Interpublic Group of Companies Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2022

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Interpublic Group Second Quarter 2022 Conference Call. This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Mr. Jerry Leshney, are Senior Vice President of Investor Relations.

Operator

Sir, you may begin.

Speaker 1

Good morning. Thank you for being with us. This morning, we are joined by our CEO, Philippe Krakowski and by Ellen Johnson, our CFO. We have posted our earnings release and our slide presentation on our website, interpublic.com. We plan to begin our call with prepared remarks to be followed by Q and A.

Speaker 1

We plan to conclude before market open at 9:30 Eastern. During this call, we will refer to forward looking statements about our company. Are subject to the uncertainties and the cautionary statement that is included in our earnings release and the slide presentation and further detailed in our 10 Q and other filings with the

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SEC. We will

Speaker 1

also refer to certain non GAAP measures.

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Have been participating in the past

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several years. We believe that these measures provide useful supplemental data that while not a substitute for GAAP measures allow for greater transparency in the review of our financial and operational performance. At this point, it is my pleasure to turn things over to Filip Krakowski.

Speaker 3

Thank you, Jerry, and good morning. I hope you're all keeping well. Before turning to our results, it's important to acknowledge that as individuals, we're living through and as organizations, we're operating in quite unusual and challenging times. In all our conversations with clients, The question of purpose is something that increasingly comes up. That topic is also at the forefront of our thinking.

Speaker 3

And it's essential that we as IPG continue to be clear about our values because living into those values is something that our colleagues across the company take very seriously, which is particularly important when you consider that we're a talent based business focused on ideas, creativity and IP. So I wanted to call out to the teams across Interpublic that are making contributions to alleviating the impact of crises such as the war in Ukraine and the political upheaval in Sri Lanka, as well as to all our people who are leaning into our equity and inclusion efforts and are playing their part in programs that seek to address other key areas of ESG, which remains an important priority for us. I I think that was evident after the Supreme Court decision on Roe v. Wade, when we assured our people that we would update our healthcare benefits to provide funding for travel to ensure consistent and equal access to health care, including reproductive choice for all our employees. We understand that decisions regarding healthcare and our families are by their nature ones that each of us makes with a great deal of thoughtful deliberation and in keeping with our individual circumstances and beliefs.

Speaker 3

Of the call is being recorded. As an organization, we want to ensure that we live up to our values of mutual trust and respect, which have been core to our long standing commitment to inclusion and equity. Turning now to the immediate purpose of this call, We'd like to share with you our Q2 and first half results as well as updates on the highlights at our agencies and on the tone of the business performance over a period of many years. 2nd quarter organic net revenue growth was 7.9%. Worth noting that's on top of very strong 19.8% growth a year ago, and this brings our 3 year organic growth stack over the period of the COVID crisis to 16.5% in the 2nd quarter, which is well ahead of industry norms.

Speaker 3

Over the 1st 6 months of the year, our organic growth was 9.6%, which brings 3 year growth to 15.2% for the first half. Organic growth in our international markets was 7.1%, highlighted by growth in every region of the world and on top of 24.4 percent growth a year ago. Growth in the quarter was also broad based across our portfolio of solutions,

Speaker 2

of the

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call, whether viewed

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by segments,

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agencies or marketing disciplines and client sectors. This reflects the increasingly integrated nature of our offerings It's important to call out the fact that growth at each of our segments compounds double digit growth a year ago. Our Media, Data and Engagement Solutions segment grew 6.2% organically, which adds to 25.1% growth last year. This strong performance was led by double digit increases in our media, data and tech and e commerce offerings. Our digital specialist agencies were dilutive to this result as we saw deceleration in certain of our respective client categories and related project work.

Speaker 3

At our Integrated Advertising and Creativity led segment, organic growth was 8.5%. We had growth at all of our largest agencies, significantly outpaced by IPG Health, followed by strong growth at MullenLow and FCB. In our Specialized Communications and Experiential segment, organic growth was 11.1%, highlighted by double digit growth in our experiential solutions and solid single digit increases across the public relations discipline. As you'll recall, when we launched this enhanced disclosure, We believe the new segments are important and that they reflect the key areas of activity in which we are providing services to our clients and the broader evolution we are seeing across the industry. However, we remain a highly client centric culture and organization, and our major engagements with clients involve custom solutions, which draw on services from all segments in integrated open architecture teams.

Speaker 3

Our growth in the quarter was also broadly shared across client sectors. We were led by double digit percentage growth in our other sector of leisure, government and industrial clients as well as by double digit growth in the financial services and healthcare sectors. Turning to operating expenses and margin. Our results again reflect our leadership team's demonstrated capacity will be able to run their businesses with the appropriate discipline, while at the same time continuing to invest behind key areas that will drive further growth. And while our comparisons to last year continue to reflect the ins and outs of the pandemic, it's encouraging that we're driving margins at levels well above of seasonably comparable periods prior to the pandemic.

Speaker 3

Net income in the quarter was $229,600,000 as reported. Our adjusted EBITDA was $370,100,000 resulting in net revenue margin of 15.6%. Of the call is being recorded. As expected and as shared with you on our last call, that is below last year's Q2 of 17.9%, when our growth had begun to accelerate very significantly, yet certain variable expenses were historically low due to the effects of the pandemic. Compared to a year ago and under our organic growth of 11.4% over the trailing 12 months, Our headcount has grown approximately 9%.

Speaker 3

Variable expenses have recovered to higher levels as well as we've resumed travel and returned to office in far greater numbers. It's worth pointing out that margin in the quarter of 15.6% compares quite favorably to margin in the pre pandemic Q2 of 2019, which was 13.4%. That's a result of both our growth and the benefits of the strategic restructuring actions taken in 2020. Of our earnings call was $0.58 as reported and $0.63 as adjusted for intangibles, amortization and dispositions. Under our share repurchase program, reauthorized earlier this year, we repurchased 2,700,000 shares in the quarter using $84,800,000 A differentiator of our performance in the quarter and over a period of many years now has been our ability to bring together creativity, digital technology and data to create higher order marketing and media solutions that are responsive to the evolving business transformation needs of our clients.

Speaker 3

The growth you're seeing is driven largely by these very relevant capabilities with which we can solve an expanding set of marketer needs for more precise, personalized and accountable engagements with their audiences at an individual level with respect for data ethics and consumer privacy. Looking ahead, we fully appreciate that we're at a moment of macroeconomic and geopolitical uncertainty. In this environment, it's fair to say there is a high degree of volatility and visibility is challenged for every company. That's no less true for us at IPG, given that we're a global and diversified client service business. Despite these uncertainties, however, economic concerns significantly weigh on the growth outlook for the year that we shared with you back in April.

Speaker 3

While we appreciate the environment is dynamic, the demand we're seeing for our services remains broadly strong and we are committed to delivering on our growth expectations for the year. You'll recall that in April, we upgraded our 2022 organic growth expectations to 6%. Given our growth through the first half of the year, we see upside to that and believe we will exceed 6.5% organic growth for the full year. We continue to expect that we'll deliver adjusted EBITDA margin of 16.6%. While there are always puts and takes as we progress through any given year, we've not to date seen anything of the size or significant that would put us off those objectives.

Speaker 3

We are, of course, staying close to our people and our clients, carefully managing expenses, and as always, will keep you apprised as the year develops. Understandably, clients are considering how best to factor a slower macroeconomic picture into their plans for the balance of the year, but that varies significantly on an industry by industry basis. And marketers are are giving considerations of the disadvantages of being out of market during a slowdown, especially if one doesn't fully materialize or is short lived. Of our diverse business model, which as you know encompasses about 5,000 clients, 100 plus countries Marketers remain focused on leading with strong brands, which can help mitigate the impact of higher inflation and brands are critical to their continued transformation to DTC at scale, all of which matches up well with our strong portfolio of agency brands, of the call is

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being recorded, fueled by top

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industry talent, differentiated capabilities and data and the ability to customize our offerings on an open architecture platform. The skill and commitment of our IPG colleagues have helped us to reach the halfway point of the year on a strong footing. I'd therefore like to, in this part of my remarks, again recognize and thank our people for their work on behalf of clients and in support of each other as well as their engagement on vital societal issues consistent with our culture and values. One additional important item, of the call is being recorded.

Speaker 2

As you will have

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seen, there's significant news related to senior leadership within our organization, which we will be releasing a bit later this morning. Our people are key to IPG's long term success and another thing that's core to our culture is the ability to develop outstanding talent and find new opportunities for colleagues across our organization. So it's gratifying to have elevated a number of our most exceptional and experienced leaders of the call to new roles within 2 of our key business units. Daryl Lee, who's been most recently serving as the CEO of IPG Media Brands, have been named the CEO of McCann World Group Eileen Kiernan, CEO at Worldwide will succeed Darryl at IPG Media Brands and at McCann World Group, Bill Cobe will continue in his role as the network's Chairman. We know they'll all contribute to the future success of IPG and our clients.

Speaker 3

At this point, I'd like to hand over the call to Ellen for a more in-depth view of our results.

Speaker 5

Thank you. I hope that everyone is well. I would like to join Philippe in the recognition of our people and add my thanks to them. As a reminder, my remarks will track to the presentation slides that accompany our webcast. Beginning with the highlights on Slide 2 of the presentation, our 2nd quarter net revenue increased 4.7% from a year ago, with organic growth of 7.9%.

Speaker 5

Organic growth was 8.3% in the U. S. And growth was 7.1% in our international markets. Organic growth was 9.6% in the first half of the year. 2nd quarter adjusted EBITDA of the call was $370,100,000 and margin was 15.6%.

Speaker 5

Diluted earnings per share was $0.58 as reported and non operating losses associated with the disposition of certain small non strategic businesses. We repurchased 2,700,000 of our common shares during the quarter for $84,800,000 bringing repurchases to 4,500,000 share is due to the 1st 6 months of the year. Turning to Slide 3, you'll see our P and L for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow. On Slide 4, we present 2nd quarter revenue in more detail.

Speaker 5

Our net revenue in the quarter was $2,380,000,000 an increase of $105,900,000 Compared to Q2 2021, the impact of the change in exchange rates were negative 2.6 percent with the dollar stronger against currencies in nearly all of the international markets. Net divestitures for certain small non strategic agencies were negative 60 basis points. Our organic net revenue increased from 7.9%. At the bottom of the slide, we break out segment revenue performance. Our Media, Data and Engagement Solutions segment grew 6.2% organically on top of 25.1 percent in the Q2 of 2021.

Speaker 5

As you can see on this slide, of the segment is comprised of IBG Mediabrands, Acxiom, Canessa and our digital and commerce specialist agencies, While we experienced softness at RGA and Huge, organic growth at our Integrated Advertising and Creatively Led Solutions segment IPG Health, Monlow Group, FCB and our domestic integrated agencies. Our growth was led by double digit increases at IPG Health and FCB. At our Specialized Communication and Exponential Solutions segment, organic growth was 11.1%, which compounds 15.5% in last year's 2nd quarter. The segment is comprised of IBG DEXTRA and DEXTRA Health, Weber Shandwick, Golin, Jack Morton, Momentum and Octagon. We were led by double digit increases in our experiential solutions and had mid single digit growth in the PR discipline.

Speaker 5

Moving on to Slide 5, our organic revenue growth by region. In the U. S, which was 66% of net revenue in the quarter, organic increase was 8.3%. That was driven by very broad based growth across segments, agencies and client sectors. International Markets were 34% of our net revenue in the quarter and increased 7.1% organically.

Speaker 5

We grew in every international region. Continental Europe increased 8.3%. It's worth noting that of the Q2 of 2019, we have double digit growth in Germany, France, Italy, Portugal and Our performance was mixed in the market with notably strong growth in Media, Data and Tech, Exponential and IPG Health and with softness in certain other parts of the portfolio, which was due to client specific actions. Asia Pac grew 4.8% organically. Among our largest national markets, we had strong growth in India, Japan, Australia and Singapore, while China decreased from a year ago.

Speaker 5

Our organic growth in LatAm was 8.8%, which is worth noting is on top of 49% growth a year ago. Our increases were led by Media and Bayouge. Our Other Markets Group, which is Canada, the Middle East and Africa, grew 11%, led by very strong performance in Canada. Moving on to Slide 6, operating expenses and margin in the quarter. Our adjusted EBITDA margin was 15.6% in the quarter, which as expected decreased from 17.9% a year ago.

Speaker 5

It's worth noting that margin in the quarter compares to 13.4% in the pre pandemic Q2 of 2019. You'll recall that last year's 2nd quarter margin benefited from several transitory effects, which were due to both the sharp acceleration of revenue growth in the quarter and to the impact of the pandemic on our operating expenses. A year ago, certain expenses were running at unusually low levels. Those include expenses due to travel, meetings and office work. You'll also recall that our hiring lag behind top line growth.

Speaker 5

Compared to 2019, this year's 2nd quarter margin is significantly higher, which reflects both leverage on growth and the ongoing savings from our 2020 restructuring program. As you can see on this slide, our total our ratio of total salaries and related expenses as a percentage of net revenue was 66.9% in the quarter compared to 65.4% a year ago. Underneath that, As our results, we delivered on our expense for base payroll benefits and tax due to the hiring that was required to support of our 11.4 percent organic growth over the trailing 12 months. Headcount increased approximately 9% over the same period. Going the other way, our expense for performance based employee incentive comp decreased from a year ago from 6.4% of the Q2 of 2019, total worldwide headcount was approximately 57,600.

Speaker 5

Also on the slide, our office and other direct expense was 14.7% of net revenue compared to 13.3% a year ago. Underneath that, we continue to leverage our expense for occupancy, which is 4.8% of net revenue, an improvement of 20 basis points from a year ago. All other office and other direct expense was 9.9% of net revenue compared to 8.3 of the presentation. The comparison reflects the return of variable expenses that I referred to earlier as expense was 0.8 percent of net revenue, a decrease of 50 basis points from a year ago. On Slide 7 will present a detail on adjustments to our reported 2nd quarter results in order to provide better transparency and a picture of comparable performance.

Speaker 5

This begins on the left hand side with our reported results and steps through to adjusted EBITDA and our adjusted diluted EPS. Our expense for the amortization of acquired intangibles in the second column was 21,100,000 Below operating expenses and shown in column 4, we had a loss of $4,200,000 in other expense due to the disposition of a few small nonstrategic businesses.

Speaker 6

At the

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foot of the slide, you can see the after tax impact per diluted share of each adjustment, which bridges our diluted EPS of $0.58 to adjusted earnings of 0.6 $0.33 per diluted share. Slide 8 depicts some of adjustments for the 6 months, again On Slide 9, we turn to cash flow in the quarter. Cash used in operations was $90,800,000 which was due to working capital use of $382,100,000 Operating cash flow before working capital was $291,300,000 As a reminder, our operating cash flow is both highly seasonal and can be volatile by quarter due to the changes in the working capital component. The magnitude of our receivables and payables means that the timing and collection of payments within any single quarter of the call can significantly vary and affect the working capital results. With that, it's worth noting that over the past 3 calendar years, We have generated cumulatively $2,000,000,000 from working capital and that our cash position at the 2nd quarter end was historically high, of the quarter exceeded only once in the past 20 years.

Speaker 5

In our investing activities, we used $61,000,000 mainly for CapEx and the deconsolidation of the subsidiary in which you hold a minority interest. Our financing activities in the quarter used 233,000,000 primarily for our common stock dividend and share repurchases. Our net decrease in cash for the quarter was $418,600,000 and our cash position at quarter end was $1,990,000,000 Slide 10 is the current portion of our balance sheet. Slide 11 depicts the maturities of our outstanding debt. As you can see on the schedule, total debt at quarter end remains at $3,000,000,000 Our next maturity is April 2024 for only 250,000,000 Thereafter, our next maturity is not until 2028.

Speaker 5

Gross financial debt to EBITDA, as defined in our credit facility covenant, was 1.68x@quarterend. In summary, on Slide 12, our teams continue to execute at a high level and have us well positioned to deliver on our expectations for the year. I would like to reiterate our pride in and gratitude for the efforts of our people. The strength of our balance sheet and liquidity means that we remain well positioned both financially and commercially. And with that, I'll turn it back to Philippe.

Speaker 3

Thanks, Ellen. Turning now to highlights from the quarter. Much of the demand we're seeing and in many cases converting into growth comes from more transformational services as clients seek to tap into the areas where IPG has made significant investments in recent years. The business transformation agenda crosses all client sectors and the consumer sits at the center of these changes. We're being asked by marketers to address not only the all important questions regarding the positioning and articulation of their brand, of the call, which are key long term equities, but also the activation of that brand's value proposition in ways that engage with consumers and drive marketplace performance.

Speaker 3

Of the call is being recorded.

Speaker 2

That combination of our creativity

Speaker 3

and expertise in marketing services coupled with the use of data and technology to identify and understand audiences means we have an important role to play going forward in helping companies define their businesses and unlock growth. A key component of that formula is our continued ability to deliver best in class creativity across all marketing disciplines and around the world. Our very strong showing at the Cannes Festival of Creativity just a month ago demonstrates that our capabilities in this regard continue to be world class. As IPG Agencies won 110 Lions at Con, including 5 Grand Prix and 1 Titanium Lion. Earlier this year, as you'll recall, we were also the number one holding company in North America at the Effie Awards, which recognize the effectiveness of the programs we create for our clients.

Speaker 3

An ongoing success story for us is IPG Health, which continued to deliver very strong business performance in the quarter. And at Khan, their creative strength was also on full display as the network marked its 1 year anniversary by winning 17 Lions More than any other healthcare agency group, FCV Health was named Healthcare Network of the Year and McCann Health came in 2nd in that category For an unprecedented showing atop those rankings at CUN. Area 23, also an IPG health company, was named Healthcare Agency of the Year and won the Grand Prix for Good, which recognizes campaigns for nonprofits that use creativity to make a positive impact in society. Of the creative success of IPG Health comes as the group continues to leverage its broad reach, scale and diverse talent to evolve its capabilities. In of the call is being recorded.

Speaker 3

In the Q2, the network launched a new agency offering called 90 North, which is a software based advisory that enables pharmaceutical, biotech and life sciences companies to tackle complex issues beyond traditional marketing communications. Another standout for us at Conn this year was FCB, which despite a more modest number of entries than many much larger global agencies was honored as the number 2 network overall, following up on last year's number 1 overall ranking. In North America, FCB was the con network of the year for the 4th consecutive year. The network took home the Creative Effectiveness Grand Prix of the call for its work for Michelob Ultra. It is a remarkable campaign and that it's a platform idea that seeks to impact long term sustainability of the country's history of fascism.

Speaker 3

And FCB Inferno based in London won a titanium line in their partnership with Virgin Group and LinkedIn for their effort to make dyslexic thinking recognized as a term that should be celebrated and a skill set that should be valued. Noteworthy developments at McCann other than those I called out a bit earlier during the quarter included several new business wins. Of the company's financial results. Prudential Financial selected McCann as its lead agency creative agency of record following a competitive pitch. The agency won creative duties from McArthur Glenn, which is Europe's leading owner of designer outlets.

Speaker 3

And in collaboration with Golan, McCann expanded its remit with No Man foods, Europe's top frozen food company to support the development of a sustainability marketing strategy and communications framework for 2023. McCain also won a Grand Prix at Cannes for its serious and thought provoking work related to global food shortages, which is done on behalf of the Swedish Food Federation. And MullenLowe Group, the New York office was named U. S. AOR for Bayer's pain reliever, Aleve.

Speaker 3

In the UK, MullenLowe Group successfully renewed their remit for the National Health Service following a highly competitive review. Highlights at Mediabrands in the quarter included continued strong new business performance as the network helps clients make data driven decisions that are central to effectively investing marketing dollars in an increasingly complex digital and addressable media landscape. We saw initiative win significant new assignments in Spain, Canada, Australia and the UK during the quarter, including media planning for meal kit delivery, giant HelloFresh. Was named media agency of record for Upwork, of the platform that connects companies and freelancers. In April, Magna held its 2nd annual equity upfront, of the company's strategic initiatives, which seeks to accelerate support of diverse owned media businesses.

Speaker 3

By enabling collaborative workshops between brands and media owners as well as arming of those media owners with the tools to engage with major marketers, Media Brands is helping upstream investments take hold with media that are minority owned or those that serve critically important diverse audiences. During Cannes, IPG also announced a partnership with SpringHill, of the global entertainment company created by LeBron James and Maverick Carter. While additive to our own creative capabilities, This partnership will provide a new avenue for our clients to access SpringHill's exceptional range of diverse creators. Were active across the breadth of communications channels and formats. We've already seen strong interest in demand for this new partnership, notably from the Media Brands' Content Studio, which is a high growth unit within Media Brands.

Speaker 3

Media also continues to benefit from close connectivity with our Acxiom unit and news that Acxiom during the quarter includes the enhancement of its marketing cloud practice with new offerings in both the Salesforce and Snowflake environments. During the quarter, Caneso continued to focus on its marketing intelligence engine suite of technologies, which help Brand manage all the data, marketing software of the company's financial services required for growth. In bringing those complex capabilities into one comprehensive offering, of Canessa is helping our clients connect with audiences in a flexible and respectful way, deriving insights that can power creative campaigns as well as media investment decisions. During the quarter, MediaHub, which is another very dynamic IPG media agency, was appointed by Lyft to handle U. S.

Speaker 3

Media planning, buying, analytics and measurement duties. And for this win, MediaHub worked in close collaboration with Acxiom to understand and identify key consumer audiences for the transportation company. MediaHub also won U. S. Media for Amazon's new live radio of AMP.

Speaker 3

And in Australia, the agency was named Media AOR for global CPG brand, Arla. Of the presentation is that MRM Commerce continued its strong growth performance, winning assignments from General Mills and Electronic Arts as well as an enterprise level assignment in CRM and party data integration with Johnson and Johnson. Among our specialized communications agencies, we continue to see strong marketplace performance. An integrated cross disciplined DEXTRA Health team was appointed by Moderna as the brand's of the company's global enterprise agency of record. This solution draws on talent and expertise from Weber Shandwick, Golin and Jack Morton, and they've been tasked with enhancing Moderna's reputation globally as well as expanding awareness of Moderna's leadership in mRNA technology.

Speaker 3

Webershan would continue to win significant assignments from major brands, including expanded responsibilities from client Mars of their Skittles, Orbit and Extra brands. Group Black, a media collective and accelerated rooted in the advancement of Black owned media properties, also recently announced that it had hired Weber Shandwick to lead its external marketing and communications activities. All our PR agencies continue to stand out for their creativity and effectiveness during the quarter. At Cannes, Weber won 20 Lions, including 3 Grand Prix. And at this year's North American SABR Awards, our PR agencies combined to win 14 awards, which is more than any other holding company, and this was led by Golin, which In terms of notable developments on the ESG front, we published our 2021 ESG report, which of the range of environmental, social and government topics.

Speaker 3

And this report is the first from a U. S.-based advertising holding company to receive limited external insurance on certain ESG data and the first to disclose in accordance with the recommendations of the task force on climate related financial disclosures. This work builds on our evolution of enhancing disclosure following our 2020 report, in which IPG became the 1st company globally to publish in alignment with the Sustainability Accounting Standard Board's advertising and marketing standard. It's a mouthful. In summary, we are pleased with our quarterly results as they contribute to a strong first half of twenty twenty two, of the year, which comes on top of exceptional 2021 comps, especially in Q2 of last year.

Speaker 3

And despite increased volatility and growing caution Due to macroeconomic concerns, the tone of the business is broadly strong and we remain net new business positive. As stated earlier on the call, we believe organic growth for the year will exceed 6.5 percent along with our expectation for an adjusted EBITDA margin of 16.6%. Given the macro uncertainty that does exist across multiple economic and geopolitical factors, we're clearly going to stay very close to our clients and our people, so as to be in position to respond as required if there are unforeseen developments. A key value of the financial results are in the range of $1,000,000,000 and an area of value creation, I think, which Ellen just pointed out remains our strong balance sheet and liquidity of the call is being recorded. I think these initiatives also reflect our Board's confidence in the longer term prospects for Interpublic.

Speaker 3

Going forward, our teams remain highly focused of our operational execution, just as our companies continue to provide the kind of higher order business solutions to clients that can help them drive growth across a range of marketing activities and economic conditions. With that, I'd like to just thank our client partners, our people And those of you who are on this call for your continued support, and open the floor to questions.

Operator

Our first question is from Tim Nollen with Macquarie. You may go ahead. Hi.

Speaker 1

I guess the obvious first question I'll kick off with is about the macro outlook, which just seems To be so conflicting between what you and your peers are saying you've seen thus far and what clients are telling you and then everything we're reading in the press, Just wonder if you could just maybe help us understand why the numbers seem to be so strong and And like really what should we think about for the second half? Clearly, your full year guidance implies slower numbers. Just wondering What kind of what gives between those 2 kind of sets of info? And if I could ask a second broader question, there's been a lot of news recently with new regulations passed in Europe, the Digital Markets Act, Digital Services Act and now we've I've been reading about Google possibly. Considering, splitting out its ad stack business, just very broadly, if you wouldn't mind kind of zooming out and giving us your opinions on what all of this might mean for your business positive or negative?

Speaker 1

Thanks.

Speaker 7

Sure. That's a lot of so I don't know that

Speaker 3

I can human nature is what it is, right? So I think the headlines are the headlines and I think it's about of a broader mood, whether it's the combination of headlines around inflation around What and where governments around the world are going to be doing about that. So I can't reconcile why I wouldn't suggest, as you said, that what clients are telling us in a broad sense. I mean my sense is, yes, some clients are asking us to think about contingency plans, but many more performance marketing or they're committed to a digital transformation journey or really taking control of their first party data and building out an ID graph. So I mean, I guess the first half relative to second half question to my mind comes down to, you look at Very strong first half performance.

Speaker 3

You think about we come in north of 6.5 on top of 12, That's strong performance for the year, right? And our comps are very challenging and I'll take that. I think it's good to be able to keep saying as we do, Our comps are very challenging. So I think a lot of that is just the math. And I'd reiterate that the momentum in the business is healthy.

Speaker 3

And as we said, The demand for what we do is healthy, right? So I'd look at again on the back half Q3 21, we're up against maybe a 15% growth number. Q4, we're up against 12%. And on a 2 year stack, that's Probably, I don't know, 11.6 give or take. So it would stand a reason to me that you'd expect to see some deceleration against That independent of the macro.

Speaker 3

And to my mind, what that means is the macro is manageable. And I think that's why we're telling you that we see What we see for the back half of this year. And again, we're clear on more visibility into Q3 than Q4 and the fact that there's some There's definitely uncertainty, but I can't reconcile for you why the noise doesn't necessarily connect into what we're seeing in the business, which is, as we said, broadly speaking, Strong demand and it is variable. You do get different On a client basis, on a sector basis, in different parts of the world, there are folks for whom Some of these signals lead to more caution or action than others. Your second question to my mind, I think we've always thought That a number of things were going to come together that would get us to a moment in time when there would be Appropriately a focus on consumers having control and agency as it relates to Their data and again to our mind that's kind of consistent with a series of things that we've done going back a long time, whether that's agnostic relative to media, whether clearly that's A strong first party, and data management capability at the core of what we do.

Speaker 3

And I think that clients are intelligently focused on how they are going to continue to reach the right of people, whether it's the right cohorts of people or whether it's the right individuals and how they're going to activate the data that they do have or how They're going to pool data with like minded clients or interesting sort of partners, second party partners. So again, I think to our mind, none of what's happening strikes us as if it's Surprising and we continue to see it as opportunity, and we see the need to have Both the consultative capabilities and a partner to go on that journey with. But none of that strikes me as if it puts us off our view that all those capabilities and services Are only going to become more valuable to our clients.

Speaker 1

Great. Thanks for the insights, Philippe.

Operator

Thank you. The next question is from Steve Cahall with Wells Fargo. You may go ahead.

Speaker 8

Thank you. Felipe and Ellen, the guidance implies a big slowdown in the second half. And as you said, we know some of that is conservatism in the comps. I I think there's also been some announced agency reductions, places like RGA and Huge. So I guess my question is, are you proactively managing headcount in anticipation of a slowdown, or is the business actually still pretty strong?

Speaker 8

Those are more idiosyncratic agency announcements And things would kind of have to get worse from here before you started taking sort of aggressive action on the cost base. And then the second question is, if we do see a bit of a slowdown, particularly into next year, how should we think about EBITDA margins? They're up a lot from where they've been historically, even with the good growth this year, they're kind of staying flat. So I guess the question is if growth kind of decelerates in the future, What does that kind of mean for margins from here? Thanks.

Speaker 3

Sure. I mean, why don't we maybe we'll split them. I think The business is growing, right? And you've seen that with that growth, we've been Bringing people into the organization. I think I've talked about the fact that the skill sets we're bringing in may not necessarily be the ones that we would have been bringing in had we've been talking about this couple of 3 years ago.

Speaker 3

But in the high growth areas and disciplines, there is still need on our part. And so I'd say we've largely Caught up on hiring relative to what 21 represented, but there isn't a proactive need to do what you suggest. And the two examples you called out are Whether you call it idiosyncratic or they're specific to things going on within those entities or of the client base at those agencies. And then I'll sort of segue into or maybe hand off to Ellen in thinking through the margin question, but I think that we also have The variability of costs like temp labor and clearly the fact that our incentive programs are really, really synced up to How it is that we give you visibility into the business and what our goals are, which is to grow organically and see improved margins. So I think those provide a lot of what we need to continue to manage the business, as we look to the back half of the year, Right.

Speaker 3

And in terms of margins go forward, I'll pass it over to Ellen to start.

Speaker 5

Sure. Thank you. I would say, start with our track record, right? We do have a track record of being able to manage our margins very effectively in a variety of different circumstances. And Philippe mentioned, I think some of the things that really help us do that is that our flexible cost structure.

Speaker 5

So whether as Philippe mentioned, it's temporary help versus permanent labor or our performance based incentive comp, which provides variability as well or buffers, Absolutely help us. We're very disciplined on how we manage costs. As Sveep also mentioned, our intentions are aligned with that. And we're continuously looking at offshoring and near to shoring in other ways that will make us more efficient in addition to the fact that we're growing our higher value services, which should also help us expand our margins. So yes, we do believe that we can of our margins going forward.

Speaker 3

Great. Thank you. Thank you.

Operator

Thank you. The next question is from David Karnovsky with JPMorgan. You may go ahead.

Speaker 4

Thank you. Maybe to follow-up on the macro questions. Philippe, one thing we've heard from some of your of the year is on earnings calls this week, is that marketers have largely learned from prior recessions or crisis periods that if you cut spend too quickly, there's a real price to pay Later on in terms of market share sales. So I'd love to get your take on that and whether you think that mindset can kind of keep ad spend is relatively steady even as macro trends potentially worsened. And then just a follow-up on the digital specialists.

Speaker 4

I think you had mentioned some weakness in speculative categories of project work, do you view these headwinds as sort of temporary and the underlying performance remain strong? Or are there kind of more structural factors at play? Just wondering These firms, at least in the pre pandemic period, were real standouts for IPG. Thank you.

Speaker 3

Sure. Look, I mean, I think In the remarks, I spoke to the fact that I do think that the conversations with clients go to a place of Past cycles, even obviously 2020, where there was a bit of a knee jerk reaction we were all facing something we'd never seen before. And I do think that there are ways in which you internalize that and you think hard about whether or not pulling back, whether it's share of voice, whether it's of the presence of your brand, which is a very powerful equity, as I mentioned, would make sense. So I think people are definitely doing that, calculus. And then as I said, just a few minutes ago, there are some who are asking for contingency plans, but there are many more who are still Very, very committed.

Speaker 3

I was with a large CPG client less than a month ago and they're in the midst of a digital information and they see all the things we see. They see input costs rising and they see the ability for the brand to help mitigate that and They're looking at a multiyear journey and they're still committed to that. So to my mind, I think that that sense of I mean, people's mix is very different, right? I think that on that journey, if you've gone from having Sub, say less than 25% of your spend being digital channels to twice that and you're on your way to trying to get Well above that and some of the categories that have been sort of slower to make the shift over time, which accelerated during the pandemic. So I think all of those things do give you a sense that We've collectively made progress in evolving the model and none of us knows again there There's a lot of noise around what it might be and how bad it might be and we're not seeing that, right?

Speaker 3

So you see that. You see places in our business that are clearly going to be sturdier, data business, it's an enterprise level business, it's on multiyear contracts. Healthcare where you've got sort of baked into it, very integrated Disciplines and capabilities, a lot more science in terms of what we bring in the way of expertise to those clients And then a lot more data in terms of how we push, how we sort of, kind of make decisions. So it's Clearly TBD, but there is definitely there's been underlying change in marketing since we last went through something like this. Specific to the 2 agencies you call out, I think that We were clear that client mix can make a meaningful difference.

Speaker 3

I think you've got 2 premium players And the industry has clearly evolved and so there are some rethink going on, on the part of both of those management teams In terms of how do they reinvent, so that they are in a place where those premium positions can continue to prevail. So I think there we're looking about at both things that are specific to their mix And then perhaps where they are in their cycle as companies.

Speaker 2

Thank you.

Speaker 3

Thank you.

Operator

Thank you. The next question is from Michael Nathanson with MoffettNathanson. You may go ahead.

Speaker 2

Hey, I'm asking for reconciliation also. I think I love to know When you look at your client mix in total,

Speaker 3

how much of the growth do

Speaker 2

you think is coming from the speculative categories? I think back to 20 years ago and all the DICOM bubbles, I wonder, is this time different because you guys didn't benefit from either the growth in respective categories Or the growth of SMBs, is there anything you can tell us about client mix now versus pre pandemic? That would, to me, I think, Help reconcile why we see the digital weakness we're seeing at Facebook and the rest versus maybe what you're saying.

Speaker 3

Look, I think that the comment of the speculative categories was very, very specific, right? And so as always, we're going to want to give as much detail as we can when we are taking you through the results. And so within that of the new segment to try to give you clarity, we wanted to pull apart that there was double digit growth in parts of it and that where you had something that was dilutive, what was it that was impacting that? So to my mind, we weren't saying that those categories have an impact on the macro portfolio because we tend to do more work With some of those categories in the places where we're doing some of the most, whatever we're going to call it, sort of the most bleeding edge work, right? I read what you put out this morning and I think that the bigger question around where and how Large scale digital is undergoing a transformation of sorts.

Speaker 3

I'd say to you there's substantial growth that's happening outside of what you might kind of call the big three. So there's diversification happening in the in what is now the primary way in which companies go to market, which is on digital channels, right? So you might have year on year growth slowing at the really big players there, although they're clearly still growing. And I think to my mind, The 3 big factors that are changing things on that side of the house are, TikTok, absolutely. Then the fact that there's much more e commerce going on and retail media networks are clearly, I know, seeing a lot of that growth heading their way, right?

Speaker 3

And that's kind of interesting from where we sit because You can clearly do some interesting things with first party data that's sitting inside of those channels that are growing and then what we can do with 1st party data. So partnering there is interesting. And then digital video is sort of benefiting lots of people, including some traditional marketer media owners who've come into that space with interesting And necessary streaming channels. So I mean that's a bit of a divergence, but I think I found what you thought was It was interesting, but I think that's got a lot more to do with it than like our client mix isn't really going to impact that math for us.

Speaker 2

Thanks, Floyd. I appreciate it.

Operator

Thank you. The next question is from Ben Swinburne with Morgan Stanley. You may go

Speaker 7

ahead. Thanks. Good morning. Good morning. I was curious if the lockdowns in China, Broader Asia impacted that region's growth at all this quarter, and still pretty solid.

Speaker 7

I think you mentioned China was down year on year, but just trying to get a sense for how material that might have been. And then I wanted to ask about the media business. In 2020, As the pandemic came on, brand spending really collapsed and we saw much more of a focus in bottom of funnel performance. Some of that obviously because we're all stuck at home staring at our phones, stimulus checks being sent out. But I'm just curious Philippe like We've talked to your media your smart media people.

Speaker 7

What do they think happens, as if things just get even incrementally tough, Let alone recession. Is there parts of their media spend that sort of is more defendable or they're more focused on than others? And I'm sure you'll tell me that it depends by client, but I'd still love to hear your answer. Thanks.

Speaker 3

Sure. I mean, I think Ellen can give you the answer to your AsiaChina question.

Speaker 5

Absolutely, yes. China was dilutive to the overall continent. If you look at it ex China, our growth would have been there High single digits, closer to double digits.

Speaker 3

Got it. And in terms of media, In the event of or should there be a slowdown, It's interesting because in 2020 we saw that it was a place people went It's the logical it's sort of the equivalent of what used to be a project that you could perhaps choose not to go forward with in a difficult economic climate in certain back in the day. So it's not that There isn't a sense that it would be A Place clients might go, but I think that there's going to be more The consumer journey, can I interrupt the flow of information I get back from those channels? I think people will probably just be more choiceful. I mean, I think it'll be like anything in a circumstance such as that.

Speaker 3

And I mean, again, you're asking me for of the and we're telling you that in the business and in the bulk of what we're the interactions and the conversations we're having with clients, The reality we're dealing with isn't the story that to the very first question we had that you're seeing in the headlines. And so I think that there would be sort of a flight to kind of quality in essence. There would be a, what can I not afford to turn off? Where am I getting the best returns, what makes the most sense because it really is getting me to intersect with audiences. So It's not that you might see some issues there, but it would I think it would be about the quality of The platform, it would be about the quality of the back end and the data you're seeing as a result of making that investment.

Speaker 3

But I think it's naive to suggest that if as you say we got to that point, you wouldn't have some of what we saw more recently.

Operator

Comes from Jason Bazinet with Citi. You may go ahead.

Speaker 6

Hi, Jason. Hi, good morning. Just had a real quick one On inflation, since I don't think any of us have covered a firm like yours in a high inflation environment. Can you just spend a second and talk about what items You feel like would be that would be impacted sort of coincidentally with the rate of inflation? And which items do the revenue or expenses you feel might lag the rate of inflation where it doesn't show up until a little bit of time goes by.

Speaker 3

This is within our company, so it's not a what happens on the client side. I mean, look, I think We are seeing a modicum of wage inflation inside of our 4 walls, right? So I think We're going to if I look at it, I go, okay, so growth, lead hiring over the last 12 months, Probably by a couple of percentage points, right? And as I said, there's still a bit of hiring to be done. But if you think about that delta, It goes to what we said to you, which is that we see that as manageable.

Speaker 3

And then I think the other thing I'd sort of call out on the most evident where inflation is impacting us is that if I had to give you kind of a qualitative sense of it, the pressure on labor markets Is less evident than it would have been a quarter ago, right? So I'd say that hasn't fully abated, but it's definitely slowing. And then in terms of other places in our cost base where we'd see inflation, I don't know if there's anything Ellen would want to call out. But obviously, SRS for us is an important part. It's where we get the folks we need to make the model work.

Speaker 3

So I don't know if anything else would be a lagging component of inflation in our world.

Speaker 5

No. And I would just add that, again, we're always focused on continuing to offshore and nearshore and there's things that we're looking at that will also help mitigate.

Speaker 3

Yes, the internal transformation efforts are definitely going on in a number of places and how we do a lot of the back end on media and how we do production And how we automate that and how we connect that back to the data stream. So yes, nothing I mean, I think it really is I think you're seeing we've been talking about it and it's the one we would obviously stay focused on and be very vigilant about.

Speaker 6

And how about revenues? With inflation, would you say that's sort of lagging or coincident or?

Speaker 3

I mean, so far as I've said, I think that clients continue to See it marketing as a way to mitigate that and we do have the capacity in many cases contractually to sort of share that with them as we see it impact. So again, I don't see it impacting revenue at this point.

Speaker 6

Okay. Okay. Super helpful. Thank you.

Speaker 3

All right. Well, as always, we appreciate the time And the interest and we will keep you posted as we go forward and very, very focused on execution for the back half

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Earnings Conference Call
Interpublic Group of Companies Q2 2022
00:00 / 00:00