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

Yes. Great. Maybe we'll just get started. So good afternoon. Thanks for joining us. I'm Lisa Yang. I cover the Internet at Goldman. It's a real pleasure to welcome on stage Ellen Johnson, CFO of Interpublic, and thanks very much for being with us today. Lots to cover. So maybe as an introduction and to set the stage a little bit, I think the IPG and the broader agency space have been performing pretty strongly if you look at since COVID. And coming out of a period where the group was perceived as maybe being structurally challenged. So can you maybe just go back and explain what have been the main tailwinds and structural drivers in recent years? And how do you see those structural growth opportunities evolve if you think about the next couple of years?

Thank you, and thanks for hosting us. I have to say the secular or structural factors I think are significantly in our favor. If you look at post the pandemic, some of the trends that we were seeing just began to accelerate, and they've continued to do so. I mean, start with healthcare, which is 28%, 29% of our revenue, I don't think anyone has ever valued healthcare and pharmaceuticals and what they can do more than today. So given that's our largest client sector, which is really no accident, since It's a sector that really lies so heavily on data analytics and sophistication, based upon who they're trying to reach. So I think that's a strong point. Direct-to-consumer, that trend is -- and the e-commerce or retail media, all of those things have accelerated, which really plays to our strength again. The more precision, the more data, the more tech you can bring to marketing, really allows things to become more measurable. And the landscape has continued to fragment. So people really continue to need a trusted adviser, to help them navigate, and we haven't even gotten to the privacy changes which are coming, which again, I do think will be favorable for our sector, as clients will need advisers to navigate the new landscape.

Now obviously, the recent sort of results, I think, have maybe raised some concerns on the more near-term growth outlook. I think you have raised some cuts in tech and telecom. I think WP and Omnicom have done the same. So I think I was just wondering like if you can elaborate a bit on, firstly, what drove those sort of cuts and did it really come as a surprise, did the magnitude of the cuts kind of came as a surprise? Maybe that's the first thing, and how much you think is permanent as opposed to really just postponing of, delaying of sort of projects? And secondly, if you can just maybe tell us what sort of conversations you're having with clients in terms of when they may spend again, and the timing of that?

Sure. Lots there. Tech and telecom, it is our third largest sector, down from being #2. I'll start with saying we love the sector. I mean it's definitely going through a moment in time. It's not unique to us. You've heard it across our whole industry sector. They're going through, whether it's efficiencies, whether it was a period of overinvestment, some of them are having layoffs. So I don't think you can separate the marketing spend, from what's going on more specifically with them. But over the longer term, given all the innovation that's in that space, I do think it's a great sector, and I really like our weighting in that we just need to navigate the current moment. But if you look back over the first 6 months, 6 of our 8 client sectors were growing. So I think that's important to note as well. And we have 5,000 clients. So the conversations really vary across them, but we're actively engaged with all of them.

Right. And I think -- wanted to just contextualize a little bit the impact of tech for IPG. Maybe if you can explain whether there's any sort of particular tech like areas of spending, where the IPG is more exposed to, whether it's creative as opposed to media, it feels like media maybe continues to do well, creative less so? And is there sort of any sort of concentration, which is more specific to tech and telecom, which means like if you have maybe 1 or 2 [indiscernible] has an [ outsizing pack ] on IPG?

I would say that the impact probably is more to do with the percentage of revenue that we have in tech and telecom, versus the concentration in the client sector. We have 8 sectors, which is the way we report, which is different than others. And each one of those sectors is a bit top heavy, that's just the way it works. But it's a good thing because you have large relationships with big clients, and we work across many, many disciplines, which makes them very sticky, deep relationships.

Right. Okay. And I think the other maybe as a follow-up to that, is there anything which you think is really, really specific to tech and telecom? And what gives you confidence that might not -- those cuts might not spread to potentially all the sectors late in the year?

So 2 things. One, I think there are specific things going on in the tech and telecom sector, that's really unique to them, and unless there's a common theme across different industry sectors, it doesn't tend to be contagious. Now if there is macro, either getting better, that could help all the sectors, if it gets tougher, that could be a challenge. But otherwise, it doesn't typically have that contagion.

Right. Okay. I think maybe we can just move on. I think another area where maybe it's more specific to -- to IPG has been the weakness of some of your specialty digital agencies, R/GA and Huge. Could you maybe just elaborate again in terms of what caused the weakness, I think, in the first place, and where are you in terms of the progress of the turnaround, when do you think we're going to get back to growth?

Sure. R/GA and Huge are 2 very innovative brands, and due to the nature of being so innovative, they really need to reinvent themselves every 4 to 5 years. And some of that is timing, with the pandemic -- help or when everyone was working from home, probably not. There's also the double whammy that their clients are more concentrated in tech and telecom. So those are factors which are making it more challenging. But I'd say work in progress and separating the 2 of them, Huge has made some great strides in productizing their offerings and moving from FTE and overhead to more of a service offering to more of a product offering. And they also have a C&I component, out of what they do now. And we've seen some green shoots there; early days but encouraging signs. R/GA, a little bit further behind, but we are in the process of making management changes. And we do believe that there is a point of differentiation, where they really could add to our portfolio. They just have to find that new leading edge space.

Right. So it's progressing well and potentially next year could return to growth?

We said we're not counting on it for the back half of this year, but we're very focused on helping them with a sense of urgency, get to their -- through their transition period.

Fantastic. As you're talking about the guidance for this year, obviously, you have sort of grow your outlook for the year to 1% to 2%. That still implies quite a big step-up in organic growth from the negative, I think, close to 2% in the second quarter sort of 3% to 5%. So could you maybe just help us like run through, what assumptions you have sort of baked in, like often do you like revise your budget? How much visibility do you have for the second half of the year? And I know you don't typically give quarterly guidance, but just help us understand how to think about the different drivers of growth in Q3 versus Q4? Shouldn't like Q4 be maybe stronger than Q3, just like qualitatively?

Sure. So we have a very robust planning and forecasting process, which we do 4 times a year. We do them typically right before our earnings call. So the last one we did was in July. We will do another one again in October. And the basis for that is, we sit down, we meet with all of our agencies. We talk to the clients. We review their pipeline. So that's how the process comes together. What we've said is that, we're not expecting R/GA and Huge to have big turnarounds in the second half of the year. But the growth that we are forecasting in the back half is 50% from some of the new amazing client wins that we have coming on stream. They will not be at full run rate this year. They will translate, transition some brand by brand, and the speed of that will be -- some of it we will definitely have the impact in the second half. And also underlying some of our stronger performers, whether that's media and healthcare. And we had said from the beginning of the year that we expected that the first half would be soft or slower, and that the second half would be stronger. And some of that's due to the timing of campaigns.

Right. You mentioned at the beginning of this chat, healthcare obviously has been really-really strong for IPG and your [ standard ] performing in that segment. How sustainable do you think that is? And obviously, you have this big creative win, which is Pfizer. Could you maybe talk about like how should we think about the ramp-up of that contract, like how quickly typically do you like create budget or ramp up as opposed to maybe new media wins?

Sure. So healthcare again, it's our largest client sector. Very sophisticated offering, and it's much more than just IPG Health. We have healthcare and IPG Health. We have it in our media business, our PR business and some of our other creative businesses. So widespread, deep relationships with most of the pharma companies, in particular, amazing work. We have data scientists to medical doctors on staff and can really deliver this very sophisticated, complicated solutions, with a high degree of creativity too. We think it's a huge growth -- continues to be a very strong growth area for us. The pipelines and the research and development dollars that they have, are huge and the pipelines for the new products are substantial. So we continue to be very bullish on that. As far as the Pfizer win, which we're super proud of, a very large win, a consolidation from going from thousands of agencies, to 2 big holding companies. It was a very competitive pitch. We won the creative business, the PR business and the medical comms business, which is really the medical information that goes within the prescriptions that we're sending out. It will transition brand by brand, and that has more to do on the client side than on our side. So we have some of that baked into the second half. If it happens faster, that will be upside, if it happens slower. The good news is we're going to eventually have it all of the creative that we won. It's just -- it will go brand by brand.

Right. And just on healthcare, obviously, quite strongly positioned in that sector already. Do you see in the medium term, the opportunity to come from all the expansion of assignments with your existing healthcare clients or similar to what we've seen with Pfizer, there is an opportunity to even acquire -- like win more new pharma customers?

Well, just in the recent past, we won BMS on the media side, in addition to Pfizer. So I think we continue to be very, very competitive and have great new business track record. But I think the best way to grow always, is to treat your existing clients like new ones every day and try to expand your share of wallet with them and that will remain our mantra.

Right. So maybe we can switch gears a little bit, and will talk about generative AI. Like it feels like it's been really top of mind. This year, I know IPG has been embracing AI for years. So do you think AI is really going to be a game changer for IPG for the broader advertising industry? How are you kind thinking about it? Do you think over time, it creates more complexity, that it creates more work for IPG or to play the devil's advocate, a lot of your clients can actually do it themselves, like the creative part, so they are increasing the risk of in-housing?

So I think it's going to be a game changer, not just for our industry, but for all industries. I mean, I think it's a very exciting time actually. And I think for us, the opportunity to be accretive both on the top and the bottom line, I think it will be a tool. I think at some point down in the future, everyone is going to have the tools. So how do you differentiate yourself? And I think what will differentiate us is our talented people. I think with the tools you need to have an architect or adult supervision, to make sure they're doing what they're supposed to be doing in a healthy, good positive way, without harm. And I think data is the other thing that will become singly important in IP, and with our Acxiom asset, I think that will become -- continue to be a real strength of ours, where we can not only help our clients use their first-party data to become their differentiator, but supplement it with the data that we have. So I think there's so many applications for it. I mean there is now the opportunity to do mass personalization. And we already have some interesting examples of where we've done that recently. We have a bakery client in Latin America and their clients sell their product through food trucks, and we were able to create 42,000 posters to drive traffic to those food trucks, with [indiscernible] been cost prohibitive. Another example is we have a lottery client, and everyone plays lottery when the pot's very large, [ who plays ] lottery when it's $2 million. So we bought 50,000 Shutterstock images and created a closed AI system and allowed our clients to interact, and we had a contest of what you would do with $2 million if you won, and then we made a commercial out of that. So those are just 2 examples of how you can create so much more content. You could also get to insights so much quicker, which is something we've been doing with AI in our data business and our media business, but think about how more quickly you can get the correlations or find that -- [ sound by ] the difference. So I think that's going to be an opportunity too. And then there'll be efficiencies. Can we take some rote tasks, whether it's reconciling media or other things and use technology to do that. So I think both top and bottom line, it will be an opportunity, and it's an exciting time.

When do you think we'll start to see the benefits flow through to your top line or margin? Like is that multiyear thing? Can we see that early as next year or -- how do you see that playing out?

I think you'll see some impact. The question is, it's developing so quickly, how fast does it go?

Exactly. And I think the question on that is, we all know it's going to probably improve your approach to [indiscernible]. There's a lot more content that's going to be created. And I was just wondering how you think about the trade-off between more volumes of work being created, versus what that does to pricing and whether you have any sort of idea on that?

I think because you're going to be able to be smarter, you're going to get insights faster and hopefully, things will continue to become more and more measurable. It will allow potentially for different revenue streams. So if you can demonstrate what you're doing becomes more and more valuable, you can get paid in different ways, and I think that could combat the FTE and overhead, and not compromise the efficiencies that you can get. The other thing I would say is it allows you to sell more services than you otherwise would. If we could use AI with adult supervision to help doing press releases, we could sell more high-value services like crisis management or communications training. So it allows you, I think, to go upstream as well and price those things at a higher price point.

I'm just curious, like, what do you think this sort of mass personalization would do to probably the efficacy of digital advertising, as opposed to [indiscernible]. Does that just accelerate like the structural shift away from the sort of offline media towards digital even more, because you're going to get a much better ROI from mass personalization? How do you think about that?

I think there's 2 different -- I think the trend is going that way, but there's still something about the reach that you get for TV in one spot, that has value depending upon who your customer is and the objective. I do think mass personalization will allow you to be more precise and go further down the funnel in a more measurable way. But it doesn't mean that there isn't a role for both.

Right. Okay. Very helpful. And I'd love to talk about margins now. So you have lowered your organic growth guidance, but you maintained the sort of margin outlook on trends, I think, 16.7%. Could you maybe just talk us through the different moving parts in the second half, how you are beginning to think about also 2024? I'm sure you start thinking about next year as well. Anything you can share in terms of how you think incentives pool is going to evolve, versus offshoring opportunity and [ reconsolidation ]?

Sure. I think that there's opportunity in the margin going forward, which is exciting. I think that -- I always like to start at the top. So I think as we continue to evolve our revenue model, we will be able to have more performance-based compensation, and that should be accretive to margin going forward. Our higher-margin businesses are strong and they're growing, that's accretive to margin. On the cost side, this year, you see the variable cost model working. You see our temporary labor flexing down as it should. Severance was higher in the first half of the year. There should be savings that come from that. And incentives is one of the things you mentioned, and our plans are designed to provide leverage. The biggest portion of that is margin improvement. The other portion is revenue growth. So we -- not only do we have an aligned organization marching to the same goal, but we also have a lever, when things get tougher, that gives us the flexibility or the operating leverage that we need. And we resize that every year to make sure that those plans always work in different environments. The other things we've done, we've done structural things. I mean we -- during the pandemic, other than worrying about our people, we took the opportunity to restructure. We looked at different layers of management. We focused on offshoring and nearshoring, and that's yielding benefits. We've taken 2 restructuring charges related to real estate and taken -- and are seeing the savings from that. We manage our real estate very centrally. And so any time a lease comes up, we are continuously looking at it. And business transformation for us is a constant. We have a team that's fully dedicated and we are looking at how we use technology to become more and more efficient, and how we continue to do so. And we're not complacent, so that's not going to stop.

And where are you on offshoring and where do you think -- what are the ambitions there? Where do you think it could get to over time?

I think we have opportunity to do more. We do have hubs in low-cost places, whether that's in Latin America, whether that's in Asia, whether that's in parts of Eastern Europe. And it's a transition. You have to make sure that everything is working fully, and then you can put more there. But I do think that there is opportunity to take some of the tedious, more rote tasks and put them and reengineer the process first and then use more technology to drive efficiencies. And that's something we're very focused on.

Right. And you mentioned obviously, there are a number of areas where you're stretching more efficiencies, more savings. How do you think about reinvesting part of that into maybe driving more growth? Like what are the -- maybe areas of focus we should be aware of for the next 6 months or medium term?

No, that's a great question, and you have to always be thinking about reinvestment, because revenue growth should be the best driver of margin enhancement. And areas that we're really excited about are retail media and commerce. You would see in the beginning of this year, we hired someone from Accenture Song, who is leading our commerce practice, and we think that's a huge opportunity. And retail media, in particular, very large market, estimated $121 billion, growing double digits globally. And that's a place where net new dollars are going to be coming into our -- to us and to our industry. And it's a more measurable area as well. And there's opportunities on both sides. The retailers, since COVID, you asked about trends where we started this conversation, their costs have just gone up. Whether they're selling shampoo, and if they're not selling more shampoo, but now they have to sell it in-store, online, curbside, home delivery. So how are they offsetting their costs? They're all going to start having retail media networks. So we can help the retailers. We could also help manufacturers, because they're going to have pressure. Everyone wants them to advertise on their retail media site. So how do you normalize and standardize the audiences and solve that for them? And we recently launched IPG media brands retail solutions, which does just that. It standardizes audiences across the different retail media channels, and help solve that problem.

Great. I'm also curious in terms of -- I think if you think about the agencies, I think historically we have been perceiving that to be maybe too complex and siloed, and I think that's why probably that has led to maybe some kind of attrition. I think you probably have first stood out with your sort of open architecture model and probably have been offering something which was maybe more tailored to your clients. Do you think that could be done to simplify your offering to adapt to maybe like the clients' evolving needs, or do you think we have probably got to a steady state now?

I would separate that question. I always think that you should be looking at simplification. I mean, I would use the example of IPG Health that we created 1.5 years ago approximately, and that took 2 very strong assets that had complementary geographies and complementary offerings and put them together, which has been a huge success, for the talent. It creates more mobility, greater career paths for clients, a central place to get very sophisticated services, and it's worked out nicely. So I think you always need to look at your structure and say, can we be simpler. I don't think that's been an inhibitor on the open architecture. We've been doing open architecture for 20 years now, where we put the client in the center and we bring the best of IPG bespoke solutions together for them. And so that, I think, we've done well and continue to do well, but it doesn't mean that there is an opportunity to streamline.

Now maybe we can move on to new business. You obviously talked about a lot of like very, very strong wins. Like what do you think has made the difference? Like what sort of drives such strong wins? Is that your data capabilities? Maybe you can talk a little bit about that? And maybe related to that question, obviously, with the environment deteriorating a little bit, like how do you see the current competitive environment for pitches? Do you think there's a risk that agencies will start to maybe, I would say, compete more aggressively for new business, if you think about the next 6 to 12 months?

I think our industry has always been super competitive, which makes the wins that much sweeter. The wins that we've had of late, which have been pretty substantial, have been all very, very competitive pitches with some of the best marketers out there very sophisticated. I mean if you look at, whether it's Pfizer or whether it's GEICO or BMS or Constellation Brands or Intuit or Skoda, I mean, not only are they great sophisticated marketers that we want in very competitive pitches, but they span different parts of our business, whether it was media, whether it was creative, whether it was PR. So I think it really is due to the great talent that we have. Our data in tech is great. We love when we're pitching -- if someone asks us to test our data and our tech assets, our match rates tend to be very, very high, close to 100%. So that's an advantage to us. So I think it's really being able to help clients, whether they're trying to maintain their brands or to do more direct-to-consumer, more in their digital transformation or more precision marketing, we have the capabilities. And I think we listen really well to what they're looking for and then we respond to their needs.

Right. And you mentioned the environment is always competitive, like pricing, obviously still a driver -- like consideration, some of those pitches. What about working capital and payment terms, and we see this in an environment where I'm sure your clients are maybe a bit more -- maybe they want a bit more capital -- want a bit more [ capital buyback ] cash. Do you see a bit more pressure on payment terms or?

That topic comes up from time to time, and I was Treasurer for a very long time, before I was in the current role. And we've always had the mantra that we're not a bank. And we -- there's a lot of value we can contribute to our clients, but we're not in the banking business. So we have a very centralized managed process. And if anyone even asked for payment terms that are outside what we call standards, they need approval, and it goes all the way up to me. And most of the times, people don't even want to ask me. So it hasn't [indiscernible].

Right. And obviously, another of your major focus, obviously, clearly capital allocation. Can you just maybe give us a latest update in terms of how you're thinking about capital allocation, the priorities? You did mention you want to invest in retail media, in commerce. I don't know how much of that is organic versus M&A? And in [ agency particularly ] where you want to strengthen your presence? And do you think there's maybe scope to maybe do more buybacks -- step up the level buyback over the next few years?

So capital allocation, we've had a pretty consistent disciplined approach, where we believe a balance between the dividend growth, which we've grown consistently since we reinstituted in 2011, pandemic no exception. And we believe in share buybacks. We paused it for a moment in time, when we were paying back the Acxiom debt, but did exactly what we said, as we brought down our leverage and are back in the market. We see value in our shares. We saw value in our shares months before where it was at a higher level. So we definitely -- we actively manage that. And there is room for M&A. We are a very disciplined buyer. We do our diligence. If we can grow something organically, we tend to do so. But if we see an opportunity to really accelerate our capabilities, then we will. I'd say Acxiom was a large deal. We saw the opportunity in data management. We knew it was going to be hard or impossible honestly to get the reputation they have built over 50 years. I mean their clients are highly regulated industries, and to be able to handle that type of sensitive data, we thought that, that was something that was really worth buying, and it came along with an amazing database info base, which has 2.5 billion records on individuals. So we found that to be very interesting, and we knew them very well. And that's turned out well. Last year, we did an acquisition of RafterOne, where we acquired 500 engineers helping us implement Salesforce overnight, which is really part of our commerce capability. So that was also an acquisition where it really accelerated the pace. So when we see those opportunities, I think commerce could be an opportunity. I don't see anything Acxiom-like their size, but we are thoughtful and disciplined.

Fantastic. Maybe obviously, within the U.S. right now, and there's -- you have this writer's strike, you have this dispute Charter-Disney. I know you tend to be quite agnostic in terms of where media has been spent, like how maybe your clients will think about it, how you are reallocating, maybe spending or not? What do you think of potential implications, in your landscape?

I think, for us, the implication is, once again, we get to be a trusted adviser. There's going to be certain make goods that are going to need to happen and certain reallocation of spending, and we can help them do that. We have great relationships with the media partners. If there's no new content, where should they go? So we think it's a time where there's a challenge out there, and you can rely on your adviser to help you figure out how to navigate it.

Right. And maybe the last question from my side then. I know it's really early days and maybe a bit perverted to talk about 2024. I mean there's still obviously moving parts in 2023. But given what you mentioned, the new business ramp up, the turnaround of Huge and R/GA, and I guess I truly also believe that etch spending will come back, like probably we're going to get new AI products to advertise next year. Your guidance of 3% to 5% for H2, like is it fair to say that you think about 2024, it should be at least as good as in the second half, that 3% to 5%?

We do have great talent that's going into -- from the new business that we just won, that will not be a full run rate this year, that will ramp up even more as we get into next year. So that should definitely be a plus. And like I said, I think the secular trends are definitely in the medium to longer term, in our favor. There is more complexity than ever. Retail media and commerce are still, I think, in early days and there's a lot of opportunity there. So too early to put a number on it, but there is definitely positive tailwinds that should help.

Fantastic. Well, thank you very much, and for being here. It's really helpful.

Thank you for having us.