Q3 2019 Earnings Call
Good morning, and welcome to the Interpublic group third quarter.
Teen Conference call all lines are in listen only mode until the question and answer portion.
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I don't like to introduce Mr., Jerry listening senior Vice President Investor Relations, Sir you may begin.
Good morning, Thank you for joining us.
We have posted our earnings release, and our slide presentation on our website Interpublic Dot com.
This morning, we are joining by Michael Ross and Frank Mergenthaler.
We will begin with prepared remarks to be followed by Q anyway.
We plan to conclude before market open at 930 Easter.
During this call we will refer to forward looking statements about our company.
These are subject to the uncertainties in the cautionary statement that is included in our earnings release and the slide presentation.
Further detail in our 10-Q and other filings with the FCC.
We will also refer to certain non-GAAP measures.
We believe that these measures provide useful supplemental data that well not a substitute for GAAP measures to 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 Mike Ross. Thank you Jerry and thank you all for joining US. This morning, as we review our results for the third quarter and first nine months in 2019.
As usual I'll start out by covering the highlights of our performance. Frank will then provide additional details and I'll conclude with an update on our agencies to be followed by our QNX.
We're pleased to report another quarter of solid financial performance.
Organic growth of our net revenue was 1.4% in the corner.
That's on top of 5.4% a year ago as well as revenue headwinds, which brings organic growth over the first nine months of this year to 3.5%.
Organic growth of our international markets continue to be strong at 4.5% in the quarter.
Driven by a performance in led Tam Continental Europe and Canada.
Growth slowed in the UK and Asia Pac continue to be challenging with varying performance by national marketing.
In the U.S., our organic change was a negative 60 basis points against 5% growth in Q3 last year.
This result includes underlying growth across many of our us agencies and disciplines, but as expected also reflects headwinds from the account activity toward the end of last year, which we've talked about on previous calls.
These losses year over year resulted in the U.S. headwind of 4.8% in the quarter.
Overall, our performance taking into account the headwinds and industry leading comes from last year, along with positive net new business. This year demonstrates that our business remains highly competitive and on the right tracks.
Looking at our operating segments, our integrated agency networks grew 1.2% organically in the third quarter led by Mediabrands and FCB health.
The impact of the headwinds is felt primarily in the audience segments.
Organic growth at our CMG segment was 2.1%.
Paced by Weber Shandwick.
The gone as future brands.
In terms of client sectors. We saw continued global increases across a very broad range of verticals that includes healthcare financial services retail tech and telecom and consumer goods.
Auto and transportation sector decrease mainly due to loss headwinds.
The total growth of our net revenue in the quarter was 8.7%.
That includes organic growth as well as the impact of year over year currency changes plus acquisitions and dispositions.
Then that we continue to be pleased with the growth of axiom, which remains on track with our expectations with accretive growth and margin performance.
It's worth noting that we made a handful of new desk dispositions in Q3, as we continue our actions with respect to small non strategic business units around the world.
Turning to EBITDA and operating income in the quarter EBITDA was 302 million an increase of 8.7% from last year's third quarter. Adjusted EBITDA operating income was 280.3 million.
Third quarter diluted earnings per share was 49 cents as adjusted for amortization of acquired intangibles and business disposition expenses and was 42 cents as reported.
Looking at the first nine months of 2019, our organic growth was 3.5% with contributions from both our IEI and CMG segments, driving adjusted EBITDA margin expansion of 90 basis points.
Our growth at CMG was led by Weber Shandwick Octagon and Futurebrand.
And with led by DG Mediabrands and also highlighted by the growth of our global creatively led agency networks, FCB Mccann and Mullen Lowe.
It continues to be clear that our strategic decisions and the execution by our operators continue to serve our clients distinctively wells and set us apart in our industry.
These include our open architecture structure, our sustained investment and strong agency brands a foundation of digital competencies in all of our agencies.
Mittman to transparency and to best industry talent and unique enterprise level data management capabilities.
Therefore heading into our important fourth quarter, we remain confident that the strength of our offerings our performance to date and the current tone of business have us well positioned to achieve our financial targets for the year that is the high end of 2% to 3% organic growth, which is inclusive of headwinds.
And 40 to 50 basis points of margin expansion over last year's margin, bringing us to 13.9% to 14%.
At this point, it's my pleasure to turn turn things over to Frank for additional detail on our performance and then I'll return with an update and highlights of business.
Thank you Michael and good morning.
As a reminder, I was referring to the slide presentation that accompanies our webcast.
On slide two you'll see a summary of our results.
Third quarter net revenue growth was 8.7%.
Organic growth was 1.4% international growth of 4.5%, while the U.S. decreased 60 basis points to the impact of headwinds.
As we have described previously the headwinds are the result of account activity in the fourth quarter last year, namely FCM media Us Army.
In both wedding us, which together weighed on us growth by negative 4.8% in Q3.
Q3, EBITDA was 302 million comparison, adjusted EBITDA up to 77.8 million a year ago, an increase of 8.7%.
For the quarter adjusted diluted earnings per share was 49 cents.
The adjustments exclude the amortization of acquired intangibles.
And exclude non operating losses due to the disposition of certain small non strategic agencies.
Yes.
Turning to slide three you'll see arpino for the quarter.
I will cover revenue and operating expenses in detail in the slides that follow.
On slide floor for Q3, and nine months net revenue.
Net revenue in the quarter was 2.06 billion.
Compared to Q3 18, the impact of the change in exchange rates was a negative 1.3%.
With the dollar stronger all of our international regions.
Net acquisitions and divestitures added 8.6%, which includes the impact of axiom and smaller acquisitions less our dispositions.
The resulting organic increase was 1.4%.
As a reminder, beginning in the fourth quarter axioms revenue growth will become a component of our organic revenue change.
At the bottom this slide we break out our operating segments as you can see our high end segment grew 1.2% organically.
Underneath that result was growth in media led by RPG, Mediabrands and our global creatively led integrated offerings, notably FCB health and Mccann Worldgroup.
Total revenue growth at I.N. was 10.3%, which reflects acquisitions, including axiom dispositions and currency changes.
At our CSG segment organic growth was 2.1% in the quarter driven by our branding specialist futurebrand.
To go into sports Entertainment marketing.
And Weber Shandwick and public relations.
Moving on to slide five revenue by region.
In the U.S., our third quarter organic change was a decrease of 60 basis points against last years, 5% and weighed down by the impact of headwinds that we're working through.
In our eye and segment, we continue to see solid growth from our global creativity led integrated offerings, and FCB and Mullen Lowe and from Carmichael Lynch.
It's worth noting the total us growth was 13.1%.
Due to the net impact of acquisitions, including axiom less dispositions.
In our international markets, we had another strong quarter work with organic growth of 4.5%.
In the UK organic growth was 0.5%, which is on top of 6.8% a year ago.
Mediabrands Weber Shandwick led our growth in the quarter.
While our growth slowed for the first three month period due to normal variability in projects. It follows three years, a very strong growth in the third quarter in the UK.
In Continental Europe organic growth continued strong at 6.6% on top of 5.8% a year ago.
This was highlighted by increases in Germany, France and Italy.
In Asia Pac net organic revenue decreased 50 basis points in Q3.
Among our largest markets, we again had solid growth in Japan, and India, but that was offset by soft results in China and Australia.
In Lat am we grew 23% organically with strong organic growth across the region led by Brazil.
Organic growth in the region was 24% over the first nine months.
In our other markets group organic growth was 3.5% led by Canada.
Moving on to slide six and operating expenses, which were again well controlled in the quarter.
A ratio of total salaries and related expense to revenue was 64.7%.
Improvement of 130 basis points from year ago.
The improvement reflects our discipline in the organic growth of expenses in the benefit from the consolidation of axiom.
Underneath that we had solid operating leverage on our base payroll benefits and tax.
And our expense for incentive comp temporary labor and all other salaries related expenses.
At quarter end total head count was approximately 54300, an increase of 5.7% from year ago, mainly due to the addition of axiom.
Our office and other direct expenses was 17.8% of third quarter net revenue compared with 16.7% a year ago.
Within office, another we leverage our expenses for occupancy by 50 basis points from year ago.
That was more than offset by the addition of axiom, which is accretive to our overall margins, while consolidated consulting relatively more investment in data and technology.
Our SGT expense was 50 basis points of Q3 net revenue, which is the same as a year ago. After adjustments for deal expenses in Q3 18.
Our expense for depreciation amortization increased due to the consolidation of actually in this year.
On slide seven we present detail on or adjustments to report results in the quarter in order to provide better transparency and a picture of comparable performance.
This begins on the left hand side with our reported results in steps through from an operating income to EBITDA in our adjusted diluted EPS.
Our amortization expense for acquired intangibles was 21.7 million, resulting in EBITDA of 302 million.
Below operating expense, we had a loss in the quarter of 7.7 million and other expense related disposition of a few small nonstrategic businesses.
At the foot or this slide you can see the after tax impact of produced per diluted share of these two adjustments.
They need to seven cents per share the difference between the reported diluted EPS of 42 cents and adjusted a 49.
On slide eight we show similar adjustments to result of the first nine months.
This also brings in the impact of the restructuring charge from Q1 and the tax settlements from our second quarter.
As you can see on the last slide.
Just a bridge between 84 cents per diluted share in the dollar five which compares to 97 cents per share 2018.
On slide nine we turn to cash flow in the third quarter.
Cash from operations was 225 million compared with 231 billion a year ago.
Within that working capital used 47 million a typical level given the seasonality of our business compared to a use of $30 million in Q3 18.
Investing activities used to net 43 million in the quarter primarily related to Capex.
Our financing activities used a net 253 million in the quarter, including another 200 million toward repayment of our term note and $90.8 million for our common stock dividend.
Offset by 41 million and increasing our short term borrowings.
Financing cash flow a year ago reflects the issuance of long term debt during the quarter in anticipation of closing our acquisition of action.
Our net decrease in cash for the quarter was 93 million.
Slide 10 is the current portion of our balance sheet. We ended the quarter was 520 million cash and cash equivalents.
Our cash balance year ago, which is on the far right of slide includes proceeds of debt issued to finance the action acquisition.
Slide 11 depicts the maturities of our outstanding debt would total debt at quarter end of 3.6 billion, a decrease of $200 million during the quarter.
In summary on slide 12, our growth and margin expansion over the first nine months of the year have us well positioned to deliver on our financial targets as we head into our very important fourth quarter.
Our teams continue to execute very well our balance sheet continues to be a strong and meaningful source of value creation.
With that I'll turn it back over to Michael.
Thank you Frank.
Our results reflect a quarter of solid financial performance and position us to achieve our 2019 financial targets.
The organic revenue growth, we posted despite headwinds in challenging comps is a clear signal that our existing clients remain in an investment mode. When it comes to our services and that our agencies continue to add value and our sought out by new clients, which is why were net new business positive this year.
Growth in the quarter came from a range of IP GE agencies regions and client sectors.
Demonstrating the depth of a strong agency brands, our innovative offerings and our talented people.
Our continued strength in the market is due to a series of strategic steps, we've taken over many years at Fiji.
We recognized early on that consistent investment and top industry talent and in DG agency brands and their vibrant individual cultures, we'd be essential for long term success.
We brought top strategic digital and creative leadership to IP Gi and have deployed this talent to build great teams and customized programs that add value and win market share for clients.
We also invested in embedding modern digital offerings and expertise into all of our agency brands.
We pioneered the open architecture model, which brings the best agnostic solutions to global clients in a way that moves that brands across the consumer landscape.
This client centric approach is currently deployed across many of our largest clients worldwide.
Open architecture is enabling clients to reap the benefits of all of IP GCE assets customized offerings that help them addressed the demands of a fragmented consumer and media environment.
To note axiom now has a prominent seat at the table.
With our top open architecture clients.
That is because clients increasingly recognize that the future of marketing is data driven.
Marketers looking to leverage their own first party data coupled with other strategic datasets to create more seamless and connected consumer experiences at scale.
But that means is that expertise and managing first party data and PCI at scale is indispensible for high value media and marketing services partner.
Ultimately, we are seeking to achieve people based marketing.
As such we will be held accountable to meet an elevated set of demands and responsibilities for the ethical sourcing.
Collection duration and compliant deployment of data from all sources, including third parties.
That is why we feel very strongly that what is worth owning is the highest level of capability and expertise and data management.
That is a significant and increasingly in this as necessary differentiator in today's world.
It makes a company like ours and more strategic business partner for our clients.
Looking forward there are many ways more data use cases that we are increasingly getting involved with ranging from powering ecommerce to the execution of true Omni channel media.
Which is why we launch connect so this quarter.
Which brings together top data and technology talent with addressable media experts and will allow us to further leverage axioms assets as well as other mediabrands AD tech and Martech capabilities.
This new technology layer within our offerings will build software products to help all of our agencies deliver precision marketing for their clients.
Combined with the capabilities of our media companies, along with our creative and marketing service agencies, and Esso will enable our clients to drive better outcomes through marketing that is faster more efficient and informed by a conscious commitment to data ethics.
Turning to the highlights from the quarter of how our agencies are delivering ideas and results for our clients you get a sense is a powerful opportunity that we feel lies ahead for our organization.
In our ending integrated agency network media brands led our growth in the quarter.
Hosting a very strong performance.
The groups are exciting leadership changes as we elevated the CEO media brands to be the new Chief operating officer right Vg.
And elevated two of the long term executives to fill in the CEO roles at Mediabrands and UN.
These changes highlight the strong and orderly internal succession planning we have in place at our company.
Speaking of you win in the media agency continued to grow in the third quarter.
Attained this relationship with Cvs and added Edna health as part of that review.
The agency also won the Levi's America media account supported by FCB, Wes the clients existing creative agency.
Axiom talent and expertise played an important role in both of these significant wins, particularly the Cvs Adnan.
At week recently named UN, Canada, and UN New York Media plan as the year winters.
Initiative also posted a very good quarter.
It's Lego advantages work and FDA. One leaves were both awarded media plan of the year.
And the agency picked up global media duties for delivery room in most oil world markets.
All in for IPG agencies were recognized with eight media plan of the year Awards.
Our surpassing any other holding company.
FCB also grew in the third quarter with several new assignments in North America, and strong organic and new business growth from its health operations.
The agency network had its best year at the Cleo Awards, winning several grand close in 12 goals.
FCB health had a dominant showing at the medical marketing and media awards, taking home gold and silver and the large agency the year category and titanium for best in show.
Recently, the network announced a new north American structure that unlocks new capabilities for clients with the expansion of its FCB six creative data offerings and will promote greater inter agency collaboration.
Mccann Worldgroup saw continued growth globally.
Especially in light Tam was named network of the year at the Latin American Ft Awards during the quarter.
And just last week Mccann Worldgroup was named European Agency network in the year at 2019 European that for you Awards.
On the new business front Mccann brought on Fuji film globally, and new case, or a number of new business wins, including Lloyds pharmacy.
At the Cleo Awards Mccann, New York was named agency the year, taking home and number of Grand close.
Mullen Lowe group sort, particularly strengthen us from a number of new business wins.
All in low one Humana and tax Act.
Mullen Lowe and media hub collaborated to bring in the Navy Federal credit Union.
Agencies integrated media arm was also selected for the Twitch business and its new balance where it was named media plan as the year in the best use of streaming media OTG category.
Celebrating his first year with our company axiom continues to expand its role with clients and our agencies.
Axiom designs and run the data infrastructure for many of the world's most sophisticated marketers the scale of which they operate handling billions of client record safely in getting the most value from them in ways that a respectful of the consumer.
As clients comfort did they are working with a company that has deep expertise in data management ethics and privacy.
Brooklyn based huge unveiled a new operating model as the agency elevated key leadership roles and streamlined it's us offerings.
The agency also saw a number of new business wins in the third quarter, including Accu weather and E Commerce car buying platform Rumble on.
The agency continues to strengthen and grow its business and product innovation capabilities as well.
Highlights at RG, a in the quarter included growth with new clients, including Air VNB and slack.
As well as growth with existing clients.
Additionally, RG eight ventures announced its argon enterprise block chain ventures studio during the quarter.
The six participating companies presented a demo day this month.
Aimed at building a scalable block chain based ecosystem.
Our us integrated independent agencies round out the portfolio.
Delivered the full suite of marketing services to their clients and also combined with the rest of our offerings on a collaborative open architecture solutions.
Highlighted within this group came from Carmichael Lynch weeks delivered strong growth in the quarter from such notable clients as Subaru and Excel energy.
At Deutsche We recently announced that both in New York and lay offices will be led by women Ceos from within that agency.
In recent months the Deutsche Allay office was awarded Behr paint Mattel and global Dot Com redesign responsibilities for the having Almond board of California, While New York secured Reebok, Michelob, Ultra Budweiser and Jay Jayson.
Yeah.
The Martin Agency continues to show good progress with existing clients and was recently awarded media plan of the year in the best use of social category. The agency also one door Dash and just released its first creative work for the brand.
Turning to CMG Weber Shandwick recently added best buy Canada, and USAA two as client roster.
The agency was named the most admired PR agency among leading in House Communications and brand marketing leads by the homes report.
Jack Morton our experience agency debuted new work for brands, including Millercoors, HSBC, Facebook, Google and Peets coffee.
For the current NFL season, the agency created the broadcast environments for five major networks.
Octagon also had a strong quarter, adding new corporate clients Linkedin and the National Women's Soccer League and also celebrated major victories from athletes it represents including Bianca and rescues when in the U.S. opening women's championship as well as Simone Biles Historic performance at the gymnastics World.
Championship.
In total were pleased that through nine months.
Gee continues to perform ahead of industry norms.
It shows that our investment in people and in modern digital and data fueled offering is succeeding.
And that our focus on a client centric open architecture model is the right formula.
Turning to our outlook, we're confident that our performance to date has us on track to deliver growth into high end over a 2% to 3% or growing organic growth range.
In addition, we continue to be comfortable with our target for adjusted EBITDA margin expansion of 40 to 50 basis points over last year's 13.5%.
We view, our current performance and long term strategy, a significant factors that will continue to enhance shareholder value.
As always remain committed to a strong balance sheet.
Significant reduction in debt as well as continuing to grow at dividend and in time returning to share repurchases.
With that I'll open up the call to your questions. Thank you.
We will now begin our formal question answer session. If you would like to ask your question. Please press star one.
Your first question is coming from Alexia Quadrani with Jpmorgan.
Hi, Thanks, so much just a couple questions I guess the first one is.
There's always been a bit of a disconnect between wall Street main street and I'm wondering if you can kind of give us color of how your clients are viewing the world's from an advertising perspective, I'd incrementally nervous about the economy I know, it's a little early but I think that in a few weeks or so you start talking a bit about budgets for next year, just any color on that.
Thank you will exit usually you asked me what our performance was last week and now you're into.
The wedding.
Yes look there's definitely a disconnect between business and what's happening in the stock market in the global.
World. If you will in terms of what's happening there the uncertainty obviously is not helpful.
And clients as everyone. Just continues to look to see what the what's going to come of it.
That said I think if you look at our performance.
They continue to invest in their brands and they need partners such as the offerings that we have to help them move the needle I think it proves that what we do actually works.
And the conversations are really focused on.
Can we help them move the needle and as long as we have the offerings, which is what we are building here at night BG to help them move the needle they have the money and they are willing to spend.
The difference I would say between now and.
In a stronger environment.
Is the process that we go through.
It's very project oriented we're seeing that they're very focused on return on investment which is why it's so important that we have the appropriate data analytics to reach the right consumers with the right message.
But that said, they're very willing and ready.
To spend money on on on.
Offerings that help move the needle so like everyone else there are concerned.
But they realize that what we do actually works and then you have to spend dollars to build it rains.
It's it's a very competitive world out there.
As I've said before there are lot of offerings out there chasing the same revenue and it's very important for us to differentiate ourselves in the marketplace, which is exactly what we do.
By using open architecture by bringing in axiom by focusing on our creative capabilities, our digital and our experience will NPR were low sitting at the same table. So I think the answer is if we have a strong offering that we can improve works clients, it's still going to willing to spend those dollars to move.
Just looking at I guess at your full year guidance and given what you just sat out there some more project based work.
Your full year guidance does suggest some softening in Q4 and I'm just wondering if you're building in some conservatism just given the higher level of uncertainty. Some more project work at year end or is there some incremental headwinds that you can pinpoint.
While we're still going to have headwinds in the fourth quarter as we had in this quarter and they'll be assume similar magnitude right and frankly, the roll a little bit into first quarter in second quarter of next year.
That said when we set our guidance we do it from the bottoms up we do it on a full year basis, we started at the beginning of the year.
And we adjusted as we go through the years, so aren't our guidance on the high end of the 3% takes into consideration whatever operators is seeing in the marketplace, what our contracts provide and what projects. We have in the price pipeline that we think will will result in our organic growth for.
The quarter.
Look you know this fourth quarter is very important to us.
It's dependent upon projects is dependent upon completing a number of.
Proposals, we have with existing clients. So I wouldn't say there is conservatism in there I would say that it's our best shot at looking at what we think we'll be able to deliver for the year.
And just lastly on new business and I know you have some headwinds to still circle true to the beginning of 2020, but you've had some great wins. This year you. Thank from a net new business perspective, I guess, where you're now looking for the full year next year are you in a positive position or is it so that the habit of a challenge given some of those Pete.
As Paul.
Well I would like I said, we're going to have headwinds in the first and second quarter, but we are net new business positive year to date, and we hope will finish that way for the rest of the year. So.
But for Roger I hear it goes I was wondering how long it takes me to do that.
But but for our headwinds we'd have a very strong organic growth number right now.
And I think Thats the point that are arc, our existing clients in a new wins reflect a solid economy out there, where where where clients are willing to spend so.
I think we're well positioned giving our new new business performance and as we cycle through these headwinds.
We will be posting.
Good decent.
Leading industry organic growth I hope.
Thank you so much.
The next question is coming from Dan Salmon BMO capital.
Good morning, everybody.
Michael I just wanted to follow up on your comments and Frank mentioned that as well.
Well divestitures in the quarter and I guess not so much the.
Ones that you made specifically, but just taking it up to a high level.
Is this sort of the new normal for the holding companies right. If we go back over the past decade generally the group was consistently adding assets over time and it was a little different for RBC in the early days, but.
Over the past few years, obviously, we're still seeing some bigger deals yourselves included but we've also seen this sort of consistent terming do you think thats the new normal for the for the industry.
And ER yourselves in particular, and then maybe for either one of you I'd love to see here just a little bit about as axiom does go into the organic number has been in the organic numbers since October Onest I know you will comment on how it's been so far this quarter, but just maybe what was it sort of glide path I guess as that headed from September 30 years in do off.
First.
In line with your expectations anything sort of performing better or worse and maybe in particular, if you can give a little color on that is it has traditionally been a little bit more of a U.S. oriented business and.
Having seen that number dip negative this quarter on the organic side is there a potential that it can be a boost there. So thank you.
All of that okay.
First let me comment I was actually a maximum continues to deliver I said in my remarks.
Consistent with what we expected in terms of our acquisition and when I say that I say anticipating the same for the rest of the year. That's built into our numbers. We knew that was going to be in our numbers in the fourth quarter. So that number is all inclusive.
I think the important part of axiom, one is that the data management business continues to perform well their best in class and Thats two thirds of their business they've added some new logos, we don't talk about specific clients of vaccine for various reasons, but theyve added some new logos, which is which is great, but I think the real important point.
Nick Axiom has been part of a number of our new business wins and frankly.
Working with existing clients and adding value to our existing clients, which I hope will lead to retention of particularly on the media side. So we're very pleased the way first of all that axiom has been integrated into our business basically the integration of axiom in diabetes Doug.
And frankly, I know that was one of the questions in our industry, whether we can absorb companies like this and I think we've proven that we can and they continue to add value to us. The question of dispositions is an interesting one if you go back to the history of holding companies.
They are much a series of roll ups Mullen Lowe is a great example.
They had a global clients, particularly Unilever.
We have to hadn't locations all over the world than we had agency supporting that business all over the world and they were partnerships. They would joint ventures. They will stand alone we had agreements with them.
But the world does in the world doesn't operate that way anymore and the need for us to have all these standalone agencies in countries that frankly take up a lot of management time, some are actually losing money. So it's a diluted to our margin.
Hi.
To maximize our returns and maximize our margin expansion, we have to look at whether there is other ways of doing business in those markets without having standalone agencies. So thats. What this reflects and I suspect you are seeing that for all the holding companies.
It's interesting to add to the when you ask these global clients do you need an agency in this market the answer is no.
And when that's true.
And we look at the local markets excel itself and weather.
The return on their investment makes sense in the local markets and if we can have a contractual relationship with those agencies to provide the services that are necessary for our global clients. That's fine for us and we can focus on management.
Growth in the bigger markets. So I think it's something you're going to see.
Throughout the industry and I think what you've seen us taking a hard look at are we in the right markets with the right offerings and how should we be physician with respect to those markets and Thats why you see us adding to the dispositions it's not that.
We're cutting back on acquisition, it's we're focusing on the efficiencies of how we do business in the world today in the U.S., we continue to but for the headwinds in the U.S most of the headwinds.
The 4.8% that we've referenced are in the us.
So.
The first time, we've had a negative organic growth in the quarter.
Did I can remember actually.
And it's all due to the headwinds that we're going through again, if you pull out the headwinds with doing pretty well in the us.
So we're kind of go have to go find a new client to replace those headwinds.
And again the other reality of our business. These days is that you don't have these big clients.
More.
It's a bunch of doubles and singles as opposed to home runs.
But we're doing a pretty good job at that which is why were net new business positive and.
That is in the us and remember to 64% of our businesses in the U.S and it's a health, it's a healthy market in the United States.
Very thorough thank you Michael. Thank you. The next question is coming from Ben Swinburne Morgan Stanley .
Thanks, guys good morning.
I don't know, if you're able to to help us on the.
The account loss headwind as we move into Q4 Q1, but is this the sort of peak quarter. You gave us that I think it was a 4.8% I think thats the number.
Headwind this quarter does that number is this sort of the peak headwind given you've got some nice wins that will start to offset that are up to want to be that specific and then just on on axiom.
Michael.
Just from an organization perspective.
Would you say that the sort of the team is in place integrated into the organization.
To the point that you're sort of satisfied.
Not a lot more in a way of reorganizations and how does connect to fit into how axiom goes to market or is that more of an internally facing organization, just maybe flesh out that announcement, which I think it's something you guys think is is pretty meaningful.
Yeah all of that [laughter].
Look.
The headwinds I said I, just said in the fourth quarter.
There is similar to what we had in the third quarter.
And they do spill into the first and second quarter, but not not certainly if that magnitude, okay, Mike, but we aren't net new business positive and we're working on ways through that.
As far as axiom, Yeah, I think when we are.
Our board was very specific when we propose the acquisition the vaccine we had to have an integration plan in place.
We have teams and I think we've taken under tremendous job one of the reasons, we've been able to do this is the cultures of axiom and DG. So similar.
So the hard parts, where the legacy systems that were even incentive comps and things like that and we're in good shape in terms of integrating axiom, So I would say.
That we're pretty much a 100%, there, maybe where 90% there there's still bits and pieces.
The integration of vaccine has gone.
Better than planned to actually and we're actually moving people within EPG, we move some people.
Into interconnection, which I'll talk about.
To help that so we're very pleased with how axiom has been integrated and the additive value that we see remember axiom is data management right and and connects that does not change is core business in axiom of managing first party data.
Right. So so a lot of the questions are Whiting, we just put this in accident light and we take axiom unproven connect acting as a standalone business is a great basis. It's two thirds of their business is data management and Thats the way, it's going to state.
As an independent company, what we've done in Knesset. If you think of it think of axiom is providing the data information and capabilities to connect so.
And then the technology is itself in the connection.
So the company itself I.
Think of it as a technology arm and then on top of that you add the services part of the which is like the cadreon and other creative that assets that are available to connect so through integration with our creative agency. So there are three legs the data that technology in the services and Cadreon is.
One piece of media brands that actually was put into connect so.
So that as a Standalone company, we're really excited about it we're going to start rolling that out we already have in terms of working with Mediabrands in particular because of the value added.
In that environment and in fact, we mentioned that.
Axiom has been very helpful in terms of new media wins.
The value proposition of can Esso was a good part of that.
In terms of the wins, so we're very happy with the opportunities So and I would look to 2020 before we really so I've seen the impact.
Of this but we're pretty excited about it.
Thanks, Michael.
The next question is coming from Steven Kamal.
Okay.
Thanks, maybe first a follow up on axiom I think you said it it's on track in its growth is accretive I think you've previously talked about a growing around mid single digit. So I was just wondering if you can speak to maybe what the organic growth to that has been and also.
Maybe any connections that you're seeing with the rest of IP GE to kind of get one plus one equal three in terms of new business for either axiom or IP G.
Yeah, Great. What you know what we said is we will look into about a 5% growth.
For axiom, we said that in our business plan and when I say axiom continues to deliver consistent with its business plan you could assume that's where it's coming from.
So we don't break out the growth of axiom separately, but you can use that.
As a number and yes, the integration of axiom in terms of the rest of IP GE, obviously as I said on the media side of the business. It's been very active in terms of value propositions that the media.
James or using both you and initiatives so they've been very helpful.
And.
We haven't yet although in some unique cases.
Used the strength of axiom and can esso, yet with respect to some of our other global networks, but thats on the horizon.
And we have them lining up asking for assistance in fact, one of our agencies.
He is involved in a page right now and I think today, they're going to have a compensation.
The axiom team and connect so to see how they can help in the pitch.
And this is a creative pitch.
So.
We're very happy to see.
That happening and it's all part of our open architecture model.
It's a core part of what we do in the marketplace and resonates exceptionally well with our global clients I've had a number of meetings.
With our global clients that are actually calling out open architecture to me and the team, which is which is great and sitting at the sitting at the table. You had the can you have FCB you have Weber Shandwick, you have RG, Hey, you have mediabrands and you have axiom you put all those people together on the room focusing on to sing.
No client.
And that's exactly what our market.
Demands and what clients want to see and to the extent, we can show that we can work together.
On a client bases, bringing all these resources together there is no need for them to use anyone else.
And the relationship we develop as a business partner to our clients is indestructible when that works correctly. So that's the whole premise and that's that's the differentiator between BG and the other agencies.
We open architecture is that our core collaboration is in our core we didn't have to break up all of our agencies and put them together in one silo.
We build up brands our brands are our our we're very proud of each of our brands.
The retention of the talent the creative capability within those brands is world class.
And why would we break those up.
The whole. It is is accounting and will you have to do is put these people in room and work together and magic comes out of it. So that's our whole go to market strategy and frankly.
That's why we've been performing the way, we have and clients know that and they're asking us for the rest of IP G coming to the table and on the question of actually we still had the opportunity a vaccine clients, bringing high pgms to axiom clients.
It takes a little bit longer.
In terms of that kind of relationship we're already starting doing that as well. So I think the the opportunities that are in front of us are good and where position as a company to meet those demands we have the talent we have the tools we have the resources.
And we have the will to make it happen. So I'm kind of encouraged and optimistic in terms of what we bring to the marketplace and how we can differentiate ourselves in the marketplace.
And then I had two quick follow ups.
Maybe first you talked about that 2.5 times leverage can you just remind us what your commitment is to the debt markets before you might think about buying back stock again, and then lastly, you've had some recent promotions in the C. Suite that you mentioned, maybe you can just speak a little bit to the transition there and I'd love to know Michael any thoughts on.
Maybe your time left at Ivy League. The Wall Street Journal says that your success there might now be in line. So if you can comment on that that be great. Thanks.
What was your first question [laughter], let offsets that leverage I know it.
[laughter].
Well, we don't have any leverage guidelines that we've already as you saw in the quarter, we paid down 200 million our commitment to our rating agencies is we'll maintain the strong balance sheet, we want to retain our investment grade rating.
By that but it's on the horizon.
Frankly, we meet.
I mean [laughter] regularly to figure out how far we have to bring that down before we can get back into the share buyback. So it's on the horizon, we won't commit to date.
Yes, we want to make sure our balance sheet is as strong as it could be.
Yeah, no one's asked yet about the potential of a recession, but everyone talks about it.
We want to make sure we have a balance sheet. That's continues to be strong in the event something that should happen. So all these factors go into place when we make that determination that said, we still paying dividends, we still increased dividends. We believe we do have no need.
To to do any large transactions I think what you'll see on the acquisition side are very strategic and smaller transactions that are either geographic more discipline or just talent. So there's no need for our excess capital.
Internally, so obviously returning that to our shareholders is of Paramount objected to us and we will continue to look at the dividend to to accomplish that until we get our levels at a reasonable rate.
Place and so that we can.
I'll be back in the market buying shares on the on the promotions, obviously would fleet coming onboard as chief operating officer.
That's that's a recognition.
His contributions throughout all senior management team and his role played in the turnaround of IP, Jay we're very proud of it obviously when myself and the board.
That decision it positions Felipe and a very strong way in terms of succession, we have a succession plan in place what I love about them promotions, Darryl and I lean at Mediabrands. These are all whether it became more or Val at Deutsche These are all internal promotions and it's.
The strength of our talent.
And we don't need to go outside.
In most cases for promoting from within so I think our responsibility as a as a leadership and as a board is to make sure that is.
Succession plan in place not just for my job, but for everybody's drought within the company, which is why we do talend reviews, and we have a pretty clear plan.
In terms of next steps and so on so when when it comes to making those decisions, we're very well position and thats. Another factor that I believe distinguishes us.
From our competition, we don't have promoted the outside.
As far as my timing goes.
As I said im on the back nine as opposed to different nine.
And obviously I can't keep doing this forever.
And my responsibility to the board is make sure that everything's in place it I BG than I committed to and working with our team and when that happens.
When it will happen.
Great. Thank you.
Okay.
Your next question is coming from Tim Nollen Macquarie. Your line is open.
Thanks, I'd like to touch back on.
Not so much axiom itself, but I guess the role of data and a lot of discussion about privacy continuing to go on here.
We've got this California, Ccps coming on I think in short order.
Europe is looking at the big Internet companies are looking at programmatic buying perhaps challenging the GDPR precepts.
Looking internet companies I, just wonder what can you tell us about the role of data and some privacy concerns out there with advertising in general and then maybe how axiom.
Said before actually can help you with this could you maybe elaborate on those two points. Please sure right I don't think it's a secret.
That with the.
With GDPR, we've seen already in place. It's I think it's in January in California, and other states have adopted similar.
Requirements, and which is why it by the way we support the business round table position on our federal GDPR I mean, it's not easy to do it on a state by state basis each of the states.
Require different things and therefore, it's going to cause a great deal of additional work for our clients as well as us.
And if we had a federal.
Legislation that covers it it's an important issue I think it's pretty clear that it's here to stay.
And regulation in this area it is important.
And the more unified network religious location to better it is.
We endorse that business round table statement.
One of the things about axiom is his expertise in privacy.
As far as there has is five stars is one of the most highly regarded.
Data management.
Companies and privacy is a critical piece of that so we view.
Our expertise of axiom as critical as clients are looking for ways.
To deal with the GDPR and privacy rules in general and again. That's another reason we found the acquisition of axiom to be an important part of differentiator for us going forward. So yes, it's one of the most important issues we have to face.
And yes, we have the capabilities to help.
Implement that with our clients.
Thanks.
The next question is coming from David Joyce Evercore.
Hi.
Thank you wanted to ask about the impact of the addressable advertising across media platforms. On your business model are you seeing any change in client budget allocations yet towards.
Towards addressable and how does that impact you since some of the promises of addressable or for perhaps less.
Budget, but less investment greater ROI.
But on the flip side of that it's a very complex environment with a lot of players.
Look the different array of services just wondering how we think about that evolution in your growth.
Yeah, I mean, it's a very important factor frankly can esso as one of the raises we happen Esso and what they're one of the key offerings that if you couple of cadre on with the data.
Capabilities of axiom, that's what we've had begun to use and addresses addressable markets and so therefore, that's one of the reasons. We created connect so to be in a position to work with our clients and yet there's a shift there's a shift moving from TV digital we see that in terms of having TV.
And linear TV pass digital in terms of total spend.
So all of this.
It is frankly, why we bought axiom and and why we isolated.
Certain aspects of that and Esso. So the value proposition that we can bring to our clients in terms of the addressable finding the right individuals because it is looking for individuals not just.
Loops of people.
And on.
Cleanse basis, so yeah, I think it's a happening in the marketplace and we add value when those issues come up so when clients ask about it.
That's good for us because if we can be in front of our clients showing our capabilities.
It just as of.
The relationship significantly.
All right. Thank you.
Okay.
And then last question is coming from Jason.
Your line is open.
I just.
Macro question.
If I look back over the last whatever 20 years, they've been sort of two recessions and.
Certainly the most recent one though eight or nine was not typical you could almost argue a one wasn't typical if if we entered a garden variety recession. When you guys go through your model this sort of stress test.
What would you say is reasonable in terms of topline compression and expenses that can come out.
Well it look what we hope I don't see any signs of a 2008 nine recession right now and even with the talk.
A lot of people talking about if it's a recession is going to be recession light.
Whatever that means but in 2008 nine.
Marketing dollars.
And there was no capital I mean, it was it was a whole different world.
I think I think.
We've taken the physician already.
Thats why were able to expand margins like you are saying is that we matched revenue and expense very carefully all of our agencies have very strong disciplines that before they add headcount it has to be associated with revenue.
The fact that we're doing the dispositions on those.
Countries that were not necessary to.
To be in all leads itself to margin expansion efficiencies and protecting our PNM out in the event that a recession comes.
The one thing we've learned since all eight and nine is how to manage expenses and as part of every business review we have.
We take a look at what actions would a necessary and because we're a variable cost model.
You know you look at their head count and Srs and so we have governors on all of our incentive comp.
Calculations to make sure that.
All of those are in line with pre determined levels.
We were comfortable.
But in the event, we do get a recession light.
That we're well positioned and frankly, where we're at a point where.
We need organic growth to expand margins. So there's no question that if there is no organic growth and it's going to be hard to expand margin.
But I think we've been able to show just in this quarter.
That if there is.
Lower organic growth, we're still able to expand margin by doing the things I just talked about.
Understood. Thank you very much.
Okay, well like I. Thank you all for participating and we look forward to our next conversation.
Regarding our final year results. Thank you.
This will conclude today's conference all parties may disconnect at this time.