrands, we've got a search, an SEO agency, Reprise, where we've been building out a lot of e-com capabilities huge in R/GA. And then the [BT] projects. So it's sort of that infrastructure approach to how does the client get organized at an enterprise level to deal with a new environment. And so I think that on growth there should definitely be opportunity. And in terms of profitability, these new offerings just kind of pivot to having a data component to our offering and then a software layer so we can activate that data. We can turn it into kind of intelligence that the agencies can apply. And the agencies are where clients -- it's not just where our people come to work. It's also where we activate with the client, right? It's where the relationship exists and where we can bring these new capabilities. And so these new ways of working, I think, we believe, should open up different revenue streams, right? So licensing an IP, which would clearly be accretive with kind of more data-driven sort of precision solutions. You can do more performance models. And I think that's also an opportunity, as we do more of that, to kind of enhance margins. So I think net-net we see -- it's funny. Michael always used to say complexity is good, but I do think that, when you've got the breadth we've got and when you've sort of been supplementing the core strengths with these capabilities that orient us to the changes that you were asking about, Ben, I think there's definitely opportunity.

Yes, yes. Michael also likes to use the phrase "open architecture," or back when we used to do conferences in person. That was a frequent one.

Yes, we're all looking forward to getting back to that, right?

Yes, for sure, but just back to your point, though, on technology and complexity: Does open architecture, which at least I read is -- as a client has access to the whole suite of services at IPG, wherever they come in. Does that become harder in an environment where the tech is changing at this pace; and the need for real expertise in analytics, in technology -- you're probably having to hire a lot more engineers, et cetera. Does that get more challenging? Or does it remain a competitive advantage for IPG in your mind? Or both.

Well, look, I mean I think what's interesting is, to your point, I think, kind of when you've been doing something and it's been working well and other people sort of start talking about similar things, you know that you've got a little bit of a head start, but you got to kind of keep adding. So it feels to me like this idea of open architecture and integrating is sort of working. It's like forever work in progress, right?

Right.

And then as you say, we've got a lot of experience because, when we built the search capability or when we built programmatic and essentially a tech layer inside of Mediabrands, those things were being connected to our big client engagements, but it's definitely there's more moving parts. So I think one of the reasons -- I think you're right. It's one of the reasons why I said earlier that with our agencies we are kind of increasingly saying to them focus on the 3 or 4 things you're really, really kind of outstanding at. Because I think that, in the early days when everything became digital, I -- we liked that our operators are entrepreneurial, and so there was a degree to which people kind of was like, "Oh, I can do that too, right?" And I think now what you need is you need kind of enough of a reality check or like humility. So that you can go, "No, no, no. You guys are good at these 3 or 4 things." And so when we're bringing you onto the team, those are the 2 sort of swim lanes you've got. And then these are where -- so look. I think the idea of kind of, as you sort of said, I -- like open -- the open architects, the people who run the engagements. Yes, they're -- the profile will evolve in the same way that, if you're a CMO these days, you have to understand this stuff in the way that 5 years ago you didn't. And 5 years hence, if you don't, you probably aren't sitting in that chair. So I think that's definitely a filter for us, but it's surprising. You find people who have either the capacity or the curiosity. Kind of they come at it from different -- it's like relationship management in the financial services business. You definitely need to understand, but there's a point at which, the really deep subject matter tech expertise, you just need to know that your teammates are on to do that. I don't think you're going be [indiscernible] those folks, but yes.

Sure. Let's come back to this year. We're not out of the mess yet, as I'm sure you would agree. Maybe you could talk a little bit about the outlook for '21. You talked about significant uncertainty in terms of visibility into the business, which makes sense, but what parts of the business are performing relatively better than others as you sit here early in '21?

Look. I mean I think it's kind of -- it -- not a lot has changed since our call. And I wonder. Obviously, if you sort of think about it and go, okay, so the recovery is all kind of -- we were all spending all of our time sort of talking about virus variants and about vaccine rollout and that kind of stuff that none of us ever thought we would have to be this focused on. So the big hinge is still, to my mind, resolution of the health crisis. And obviously we're getting more clarity around or we will get more clarity around stimulus, et cetera, but -- so it's very sector-driven and so you're seeing really disparate impacts. And it's really consistent, early days yet this year. So health care and retail as client sectors grew for us in 2020, and they're looking like they're continuing to be strong as we kind of head into the new year. On the other end of the spectrum, again fairly self-evident, sort of leisure, so travel, airlines, cruise lines, hotels. QSR took a hit. And I think for the QSR that needs you in the restaurant because it's sort of a step up. Now a lot of the QSR are clearly reinventing their entire models to make it much more order in, much more touchless, et cetera, but those were hard hit. And until people can be in the world again -- you called it, I think, what, social gathering on one of your podcasts. So it's like, until we can social gather, that's going to remain the case. And then I think other watch-outs are supply chain. If what's been going on -- spikes in certain places and supply chain hits a particular industry or client sector. That's a layer of uncertainty. And then for us, although it's a small part of the portfolio, experiential and event businesses got hit really hard, right? So you're locked down. And if you're helping clients with their trade shows or with their sampling or with sports, marketing, et cetera -- so we don't figure that comes back at least until the back half of the year. So it's sort of odd. I think for us it's not -- like we feel good and confident in the bits we can control. We're just being sort of realistic about the bits we can't. Our CFO has a funny saying actually. Ellen sort of says it's not if but when. She'd probably have that put on a t-shirt, right. But I think what we're seeing kind of in terms of what's working and what's not is pretty consistent with the more digital part of the businesses. Media kind of bounced back nicely. That -- our health care-focused practices, with the specialties, as well as inside the agencies, that performed well. No new news.

Okay, that's helpful. Anything else you would add? One of the things that came out of your earnings call, I think, was -- from investors, anyway, was around your sort of framing of '21 as being a year where IPG delivers industry growth. And as we've discussed earlier, we've been spoiled seeing kind of pretty consistent outperformance. Anything you would add beyond just the comp is obviously harder for you guys? Anything else you would add to that comment to flesh it out?

Yes. I mean, look, the comp is like a -- is harder and harder. And I guess what I mean by that is the variance in performance inside of the sector in '20 was kind of wider than it had been in a long time, right?

Yes.

So I'm sure, between us at the top and kind of the competitor who was on the other end, there was like a 7 percentage point gap. So that's bigger than usual. And then you stack that on top of, as you said, a number of years of outperformance and a lot of, I think, challenged visibility. I think we're just trying to be kind of just trying to be real. I think, look, the other thing that's hard to tell is when is when -- for how long is growth going to be available this year, right? So like does -- if the world opens up and you get 6 months to go out and perform, then if you feel like you've got strong assets and you can outperform, then you're more confident that you can really show that out. If new business -- and there should be some pent-up demand for reviews. If that kicks off in September, then it really probably doesn't impact this year. So it's kind of like when does it take hold? How much of an impact can we make? But it's not indicative of any broad change in perspective about how we feel about our relative position.

Got it. And fair to say you think media probably outperforms kind of the marketing services side just given everything we've seen in 2020 and heading into this year.

Well, look, yes, I think so. And I think it has for a number of years because it's kind of where -- it's where you get the most signal in, right? So big client budgets, a lot of focus on can you get me more rigor around and specificity around digital media kind of fragments. There's a lot of ways to get precision. So -- and then all of that starts coming back to you, and you start going, oh, this is a really rich place to -- so that's why I think it's where the evolution of the business has been kind of most pronounced. And I think all of those -- it's kind of a virtual circle at that point. So I think that's a space that should continue to be. And so how do we time more of what we do in the rest of the portfolio to those kinds of tools or processes or that data stream. We -- I think you're absolutely -- yes. That's kind of going to keep being, I think, the place that outperforms.

Okay, we've got about 5 minutes left, so I want to crank through a few more at least that I think are worth hitting on. First, it's been about 2.5 years since you bought Acxiom. I imagine that business helped last year, just knowing the business model a little bit, but I'm just curious if you had an update on how the asset has been integrated into IPG; and whether the opportunities you guys called out at the time, particularly on the revenue side, have been something you've been able to capture. I realize with -- the pandemic may have impacted your plans there, but any update on that given the size of the acquisition was obviously pretty material?

Yes. I mean so the integration is done and we feel really good about that. And that's really important, by the way, obviously because in a space where one of the things -- they brought a number of things. So they brought a big really powerful kind of foundational data set, and it's really where we start, right? It's we then build on top of that, whether it's client first-party data, whether it's -- that gives us real -- a clear line of sight into where there are gap in the client's data. But to handle data at scale really securely and really thoughtfully is really important. So I think their performance has been, as we said, solid, and we're comfortable with it. And we like that. It's also a chunk of our revenue that is on a kind of long-term retained client -- contracts, which is obviously again different. And we were talking earlier about aspirationally wanting to diversify the revenue stream. And then what I tried to do, which is different, on that -- on our call just a little while ago was to try to sort of kind of dig a little deeper and show how Acxiom; and then Kinesso, which we've built that sits on top of that, is playing a part in so much of the client engagement. So it's kind of at the table with all the top 20 clients. It's kind of showing up in all of our new business of any scale. And then we're also trying to sort out how do we take -- how do we kind of cross-sell and help the agencies take that data or that data management expertise and sort of bake it into things that they do already and turn that into product that they can sell to clients. So I think overall -- the only thing that we mentioned that we were going to get to that is still "a to be gotten" in a meaningful way -- I think it's both because, integration, you want to make sure you get right because then getting it -- the asset to work with more and more of the company requires a lot of work -- was kind of international. And we talked about sort of their footprint is very domestic. And so that opportunity is still very much untapped.

Okay. And then maybe just a couple, to wrap up, on the numbers. You guys -- obviously it's going to be a very interesting year from a comp point of view. Do you have a sense of what the sort of shape of the year looks like in terms of organic growth just given the comps? Do we expect Q2 to be the peak quarter for growth and then it sort of fades from there? Anything you would want to call out at that -- at this point?

I mean, look, we don't -- we're not prone to -- we don't manage it on a quarter-to-quarter basis and so we don't tend to focus on it that way or to comment. I think the comp clearly eases pretty dramatically in Q2. So that's kind of a logical point at which to assess are we starting to turn the corner, right? And then I think, other than that, restructuring, we're going to stay really focused on the commitment that we made that there would be a sizable, long-term kind of basically -- the cost savings that are permanent. So I think that that's a focus, but look, I would say Q2 is a really important point at which to sort of see kind of where we stand. And then once we sort of head into Q3, we sort of see where the world is. And if the world is starting to kind of come out of its shell and we're all back in the world, then some of the project- and marketing services-based part of the business, I think, starts to be able to contribute to growth. And so that's sort of -- right. But I can't -- yes, kind of phasing...

Yes, hard to say, I realize.

As we said, we're just -- the visibility is such that we just figure it's a bit of a fool's errand.

And then lastly. Just you mentioned the cost savings. You and Ellen and the team have identified $160 million of annualized cost savings from restructuring last year. I think margins will be up nicely in '21. It does seem like, at least where consensus is, that there's -- a lot of that $160 million or some of that $160 million may be more in '22. I'm wondering if you think this is a multiyear or a 2-year process to sort of fully capture that. Is that kind of how we should think about it?

Look, I think there's incremental profitability just because we've shown that we can grow profitability independent of the restructuring. Then there's of -- a lot of the restructuring savings this year. And the degree to which it then, to your point, becomes a multiyear process has to do with the lease accounting and with actions that we've already taken but then when subleases take place. And therefore, to your point, with growth, we can increase profitability. The restructuring was a rethink of core operations and a sort of streamlining of how we deliver core services. So that is going to be evident kind of we, in perpetuity, permanent savings. And then on real estate there's benefit in '21 and benefit in '22. So I think that's kind of stripping it out.

Got it. I couldn't let you go without touching on lease accounting. I know that was important to cover.

[indiscernible] a lot more about it than you and I ever will, so...

Right, exactly. Well, listen, thanks so much for your time this morning. It was great to see you, and all the best for the rest of the year. So thank you, Philippe.

Thanks for having me. All right.

Okay, everybody, thanks so much for joining us.