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

Right. Good morning, everybody. I'm Julien Roch, in charge of European media research at Barclays. I also cover the agencies globally. And with me today, I have the extreme pleasure of talking for about 30, 35 minutes with Philippe Krakowsky, the CEO of Interpublic. Philippe has been CEO since the beginning of the year, but he was CEO of the company before that and the CEO of Mediabrands before that. So Philippe has been at IPG since 2002. So he has forgotten more about agencies and advertising that I have ever known.

So Philippe, thank you very much for taking the time out of your busy schedule to be with us. I'll start with almost the mandatory short-term trading question, and then we can go to more strategic things. So how is the environment in Q2 now that some economies have truly reopened like the U.K., the U.S., China, for instance? How is the mood among advertisers?

Well, thank you for having me, Julien. Look, it's good to see you and appreciate being asked. I think that the environment clearly has improved and continues to improve, right? And so from the beginning of the year until now, I think you heard our tone change even from the point in February where we shared the Q4 2020 and then when we put out our first quarter results. So I think in February, we were still measured. We still felt that there was uncertainty. What I think we shared with the investor community was a sense that we had confidence in the things that we can control, our offerings, our people, the relationships with the clients. But that the macro, there was uncertainty in those areas that we cannot control, so whether that was the virus, whether that was the vaccination programs, stimulus, things of that nature. And so there's clearly been a shift. We knew that it was a question of when we would get back to growth, not if we would get back to growth. And I think that whatever it is, mid-April from -- and then until now, we've got a strong Q1 and we've got clarity. We've told you all what we think we can deliver and accomplish this year with organic of 5% to 6% for the calendar year. So I think that it's both more confidence and, to some extent, more visibility. And then conversations with clients are clearly bearing that out. So I would say there's more of an investment mindset. It's sector by sector, but all clients are clearly feeling better, feeling a greater sense of engagement. And we know there are a few markets around the world where the situation, in terms of the health crisis, is very challenging. I was on the phone a few days ago with the head of one of our agencies in India. And so you have to understand and be respectful of the fact that there, we're still in maintenance mode looking after our people. But across-the-board client sector, we saw quarter-to-quarter improvement. International region, we saw that. And so I think you see that confidence in our expectations for the year.

Okay. Very good. If I move to pitching, so we're almost at the halfway stage in 2021, I mean, a month to go. The year started strongly in terms of big pitches, but announcement seems to have abated. So do you think will be -- Mediapalooza 3, I hear, a big year of pitches? And what are the biggest pitches out there and your position into them?

Wow. Yes, palooza is a big word, right? It's like a big party. I think it's funny that people choose to interpret it that way. And we have seen, over the last few years, every few years, that cycle of very large pitches, which I think was, in many ways, a reflection of the changes that had been transforming the market, much more digital, a greater focus on the need for technology and data in the offerings. So I don't think that we are at palooza level this year. I don't think we will get to it. I think what we're seeing is during the course of the year last year, there was definitely a reluctance to go through a process that is very complex and can be disruptive because it was already so much that people were mitigating against inside the business in terms of just battening down and getting through the challenges of 2020. We're seeing a pickup. I'd say we're seeing it in probably 3 parts of the space. One is, we are continuing to see a fair number of media pitches which are complex, generally speaking, global in nature. They involve a lot of the offerings, a lot of the various expertise that bridges media, technology, data. We're seeing, I think, a fair number of pitches again in the fully integrated offering space, where your -- where, for us, for example, recently, it was news around Cigna, which was a global network, a digital specialty network, a media agency, that technology and data infrastructure and some specialty agencies. So there's activity there. And then there's some activity, I think, in kind of the more digitally focused, building a brand in this new digital sort of world or ecosystem. So we're seeing quite a bit. I think that we will see it play out during the back half of this year. And then it will also spill over in the next year as clients are asking themselves, given everything that's happened in the last 15 months, given the need to solve for the acceleration of some of these trends, "Am I fit for purpose in my e-commerce strategy and offerings? Is my media or my -- kind of is my go-to-market getting me maximal, I think, effectiveness really in this digital ecosystem?" It's very complex and not -- and sometimes a bit opaque. So I think we're seeing them in those areas. We'll see them continue to pick up but not sort of -- as you said, not sort of to the point where it's a wild party. But I think we'll keep it -- it will be picking up through the back half of this year and then into next year. And for us, net-net, we see a lot of opportunities. So generally, there's a lot of net new. So we think that it allows us to showcase our offering, and we're seeing more opportunities to pick up than to have to defend.

Great. Thank you for that. Changing subject, health care, which has been a strength for IPG over the years. So can you explain your offering in health care? Give us some details, if you can, I don't know, biggest agency as percentage of revenue. And why it has been so good for IPG in -- for a while now?

Wow. Okay. So I'm trying to figure out. So at the most macro level, I'd say, yes, it's a hair over 25% of net revenue. It is very distributed and very embedded throughout the portfolio, right? And so what you have is -- with us is you've got 2 very powerful specialty agencies, FCB Health and McCann Health. And they do more of the professional work. They do more of the, as I say, more specialized work where you are interacting with specific kinds of circumstances, whether that's a clinical trial, whether that's interactions with pharmacists or the sales force as well as some of the more, as it were, sort of standard strategy, messaging, definition of audiences. But it's all through our portfolio. And so a big part of the success that Mediabrands has had in the last 3, 4, 5 years has been to build out and to win scale, health care and pharma clients. And then within the marketing services agencies, Weber Shandwick is a large global health care practice. And now Golin has built one. And MRM, which does relationship marketing and a lot of the digitally enabled marketing, whether that's commerce or whether that's business transformation, those all participate in the space. So I think that for us, it's quite comprehensive. It's across the group. I think that what we saw that appealed to us about the space is that it went in a direction that was consistent with some of the strategic decisions that we were taking. So do you need more specialized skill sets? Do you need the technology or the analytics competencies? Is it a set of clients who are more sophisticated and wanting to be very precise in who they reach within -- they have some constraints, whether it's regulatory constraints. We want to get the information to people, but there's the need to really be respectful of privacy. So we saw a lot of characteristics in the space that we thought lined up with a more modern or more future-facing offering. And then I would say to you that I do think that it is going to be -- continue to be an attractive space, I guess, for us or for the sector, for both. So for the sector, I think 15 months of pandemic, a lot of focus on health, a real sense that the industry has rallied and done a great deal to help us collectively get through this. So I think that reputation of the industry is in a strong place. Historically, their pipeline is strong in terms of a lot of R&D, for which they will need the kind of help that we provide. So I think that sets the stage for continued growth macro. And then for us, specifically, we've been taking share for a number of years. And so I think that we'll get the benefit of both that overall tailwind but then also the fact that we're very strong there. And it connects very well into our -- the infrastructure we've built and the strategic actions we've taken around data and tech.

Well, that's a good transition to my next question on data and tech. So IPG technology offering, could you explain what assets you have? How they fit together? What they do? And why does that give you a competitive advantage? I mean, my understanding is that Acxiom is your core data layer. Kinesso provides the technology application, and Matterkind is your new addressable media activation solution. But agencies' technology offering are complex and fluid and changing. So I might have missed something in my description of your offering. So if you could remind investors what do you have? How it fits together? And why it is a competitive advantage for IPG?

Thank you. No. I mean, look, I think you've laid a very good sort of groundwork there. I think those are a lot of the core or the foundational pieces. I guess I would sort of take a step back from that. And I would say to you that one of the things we did going back some time, when you began to see the very significant growth in digital channels and the further fragmentation that, that was creating in the ways that you can engage with information if you're a consumer, the ways you share that information, as you remember, we took a look very early on at Facebook to understand what was going on in that space. And so you start seeing the need for digital skill sets to be embedded everywhere in your organization. So the first step for us was to not silo digital but to put digital capabilities and to challenge our operators, regardless of what they did with building digital into the company. So I think that was the first step. And then we began to kind of organically develop, whether it was search capabilities inside of media, whether it was programmatic capabilities inside of media, but also, as I said, MRM. So now you begin to have digital-native agencies in MRM and R/GA, a media offering with these very strong digital capabilities. And the pace quickens. We've built our own data stack initially. We've found it competitive to win large, particularly media assignments because the scale of investment on the client side is significant there. And the amount of signal that you can pull back, you're putting so much -- so many messages out through these very sizable investments in media budgets. So for us, those were the logical places we were winning big assignments like a LEGO in media, like an Amazon with our own stack. But we did take a very significant step of sort of above and beyond our organic strategy with Acxiom. And for us, that was a sense that the scale data management, so handling of first-party data at scale in a way that was very sophisticated, very safe, was important and that building that would take time. And so for us, Acxiom is that foundational layer. They do, as I say, data management for very, very large clients where they architect the sort of foundational data layer for their business and then they handle all of the data for many of the largest financial services companies in the world, some large automotive, some big-scale tech and telcos. Those are also the industries that I think are better prepared for this new world. So that's the foundational layer. And then also, what came with was a core data set, InfoBase, which outside of the really massive data sets that you find inside the walled gardens, was, to our mind, a very powerful asset that gives us a spine to build these data and tech-enabled solutions for clients. Then as you say, we took some of the engineering teams and the data and tech that we've been building inside of media and some of the engineering that was inside of Acxiom, that's combined, that's the Kinesso layer. So that's where we create software and applications that allow the data to be pulled up or queried or acted upon across our ecosystem. Matterkind is where it gets activated, and more and more media is addressable. So we think that more and more clients, as there's more inventory, more opportunity, we'll want to engage with consumers in these very precise ways where you have accountability. You can begin to see whether it's driving specific outcome. As you know you're reaching the right people, so you can increase as much effectiveness as efficiency. So those are the core layers. And then Kinesso has got a behavioral science team that is informing the work that's done at the more traditional, as it were, marketing services agencies. So we're trying to get more and more of the offering connected to this. And then there's a marketing technology layer as well because we want not just to be able to activate and to engage with clients on the ad tech side, but also in their marketing technology activity and -- with all those platforms. And then lastly, there's a production layer, which we call Craft, which is quite robust but still in the process of being built out because you want the data to inform a lot of the kind of the lower funnel, the creative activity that is more what we would have seen in the display pop-up in the world where we saw maybe creative manifestations in the digital domain that can be more tailored, more built at scale. So that's kind of how it all comes together for us. I don't know if that is -- I'm sure you always have interesting and thoughtful questions. So I'd lay that out.

No. Thank you very much for that. That was clear. And I suppose, do you feel you have enough of a differentiation with the other agencies? Or is Publicis, following the acquisition of Epsilon, have something that's not too dissimilar, and therefore, it's more about execution than the technical capabilities? Or do you -- and WPP is launching Choreograph. So again, is -- everybody has similar capabilities. There's not a massive differentiation. And therefore, it's about having better people, better execution. Or do you feel that your technology and architecture is strong enough that it does make a point of differentiation?

Well, look, I think the answer is, in essence, both. And so yes, we feel very good about the resources that we brought together and the assets that we have. And so for us, Acxiom has multiple benefits. It's acknowledged as sort of the gold standard in terms of handling data safely and securely and an ethical approach to how you build these solutions. I think that's going to be a differentiator going forward because I think clients realize that they need to have a first-party, data-driven way to go into the marketplace to engage with consumers. And so what that means is, am I dealing with the provider who has the strongest track record of building those kinds of solutions? And am I doing that in a way which -- as regulation and consumer expectations around privacy ramp up? And in that regard, we feel very good about the strength of Acxiom. So I think that, that's clearly something where we see differentiation. So when I see perhaps announcements that look like they're trying to get to places where -- for me, it's less about what do we -- what is the big noise or the big headline in the market. It's just, on a regular basis, are you seeing in your engagements with clients, either they're turning these capabilities on or they're asking you for advice? So again, for us, a long-standing commitment to being fully transparent in our media dealings and, therefore, consultative and aligned with the interests of clients will also apply in this next phase. So I do think we've got very, very strong assets. And then on top of that, execution is absolutely a given. So you need to deliver on -- because these are complex engagements where you're pulling together now, in many cases, the marketing side of the house at a large organization with the technology side. And they're sorting it out. So you come in to help them with that. So I think execution is going to continue to be key. And then pushing the envelope in terms of, are you connecting that to the new channels, to e-comm? Are you getting kind of -- are you continuing to get the best talent? But we do feel very good about the assets that we've got in place.

Great. Thank you very much for that. Moving to privacy, which has always been topical, but it's slightly more topical now that iOS 14.5 is out for a couple of weeks. And in fact, only 6% of Americans think it's cool to be tracked. And 94% of them say, "Don't track me. Don't advertise to me." So end of cookies, end of tracking. First question is, what will be the impact on agencies, do you think?

Well, I mean, it's funny, right? Because nobody is going to tell you they like it, right? I mean -- so by definition, I think it's one of those things where 20 years ago in the industry world, people would say, they -- do you like advertising? And of course, everybody would say, "No, no, I don't like advertising." But then everybody still wanted to talk about the advertising they saw on the Oscars or on the Super Bowl or if it was actually relevant to them. So I think that what we're going to see is -- I mean, look, GDPR, we had that same moment of like -- so I think that there's going to be an interesting in-between time, right? So the cookies deprecate and go away through things like iOS or through things like anything that kind of looks to ensure that when you're engaging with people, they have an understanding of what is happening and what that value exchange is, and there is consent. But to my mind, there's going to be this moment where there's no longer a standard. And we're going to all be trying to understand what is the new standard that is acceptable, that people are comfortable with, where they feel that it's not overly intrusive or that the benefit to them is meaningful. And none of us likes getting the same advert for the 40th time online. So that's understandable. And clearly, you don't want to have a situation where, from a privacy perspective, anything is being mishandled. But I think what's going to happen is that the platforms will try to solve with the cohort approach, and we'll test and learn with them. And that will either prove to be quite good at getting people the messages that they should be getting in ways that are relevant and timely or it will prove to be good for certain use cases. And then we'll also be engaged in some activity with some of the players in the space who are alternatives to perhaps -- so incremental alternatives or new alternatives to the platforms, where they're building their systems with some of these things baked in. And then you'll look for ways to solve this and still understand who that individual is, who that audience is, why they're particularly valuable for the client that has something that they should hear about. And I think that's why, as I was saying, a lot of clients will say, "With my own first-party data and the right partners, can I create a big enough alternative set of interactions, addressable consumers, some partnerships where maybe you do data exchanges in ways that are, again, thoughtful and safe?" And people will begin to once again hear from companies, and they'll decide whether that's something they're comfortable with or not or whether because, again, as I say, there's clarity around what's happening or what the benefit to them is. So I think that, over time, we'll get to a place that will actually be beneficial for all parties. I mean, we feel like we're well on the way as an independent entity in solving some of these identity resolution problems. And that's before we then partner up with some of the other players in the space.