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

Good morning, everyone. My name is Adrien de Saint Hilaire. I've got the immense pleasure of being a media analyst at Bank of America based in London, covering the agency space. And as part of this, it is my immense pleasure to welcome Philippe Krakowsky. Philippe is the CEO of Interpublic, Philippe, you need no introduction but my -- for those of you that don't know you, you are indeed the CEO of IPG. So thank you very much for being with us today.

My pleasure.

So we've got Philippe for about 40 minutes. If you have any questions, we will give you an opportunity to ask some of these questions towards the end of the presentation. But for the time being, I'll kick off with some questions.

Absolutely.

And why don't we go straight in into like what happened over the last couple of months, the last few months. So Q2 was a little difficult compared to our expectations by our expectations. But on the brighter side of things, you've gone into the second half being better, up 3% to 5% organically from the Q2 level. So can you talk to us about the drivers of that improvement? What's the bridge between some new account plans perhaps?

Sure. I mean, I guess, what I would do to answer the question is maybe back up a tiny bit and just talk about what has impacted the first half because then in terms of the change and what's going to our mind result in the second half performance. So I think that what we have is you've got some segment issues for lack of a better term, or sort of sector-wide concerns around particularly technology clients and the degree to which austerity in the tech sector has sort of found its way into its behavior or the activity that we engage in with some very, very large, say, 6 or 8 of the largest technology companies globally. So I think that's one. And then the other thing that we called out going back now 2 quarters and I think that the progression was 2 quarters ago, indicating to all of you that what we had was a sentiment on the part of clients that with the macro uncertainty that we're beginning to ask questions around help us, plan for contingencies help us think about what might be the case, should there be a broader economic slowdown. And then I think what we began to see is clients pausing activity. So those are the macro elements that have impacted our performance. And then the tech piece has had a particularly dramatic impact on two of our digital forward agencies, which traditionally have been both strong growers and innovation drivers for us. And in the back half, as you said, I think that what we see impacting the back half for us is a very, very strong first half in terms of new business. So I would say that it's either us or Publicis who are leading the industry in terms of revenue that we brought in from very, very large account wins with our very integrated, data-driven, sort of the most sophisticated elements of what we do, data plus media, very targetable and addressable work. And then the two parts of the business that have performed very well for us over that multiyear outperformance have been media and then our health care marketing segment, which over that 5-, 6-, 7-year period, we grew from range impairing 15% of our revenue base to north of 25%. And so as we look at the back half of the year, we see new business at scale beginning to phase in. It will not all actually be on stream by year-end. Quite a bit of it will actually kind of come on board also in early '24. And then media and health care, which are our strong performers continuing to pull through in the back half.

And when we had a conversation with that in about 3 months ago, this was right in the middle of the upfronts, which were a bit mixed, so to say, if we put it mildly. How would you characterize the broader ad markets at the moment? Are we seeing some acceleration, some weakening, stabilization from the Q2 trends?

I think it's harder to call that than it used to be because what you're seeing is an underlying shift. So I mean, if you look at us from a client sector, 6 or maybe of the 8 industry sectors that our clients -- that we bucket our clients into have been up through the first half. So it's more that, as I said, we're sensing that clients are pausing because there is still some uncertainty. I think the other observation I would just have at least in the U.S., is that, if you look at the economic growth that we're seeing, some of it is happening in places that's not actually an addressable market for any of us in our space because if you are going to see infrastructure help the economy, if you're going to see kind of greening and early-stage technologies taking -- getting a lot of investment electrifying, getting automotive electrification up and down both coasts, et cetera. That's probably a little further down the tracks for any of us in terms of those becoming companies that are at scale that they then require our help. But how do I see the market? I think it's -- there's a measure of conservatism. And then what's really happening is share shift. I mean, so linear, clearly continues to suffer, and we've all asked ourselves for a long time. And you and I've talked about this for a long time. When does that model ultimately whatever the right? When do we abandon it? When does it break as it were. But you're seeing more inventory in CTV, which is actually good for us because we have made big investments in data and addressability and sort of data informed decisioning or investments in media, we think, are net positive for us. And you're seeing a lot move to retail media. And I think to date, that one is a bit harder to size, you get very different even from a holding company to holding company where we sort of try to understand the scale of that. We see a lot of growth. But -- and then it's harder to track at this point how much client activity is going into those new channels, but it's definitely a big opportunity.

Great. So I want to come back on one of the points that you made earlier about the technology sector. So a lot of these companies without necessarily naming them, but they've been really successful financially on the stock market with those austerity measures.

They have been rewarded for those austerity measures in the last 12 months, yes.

So let me ask it this way, why would they stop, like why would we imagine that it could reinvest then back into marketing if the market seemingly rewards their austerity efforts around marketing?

I mean I guess I would flip that back on to you or on to a lot of the folks in the room here because you're the folks who put capital to work. But I don't know that it's sustainable for companies that have been rewarded for growth to stay in that mode for an indeterminate period of time. So whether it's because there's been slowdown or because there's been uncertainty and a sense that there might be a recession coming, whether it's here, whether in Europe, I would have called Europe wrong because I would have thought Europe would be in recession by now.

[ It's only a good call ].

And that's a [ funny ] point. It's true. So to my mind, I don't think that austerity is the right long-term strategy for them to be rewarded or for them to create value. And then I think secondarily, if you look and if you speak to the leadership of a lot of those companies, I think there's an acknowledgment that there was -- whatever the right word is going to be, whether it's out over your skis or whether there had been -- that there had been exuberance when it came to hiring definitely. And then spending maybe even disproportionately against some initiatives that clearly didn't pan out. And so you understand why that discipline or that austerity has been seen as focus and has been rewarded, but I don't think that it's in their long-term interest because I don't think -- I think they're clearly growth companies. And I don't see how economic growth is not going to still be informed by the 5 or 6 big, big names in tech, obviously joined more recently by NVIDIA, which is kind of adds another one.

And if we stick to that point for one more minute, how confident are you that from your conversation that you have with those executives that Q2 was perhaps the bottom in terms of their marketing expenses or their marketing plans? Is there any...

No. That one I can't call for you. I mean my sense is that to the extent that what we've seen in tech has clearly had a knock-on effect, and you've seen it probably called out in, I would think almost every public comment made by anybody in our space, the marketing services, we provide professional services to that world, and we work with, I'd say, 4 or 5 of the largest at scale. But I think it's too early to kind of call the turn there. I don't know that I would -- I mean, I don't see it between now and the end of this year. And then as we begin conversations with them about activity for next year, that will be later this year, and some of them actually run-on midyear fiscal and so then it will actually be a bit later still because so it will either be kind of November-ish conversations October, November for '24 or it will be first quarter conversations because some of them will run.

Yes. Yes. Okay. So on the brighter side, we talked about this net new business activity in the first half, which was really strong Pfizer, Škoda into it, just a few names that just spring to mind, but I'm missing a few...

Yes. You are. Fine. Glad that we've made it hard for you to remember them all.

Exactly. So talk to us about like why you think you've won those pitches? Are there any like common points between all these pitches? What are the capabilities that IPG is bringing to the market that maybe other holding companies can't?

Well, look, I mean you've been sort of calling this calling investors' attention to this for some time, but I think that there's definitely begun to be a differentiation among our peer set, and we were very early to it. In that some of us have scale data assets. And I think that those definitely are all apart when you look at our sizable wins. And I think that they probably bucket into very large media consolidations where what you have are clients who are looking to use the very sizable media budgets that they have and invest more intelligently. And their understanding of value is sort of evolved and it used to be about efficiency, and now it's about effectiveness. So how do you use your marketing spend to drive business growth. So that's where we talk about sort of moving upstream with clients or about really business transformation through. Again, data combined with media. And then a few have been large integrated pitches like a Pfizer, where what you have, again is -- and I think the entire industry showed up for that because the scale of it, and they ended up splitting it between us and one other holding company. But that data spine, that backbone that informs the decision-making but then also allows you to target. So then at that level of production, you're using that data to be -- to do personalization and scale sort of buzzword over the moment. But -- so we'll always plug those solutions into the sort of foundational data layer in the company. But that is about filling your know-how in medical affairs and health care marketing and combining it with the creativity of the more "traditional agencies". And I think people talk a lot about whether and the extent to which creativity is potentially at risk in this new world. And I think if it's connected to data and other areas where we've got specialization then it can be quite powerful and then also earn public relations work. So that was essentially -- those are, I think, the 2, 3 [indiscernible] lines on a lot of these Constellation Brands, Bristol Myers Squibb and then some of the names you called out.

Okay. Do you see a busy pipeline ahead in terms of pitches? Because it seems like H1 was fairly robust, but are there more things coming up sizeable?

Yes. I mean I think we've got a pretty healthy -- I mean I think the industry pipeline is pretty good. Ours is healthy. And then the sense is that there's more coming in that, that activity is actually been picking up.

Yes. Great. Another thing which unfortunately was a drag in your performance in the first half. You talked about it as R/GA and Huge, which is quite intertwine with the fates and need of like the technology space. So where are we in the recovery for these two specialized agencies? What are the initiatives that you've taken to turn them around?

I think just the -- but the back story there is that, obviously, when you do what those kinds of companies do, which is help clients innovate in digital channels. The rate of change is fairly high. And so every 3 to 4 years, you -- things that were at the leading edge have become -- I'm not sure what the right word is because they become commonplace enough, but others are doing them. And so it's -- for us, what's unfortunate is that they do over-index the tech clients. And so we get asked a lot whether or not the tech issue or at least early on, I think people have actually sort of internalized now. But initially, the question was, is it small and medium-sized tech? Is it "startups"? Of course, obviously, is it crypto? We all know how that ended or maybe we'll have to pay attention to what happens in the quartile south of here to know how that ultimately ends. But those agencies have a lot of their -- there's a client concentration in tech. So that's been an impact. They are the ones for whom the answer would have been, they do work with some start-ups, some of the part of tech that's more kind of bleeding edge. And the slowdown happened as both of them needed, I think, to reorient their models to a world where we kind of need to lean into, I think, for us, a very big opportunity as a holding company when I lay out for you what's worked really well for us for a number of years now. A very big opportunity is going to be commerce. And it's going to be taking that data layer taking the way in which it informs smart production at scale and then putting it out into the world where everything is shoppable and not just the advertising technology world through media but the martech world. And so that happened at a moment in time when both those agencies. So what we're doing is, at Huge, I think, a little bit further along, and there is a productization model and really a consulting model in terms of how they take all of the tasks that they perform in all of the deliverables and really turn them into products that are bought as such with a consulting front end. And then at R/GA, we haven't actually named the new CEO, but we did move on from the prior one. And I think it's going to be pivoting into the opportunities that sort of e-com and then the nonmedia part of retail channels represented.

Okay. Great. Earlier in the year, a big focus point for everyone, and I think it's still a big focus on is the impact of generative AI and agencies rightly, wrongly, but...

20 minutes in. It's like a record, actually...

I managed to hold this for 20 minutes. But anyway, so it was a big focus point for a lot of us, I guess, and it still is. So let's discuss like how this thing is impacting your business. Any example of campaigns that you run with generative AI? And I can see Ellen is in the room now. So we can ask maybe financially, how does the model work with generative AI?

Sure. Again, we've got a portfolio that has quite disparate assets, right? And more than half of it, although obviously, I'd be happier if it was significantly more than half of it. It is in activities that are far more tech and data informed. So if you look at the work that we do at Acxiom, where we're doing first-party data management for very, very large enterprises around the world in financial services and automotive, telco, et cetera. AI has been a part of the work we do there for some time. And so whether it's -- it would have been called machine learning, it wouldn't have been called generative AI. Similarly, in the media space, which is so closely connected to data, where you are identifying audiences and using those audiences to them, as I said, sort of turn a media investment into a lever for business growth. So AI is already in parts of our business that have made that transition to higher value to clients that have, to your point, about my finance partner there. Going to give us the opportunity to get paid for business outcomes or take some of the technology and think about whether it's licensable to clients and things of that nature. So it's already in that part of our business. And then in a Reprise media where we do search and optimization work and retail media, we've had a Chief AI Officer for a couple of years inside of that company, inside of an MRM where we do, again, what used to be called direct marketing. So if we then really kind of focus on the more "traditional" or creative parts of the business, I think that -- the question is going to be thinking, as I said earlier, from not a people or FTE model approach to how we engage with clients and you're getting paid for a person's time. It's to think about tasks and deliverables and then how AI is going to allow us to do those things. Possibly faster, but you still want the skill sets that those folks have, to perhaps also meld them together to in, say, the PR space, work with a client and a decade's worth of press releases that we've generated in a sort of standard way and figure out how the technology can allow us to either automate that or do that better. But then to free up that expertise and have the folks on our side, be able to engage with clients on higher order or higher-value tasks or tasks that end up getting to the side because budgets ultimately run out and you do the rudimentary things, but then you don't do the higher value or the more strategic things. But it's work in progress. And then in terms of whether it's in the creative product, all of the creative leaders at the agencies have been sort of working through, does it help you identify richer areas in which your teams can work and go faster to get to the nuggets. Clearly, it's going to inform insights that creative people work with. And then on scale creative that is very, very personalized across tens of thousands of iterations because there are so many channels. It's clearly going to be quite helpful there, and that's just a net new need. So even though we may leave certain things behind there'll be new ways for us to assist clients. And they have incorporated it into creativity even at a fairly high level. And so I've seen some interesting things we've done for clients. We really quite recently took a very big idea for clients for what would be a very traditional type of creative -- we took a Super Bowl idea to a very big client recently they wouldn't have been possible were it not for the fact that AI allowed us to bring a creative idea to life. It would have been either impossible to do or prohibitively expensive to do. So it's -- but it's quite early days in terms of what we -- the generative AI or IP. So I think you'll see both. You'll see migration to new sources of revenue with clients, and you will also see some efficiencies. So for the moment, it's already baked into a big chunk of what we do and in the places, where it's still very early days, we think they'll be definitively upside when it comes to margin and quite likely opportunity for incremental revenue. But maybe less evident right now that that's either available or we're going to be a significant upside.

So you give me a good segue to talk about your margin. And portability has expanded a lot at IPG over the years. Now actually about 16.7%. First of all, if we spend a few minutes on that topic. So how are you managing this margin performance despite the fact that indeed your top line performance for this year is a little weaker than what you expected at the start of the year? What are the levers that you're putting?

I mean, the model that we run is quite useful in that regard, right? And so when there is growth, we are very, very consistent about converting it to incremental profit. But if you really come down to it, you've got a lot of variability to our cost base. So notwithstanding all of the wins that we called out earlier, we'd never hire ahead of revenue coming in. So to begin with, that's a benefit. There's very, very close alignment from an incentive perspective with ultimately, what we think that all of you as our owners or prospective owners care about and should care about. And so it is essentially all of the compensation plans are revenue margin with about a 2:1 ratio of margin. So there's clearly alignment on the part of our operators that kind of margin delivery is going to be a way in which folks can assure that they're also going to get compensated. So you've got that. You've got temporary labor, which Ellen and her team managed really, really well. And we're actually very thoughtful even now about, as I said, when you've got different -- the nature of the businesses we've got in the portfolio are different. And so there's a lot of thought given to kind of right levels of temp and utilization. So I think that we've been asked at very nominal or modest growth rates. Can you improve or whole margin? And notwithstanding the -- we've said we're not that coming off of the kind of performance we were used to. And I think we've gotten you all used to with the weight at the first half has rolled out. But I think we may have been the only holdco that committed to margin enhancement as we headed into the year, and we still be able like we'll deliver on that target. So I think it's just the nature of the business model and then how we run it.

And before I pass it over to the audience for their questions. Going ahead, I don't think you've really set out like a long-term outlook, but I think you've been quite clear about the fact that you see further upside to the current level of 16.7%. So how do we get there? Do we need to see growth really pick up fundamentally? Or what are the initiatives, the self-help initiatives that you're taking to like -- perhaps minimize the effect of inflation or reduce certain costs?

Well, as I said, I mean, I think that if you see whatever we call it sort of moderate growth, we definitely know that we can convert that to margin improvement. So the return of growth is one piece of it. if you see growth above and beyond that as you have with us for 4 or 5 years now. Then to your point, we do a lot. There's a lot of work that we are doing to sort of optimize our own structures. So we near shore, we offshore, we actually use AI to look at a lot of our own processes. So we think that from a reengineering process improvement point of view, there's still more we can do with our business. So it's growth at a modest rate incremental profit growth above that. Clearly, meaningful steps forward. There's the kind of reengineering of our own business. And then some of the -- whether it would be a huge with a productized offering that is so essentially off the shelf as a solution to a client. But mostly with the data informed part of our business, you also have when you're doing true pay-for-performance, when you're doing outcome-based work. And as a result is delivered for a client, a transaction, have been on a cruise line, a test drive, then we also see incremental margin opportunity because that activity is going to be accretive.

Superb. Great. So I was promised. If you have any...

You got 5 seconds to go.

Actually, that was for my questions...

No, I know -- we've got...

Yes. Yes. About 10 minutes. If you have any questions, otherwise, I've got still some questions to ask of course, but there are some mics in the room if you have any questions.

We got two over here.

Is it a concern that the generative AI tools that you referenced that are used by your creatives. Is it a concern that those will be equally, if not more available to your competitors or to big tech? And I guess what is the special sauce that in your team's hands makes those more powerful?

So what's interesting about that is in conversations with clients. The year -- I mean, I think you're into something which I think has real [ potency ], and I think is going to be an interesting place to work with clients. So everybody will be able to use everything about what AI theoretically delivers, right? So whether that's around how you crunch and information and generate insights in many businesses, how you do creativity in businesses, et cetera. In media buying, I don't know, 75% of media is going to be bought algorithmically, another 3 or 4 years, right? So it just raises the bar, right? But to differentiate, you still need that level of specialization, but more you need to sit with clients, and I think it's how you use first-party data is going to become much more important in, sort of in an AI informed world. And as I was saying, with a client with whom we're doing an interesting trial in the PR space, I think clients are going to want to create -- and they can be fairly modest because that's not like a super high-end use case, but it's saying you've got a database of 10 years of the work we've done together being something that seems fairly route or rudimentary. But there is actually expertise there that our folks are bringing to the table, right? And so I think it's going to be that combination of are you folks smart about the tools? Do they understand how to use them? Do they understand the limitations of them? Are we baking -- when we bake the data piece, so FCB, one of our creative agencies, not the biggest by far in the industry. Currently one that is winning a lot, a lot of awards and is understood to be one of the most creative, right? And the reason that they are is that they've gotten ahead of -- everything is audience-led with them. They look at data. They come to a point of view about where the business opportunity is. They then identify the individuals they need to be talking to, to make good on that business opportunity. And then the strategic insights that lead to the creative are informed by that. This isn't an AI. This is just data. And then they do work that is not only highly creative, but works as a result of that. So I think that you can see where, again, you need to know how to use the tools, but theoretically, yes, 3 people and a dog in a garage could do this, right? But they won't actually have that knowledge base that we've got within our -- we've got essentially specialized professional services capabilities that have proven that they have value for clients over time. And now the question is going to be how do we use those tools to amplify those or to get more from those two together. But yes, in theory, right, everybody will have. It will just be the new kind of floor.

Any other question?

It's early in the morning.

Okay. I'll carry on then. Before we had this conversation, we were talking about the fact that you do more work around commerce, more work on CRM.

I'd like us to do even more...

Exactly. So talk to us about like what is it that you concretely do in that space of commerce? Because I don't know if anyone actually realizes what you're doing here and what your -- why you're excited about that space.

We have only 5 minutes to go, that's all. That's a hard question. I guess if you sort of break it down, one place, you can hive off the retail media piece very quickly and quite immediately, right? So a lot of client dollars are now going to go to retail media. The retail media networks have the benefit of both being connected to a lot of data. So from a client perspective, that means that I have a sense that there's going to be an accountability on an outcome-based piece. I know that $1 spent on your network correlates to reaching these people or to seeing these actions. And so through, again, mostly our media vertical you saw we launched a retail media solution that's informed by the data layer just in the last couple of months. So we're seeing a lot of activity there. And then I think what's also interesting to clients there is it gives them a place to invest media dollars that isn't just with the walled gardens. So all right. You understand that they're looking for ways to have more autonomy or have more impact in that space. In the commerce space, we do everything from e-comm strategy work for clients to build of everything from not a traditional website anymore, but everything is shoppable. So you're doing things that look more like a scale dot-com through to a lot of content generation that then gets pushed out in all of these channels or that consumers can engage with and much of which is shoppable, so that can happen through a PR firm in the earned space. It can happen through the digital agencies that, to my mind, again, need to be doing more in that space. And then you can do full transformation engagements where you're helping clients sort out how they're going to -- we had a very, very big win in the sort of global in the apparel space, athletic footwear that's a client that really wants to go direct to consumer. And so it was in the guise of a big media-led consolidation, but a lot of the work we're doing with them there is around how do they change the model so that over time, they either become less reliant on physical retail or less reliant on third-party, on intermediaries in the commerce space. So it's a very broad range of activity there.

Superb. Another opportunity for a question maybe. This one, just here.

You had mentioned before the decline of the linear model and just kind of figuring out the point -- where that break point is going to be. I guess is it that the advertising that's occurring on streaming channels. Is that not as impactful as advertisers thought would be like it would be an incremental benefit along with other general advertising? Or I guess like what's the point at which you think the linear model just can't do it anymore, especially given the fact that it seems like live events will continue to draw...

Sports works, right? But I mean there -- if you think about what works in a traditional media model, over time, there have been fewer and fewer either must see, must-see in real time can only see on this format kinds of activity. So sports clearly works, and there are a few sizable tent poles that I guess I'm not sure that I -- there are -- linear is useful and has a part to play when we work with clients because it brings scale and because there are times in the way in which we solve problems with clients and/or what we're trying to accomplish at different points in sort of thinking about journeys and how consumers engage with the brand, where it's very hard to achieve scale without linear television. So that's actually -- it's worked quite well because it actually has an important role to play. The challenge has been, obviously, that it's less clear and as you've had other instruments that aren't perfect but give you more clarity into this dollar spent resulted in this outcome. And obviously, digitally, you've seen just the growth of digital, right? And I think the challenge has been -- it's less about whether digital video works or doesn't work. It's more about -- and that's why I said a little while ago that CTV interest us and as there's been more CTV, we think that's a good thing. I think it's been about having inventory -- scale inventory and quality inventory that consumers are taking on board that looks and feels like linear, right? And so it's an evolving model. And I think the question has always been maybe the upfront model which was another reason why people ask themselves whether or not can it be traded in this way, kind of in perpetuity. And I think scale media owners have been moving pretty fast at -- and do we have a measurement standard, when you're engaging with a scale media owner that isn't one of the digital media owners because obviously, we've seen some of the digital media owners try to do television or get into television. And if you look at what Amazon is doing right now, they have a really interesting, really diverse ecosystem at this point, right, where you can be in their stack, which is commerce, or you can now be given that they've made meaningful investments taking on board a Thursday night NFL game, which is going to deliver a huge audience with data back end or with some addressability. So that's -- you're not going to be able to call it and say, "Oh, this is the moment in time." But that's the progression we've been on. And that doesn't mean that folks who are tagged as linear or traditional media owners won't make the shift across. They have -- they've unified the idea in there, everybody who engages in their ecosystem is targetable to some degree. Measurement has been a channel -- a challenge. But we're just -- it's just -- it's an evolution. It's not I think of...

I mean the measurement aspect has been a challenge for quite some time.

Yes, it is.

And so I guess, are we getting any closer to the point where it will -- the inflection point where it will be value additive.

Well, I -- yes, I think we definitely are. And look, I think you'd want somebody who's not -- not that I don't spend time thinking about this, but when I was -- when I ran Mediabrands, I was probably closer to it. But our Head of IR is right here, and if you like the time, sitting with the folks who do the actual media buying and sale for our clients and talking to them about where we are in the evolution of -- it's not going to be a single measurement standard, but I think we're getting closer to where there are a few, and they are ubiquitous enough and there's enough of comparability that there's at least a few currencies. And yes, I think that there's been quite a bit of progress made even in the last 24 months. But talk to Jerry and then sit with the MAGNA folks because they'll tell you what our point of view is on what Nielsen has done and whether or not that bridges the gap and who's bought into -- but yes, I mean that's been a big impediment for a long time.

I'm afraid we'll have to leave it here. That could go on for a longer period of time. But thank you very much, Philippe. Enjoy the rest of your conference with us. Talk to you soon.

Okay. Thank you. And we'll see some of these folks inside. Thank you.