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

Good day, everyone, and welcome back to the UBS TMT Conference. This is now the fifth year that we've been running on Wall Street -- longest running on Wall Street. Thank you very much, Philippe, for coming. It's nice to actually host you in person. For the last couple of years, it's been virtual. So I appreciate it. Thank you very much, indeed. Just for some housekeeping. I've got an iPad up here. If there's any sort of questions out there from the floor, please send through, and I'll be able to pick them up on here.

But now maybe just start off quickly, Philippe. Just I think talking to investors, it's been an interesting year for all the advertisers and particularly the agencies, and I think if we go back to the start of the year, no one would have thought going into the third quarter that for the first time million record, that the advertising agency companies have actually outperformed their digital counterpart, and so it's been a surprisingly strong performance against sort of a weaker macro backdrop. So maybe as a starting point, maybe you can just reflect on what's happened through the start of the year in terms of reasons for that outperformance and what's been driving the performance for yourselves.

That's a lot of questions in one because it's sort of predicated on having a point of view about what's happening to the platforms. And in some of our conversations over the course of the day today, we have been talking a bit about the dynamics of that performance, just sort of say how are we as an industry or is it our sector performing as opposed to kind of how we are publicly performing, which is, in our case, I think a continuation of 4 or 5-year cycle or a journey that reflects a lot of choices that we made. So I would say that the -- our performance and possibly sector performance comes down to decisions and choices that we make that can be valuable and resource clients in sorting for and navigating this very, very complex environment. It's been sort of taking hold. As technology impacted media, has that been played out into kind of consumer behavior? And then as data began to play a more prominent role in informing marketer decisions about where and how to invest money and where and how to get consumers in ways that could have direct business outcomes. So for us, that's part of it. Now where we are on the cycle vis-a-vis what next year brings [indiscernible] us a very strong '21. But the macro level has led to a lot of uncertainty this year, whether that again is just a factor of how the cycle is played out clearly what's taking place geopolitically. But I think it demonstrates that there are set of assets in our portfolio that hadn't been there a decade ago, even 7 years ago, and that they're useful to clients in a world that's complicated and where they're trying to get more clarity around the benefit that they get from spending the market [indiscernible].

I mean if you look at the growth rates as they've come through the year, how much has actually inflationary had a positive tailwind on your numbers? I know that's very minor.

I mean I think for us -- we've never -- I don't know how many of us have lived through inflation at the rate that we're seeing now, but what -- the fact that our contracts do have inflation baked into them in the sense that it creates a circumstance where we can engage with a client and talk about whether that can be something that we will pass through, and it's essentially about getting the best talent to help them solve these kinds of issues. And if you're looking for your partner to have strong data science capabilities or strong digital media capabilities or in the health care space for us, there's the understanding that everybody benefits if we're able to either keep that talent or recruit that talent, but that's not a given. It's a conversation that you have with the client on a case-by-case basis, so it's really de minimis in our numbers today. And it's becoming a conversation that we have with clients at the appropriate time, either as the contract comes up or as we are planning for a new year.

Did that become a positive tailwind as we go into next year then? How should we think about that?

It depends on how successful we are in those conversations and where things sit with any one of those clients. I mean I think that the nature of the model that we run, we talk a lot about wanting to diversify the revenue streams, and yet the underlying nature of an FCB model with a lot of flex built into it is a benefit as we go into potentially a challenging time. And again, I'm sorry I'm not looking at [indiscernible] in this side of the room, but it's just kind of like a clean light. But if you think about how we run our business, we're really, really measured and thoughtful around -- the revenue has to come in before we [ start behind it ], but there's always going to be a benefit error. Freelance is going to be a component part of how we solve for, again, client briefs. So there's a benefit there. And then the incentive piece is meaningful to kind of our pay mix. And it's entirely aligned with the 2 metrics that we're accountable to our owners on, which is organic revenue growth and margins. So I think that it definitely is -- it's easy to -- you said [indiscernible] I think it's a benefit to us as we think about the uncertainty. I can't tell you for a fact that it's going to lead to X, Y or Z as a headwind. I think of it more as a really effective [ stock cap ] more than a tailwind or a headwind.

Okay. Just before we sort of switch gears and other questions, that if we look at where we are now, obviously, looking at your numbers, particularly on the creative side of some of your peers, the creative side of the business has gotten been much stronger than I think probably some people would have given credit for this year. I mean your numbers in the first quarter at 11.2, then 8.5, then 6.7 and actually, very strong numbers. Can you maybe talk through the relative strength of that creativity and what's been driving that?

Sure. I think as you all know, because you all spend time looking hard and paying attention to both adjacent sectors, our sectors and then us relative to peers or competitors, our health care agency business is in that sector, and that's a business that we've been super clear for a long time is performing well for us, has for a long time in a space where we've been really focused on developing that skillset and focusing on that as an opportunity. I think maybe you will have heard me say it's not a client mix, it's a capability for us really, and so I think that probably throws off some of what you just played out. I mean we're seeing our large creative agency businesses, creative ad networks perform well. They're positive, but they're not at the number that sort of health care is accretive to that sector -- for that segment.

If we look at IPG and relative to the industry, I mean it's now been, I think, on numbers, you've outperformed the industry or your peers since 2014. And if you look at the numbers where we land this year, I think your numbers will probably be up 14%, 15% relative to 2009 on an index basis and the industry up at 10%. Can you just maybe talk about what's been driving that outperformance? And particularly when we look forward to the next 3 years, how IPG continues to try and differentiate itself to keep that sort of outperformance?

Sure. I mean I think the outperformance again is something that's looking around the room [indiscernible] folks we've spoken at different points in kind of on the journey, it's definitely been a media business. Our media business powered by data, which if you go back quite a few years, we were basically building ourselves inside of our media business, inside of Mediabrands and capabilities in programmatic and then over time with a data stack. Acxiom, which has helped us move faster down that track and its data business is quite healthy. It's core business because it's long-term contracts and pretty sizable scale-up. It doesn't necessarily have the same growth rates, but we're comfortable with that. Our health care business, which has been a very strong grower and is helpful to us, both top and bottom line kind of at the group level. And then in the last 24 months sort of post reopening the experiential event businesses have performed well for us. I think that's actually where a lot of that kind of comes in. I think that integrating multiple capabilities and being more solutions-oriented with clients has been helpful to us trying to focus more on kind of accountable outcomes in account marketing and business transformation work with clients, as during the pandemic, they dealt with the reality that they actually had to sort of stop saying they were e-commerce and actually doing that kind of activity. So that's another area that's been helpful to us. And I think there isn't a major strategic coming our way in terms of how we look to kind of continue to build on that record.

To maybe sort of switch to sort of next year in terms of ad budgets, obviously, the ad panel this morning, as we touched on earlier, was probably, I don't know, 4.5% to 6% growth in terms of advertising outlook. I mean can you maybe give us some early indications in terms of what your clients are thinking about how things are shaping for '23?

I mean not really. I mean I don't mean to disappoint here, but I think what we shared when we talked about kind of third quarter and our look to the balance of the year [indiscernible] which is that there is a ton of uncertainty that people are either sort of holding off and/or just they're looking to keep options open or they're asking us to help them think through what the shift will look like if they move to more performance media activity, kind of the kinds of things that we would have in the day been referred to as the lower funnel. But I don't think that I could say to you for fact that in looking at our clients, they know -- I think their cycles are getting tighter, so they're not looking at '23 holistically, although they have to, right? They have to think about how they're going to go into the upfront. They have to think about the extent to which they're going to kind of engage with some of the new opportunities that are out there. I can give you sort of macro trends as in people are more focused on performance. People are more focused on the media that is owned and earned, and they're looking for ways to ensure that they're either maximizing that or holding that up as a way to then decide whether the kind of media that they have to go out and purchase really should factor into their planning. And then with our teams, we literally, Ellen, and I have just started, the forward planning process, which runs through December and usually the first half, if not all, of January with our teams. And we sort of were a business made up of a series of businesses, so I don't think it makes sense to get kind of ahead of the process. It's somewhat helpful to see what you said, which is that there seems to be consensus. But the media spend part of -- what happens with the media owners, at least us, given that we run a media business that's entirely agnostic and that is more about advising clients on how to spend the money and being volume-driven ourselves, I don't think that that's going to -- I think the big question mark is just the macro around -- if it's a relatively modest downturn, I think all of the things we're talking about will do -- I think what was discussed this morning when you have folks seeing a relatively short impact in the downturn where you begin to see the light kind of at the middle of next year. So that's what we'll -- we'll probably plan more conservative than that in terms of our costs.

Typically, I presume at the start of [indiscernible] right size for that cost base or no?

I think you'll probably be seeing occasional news dribs and drabs of news coming out of our various agencies to say that people are beginning to think about. I mean we've got places in our business where people are hiring where we're growing. We see really interesting stuff because the performance inside the portfolio has variability to it. So there are parts of the business, as I said, that are accretive to our results. And there, you still have the need for a lot of the newer forward-looking skillsets and then other places where people are going to position to -- with the understanding that '23 doesn't have the visibility we'd prefer to have.

And in terms of sort of payment terms changes that we saw through previous downturns, is there any sort of indications in terms of what the clients are asking for changes in payment terms to help them through what potentially can happen next year or at least part of the discussion for next year?

That has not sort of reared its head as yet, isn't to say that it won't. I mean we're very, very -- again, we're super disciplined about that because we just think that there's such downside to -- like if they realize that you as a provider of [indiscernible] a certain advisory and as a professional services companies and start becoming their bank, it's really not a good debt. We're not seeing it. And were we to -- I think we would walk away from -- I mean you do hear that it happens, whether some clients are [ driving ] for it or some folks in our space are more amenable, but it doesn't seem like a good place to go.

You're talking about a shift in the media businesses towards performance, which obviously not really [indiscernible] with where you're positioned in terms of Acxiom and Kinesso. Is there a bigger shift that's happening in terms of where media budget has been allocated and more money is being shipped into performance?

Well, I mean, as I said, I think that you're having more discussions around that. So that's interesting and a good thing. And I think you have a lot of clients, and I think it would have been a long-term trend anyway independent of whatever we're going into over the next, whatever it is, 9 to 12 months backwards. But because as proxies go away, as poor quality third-party data becomes [indiscernible] to how smarter and more sophisticated marketers go to market, and obviously, we benefit from having a lot of large multinational clients who are somewhere on that on that sort of journey of how can we be more digital, more data-driven, more outcome-focused, so I think that you were going to see that anyway. I think you're going to see the degree to which clients wanted to take control of their first-party data and, as I said, push out and get the most from all the media that's directly adjacent to them as a way to [indiscernible] how much they do then kind of a cross-walled gardens with more traditional media owners and those kinds of media -- that kind of media inventory. So I think we're going to see that over time anyway. I think you're going to sort of see the kind of the brand and performance become either more of a continuum or just get kind of accordion. So yes.

If you talk the health care side of the business as we go into next year, I mean how resilient is that as a business model if things really do unwind?

I don't think anything -- if the macroeconomic shock is really significant, I kind of go -- gravity applies to anything, right? So you drop me out of 20th quarry window, I could be super fit, still not going to be a good day when I hit the ground, right? So I guess I would say we definitely see the data business and the media business that is powered by the data business and health care. We believe there's more resilience there. On health care specifically, if you look at kind of surveys, whether it's across geography or even across most socioeconomic kind of groupings, there are things that people get around to sort of eliminating from a personal [indiscernible] addressing or trying to figure out a way to save on life. Blues is one of them so is health care. But no, I mean I think it's true, weird, but it shows up in a lot of those -- and people's pets by the way. But -- so the health care business has a series of things about it, so the [ future ] of what you're taking to market is more vital to people's lives. So that's one. And then the way in which we go to market is more sort of sophisticated, has science behind it and has kind of specificity around who I'm speaking to and the regulation around how I speak to them and what happens when that complicated marketing program goes in the market. So I think we see that as likely to be more resilient.

And just lastly on the terms of where we're at, at the moment, is that -- how sort of confident are we going into the fourth quarter and the full year? I mean we've had others on the stage basically [indiscernible] a peer group of yours, and they were saying 80%, 85% visibility on Q4. Things are still looking good. I don't know if there's any contrary that you'd like to put out there in terms of what Q4 is shaping and particularly obviously in relation to the project-based work that has some impact in the fourth quarter.

Sort of intrigued as to how they decide, they've got that level of -- because that seems really precise in a business where you're activating a ton, a ton of projects for a lot of clients. I don't think I'd answer it by saying that we've got -- I guess what I'd say to you is we were super clear, whatever it was, 6 or 7 weeks ago, as to where and how we saw the fourth quarter, and nothing has changed that we would feel that we have an obligation to say something has changed. So that would be a way that I would address the question. I think it's also interesting that they're saying that they've got that because it is a quarter that because it's so much of the kind of project-based work that we're talking about, it is how it seems, right? And so we'll see it when we see it, but the quarter does lean heavily into that last month, and we don't provide in-quarter guidance. But the tenor is what we shared with the investor community, which is clients are wanting to keep some measure of optionality. And yet, we work with big clients who don't want to drop off consumers' radar and don't want to lose the connectivity and the dialogue that they've got with clients and have not baked in the fourth quarter. So I wouldn't [indiscernible] market to go 82%.

No, no, it wasn't -- I'm just intrigued that that's how -- that's an interesting way to approach it. If we go into sort of pitch activity next year, sort of where does IPG sit in terms of is it more in defense? Is it more offensive? What are the opportunities?

I mean I think we'll see more net new to us. I think we'll see pitch activity in the media space maybe more than we have. And everybody -- we've also have had this moment of is it going to toggle back on COVID? So if there was pent-up demand from '20 -- and it was interesting because I don't know that we saw what everybody assumed would be the case. And then, I mean, I think that's probably where we'll see it. We see a fair bit of activity in the health care space. Although it doesn't -- that often doesn't kind of get to trade publications and things of that nature, just that's a client community that's much more kind of stick to your knitting, don't put your business out in the world. And I mean, I think it will probably be either U.S. or global more than -- I mean I don't think it feels like it's going to be challenged. And there's some big -- I mean there are some large multinationals based out of Europe. So we might -- it might be a modest -- sort of it might modestly tamp down activity because some of those companies will just be going, do we need that headache in the middle of whatever else they're going through, right?

If we look at sort of previous cycles and where we're going, obviously, the business model is probably very different from where we were through previous economic cycles, can you sort of maybe touch in terms of like how you think the model is now positioned for this cycle and how more effective it is relative to any sort of macro weakness that may come through?

I mean, I think we've been talking about it a bit just in the rest of the conversation that we've been having, right? So I mean you'd have to go back to '08, '09 to, I think, have something that's like-for-like because I think 2020 was just so anomalous and just sort of year, right, in that companies were very, very concerned about liquidity. So the kneejerk of shutting digital media off was the only -- it was the only place they could go to basically just cancel inventory quickly. And so the question is, are clients sort of smart enough to know that that wasn't a perfect answer? But given that there was just this unprecedented level of uncertainty, they went there and got it. And then consumers were at home, and clearly, economy is contracted. But there was a lot of kind of government subsidy or consumption going on, so I just don't see '20 as a thing that is going to be super kind of helpful or like instructive in terms of thinking about it. But then you got to go back in ways. And then I think you get to what we're talking about, which is like in the day when you went through that contraction, that kind of macro recession, which was obviously everywhere and driven by something else, I think you all know better than we do, obviously, because what's the trigger of that contraction. But you had far fewer -- I mean the range of activities that was very one-to-one was really limited for kind of our sector overall. So you wouldn't have had kind of performance media. You wouldn't have had digital media in general. You wouldn't have had a data piece to the business, which with us is very quickly connected to the media piece. So I mean all of those are qualitatively different than what you had kind of the last go around. You would have had a lot less sophistication around and specialization around your health care business. And for us, there's IPG Health, but then there are also pretty sizable health care clients inside of media brands. And so that is relative to our portfolio. That's a pretty sizable part of the mix now, which isn't to say that we don't have businesses that we're still trying to take on that. We've been evolving to where it's professional services with a layer of some kind of intelligence baked into it and some parts of our business are further behind on that. So I think project businesses would definitely be -- will still be impacted. And then on consumer advertising, I guess it's hard to tell because it will be at least in part how much has that agency factored in kind of an audience-led approach to how they interact with clients or what is their mix because I think the impact of the recession is also going to be pretty disparate client sector to client sector.

And so if we look at sort of the profitability of the business, I mean if we go think about margins into next year, I mean how do we think about the puts and takes in terms of 2023, but then if we look at beyond that in terms of whether the structural drivers for higher profitability coming out of 2023?

Okay. Well, I'll take that, I think, probably backwards. So where there's growth, we've consistently demonstrated that we can take that growth and turn it into incremental margin, and we believe that there's still opportunity to do that. We're taking kind of whatever the one-off of '23 is off the table. And so I think the underlying model has upside to it fair. And then I think the underlying model in kind of out-years has incremental margin from some of the things that I mentioned earlier around new revenue streams, which we think will be more profitable. And we're still in the relatively early stages, true pay-for-performance productizing some of our offerings, licensing some of the tools and the IP that we built on top of the data layer. So for the long term, we see continued margin upside on the business. The puts and takes as you go into '23, there's just been so much volatility with -- so this year, the incentive will be beneficial relative to '21 but reflective of the fact that '21 was exceptional performance. This year will be, we believe, strong performance. I think that I mentioned earlier, we've got other levers that will be very thoughtful and very vigilant around as we head into '23, which were sort of other components of kind of the SRS side of things. We are looking at our business in the same way that -- I mean so we're looking at sort of internal business transformation because there is process in our place that has sort of built up over time, right? You still do certain things in a big -- in a scale media business or in a major -- a big global network in our world in ways that can be either more efficient because you're going to do it offshore or you're going to get more productivity in our higher-end employees with new skill sets if you're not burdening them with things that are kind of repetitive or can be done elsewhere. So we're looking hard at that in another place. And so I think for '23, it's sort of a function of, as you said, kind of what does the downturn look like and how disciplined can we be, so that we can -- again, I can't speak to where on growth or net -- closed net-net to 0. I mean you'll hear us say that we're challenging ourselves and looking at holding margin at flat. I mean we see -- we've got kind of line of sight to that. So '23 does have a question mark. But beyond it, we see a lot of opportunity.

When you say holding margins flat, so what sort of top line consideration is that based on?

I mean it becomes a lot about where you would see -- we were talking earlier about what's more resilient and what's not, and so a lot of it would just do -- would have to do with the mix of -- we already have a portfolio where you've got a range of performance outcomes in terms of some of our businesses perform quite well and are accretive to margin, some less so. So it's sort of -- you have to sort of go, all right, what would be impacted? So as I was saying earlier, your project businesses would be more impacted. They also -- as you sit now, the ones that have kind of a to go on getting them to where we'd like to see them in terms of profitability, whether it's by rethinking business processes, things of that nature. So it's just -- it's a hard one to answer until we start moving through it and can actually see where the moving parts are.

I mean that's a positive outcome if you can hold margins flat next year depending on where the growth outlook is?

That's what we would -- kind of whatever you're going to call it, and that's what we would aspire to. Yes, yes.

Can we just talk about sort of capital allocation as well in terms of what the plans are for next year and going forward?

It's [indiscernible] because Ellen and I have been doing this whether it was at Mediabrands, but now here for -- so like there isn't a big strategic like a left turn. And on capital allocation, it's sort of the same. I mean that we were focused and thoughtful and huge credit to our team in delivering off of the Acxiom deal. And as soon as that got basically ticked off the list, we got back into share repurchase. We've been really clear for a long time that we are committed to both that and growing the dividend, which we have for some time now and continue to do through the uncertainty of 2020. And we've tended to really, really push hard and keep [ hires ], and we build it ourselves before we have to go kind of do [ AL ] acquisition. I mean of the big players in our space over 10 years plus, we've probably been the most disciplined in that regard and still able to do what we've done growth-wise. So kind of we feel like those are the 3 pieces and that would be very kind of stay in the course. I mean you saw us do what -- for us, it is a meaningful deal in the commerce space. So we might be looking at things [indiscernible] bearing in that area, but nothing [indiscernible]. So yes, capital allocation is [indiscernible].

You touched on there in terms of adding capabilities around commerce and people obviously talked about media connected TVs as an example in other areas of growth pockets within the industry. What are the other sort of core capabilities do you think that you might need or would like to have on a sort of like a 3-year view?

First, a lot. I'd say commerce is clearly the biggest area of focus. That means a lot of things, though, right, because that means something like a RafterOne to take us much further and faster on the Salesforce platform where we've got -- we're very strong in other areas. I think performance media, retail media, but not -- we don't -- again, we don't believe in owning media, so given that we've run a media sort of offering that is more about advisory to clients and less about volume. So I think it would be expertise around or toolset and some tech that we built that help you sort of the part of e-comm that is marketplace driven, that is sort of kind of taking data, marrying it with more tech and being smarter about how you help clients kind of invest or activate in some of those areas. I mean that's kind of the -- that's [indiscernible]. There are certain things in commerce where design can be very helpful because you're basically showing up in -- at retail. So maybe there's something there. But again, it would have to have a like a way to plug back into the tech stack.

Conscious of time, I think we've only just got time for a couple of questions. I don't know if there's any other questions coming in or not. If not, maybe just a couple from me. Just on inflation, obviously, you touched and said at the start of the equation that there wasn't really any sort of major impacts for revenue basis. Can we just talk more about what you're trying to do in terms of the offset on the talent side around inflation, around nearshoring and offshoring? And how -- what's kind of looking like in terms of churn in the industry?

Sure. I mean, I think that we talked a lot about, and we'll come back at it. We've seen modest impact on our salary lending. We believe that to be manageable. It may help that in building our more tech-enabled businesses going back 4 or 5 years. The answer was never to sort of solve for that by trying to bring in or recruit that talent by thinking that we could compete with the major platforms for that talent. So we were always solving for that in a way that was, I think, fairly nimble. So whether that was finding secondary market where you had strong tech talent domestically, where you could essentially bring in the skillset or finding people who had pride, whether it was a platform or whether it was the start-up world, and we're at a point in their career trajectory where for them, it was less about the huge maybe nonexistent pot of gold and it was more about, I actually have a mortgage. And I know that if I help you build out some of these tech, you'll still be here for a while. And it's interesting because I get to work on lots of different kinds of problems. And our teams' source talent, diverse talent. There were lots of ways that we were kind of in the place where you'd expect us to feel that prefer most dramatically. So we've always said that we see that as manageable. We've seen less churn in the last 3 months which I think is indicative of...

Is that across all the practices? Or is that specifically...

No, that's in the places where we're looking to do the most hiring in parts of the business that are kind of the higher growth and the ones where we've still kept those recs open and given people to understand that they can go find that talent. So in a sense, you're seeing at least some of the dislocation in tech show up. So that's oddly maybe kind of helpful because you're seeing a lot of folks kind of running into issues because you're seeing those big, big numbers of kind of projects at the [indiscernible] platform in some of the tech companies. So kind of we're still good with -- we have seen some inflation there. It doesn't keep us from getting to our goals or the targets we set around margin, whether it's this year or in out years. We are going to rethink how you take the work that distracts your higher-value people in certain markets and finding new ways of getting that work done. And then I think we talked a bit about whether it's a cost we can and how that conversation with clients happens around passing that cost on, nothing dramatic to add to that.

Thank you very much. I think we're out of time. So Philippe, thank you very much indeed for coming in very much today. Much appreciated.

Thank you, and again, apologies to everybody who I was rude to over there.