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

Okay. Good morning, everybody. I'm Ben Swinburne, Morgan Stanley's U.S. Media Analyst. And we are here with Ellen Johnson, the CFO of Interpublic Group. IPG is one of the world's largest advertising and marketing services companies, and Ellen has been with IPG since 2000. Ellen, good to see you, and thanks for coming to Barcelona.

Thank you for having us.

Absolutely. So as you know, there's a lot going on in the world, particularly from a macro point of view. Maybe before we attempt to unpack the global economic outlook, what are your priorities for the company as you round into 2023? And how are you thinking about managing through all the sort of cross currents right now in the macro environment?

Sure. So as you mentioned, I've been with IPG for a long period of time. And the strategic priorities, for a large part, remain the same. What we've been trying to do is to really embed -- use technology and embed data into everything we've done. And we had that belief many years ago, not the silo this, but to really take the digital and to embed it into all of our offerings, so we can make our offerings continuously smarter and move up the value chain and to help our clients solve business issues. We've also always believed in agency brands. We find that that's a great way to attract the best talent in the industry because people want to work for a brand and a culture. We also have a unique way of pulling it together in what we call open architecture, where we make it very simple for our clients, but we bring together the best of IPG in a seamless way to offer our clients the most integrated offerings. And then our balance sheet and financial flexibility have always been important, as is capital return and those things remain strong and remain the same. As far as looking ahead at 2023 and the macro uncertainties, we're coming in from a place of strength. Look at the last 9 months, we've grown at 9%. I look at our 3-year stack, we've grown at almost 16%. So starting from a very strong place of momentum and strength. The data shows that for a company to continue to spend through a downturn, they wind up being stronger and better and that you really need to keep your share of voice amongst your market share. And clients seem to understand that, but as we mentioned on our last earnings call, there is a lot of uncertainty out there, and we are having certain contingency planning conversations with our clients. What they're really looking to us as their trusted adviser to say, if we need to shift spending, where should we shift it? Or if we need to trade out of capabilities, which ones do you recommend? But we know that the limited visibility is a short-term phenomenon and that we really believe and our clients understand the importance of what we do. So we're extremely bullish, once we get past those short-term.

And when clients, like Morgan Stanley, ask for contingency planning advice, I'm sure does it vary by clients sort of what the answer to that question is or are there areas of spending that usually we will address first versus others?

We have 5000 clients. The conversations are quite varied. It really depends upon what your goals are and what you're trying to accomplish, but the role of a trusted adviser is we can help them navigate those types of decisions.

Are you guys seeing different trends in different regions around the world or are there different categories of advertisers that you're seeing either more or less concerned right now?

So if you look at our growth between the U.S. and international, it's been pretty well balanced. We're U.S. heavy, which we think is a strength, but if you look regionally, we've done very well in Lat Am and what we call other, which is Canada, the Middle East and Africa. We've also done extremely well in Europe. We are watching that given the macroeconomic and the proximity Europe is, but it's been a strong point for us as well. We've grown solidly in Asia and the U.K., both have been a little bit more mixed. China, which is small for us, but it was a bit of a drag on Asia. And the U.K., while we've had certain agencies which you've done phenomenally. We've had others whether spending for COVID, but is now reduced. But overall, very strong growth.

Okay. One of the questions I get a lot, and I would love to hear from you on is around the difference between the strong growth we're seeing from the Interpublics of the world and the less robust growth from the big digital media players that, obviously, investors who invest in the public markets, focus on like Meta, Google, et cetera. What's your answer to sort of your 9% year-to-date versus numbers lower than that from really the dominant digital platforms?

So that is a business that's adjacent to ours, but not ours. And I think there's more that's going on there just macroeconomic factors. I would say that there's a bit of share shift. There's more fragmentation coming on with more players and more choices, whether it's the advent of retail media coming, connected TV. And so I think there is share strip, there's further fragmentation. And then also their clients tend to be more small and midsized enterprises where we skew to larger multinational clients.

Yes. Some are concerned that it's a timing issue that those businesses, you can pull back from spending on those platforms relatively easily, if you're an advertiser where is it an agency business or even like a linear television business has longer duration contracts. Are you guys worried that we're going to see sort of a rolling slowdown that you're 6 to 12 months behind those platforms or do you really see the point you just made sort of fully explaining the variance?

I'd say a couple of things. I mean, one, I don't think we're necessarily the most leading indicator. Our business is so much more diverse. I mean if you look at what some of our businesses are. We have Acxiom, which is a data management business, which is 2/3 made up of very long-term client contracts. Our largest sector is Healthcare. That business should be more resilient, when you think about the sophistication that's required and the products that they're marketing are so critical, and they have such big R&D dollars at stake. We do everything from digital transformation to help our clients develop e-commerce strategies. So we have a much more diverse business, and the business is continuing to evolve.

Yes. That makes sense. Sort of sticking with the digital media theme, there's been massive changes around privacy. And we haven't even seen yet the impact of the deprecation of cookies from Google yet, they've sort of delayed that, but it's obviously coming. What does that mean for your clients? And I'm sure you're having a conversation -- your media team is having conversations with them all the time about navigating that. What are your -- what's the advice you give? And how is it impacting your business, if at all?

So it's a huge opportunity for our business and what it's going to make even more important than ever before is having your own first-party data and being able to develop your own ID graph. So you know who your clients are. everything you need to know about them, where they are in the customer journey and what are the best places to find them. And that is going to become -- the marketplace is going to get more and more fragmented, and it's going to be harder to go across different platforms and agencies. So people are going to need trusted advisers who can help them with all of those types of services. And that's where we come in.

Are there specific areas of product development or investments that you've made to try to really take advantage of this opportunity? I'm thinking of some of the initiatives like Kinesso and Matterkind, do those fit into this narrative?

Absolutely. I mean, first of all, it was 1 of the things we foresaw when we did the Acxiom acquisition. I mean we knew Acxiom very well. They were a long-term partner of ours. We're building our own data stack. But what we really loved about them was that their experience in managing first-party data and the credibility that they had in that space. So that was an investment we made with this foresight. And then we created Kinesso, which as we mentioned, is our technology layer, and we use it not only to democratize the data across all of IPG and make all of our offerings that much smarter, but we've developed technology that we can license to our products. And then Matterkind is our addressable media solution. And is the next generation of what programmatic was, and we use it to access and to optimize media across all addressable channels. And then we have products like Cascade, where if you're going to find clients in a digital world, it's a much more efficient way to do it to get a higher match rates. So we are definitely using our data and our technology to enhance our product development.

That makes sense. How about on the M&A front, are there acquisitions that you're looking for in this space? Is that an area you expect to be active?

So we have lots of financial flexibility and a strong balance sheet, which is great. While we don't see any large gaps in our portfolio, which would cause us to do another Acxiom-like transaction, we have the ability to be opportunistic if we think it can accelerate our growth. We just closed an acquisition on October 1, RafterOne and we've required 500 people with expertise and integration into Salesforce. And martech integration, we were very strong in Adobe and some of the other platforms, but that's a critical component of an e-commerce offering. And so we thought that, that was going to be extremely important.

Yes. Yes, it was interesting when you guys announced that, I don't think the market, investor community appreciates how much you guys and sort of the industry have gotten into really sort of software integration. Is there any way you can help us think about sort of the size of that business at IPG or how much of a driver of growth it might be?

So we think it's an extremely part of the commerce offering. And commerce is very complicated, which we love because it allows us to sell many of our different services and bring forth many of the different products and services that IPG can offer. But when you think about a commerce offering, you need so many different types of skill sets. You need the data to really understand who that customer is. You need that identity graph. You need to help your clients make sure that they have the martech capabilities to accumulate that data and to develop loyalty programs. So having integration capabilities in the different martech stack is important. Then you need to help them build out their sites. What's the right content to put on the site? And how do you manage that contract depending upon who's coming in, do you want to recognize your customer when they come into the site and modify the images and the message as they say. But then you also have to understand things like payments and inventory management because you don't want to drive people to your site if you can't handle the purchase. And then lastly, there's the algorithms. How do you get to be in the top of the search funnel? So what that means for IPG is that we have all these different capabilities, and we can bring them together as IPG e-commerce. And if you look at commerce as a percent of -- e-commerce as a percentage of overall commerce, it's still a relatively small percentage. So we see that as a growing opportunity.

How do you think about IPG Commerce's competitive position? I think investors have been grappling with sort of the competitive threats of all the consultants -- consultancies to the agencies for years. And now, in many ways, it feels like your guys are going on offense a little bit, maybe a lot in areas that they've more been known for. Is this -- would you describe yourself as sort of one of the main competitors in e-commerce services to your clients and like you're going after a lot of the wallet that these consulting firms have been earning?

So we don't run into the consultants that often. When we run into them, it's purely in the systems integration vertical, but what I described is so much broader. And that's what's really required for e-commerce. And that's one of the things that the pandemic actually sped up is the acceleration of direct-to-consumer strategies and the desire for people to have e-commerce.

Got it. So let's tie in media to this. Omar, who was chatting with the Publicist team yesterday, I guess it was -- we talked a lot about retail media. What are the exciting things happening in media that you guys are working on and you see driving that business as you look ahead? And how is IPG positioned around the media business?

So we have our media business that's done extremely well. It's growing, it has been growing, it is accretive. And we're very excited. We think that the fragmentation that's going on in the media, it is a good thing. When we think retail media is a huge opportunity and so is connected TV and all the other changes that are happening, like we mentioned, privacy. And so for us, who's a trusted, agnostic adviser to our clients, we think that there's a bigger opportunity than ever before to help our clients navigate that space.

How does creative fit in? Because that seems like one area that's maybe been a little bit of a drag on growth, at least for the industry over the last couple of years?

Creative is important. And it's what creates that connection, that engagement and whether you're working on brand purpose or values. It's the magic. It's the secret sauce. What you can do, which is exciting, is embed that with data now and make it even smarter. So you can do things with behavioral science, so you really know what's the best imagery to reach your target audience. And how do I change the messaging? So we think creative is still extremely important.

Got it. Okay. Rounding into some other disciplines, you mentioned health care, which I think was probably an area that really helped during the pandemic from a business point of view. What's the position for IPG Healthcare at this point? How are you feeling about that business from a growth point of view?

So we view it as a capability. It's about 27% to 28% of our revenues, so we're extremely strong. We put together IPG Health about a year ago, which takes 2 very, very strong brands, both FCB and McCann, who had complementary offerings in complementary geographies. It is also a capability that we think we're good at and we're large at because it's sophisticated. It requires science, requires data, it requires technology. The products that their marketing are much more complicated than many others. And we think that skews to our strength. And we think as other categories become more sophisticated, there will be growth opportunities as well for us.

Does that business tend to be less cyclical as we think about all the macro stuff that's on everyone's mind?

We believe it should be. I mean, those products still need to be marketed. There's still a huge need for them. And we span across pharmaceuticals, there's payers in the industry, there's consumers and there's a technology component that's changing there, too, the way people are consuming medicine and advice. So we're very happy about our overweight there.

Okay. Maybe going from a massive business like Healthcare to a couple of other disciplines that I wanted to ask you about. One is on the experiential side. You guys have a very strong agency there. I think Momentum was the experiential agency of the year in '22. You just made a management change at that -- on that side as well. Is that a growing part of advertiser budget? Because it seems from the outside like experiential advertising and marketing is becoming a bigger and bigger part of what markets you're spending money on?

So it's a part of our business that is very exciting, and it's more than just Momentum...

Maybe explain a little bit about what you guys do there?

Sure. So we have momentum, which does a lot of B2C, experiential. They have Jack Morton, which leans more to B2B. We also have Octagon, which does sports marketing and sponsorship. And there's a huge opportunity there to connect it more to data and to technology because when you're at an event, you're very in a privacy-compliant way apt to give a lot of information and that information is valuable. And then with technology, you can extend an event beyond the seats in the stadium. You can premarket it. You can post market it. You can connect it with e-commerce and close the loop. So, we see that while at the moment, a relatively small part of our business, a very big opportunity, and there's pent-up demand for all of those types of services.

Yes. So even though it may seem fairly unsophisticated to be sponsoring a football stadium or something, you actually think there's a lot of data connectivity there for advertisers driving the spend?

There's a lot of data connectivity and there's the opportunity to make it a lot longer than 1 football game. And to create unique experiences. So if you know who your customer is, you can make the experience very unique for them. and then they can connect it to a brand that they're inclined to buy and connect it to the commerce aspect.

Got it. Let me ask you 1 more, and then I will give the audience an opportunity if they want to ask some questions as well before we get into some more boring stuff like cost and margins and balance sheet. So PR is another area that has obviously had some volatility during the pandemic. What's your perspective on IPG's PR offering and the growth outlook for that business?

So we have great brands in that business as well. And communication is still very important. It could be very C-suite level communication. It could be crisis communication, it could be corporate communication. But there's probably a need for communication more than ever before. So it's a business that we're very happy we have.

Okay. Any questions for Ellen for the audience? You could also wait for a microphone. Go ahead. You can go ahead and we'll repeat it on the mic.

[indiscernible] the vast majority of this business is driven by Amazon. So do you work for Amazon? And what do you see in next 3, 5 years on your -- on figures [indiscernible]

I can repeat it for the webcast. This question is about Retail Media, the outlook. It's a business I think you said, is dominated by Amazon. So what's sort of your offering there? And how big do you think that business can be for IPG or for your clients?

So for us, we're agnostic to media, so it's another place to help clients either market their products or to help them develop their e-commerce solutions. And we think it's a big opportunity because retail media is actually closer to the point of purchase. And there's going to be a lot more attribution there and ways to close the loop. So we think it's an exciting alternative. And for clients, it's -- you can be using your own versus paid media as well. So we think we're very bullish on it and think that there's a lot of opportunity, and it will be a growing opportunity.

Do you think that the retail media business is going to be largely sort of the Amazons, Walmarts of the world or are there opportunities for this to be a much more fragmented space where you can leverage real estate across -- or virtual real estate across lots of e-commerce and retailers?

I think it's going to be larger than just the 2. And I think that there's net new money coming into it because you think about all the money that's spent within bricks and mortar, and a lot of that money can go into the retail e-commerce space. So I think that net new and good opportunity.

Good. You raised your hand? Okay. Tricked me. Okay, we'll just keep going then. If we have questions, go ahead and raise your hand. Normally, we don't ask about currency at conferences sort of a pretty nuanced story, but this has been an unprecedented rise in the dollar. From a CFO point of view, does this change at all how you guys manage the business? And are there margin implications we should be thinking about for the company as a result?

So for IPG, it's mostly translation versus transaction. Our revenue and expenses are very evenly matched. And even in the most -- as you point out volatile times, I mean 10 basis point margin swing, but it's small.

Okay. Got it. And COVID has been probably the ultimate in cost management experience. You might never want to go through again for a variety of reasons. But you guys, I think, are guiding to 16.6% margins this year. What -- walk us through sort of the structural changes to the cost base, Ellen, from the pre-COVID IPG to today as we round into '23 and we increasingly leave the pandemic behind?

So we -- during the pandemic in 2020, we did a restructuring where we looked at a few different -- and we really were very clear that there were structural changes. So whether it was layers of management becoming more agile, whether it was global regional and local, we looked very heavily at that. We looked at nearshore and offshoring, which we continue to look at because we think that there's opportunities there. And we looked at our real estate footprint and took out about 15% of our real estate footprint which, again, we continue to look at. So when I think about those things, we're definitely seeing the cost benefits from them. but we're also not complacent. I mean, we have big efforts going on business transformation, where we're looking at how do we use technology and data to make what we do more efficient? How do we take joyless tasks out of what we do? And, as I mentioned, I think there is opportunity still on the real estate side.

Okay. So as we go into next year, obviously, the macro is out of your control, but we used to think about -- or we typically think about incremental margins in the agency world of 20% to 30%. And so if you're growing your revenues, margins should expand. That's still the right way to think about the model over the longer term?

So we definitely have the algorithm down of converting growth to profitability. But there's other things that should help our margin going forward. And that's the ability to diversify our revenue stream. The more things become measurable, the more we can get paid for performance. The more we can productize our services as opposed to just selling them on FTE and overhead. We have technology that we can license. And then there's, as I mentioned, I think, further efficiencies that we can have on the cost side.

Okay. How is the return to work going for you guys? You mentioned real estate savings. I know a lot of companies have been working on the right balance. Are you sort of in an optimal place from a back-to-the-office point of view? And does that impact your real estate plans in any way?

So we are a company of many companies. And what makes us unique is that we really let our agency brands take the lead on these types of decisions. So there is a divergence across IPG. We have some people that are back almost all the time at full capacity. We've others which are in more hybrid models and -- but it's working. I do think that the office there is an important place for it. We're a mentorship society. We have a collaboration and ideation and to really drive innovation, I think you need to spend some time in the office with other people. So it is -- I think it's an evolution. I don't know that we're optimal. I think learnings will continue, and we'll find that right balance.

But do you think there's additional real estate opportunities even with that return to work for IPG?

I do. And we're very efficient at IPG with real estate. It's essentially managed, where we can we tend to stack multiple agencies in 1 building, which gives the ability to flex up and flex down based on requirements -- and I think that we will structure the space in such a way that it really lends to collaboration as opposed to someone coming into the office to sit on their computer every day. And so those things, I think, allow you to look at how do you use your square footage and how much do you need?

Ellen, I want to come back. You mentioned 2 things on the margin and you're answering my question on margins. I wanted to see if you could unpack a little more. You mentioned productizing and data licensing. From a revenue model point of you maybe explain to us what that means and why that could be a structural tailwind to margins?

So a large part of our business is traditionally sold on FTE and overhead rates. What we really should be doing, especially as since what we do is so much more measurable and we can demonstrate return on investment, we should be talking about value proposition. And so we are, where possible, migrating our services and being charged a fee for what we do versus a rate card. And if you can demonstrate value to your clients, which we can, you're a lot better off to get paid that way. And so we have an effort and a focus on trying to migrate more of our business from that perspective. There's also the ability to get paid on performance, which we love and is great for our clients because, again, if we can demonstrate that we can help our clients deliver return on investment and move their business results, the more apt it's a win-win for each of us, and we try to do that where to where possible.

Got it. So does that mean sort of migrating from mostly a cost-plus model to something that's more either recurring or, yes, I guess, recurring and performance-based?

Recurring, performance base and when you buy 1 product, it will lead you to the next. I mean consultants are very good in that space. And so I think it's an opportunity for us, which we're focused on to get better.

What's going on with sort of the costs we typically associate with pitch activity, whether it's T&E or some of the temp labor, is that stuff starting to pick up now that we're hopefully -- and we're back in Barcelona for the first time in 3 years that...

It's great to be back.

That's starting to impact the cost base a little bit more than it used to?

I think those are good costs to have, to be honest. I think T&E, to a certain extent, shows business activity. It shows we're in front of clients, which we love to be. It shows we're pitching. We're getting together. We're training our people. We're creating that culture that keeps us I don't think we're ever going to get back to the 2019 levels fully, where I personally would go to London for the day or even Hong Kong on occasion for a very short period of trip. So I think we'll be smarter. I think we also have sustainability goals we're all trying to drive towards. So all those things are considerations.

Okay. What about -- there's a lot of news around hiring, hiring freezes and even certainly in the technology and media space layoffs. Where is IPG right now on the hiring front? Are you guys still adding? I know you've had a great year this year, but you've also mentioned the contingency planning. What's the feeling from your point of view about headcount?

So we're always extremely disciplined on how we manage our costs. We give our agencies -- we have a large base of -- our incentive comp is all performance-based. And that becomes a lever both up and down depending upon performance. But what that does is it spreads the targets and creates alignment throughout our organization, so all of our agencies are incentivized not only to manage growth, but to manage the margin, and that creates a cost discipline throughout our culture. And so while we're always doing that, we hire behind revenue growth, it usually lags a few percentage points, and we manage accordingly.

Okay. So no top-down orders from the...

No top-down orders.

Got it. Okay. Let's check and see if we have any more questions from the audience. Yes, we've got 2. I should again the mic runners the heads up. You go ahead. Yes.

[indiscernible]

Sure. So...

I'll just repeat the question, so those who listen to the webcast will hear. Question was about churn of your employee base kind of competition for talent, where you are on that? So I got that roughly right.

So I'll start with churn and then I'll turn to competition for talent. So our industry in general has a high degree of attrition or a higher degree. We saw that go up even more post the pandemic when I think a lot of people were rethinking their life. We're seeing that anyway for sure. And from a labor market perspective, we really are able to attract and retain really, really amazing talent, and that has not been a challenge for us. And as far as inflationary pressures, which were a natural fell on cost question from that -- we've seen a bit, but it's been manageable and nothing that would allow us to take away from the margin trajectory that we're on. I would say those are industry averages and it was higher than that during post pandemic and now it's coming back down to more normalized levels.

So the great resignation is behind us or staying behind us, is that what you're saying?

I think it's fading beyond that.

Yes. It's interesting because we usually think about the agencies competing for talent with the big tech companies and we've obviously seen what's happened to those employee bases lately, so...

Yes, I'd say the direct competition with the tech companies for talent is overstated. We offer a very different type of environment. And I think that's the draw-off. While we have very sophisticated people and the things that we do require a high degree of data and science, we also offer a very different type of environment.

Yes.

You're referring to some contingency planning conversations happening with clients. I'm curious do you think there's going to be any delayed kind of budgeting as advertisers think about '23 spends? Obviously, it's still early, and I'm sure those conversations are ongoing. But just any thoughts on '23 budgets? And then the second question, you guys had vocally, I think, told some of your clients to pause spend on Twitter. Kind of curious if you could elaborate on that? And do you think there are other digital platforms that are going to see those dollars maybe move over, whether it's a TikTok or is it kind of just going into different funnels, how you think about those 2 items?

Sure. So as far as -- you want to repeat...

No, he got a microphone...

Okay. Fine. As far as '23, we have a very detailed budgeting process of IPG, where we meet with each 1 of our agencies and really go through client pipelines and one by one. That process has not been done yet. It will begin in the next few weeks and go until mid-January. So I'm not going to touch on '23 at this point. As far as the pause on Twitter, I mean, at IPG, we have a Chief Brand Safety Officer. And we also have media responsibilities, principles and index that we publish. So we really believe it's a value add for our clients to comment on safe places to put your media or not. And with Twitter, we did ask -- we did advise our clients to pause for now.

Okay. Maybe just lastly for me then on capital allocation. You guys have been back in the market buying your stock. You have a dividend. I believe has attracted a lot of dividend investors over the years to the business? And then looking at your balance sheet, I mean, you have really very little maturities for quite a while. I know it's a nice environment to have a conservative capital structure right now, but what's your sort of willingness or interest to sort of ramp up the return of capital, just given how well the business is performing and how much your leverage has come down since the Acxiom deal?

So to go back to your first question on consistent strategies. We've believed in a balanced return of capital for many, many years. We do have a very strong balance sheet. We do have a really nice maturity profile. We have no debt coming due, really. We have $250,000 in 2024 and nothing thereafter till 2028. So lots of financial flexibility, and we believe in balance as far as capital returns. We've grown our dividend every year since 2011. And we believe in share repurchases. We've been very disciplined about it. We paused it briefly whilst we're paying down the Acxiom debt, but just as we said we were going to do, we got back into the market thereafter. So we -- we see a lot of value in our shares. .

Okay. All right. Well if there's no other questions, going once, going twice. Ellen, thank you so much for coming.

Thank you.

Thanks, everybody.