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

Great. Good afternoon, everyone. Thanks for joining this session. My name is Lisa Yang, and I cover the European media, Internet space at Goldman. It's a great pleasure to have with me today, Philippe Krakowsky, CEO of Interpublic.

So maybe just start off, Philippe, this is your second year as CEO of IPG. You have been through COVID, the rebound and this year, many, many macro issues, the war, and it's quite surprising that IPG continues to surprise to the upside. So I'm just wondering like how do you explain such a strength, not only this year, but also basically since -- really since COVID and actually even prior to that. And how you're thinking about your strategic priorities in this challenging macro backdrop.

Yes. Spectacular timing.

Yes.

Well, I'm not sure that the current macro necessarily changes our priorities in that that performance that you're talking about leading up to and over the course of these next couple of years does sync up with what we see as longer-term trends that are going to persist and that we've demonstrated can result in the kind of growth that we've posted that clearly is an outlier to the good relative to the category. So I don't know that there are any kind of major strategic shifts that come out of it. I mean I think that pandemic in terms of running the business when it's a business we're clearly -- kind of there's an IP component and a professional services business. So there's been a lot of, lot of focus on looking after our people around the world. And then, the acceleration of trends around consumer behavior and digital channels and consumption and sharing of information again in ways that are enabled by tech, those sync up with bets that we've made going back a long ways around not siloing digital and around getting kind of data in a tech layer connected into our service layer. So I don't think you're going to -- we're not going to sort of announce we're making toasters or rocket ships anytime soon. So I think we're going to sort of be steady the course.

And obviously, the investors are all focused about the near-term outlook, and we keep getting questions on why are you not seeing anything yet given what's happened in the macro. Yes, maybe just -- can you just tell us like what you're actually seeing in Q3 so far? Because your guidance actually implies quite a big deceleration in the second half, so have you seen that happening already?

But I don't think -- I mean, I think, again, I would -- the guidance, we talked a bit about it on the earnings call, right? I mean I think that the -- when you think about what '21 was and therefore, a comp that's at 15% and 12%, Q3, Q4, or that compounds over a couple year period, again, at, I think, 11% for Q3, that isn't a function of the broader macro. I think that's just -- those comps would lead you to understand that there was going to be some deceleration. What are we seeing in Q3? We're not seeing anything in Q3 that changes our commitment to the target that we put out for the year. Again, on the call, whatever it was, I don't know, 1.5 months ago, spoke to the fact that some clients were asking us to think about contingencies, that there was clearly an understanding on the part of some clients that they wanted to scenario plan for what they needed to do in the event of sort of a macro that degenerated. So I think that there's probably more of those kinds of conversations going on, and they're about how do I prioritize my KPIs. If I'm going to do that, what does that do to my mix in terms of media investment or different kinds of marketing activity. So I think that one of our operators said kind of slightly choppier waters, that's about what we're seeing. But that doesn't lead us to conclude that anything has changed for our outlook for the year.

And I'm just curious, you said there are more clients coming with contingency plans. Like are you seeing -- like what are the sectors or geographies, where you tend to see more of those sort of contingency plans? And what are these contingency plans actually about, like is it about cutting spending in Q4 into next year? Like where -- if you could maybe just share a bit more about...

Well, we've got so many clients, and we're in so many places that it's very -- I mean, it's difficult to say, hey, it's this not that. I think it is about just thinking through what would trade-offs be if there's a moment in time at which they choose to shift out of certain media, if they want to shift to certain kinds of activity that's focused on, like I said, some KPIs maybe that are a little bit less way up in the funnel or a little bit further out on the horizon. I think that Europe is definitely a place, where there's been more of that sort of uncertainty or concern. And then, a lot of it, it just gets very, very specific to a client's business and/or the degree to which they're connected to things that are disrupting the overall macro. If interest rates have a greater impact on your business, by definition, you're going to want to be thinking much more proactively about what happens if you get to a point where you're going to trim or you're going to change the focus.

And obviously, you've been through several recessions. In prior recessions, like when you came to the discussions around like contingency plans, like how long -- how much of a heads-up do they give you in terms of putting these actions into plan? It's like a month, 2 months or does it happen overnight in terms of when they actually come to actually...

Does 2020 qualify as a recession? I mean because that was really quick, right? Everybody was like, yikes, I got to do something, I got to do it now. But I don't think that's the norm. And then the last time was a long time ago. And I think what's different about what we had kind of '08, '09 is that there were far fewer levers clients could pull, and they were far -- the decisions were much more -- the tools you had at your disposal are much more basic and rudimentary. And so it's not a question of people saying, hey, let's have the discussions and then let's do something about it now. I think it's a question of people saying, let's have those discussions so that we can be clear on what we will do in the event of. And again, for clients, the point at which they conclude that something needs to happen is different based on a bunch of things.

Right. And I think on the Q2 call, you talked also about some weakness in like speculative areas, I think, project work. What are you seeing currently in terms of both areas?

I mean, it's odd because I'm not sure that -- there's a little disconnect. I think when we spoke to that, I think it was very specific to 2 agencies that happen to be very active in sort of digital innovation work and that had a lot of, lot of client activity in '21 in the crypto space. So I think that -- so that isn't something that I think I can sort of extrapolate to the rest of the portfolio. We haven't seen a drop off in project work. It would be a place along with digital media where you could see people say, oh, that's a relatively -- it's a lever that one can trip more quickly than not. But I think that we'll see in the fourth quarter, whether that's something marketers feel the need to do and back to maybe by the nature of the industry and my competitive environment or in a few markets, if the macroeconomic situation has gotten more challenging.

Right. And following up on this again, like if you look across your portfolio in different segments where you operate, like which segments you would call out as being most [ equal ], most defensive? And what's the typical contract length across your different segments, like which will give you, I think, maybe more visibility into next year?

Well -- and to the question you asked earlier about where we would have been the last time there was a recession that was not whatever 2020 was. So clearly the -- so the data business is -- would not have been and it wasn't something that was in the portfolio then. And those are meaningfully longer-term, those are multi-year clients -- contracts, excuse me. So first-party data management is one. I think that the way in which we've connected that into our media offering, where you've gotten large AOR relationships, again, is a place where nothing is immune if the world gets really, really sick. I guess one shouldn't use metaphors of that nature as we're still in pandemic. But -- so those 2, I think, would be more robust were we would go into kind of a really difficult macro period. I think our health care business is quite large. And again, the nature of what we do with clients there and the degree to which we bring know-how about their products, which is hard to replicate, and the degree in -- which the nature of what they're engaging with consumers about makes it much harder to say, you know what, I'm going to take 6 months off because I got to save a little money, but let's not talk about your diabetes or how we can help you with something that is actually pretty fundamental. So I think those are areas that we believe will hold up better. And then I mean length of contract varies widely, but those are all areas where you've got longer term, at the advertising agencies, the larger scale relationships with clients, which are AOR relationships are also longer-term, although they can be terminated in a 90- to 120-day period. And then, other parts of the business do a lot more project work.

All right. Very helpful. You've changed your segmental disclosure sort of recently, I mean, clearly, I guess, to also help like investors better understand also different parts of the business and dynamics. Could you maybe talk about like whether your internal organization or your go-to-market strategy have change -- reflect that change? Or what was the rationale behind that?

I mean, no, I think, as I said at the outset, I mean, our strategy and the way in which we've been developing the company to try to sort of move upstream with clients and be able to solve a broader range of -- but the -- that isn't changing. But the disclosure was, I think, just a function of the fact the business has changed a lot. The 3 segments don't represent how we run the business in the sense that when we deliver for clients, we always do it with the clients' needs first and foremost. So we'll pull from any number of places. But with -- having not had a change in our sector disclosure for a very long time and given how much the industry has changed and knowing that there are things like data and technology, which infuse more of the portfolio, where we can do different kinds of work with clients that is also more performance-based that has an IP component to it, we wanted to take a step in giving people a better sense of what's in the portfolio, more than how it comes together or how it works. And so in a sense, that meant, okay, you know that there's a sizable data asset, you know that media has been where we've made that happen, give you kind of range and bearing what that represents with some of the digital agencies. The second segment has the "traditional" agencies, which use a lot of what Acxiom does and how they are solving problems for clients, and then healthcare, which is quite sizable within that segment. You're never going to be able to capture a business that's this complicated and this decentralized with -- I mean, we can't do [ 12 ], we can't do [ 6 ]. And then I think there's a competitive disadvantage if we do [ 5, 6, 7 ]. But I think we wanted to be transparent about how the business is evolving and just give you more information to work with.

So how do you think about the organic growth rate in the longer-term for each of these segments?

There are puts and calls inside each segment. So I think I would -- if I were using it, I would say, it's interesting that there's scale in the first 2 segments. I think that's interesting. And then it's interesting that the segment that has the most data baked into it is more profitable, and that's a thing that one would want to see extend to more of the portfolio. But on the growth side, there's -- the small segment is doing well now in part because experiential and event got shut down in '20, and therefore, the comps are going to be modest for a period of time. So that kind of throws you off. And then what's in the other 2 is not -- I mean, they're analogous businesses, but the scale isn't analogous. And so I think that -- I like that they're all within a healthy range. I think that's another thing to keep an eye on.

Great. And I'm also curious like when you're talking about inflation, I'm sure, you're also seeing wage inflation, et cetera. Like how are you passing on to your customers? And is there any sort of inflation baked into sort of your organic growth guide? Or have you seen any benefit from that in H1?

Well, I mean, it's not a question we've had reason to ask for years, right? So I don't see inflation as there's not a correlation between inflation and our growth. There hasn't been. What we have is a pretty significant number of client contracts that do contemplate the ability to have a discussion with clients around that cost being passed along. So it's very, very early on in looking into what that will look like. I think it gives us some comfort that if there's a long-term period during which inflation is with us, there's the opportunity for us. But I don't think that I can say to you, it works this way, it doesn't work this way because it hasn't actually been something that is really called upon when you think about we've come out of a sort of long-term near 0 inflation period for years and years, right? But I mean it's there. But we're all beginning to see how those conversations evolve.

Right. I'm also curious to hear how you're thinking about your new business performance and do you see any major opportunities or risk into the rest of the year or next year. And also, when you think about the last like few years, it feels like every 3 years, you have a big pickup in reviews or media palooza, whatever you want to call it, and we haven't seen actually much activity in that space. Is that because you're more proactive at trying to pitch to your clients so that they don't go into that review process? Or do you think there could be a pickup in review activity over the next 12 months to 18 months?

Hard to say. I guess I can answer for us, and then I can speculate for the industry. But when you think about the last couple of years for us, I think we've been clear that a lot of our growth is coming with existing clients and by taking this broader range of capabilities or solutions to those clients, and we're very comfortable with the fact that, that's a way we grow. And then pretty sizable shifts in the healthcare and pharma space tend to happen pretty quietly again, also just, I think, a function of the cultures of those clients. So from where we sit, we're net new business positive, I think, the last 2, 3-plus years this year included. It's an important component of our growth. And I think it's important to us because like with Nike or Prudential, a couple of recent pretty sizable wins, you need to know that your agencies, that your companies are competitive because the competitive landscape is always evolving. I haven't had us do a ton of analysis. I mean my gut says that it's a modestly smaller part of our overall growth than it would have been 5 years ago. I mean, the palooza thing, everybody thought there would be a pretty dramatic uptick kind of coming out of the pandemic, that pandemic was just going to dissuade clients from going through that level of disruption, while everybody was -- I don't think we've seen a ton of pickup, so sort of TBD in terms of what's out there. We know 1 or 2 things that are kind of about to come on stream. I think you tend to see some where clients have been with a partner for a meaningful enough period of time that it almost becomes sort of a hygiene thing. But it does seem like at a macro level across the industry, it's not like super [ busy ].

Right. Very interesting. Maybe we can talk about margins. So you've raised your organic growth guidance a couple of times this year, but you decided not to change your margin guidance. So could you maybe go through like the rationale behind it? Is it that you're seeing greater cost pressure, is it conservatism, reinvestment?

It's funny. In one of our earlier sessions, somebody referred to this for us on a margin basis, as a digestion year. I hadn't eaten at the time. So our trajectory coming from where we were some time ago, but even 3, 4 years ago, you've seen a very significant increase in margin, which we see as sustainable, and we think we can actually build on independent of whatever hell breaks loose if there is a recession. But I do think that it's a year in which we were basically kind of consolidating 3 or 4 years of growth. I think that there are just tons of ins and outs if you think about how volatile things have been during pandemic, where everything locks down in '20, everything opens up and then some in '21, you've got some wage inflation, which we feel is very manageable. But these -- all these puts and takes on the costs that are very anomalous. So I think for us, it was consolidate gains, acknowledge that there's some ins and outs and then do some, as you said, investment, so that we can kind of keep building in the areas, where we've made a lot of progress, and where we're well positioned around more precise, more accountable, more tech dependent or digital competencies. So that's -- I think for us, that's what explains that.

Right.

But in the out years, we see -- we've been really clear, Ellen is here somewhere, so our CFO and I are, there she is, that we see with -- over time, with revenue growth, we can grow margins. And then on top of that, with new services that are more data-enabled and precise and are kind of higher value services, we believe we can grow margins. So this is just to kind of catch your breath here.

Do you see a ceiling for your margins over time or like for the type of value-added services, more data embedded like what do you think is a sustainable rate of margin you're targeting over time?

Funny because 2 things come to mind. On another one of our meetings today, somebody said they're like, so do margins grow forever. It's like, why does anything go on forever? And then I'm thinking back to when Sorrell used to say a point a year in perpetuity, which was like probably going to be killed when he got back to these agencies. But from where we sit, in a world in which we can do better than GDP growth and GDP goes back to something kind of normal, and then knowing that, as I said, we have one segment that's meaningfully more profitable than the others. And what we're trying to do is take more of that kind of ways of working tools to the rest of the portfolio, and the rest of the portfolio is still a pretty sizable chunk of our overall revenue. I mean, we definitely see margin expansion as a multiyear opportunity. I'm not going to go and then it caps out at such and such in year 6, 7 or 8. But yes, we think that we can compound that.

Right. And speaking more about the near term, like are you already starting to take any sort of precautionary measures in terms of cost just to anticipate a potential slowdown? Or do you still think there's a lot of growth opportunity, you wouldn't want to do that because that would potentially impediment your future growth? And what are the levers you have in the business?

We never hire ahead of revenue. I mean I think by definition, there's something to be said for that. I think you saw that we were clear that we were sort of getting too caught up in terms of finding the talent that we needed given last year's very explosive growth. So -- and then I think the last piece is, I think that the skill sets that you're bringing in and the talent that you're bringing in now aren't directly duplicative to talent that you have because you've got a portfolio that's got assets that are disparate in terms of are they much more developed digitally, much kind of more able to work in ways that are kind of sort of at the leading edge. So we haven't felt the need to kind of go out and kind of proactively, there's lots of levers that help us to the point of last real recession, kind of '08 or '09, are kind of our key cost drivers, temp labor incentives went down more in that pretty precipitous recession. They went down further and in line with the revenue dip, right? And so there's some built into the model that will help us. And then we look hard at how we can kind of do sort of to ourselves what we're helping clients with, so whether that's sort of business transformation, our own processes and kind of what can we automate sort of near shore, some kind of far shore. So we see lots of ways in which if the environment were to start showing up, we could clearly position ourselves too. Again, I mean, look, it's dramatic enough macro, I don't know that anybody is entirely able to get out of harm's way, but.

Right. We might have time for a bit of a question, but before we turn on to the audience, just curious to hear your thoughts on what's happening in the broader media landscape, obviously, there's increased complexity fragmentation, lot of people are talking about the increased inventory you're likely to get in the AVOD space, especially with Netflix and Disney Plus. So do you think the market will be able to absorb of that additional inventory? What do you think is going to happen to like prices? What are the major share shifts like you would still expect to happen over the next sort of 12 months, 12 months to 18 months?

I mean, it's always, I think, like any marketplace, it's always kind of supply and demand driven, right? And so I mean, what's slightly odd about it is that marketers are called upon to commit long-term to linear TV, which may or may not have some of the qualities. I mean, it clearly has -- it clearly has reach, which is important. As there's more digital TV inventory, it will be interesting to see what that does to maybe finally shake that model out. One of the questions that came up on our last session had to do with does radio, does outdoor, as it gets more truly digital like with kind of more data to it, better addressability, does that get more share commensurate with where and how people are spending time with it. So yes, I think that the media ecosystem is going to keep being transformed. I think that the changes that we're seeing in digital proper are partly Apple hiving off some of what's going on, partly TikTok making such dramatic inroads at the expense of some of the kind of established players. But it's going to get, I think -- and then as you said, the streamers are getting some. But measurement is going to be super important because like retail media are going to be a big part of the story, too. And then if you're a client and you're sorting out where and how do I prioritize or invest when I've now got any number of ways that allow me to be precise and to address, but maybe not to assess the impact of them. I think we'll all benefit, as there's kind of more clarity around a couple or 3 universal kind of currencies that sort of give us some understanding of value. I mean our investment people right now would tell you that even with the changes that we're seeing at this point, when they then do kind of relative like the ROI across these various sort of formats, channels, it isn't changing enough yet that they're advocating for some new strategies that's way out of left field. You've got clients who are still spending 40% in digital or CPG clients who should be spending 60%. That's still the case. You've got other clients, who are -- who've indexed well into digital channels going back a couple of years by the nature of their business models, they're going to stay where they are. But yes, I mean, I think everybody is looking forward to the time when we can be sort of -- where the whole thing can be saner.

Any question in the audience? Actually, there's a mic which will come over to you. Is there a mic? Yes. Awesome.

Yes. I can be loud.

No, we're streaming so...

Great. My question is around sort of the continued shift to the cookieless world. We've seen Apple update their privacy settings. Google has decided to push this out to '24 now. Just thoughts on how this impacts your clients, impacts the industry, just an overview of what you're seeing or how you guys are preparing for this if Google eventually flips the switch and goes that way.

Well, I mean, I think that we thought about this some time ago, which is obviously why we ended up kind of breaking the mold in terms of we've built kind of most of the capabilities in-house for a long time. And Acxiom was a departure for us precisely because we thought that without the scale that that provides when it comes to sort of first-party data management and the handling of PII, we were going to be at a disadvantage. So it's interesting because people often say it's about "kind of owning data". And I actually think it's about knowing how to do things with first-party data, right? So what is going to dramatically change. I mean lots and lots of conversations with our clients go to how do I take control over my own data, how do I build a proprietary ID graph and how do I show up in such a way as to kind of retain or take some measure of control over my destiny kind of in this world as it's changing? So I think lots of people are kind of focused on the right questions. And you're going to -- you're going to have kind of to live in a bunch of different realities, right? You're going to have to be able to work with and get the benefit of what massive platform wall gardens gets you as a marketer, you're going to have to be present in and able to play in the open web and maybe find some like-minded clients with whom you can sort of do data exchange, so that you can actually sort of plus up the value of your own data, so that you can be successful there, you're going to have to sort of figure out how you incorporate retail media into the mix. So I think, broadly speaking, the pivot to whatever that world looks like, it's already pretty well underway. I mean we've been working with clients on those questions for a couple of years now.

It sounds like [indiscernible] that grows with [indiscernible] how do you solve their problems.

It has been, and we think it will continue to be. Yes.

And actually, another question over there.

When you think about your data capabilities over the next 5 years, which parts of it do you feel most like the competitors are going to catch up? And which bits do you think you just can't see a way in which they're going to be able to catch up?

Interesting. I'm just -- there's a lot to -- I mean, a, define competitors in the sense that if it's just the sort of 5 holding companies, you already have sort of seen a degree to which 3 have, 2 don't an asset -- a data asset of a certain kind. As the shift that we're talking about takes place and it goes from just being about advertising technology to being about other platforms and marketing technology, I think some people will all of a sudden come into the frame as potential competitors. That will change my answer. And then it gets really, really specific around services and solutions and kind of use cases, whether that's in the media space, whether that's how it gets incorporated into how we do kind of audience -- not audience segmentation, but understanding audiences and have that inform the creative work that we do or bake it into when we've got experience on invent businesses, where you're interacting with people, you're activating in the real world, a huge opportunity to take data on board in interesting ways. So it's hard for me to kind of tell you that these 3 ways, but not these other ways. I think what it begins to do is you need to constantly go to what's 2.0, what's 3.0 of this combination of service and tech, right? So putting together our healthcare assets, given that we've built really strong ones over many years is a 2.0 of something, where we're ahead, but we want to stay ahead. What will that look like around what we do with data and media. Our competitors have different geographic strengths. They have different -- in the case, even of the ones that have a data asset, they have different mix across all the -- all the capabilities that we bring to clients. So I mean, that's like a -- it's a 2-day answer with a lot of thought and probably not one that doesn't give away competitive advantage, if I put it out into the world.

Unfortunately, we're running out of time. So thank you very much again, Philippe, for being with us. It was fantastic. Thank you.

Thank you.