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

All right. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in this registration area and on the Morgan Stanley public website. Excited to welcome back to the conference Philippe Krakowsky, the CEO of Interpublic Group. Philippe, thanks for being here.

Thank you. Nice to see you again.

Good to see you. So I feel like this is the first year we're able to sit and talk about what might be a normal year, a normal-ish year. Is that possible? And we've been through this sort of COVID roller coaster.

Inflation, war in Europe, uncertainty about yesterday. I don't -- it doesn't feel super normal to me, but...

It doesn't feel normal, okay. Maybe it's the new normal, but maybe just stepping back, what are your priorities for the company this year as you try to navigate all the things that are out there in the world?

I mean our priorities haven't really changed a lot. I mean I think folks that know us and that have been following us for a couple of years know that we made a series of decisions. And we've focused the company so that we can be higher-value partners to our clients in a world where what's happening in media and what marketers are dealing with clearly involves a lot more complexity but also tools that allow you to get much more clarity about the impact of the work that you put in the marketplace or the way that you engage with consumers. So that hasn't changed that I can tell. And to our mind, whether it's a 3- or a 5-year performance period, we've demonstrated that we can evolve a professional services model by adding to it kind of a layer of data and technology. This feels like an execution year in a lot of ways because we are still unclear about what new normal looks like.

Yes. Do you think the asset base at IPG is materially different? I mean not materially but different enough from the pre-pandemic version of the company, that it sort of impacts how we should think about the growth prospects for the company.

Well, again I think that, in a world where what you do tend to have kind of across the board, if you look at almost any industry or sector, is kind of a greater disparity of outcomes, we run a pretty complex portfolio. We've got a lot a lot of clients, so you're going to find different needs and pieces of the business that are further along in that evolution or that transformation. I'd say that again, folks like you who follow us, you've seen where -- the focus on media and the connectivity to that data layer or the growth and the investment behind our health care capabilities. So I -- the pandemic clearly accelerated clients' focus on business transformation work; and on digital, kind of going faster down a digital track. And so pre or post pandemic, not a dramatic change in the asset base, but we're definitely -- we do keep investing and reskilling, if you think maybe in '20, which obviously was difficult for everybody, maybe a bit less for us, where we did have to rightsize businesses, we didn't then bring the same skill sets. What we were really looking for was more of what we've been baking in over time, so there has been a shift [ in that regard in the assets ]...

Yes. And client needs, have -- what clients are expecting or looking for, has that changed in a way that's significant to the growth outlook for the business today versus 3 years ago?

It tracks the same. I think clients do want focus in a couple of areas. I mean I think the clients want as much -- more self-determination in a world where taking control of first-party data is clearly something they understand as important; being able to be less reliant on the platforms; and clear on sort of what's the data strategy, what's the marketing technology strategy. How does that connect into the breadth of the activity that they're engaged in? So we see more opportunity for kind of higher-order strategic work, but that's not consistent across the board. I mean it -- there's a lot of variability on a client-by-client basis and even within a sector. You can see quite disparate levels of sophistication.

Sure, makes sense. On your earnings call, you guys provided guidance for 2023, 2% to 4% organic growth, 10 basis points of margin expansion. How should investors think about that guidance, particularly as it relates to sort of the macro risks and what -- that you've tried to incorporate to that outlook?

The way that we build the budget is very much a bottoms-up budget, so we're not coming at it with a view of macro and then pushing that down, because it is a portfolio. It's a fairly complex set of assets, and as I said, there are a lot of clients involved, so we will go bottoms-up. We will then -- with our largest clients, who are either the ones where we've got multiple agencies engaged with them, we support them at a global level, we can have that discussion. So it doesn't sort of bake in, as it were, a point of view about how much normalcy, to your very first question, we're assuming. It's really just a function of, given what clients need, given what we provide them, how does that -- and obviously again, for us, with a number of years of really strong performance, we're compounding a lot of growth, but it demonstrates that, in a world where -- there is a lot of volatility in media, if you're an adviser to clients, that's something that they clearly look to; and increasingly see the benefit of having an adviser that has the expertise and the tools around -- like I said, around data [ and tech in particular ].

How should we think about your guidance relative to some of your competitors? Are there idiosyncratic factors that are impacting 2023 for IPG that you want to highlight?

I think we highlighted them, I mean, whatever it was, 1 month, 1.5 months ago. There are some specifics in our portfolio. So we talked a little bit about 2 of our kind of premium digital agencies which are at a moment in their evolution where they have to kind of reinvent the value prop every 3 or 5 years. And so that will be something that is -- I can't say idiosyncratic after 7 or however many of these we've done.

Unique.

Specific to us, we've got that in a kind of client sector view at a macro level. What is happening in tech more broadly does seem to be leading to a measure of caution among those clients, so I think that's specific to us, but I think that's how we get to that 2% to 4% that you heard from us.

Should we see -- should we expect some flex potential up or down in margin depending on where you come in within the guidance range for 2023 on revenue?

Well, I mean, we've talked about this in the past, right, where back to how volatile things are -- there was a moment in time kind of late last year when the question is, if something macro comes along and at flat, can you hold margins, right? And so I think the answer that we would have given you then is the answer that we would give you now, which is that it depends a lot on where you see the revenue, whether that's within our agency segments, whether that's geography, et cetera, but to our mind, we've consistently shown that, where there's growth, we convert that to incremental profit. And there are things about running a flexible model that allow us to do that, the discipline and the alignment around how we get paid and the fact that margin is actually a larger component which aligns all of our operators on that, but it could well be to your point that, depending on where we are in that range and whether we are selling more of these higher-value services. But in the long run, we see this as we've increased margins by 260 basis points over the length of the pandemic, so we continue to see long-term margin upside to the business.

That's good. I was going to ask you about that because it's interesting. You guys have guided to margin expansion, but your competitors have largely not. In fact, some have guided to margin compression, for '23 at least. I was wondering if anything had changed structurally in the asset mix that suggests the incremental margins we've seen in the business historically are no longer the right way to think about the business. [ And then you can always ]...

Again not to our mind because, with growth, the capacity and I think, to our mind, the responsibility to turn that into incremental profit exists. And then ways in which we are thinking about or sort of reengineering our business and looking at our processes, we see opportunity there. And then the new services that are more truly outcome-based or where there is the opportunity to link to results because there's more precision and accountability in what we do, all of those, to our mind -- we see a number of years of continued margin expansion. And should that ever change, obviously we would clearly communicate it with folks like you, if no one else.

Yes, Of course. You guys recently appointed a Chief Commerce Strategy Officer.

We did.

And one area of -- that's gotten touched on a lot at this conference has been retail media as an area where that seems to be gaining share from a client point of view. What do you see as the opportunity there? How are your clients approaching it?

I mean you know better than most that our media business is one in which we don't take inventory. And we don't -- there's no acting in a way where the volume that moves through us benefits us. So other folks may be thinking about retail media in that sense. It clearly comes up very consistently in that broader commerce conversation with clients. And I think, to our mind, in a number of the groups that we've had over the course of the day, when we've talked about it, we've demonstrated that, with the data layer that we've built in the business and then technology to enable that, we've connected that with media. And that's been a differentiator and a driver of value with clients in the ad tech ecosystem, so I think the opportunity we see is to do the same with whether it's clients' martech investment on some of the large platforms or whether it is with the retail media, but to our mind, we see opportunity. And that's why bringing somebody in at group level, who joined us -- he ran omnichannel commerce at Accenture, to think about the flying formation for the assets and then how we plug into the data stack made a lot of sense.

Let's talk a little more about media. I mean it's interesting. As we think about advertising trends right now, Philippe, Q4, Q1, a lot of companies at this conference are -- we're seeing negative numbers. And Omnicom was here yesterday. And you guys in the agency world are seeing growth and expecting growth and particularly in media, so maybe you could just spend a minute talking about stepping back and looking at your media business broadly, which I know is a big business with a lot of different pieces to it. What's driving the strength in the business? And why do you think we should disconnect that a bit from what we're seeing with some of the -- even the digital [ video ] platforms that are right now struggling?

Well, I mean I think, if you dialed back many years ago, the question was is what's happening with digital media ultimately going to disintermediate folks in our space. And to our mind, the evolution, the investments that we've made and the way in which we've made ourselves more valuable as an adviser to clients seems to kind of continue to be, to bear itself out, when in the platform space now you're actually beginning to see perhaps them being disrupted, perhaps share shifts precisely because of some of what you talked about, whether it's the pandemic bringing digital transformation work forward or the fact that retail media help a marketer go direct to a consumer or drive more accountable kinds of engagements.

Yes.

I don't know that you've got steady state over there, in the sense that there clearly will be folks on the media owner side that adopt a sort of strategic approach that is about having a point of view and clarity about identity being audience led. So I think that some folks in that world will begin to grow again. And they're not really analogous businesses in that those truly are software businesses, where ours is a professional service plus tech business now.

Yes. Is some of what we're seeing just the complexity element of media accruing to your benefit...

Absolutely, yes. I mean, if you think about it, obviously the magnitude of the investments that marketers make in media, I mean, that's a very significant line item for them. And then that does put you in a huge information flow. And so then how would you not look to turn that into actionable intelligence, kind of business decisioning off of that data?

Makes sense. One of the things you and I have talked about over the years also has been the privacy changes as well which seems to have had a pretty big impact on media in particular. You've made some big investments in and around data, helping clients manage their data. Is that still a sort of an important factor in sort of account wins but also sort of where your clients are focused in terms of spending money?

Sure. I mean I guess the way that I would put it is everything is very case by case in our sector, right, because -- client opportunity or issue comes along. A business problem comes along, and there is nothing kind of cookie-cutter. We're going to solve it in a -- privacy has definitely and sort of first-party data in general has definitely become much more front-burner conversations with clients. I think what I would say is that there is more of an appreciation that it's not just a question of the quantity of the data that you have available to you to activate but the -- qualitatively, that matters a lot too. There's reputational risk. There are other risks if ultimately what you have is not at a certain level. And I think the privacy landscape is still evolving. And who's to say that, if the macro were to get meaningfully challenging, people might not -- they might defer that, but it's definitely coming. You do and every business have to sort for that.

Yes, yes. You mentioned earlier some of the headwinds to the year around your digital specialty agencies. That's come up on a couple earnings calls, where growth has been soft. Has your view on these value-added services changed at all from the past? And is this still an area you guys are investing in?

I -- well, I think we've called out 2 premium digital agencies.

Yes.

I think it's become a more crowded field over time. I think the nature of those businesses is that they do require kind of reinvention every 4 to 5 years. And so -- and there's a sort of phasing or a timing issue for us where that's happening right now in the midst of the uncertainty that we're seeing kind of -- I think clients -- the caution -- I've said this before. I think the caution is less about what's happening right now. It's about either what a day like yesterday can be or the "there's an air pocket coming in the economy" kind of comment, so I think it's sort of incumbent upon us to get them more focused. I mean you've seen we made a leadership change at one of them. And it's meaningfully further along in what it's sort of next value prop is going to be and how it's going to go to market with a -- less of a people hours approach and more of a product and solutions approach. And then the second one, we actually just in the last week announced that there's also kind of a leadership change going on there. So I don't think it's intrinsic or indicative of an issue with that space. It just comes with if you're going to be sort of at the leading edge of innovation.

Right. And is some of this is that they are servicing technology clients and that is a vertical that has not actually...

No, I think it's fair. I think they do -- their client mix does skew meaningfully heavier to the one client sector where things are sort of up in the air and/or where what -- the news that you're seeing coming out of the valley around cutting jobs and cutting costs clearly impacts some of the kind of work we would do with those clients. And a lot of that happens at those agencies.

The year of efficiency.

Well, look. I think you're probably right. And I think what's interesting is that, the last few years, we've been successful in working with clients to define value as being much more precise and much more effective. And if it goes to efficiency, then people will -- maybe in the current environment, at least for a minute or 2, they will go with, "Can I just not do that? Or can I just get -- the quality matters less. Can I just get it cheaper?" right?

Yes, yes. Another area that IPG has a lot of exposure to that has been a nice part of the business over the years has been health care...

We've grown that a lot, yes.

Yes. So how is that business today in terms of trending? And are you as enthusiastic about the outlook in health care as you've been in the past?

I mean one of the things that we did in the last 18 months or so is -- what you had is an area of specialization that grew up kind of as a bit of a -- I wouldn't say stepchild, but I mean it grew up inside of the larger integrated groups in our world. And I think what we realized was that the nature of the skill sets that you need in order to help a client where the product is pretty complex -- so there's a lot of science to it. There's a regulatory piece to it as well. So we put all of that together in one vertical. We do a lot of health care inside of media as well. We do a bit inside of some of our project businesses like PR, but as we called out, that's now a scale business for us. And it's been growing kind of high single digits for the last couple of years. And we believe that -- unless there is something dramatic that happens to pharma as a sector where our clients all of a sudden are in a place that they might have been in 15 years ago, we continue to believe we'll see that kind of performance.

Got it, great. I want to pivot to sort of the cost side of the business but also give the audience a chance to ask a question if they have one for Philippe. Please raise your hand and wait for the microphone. Where would you say the biggest opportunities are for you as a company in terms of efficiencies? And just talk a little bit about the sort of salary inflation and sort of the wage inflation pressures that the business has had to navigate and where you are with that today.

I mean Ellen, who's right here -- I mean we've been -- to our mind, the head start of a 3- or 4-year period during which we were looking for more technology-forward skill sets and data science and any number of those things, we were not going to win by looking for that talent in direct competition with the folks who were hiring in the valley, so where and how we've been resourceful in that regard, I think, has helped us. We've been clear that, even as we went through the last couple of years where inflation, macro and wage inflation was at levels we hadn't seen before, we thought that was manageable. And that was baked in, and as I said earlier, we've seen dramatic margin improvement in the business notwithstanding that. We've seen that attenuate some. We continue to believe it's manageable, so less churn; less we've got to counter because -- and more talent that's widely available now in some of those kind of high-scale areas in tech, in particular, because of what's happening sort of to that sector, yes.

Yes, interesting. Okay, any questions for Philippe? [ Well, I'd love ] to hear my voice rambling on longer. How about on the capital allocation front...

[indiscernible].

Yes, exactly. On the acquisition front, I mean, you guys obviously did Acxiom years ago. It was one of the biggest acquisitions the company has done probably in many, many years.

I think ever. Or maybe, but...

In ever. Delevered nicely on the back of that, but where do you see the opportunity for -- where are you focused? Because you guys continued to be somewhat active last year.

Well, I mean, again you know as well, as we were going through this transformation or as we were trying to basically evolve our model, when and wherever possible, we did think that building it made more sense than the multiples that we're seeing are still pretty frothy, [ acting with the moment in time ], I think, just because, as we were saying earlier, first-party data management at scale, the credibility and then the privacy by design, all of those were things that I think would have been really challenging for us to build ourselves. So that was -- right now I think that what we did last year with RafterOne is probably indicative of what we are thinking, which is businesses that are hybrids of agency plus some technology skill set or something that is proprietary in that regard. In the past, we were filling out an agency offering where we were addressing a client need or maybe something geographic, whereas now to our mind it is in and around kind of the commerce space skill sets that will help on the digital transformation work that we do with clients. And then there is more -- we're a much bigger company, so I think, range and bearing, we're not going to do sort of anything really large or transformational, but we're looking for a couple of things along the lines of what RafterOne was last year [ in any ] 12-month period.

Right. And -- yes. And RafterOne, I -- which I will sort of try to explain as sort of a systems integration consulting software...

Very focused on Salesforce or Salesforce only, because we built an Adobe practice inside of the digital piece of one of our large networks, with expertise both on the B2B and the B2C side and just a lot of folks who have the certifications and then some of their own kind of proprietary tools. So it's a -- like I said earlier, it's like how do we build on what we've done with data and tech in media to now address media and tech in somebody like a RafterOne, to then sort of sell that through to large clients as they're doing kind of their implementations of a Salesforce solution, for example.

Got it. And maybe just to wrap up: You guys bought back over 300 million in stock last year. Balance sheet is in a good spot. How do you guys think about prioritization between buybacks, dividend growth and sort of managing the balance sheet?

Like we -- like you said, we delevered. And we obviously -- our finance folks -- when you think about kind of our debt maturity profile given kind of what's going on with interest rates now, we're really well positioned. And so to our mind, it will be more of the same where we feel like all 3 components of that are important. And as I said, we're not thinking that there is the need for transformational M&A, so it would be continuing to grow the dividend, which has been growing now for 11 years, even as we moved through the pandemic. Now that we've reinstituted share repurchase, that will be a part of it; and then kind of 1/3, 1/3-ish, being opportunistic maybe if and as needed on M&A.

Okay, well, we're basically out of time. Hopefully, you don't have 7 meetings now to go after this...

You've had 4 teams in here, so the fact that I have -- you've got me by a bunch.

Right. Philippe, thanks so much for being here.

Pleasure. Thanks...

Thanks, everybody.

Thank you.