Q4 2022 Interpublic Group of Companies Inc Earnings Call
Good morning, and welcome to the Interpublic group fourth quarter and full year 2022 conference call. All parties are in a listen only mode until the question and answer portion at that time, if you would like to ask a question you May press star one.
This conference is being recorded if you have any objections you may disconnect. At this time I would now like to introduce Mr. Jerry <unk> Senior Vice President of Investor Relations, Sir you may begin.
Good morning, Thank you for joining us.
This morning, we are joined by our CEO Felipe Rykowski and by Ellen Johnson, our CFO .
We have posted our earnings release, and our slide presentation on our website Interpublic Dot com.
We will begin our call with prepared remarks to be followed by Q&A.
We plan to conclude before market open at 930 eastern time.
During this call we will refer to certain non-GAAP measures. 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.
We will also refer to forward looking statements about our company.
These 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 SEC.
At this point it is my pleasure to turn things over to fully krakowski.
Thanks, Jerry and thank you for joining us this morning.
Usual I'll start with a high level view of our performance in the quarter and the full year.
Our outlook for the year ahead.
Allan will then provide additional detail.
And I'll conclude with updates on key developments at our agencies to be followed by Q&A.
We're pleased to share another year of strong performance.
Before turning to the numbers I'd like to once again, thank our more than 58000 colleagues around the world.
His dedication to our clients and one another are exceptional.
Along with our expertise spanning creative marketing services technology and data management.
That's what continues to be at the heart of our performance.
Turning to our results for the full year organic growth was 7%.
Adjusted EBITDA margin was 16, 6%.
Both are at the levels, we shared with you in our last update.
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It's worth noting that a year ago at this time, we looked ahead to full year, 5% organic growth.
A very challenging multiyear comps and performance throughout the year drove consistent increases to that 7%.
We grew in every world region broadly across client sectors.
Our three year organic growth stack, therefore stands at 14%.
The level of performance that speaks to the strength and relevance of our offerings, particularly in services and sectors demanding precision and accountability.
And our fourth quarter organic net revenue growth was three 8%, which brings three year growth performance to nine 7%.
That means that as expected growth slowed in the fourth quarter.
With global macroeconomic and geopolitical cross wins, which we're all aware of.
Notwithstanding slowdowns across the global economy and with that.
More cautious marketing and media environment.
Our growth continued in every world region during the fourth quarter.
Overall U S organic growth was two 4% despite dilution from certain units in the portfolio.
On top of a very strong 12, 1% a year ago.
Organic growth in our international markets was six 1% on top of 11% a year ago.
By sector.
In the fourth quarter was led by our clients in the auto and transportation sector, followed by retail or other sector of industrials and government and health care.
Going the other way.
Second telco, which for US is our second largest client sector began to show the impact of what.
But I guess, we could refer a sector specific issues, which we're forecasting will continue to present headwinds for us for at least the first half of 2023.
Also in Q4, we felt the largest quarterly impact of the late 2021 loss of a large food and beverage client, which will finish running off at the end of Q1 this year.
Each of our operating segments grew organically in the quarter.
In media data engagement solutions organic growth was 5%.
Led by double digit growth at IPG media brands.
Decreases at our digital specialists, which we've called out previously weighed significantly on segment and group wide growth in the quarter and the year.
Our integrated advertising and creativity led solutions segment grew.
Grew two 6% paced again by IPG health.
Which posted high single digit growth performance.
Our segment of specialized communications and experiential solutions grew three 5% organically with leadership from the full range of our experiential and sports marketing offerings.
Turning to profitability and expenses in the quarter.
Our teams continued their outstanding execution.
Effectively navigating today's complicated economic environment.
This in turn led to the strong fourth quarter margin performance, we're reporting today.
We've been able to deliver this result, while continuing to invest in our offerings and to take significant real estate actions in the quarter that will further our structural operating efficiencies going forward.
Fourth quarter net income was $297 $2 million as reported.
Our adjusted EBITDA was $568 $4 million, which is before noncash charge in the quarter for those real estate actions.
Adjusted EBITDA margin in the quarter was 22 point.
3%.
And that brings full year adjusted EBITDA to $157 billion and margin on net revenue of 16, 6%.
I think it's worth reflecting that at that margin level. We've successfully consolidated 260 basis points of margin improvement over the last three years.
Along with that very strong three year growth stat that I mentioned earlier.
Fourth quarter diluted earnings per share was <unk> 76 cents as reported.
It was $1 and <unk> as adjusted for the real estate restructuring charge intangibles.
Intangibles amortization and the disposition of small non strategic businesses.
In sum our fourth quarter completes a year of strong financial performance across the key performance metrics of growth adjusted EBIT and earnings per share.
During the quarter. We also closed on the acquisition of Raptor one.
Our leading ecommerce implementation partner, which brings additional scale and capability of our offerings as an area of growth and strategic importance.
Over the course of 2022, we also returned capital to shareholders in the amount of $777 million.
Dividends and share repurchases.
Given the continuing strength of our operating results and confidence in our <unk>.
T J trajectory our board has once again raised ipg's quarterly dividend by 7% to 31 cents per share.
This marks our 11th consecutive year of higher dividends.
Which as you know continued uninterrupted through the pandemic.
Our board also authorized an additional $350 million share repurchase program.
Top of the $80 million remaining in our previous authorization.
Turning to a discussion of the 2023 and our outlook for the year.
It remains a meaningful degree of macroeconomic uncertainty.
The visibility there for somewhat challenge.
It's fair to say that clients are approaching 2023 with equal parts conviction and the need to be in the market as well as an increased level of conservatism.
That's not to say that there are any less focused on the need to drive for growth into the new year or to invest in the transformation of their business.
It's just that we're seeing budgeting decisions made with more deliberation.
And it's also fair to say that there's significant variability within our client portfolio from client to client.
We're confident that the strongest growth areas of our business.
Such as Consultative media services health care marketing experiential marketing.
Commerce as well as data management and data sales will continue to perform strongly despite the broader economic situation.
We're also confident in our operational rigor and flexible cost model.
Our actions in the fourth quarter to further reduce our occupied real estate footprint by nearly 7% demonstrates our consistent and ongoing focus.
On identifying and acting on opportunities to rethink our business model and improve efficiency.
So bridging all of these moving parts together, we expect organic net revenue growth for 2023 of 2% to 4% on top of those industry, leading multi year competitors and further expansion of our adjusted EBIT margins to 16, 7% for the full year.
Our priorities for the year remained consistent.
To build on IPG strategic differentiation.
Which for us means to focus on the people talent and capabilities that enable us to broad solve a broader set of business problems and which further our evolution into a higher value solutions provider.
As well as strong execution when it comes to integrating our agencies expertise through open architecture solutions.
Second they combine those client focused offerings with operational excellence, which is always important but never more so than in uncertain economic climate delivering.
Delivering on these goals.
And our new financial targets as well as our long standing commitment to return of capital should lead to another year of value creation for all of our stakeholders.
This point when a hand things over to Ellen for a more in depth view of our results.
Thank you I hope everyone is well I.
I would like to join his belief and thank our people for their terrific accomplishments.
As a reminder, my remarks will track the presentation slides that accompany our webcast.
On slide two of the presentation fourth quarter net revenue was essentially flat from a year ago with organic growth of three 8%.
That brings organic growth for the year, 7% and our three year growth to 14%.
Adjusted EBIT in the quarter before and net restructuring charge.
$568 4 million and margin on net revenue was 22, 3%.
A restructuring charge in the quarter, resulting from having identified further opportunities to optimize our real estate portfolio.
Reduced our occupied real estate footprint by approximately 500000 square feet or six 7%.
The net charge in the quarter was $101 7 million, which we expect well we've gotten $20 million of permanent expect savings, which will be realized as we move forward.
It was no severance involved in these auctions.
You'll recall that in 2020, we reduced or at least footprint by one 7 million square foot and the additional action alright, recognizing that in the wake up the wake of the pandemic operating model has changed with respect to office space.
Do not anticipate necessarily structuring charges.
Our diluted earnings per share in the quarter was 76% as reported.
And the dollar to as adjusted.
He was the restructuring charge the amortization of acquired intangibles and a small amount of operating loss from business dispositions.
Our adjusted diluted EPS was $2.75 for the full year.
We concluded the year in a strong financial position with two 5 billion of cash on the balance sheet and with one six times gross financial debt to EBITDA as defined in our credit facility.
We repurchased three 2 million shares in the fourth quarter.
Bringing our full year repurchases to $10 3 million.
Returning $320 million to our shareholders in 2022.
Our board increased our quarterly dividend to <unk> 31 cents and authorized another $350 million. When he starts his program. In addition to the $80 million remaining on our prior authorization.
Turning to slide three you'll see our P&L for the quarter.
I'll cover revenue and operating expenses in detail in the slides up on them.
Turning to the fourth quarter and full year revenue on slide four.
Our net revenue in the quarter with 2.55 billion, an increase of one 6 million from a year ago.
Compared to Q4 'twenty one the impact of the change in exchange rates was negative three 9%.
Net acquisitions added 20 basis points.
Our organic net revenue increased three 8%, which on the right hand side of this slide brings us.
Two 7% for the full year.
Further down the slide you breakout segment net revenue performance.
Our media data and engagement solutions segment grew 5% organically on top of 11, 9% in the fourth quarter of 2021.
As you can see on the slide the segment is comprised of IPG media brands.
Axiom connect cell and our digital specialist agencies.
IPG media brands grew at double digit rate.
As noted on our third quarter call RG. Amy you are in the process of transforming their business models and had soft performance, which weighed significantly on the overall segment growth.
That's something we will not lap until the back half of this year.
At the right hand side of this slide organic growth was six 4% for the full year.
Organic growth at our integrated advertising and creativity that solutions segment was two 6%.
Which is on top of 10, 3% a year ago.
As a reminder, this segment is comprised of IPG House, Mccann Mullen Lowe, absolutely and our domestic integrated agencies.
Our growth in the quarter was led by a strong increase in IPG health, which grew in the high single digits.
For the year. This segment grew seven 1% organically.
At our specialized communications, an exponential solutions segment.
Ganic growth was three 5%, which compounds 15, 2% in last year's fourth quarter.
This segment is comprised of Weber Shandwick, Golin, Jack Morton momentum Octagon and extra house.
We were led by high single digit increases in our ex French installations.
For the year U S D and E segment increased eight 5% organic honey.
Moving to slide five our revenue growth by region in the quarter.
The U S.
Which was 63% of our fourth quarter net revenue grew two 4% organically on top of 12, 1% in last year's fourth quarter.
We had notably strong growth at IPG media brands, Igl, MRM, and Jack Morton and Exxon shell.
Decreases at our digital specialist RGA and huge weight on the U S growth rate by 160 basis points in the quarter.
International markets were 37% of our net revenues in the quarter and increased six 1% organically.
You'll recall the same market increased 11% a year ago.
In the U K organic growth in the quarter with nine 4% led by notably strong performance the media experiential and Manuel.
Continental Europe grew five 7% organically.
We really I think very strong growth in Spain, Germany, and France were relatively flat year over year.
And Asia Pac organic growth was 3% in the quarter.
Strong results in Australia, Japan, and China, well, India decreased.
The last time I think it was five 8% organically and <unk>.
Top of 22, 5% a year ago.
Our other international markets Group, which consists of Canada, the middle East and Africa.
Six 9% organically on top of 18, 7% a year ago.
It reflects notably strong growth in the middle East followed by Canada.
Moving on to slide six and operating expenses in the quarter.
Our fully adjusted EBIT, a margin in the quarter with 22, 3% compared to 19, 3% in 2021, an increase of 300 basis points.
As you can see on this slide we had operating leverage on each of our major cost lines.
Our ratio of salaries and related expenses as a percentage of net revenue was 61% compared.
Compared with 62, 2% in last year's fourth quarter.
Underneath that ratio and to elaborate on our expenses for base pay benefits attacks, it's head count increased to support revenue growth.
We ended the quarter with head count of 58400.
An increase of 5% from a year ago.
Our expenses for temporary labor.
<unk> based incentive compensation, and severance or all notably lower than a year ago.
Our office and other direct expenses decreased as a percentage of net revenue by 160 basis points to 13, 5%.
That reflects leverage due to lower occupancy expenses. We also reduced all other office and other direct expense compared to last year as a percent of net revenue.
This reflects lower client service costs consulting and employee related expenses.
Our SG&A expense was one 2% of net revenue a decrease of 10 basis points.
Turning to slide seven we spent a detail on the adjustments to our reported fourth quarter results.
In order to give you better transparency and a picture of comparable performance.
This begins on the left hand side the reported results.
And steps through to adjusted EBIT da excluding restructuring.
Adjusted diluted EPS.
Our expense for the amortization of acquired intangibles and the second column with $22 1 million.
The real estate restructuring charges or one on $1 7 million and their related tax benefit was $26 million.
Below operating expenses.
The losses on the disposition of small non strategic businesses was $8 3 million, which as shown in column four.
That's a part of this slide you can see the after tax impact.
As a chair of these adjustments, which bridges, our diluted EPS as reported at <unk> 76, and the adjusted earnings of $1 two a diluted share.
Slide eight suddenly picks adjustments for the full year again for continuity and comparability.
Our amortization expense was $84 7 million.
Our charge for restructuring was $102 4 million.
Dispositions over the course of the year resulted in a book loss of $3 8 million.
The result is adjusted EBIT, a 1.57 billion and diluted EPS of $2.75.
Our adjusted effective tax rate for the full year.
And with our expectations at 24, 8%.
On slide nine we turn to cash flow for the full year.
Cash from operations was $608 8 million.
Cash used in working capital was $672 3 million.
Paired with cash generated from working capital of $743 4 million a year ago.
As we've pointed out in the past working capital the volatile in each of the previous three years, you had very strong working capital results.
And over the last four years, we've generated a total of $1 4 billion.
Our investing activities used $460 million.
That mainly reflects our acquisition of Raptor, one and our capex in the year.
Our financing activities used $869 5 million, representing our common stock dividend and repurchases of our shares.
Our net decrease in cash for the year with $719 1 million.
Slide 10 is the current portion of our balance sheet.
Ended the year with $2 5 billion of cash and equivalents.
Slide 11 depicts the maturities of our outstanding debt and our diversified maturity schedule.
Total debt at year end was $2 9 billion.
As you can see on this schedule, we have 250 million maturity in 2024 and that our next scheduled maturity is not until 2028.
In summary on slide 12.
Our teams continue to execute at a high level.
I would like to again recognize the accomplishments of our people.
And the strength of our balance sheet and liquidity have us well positioned to continue our track record of success, both financially and commercially.
And with that I'll turn it back to believers.
Thanks Alan.
As you can see from our results our strategy talent and culture continue to drive innovation creativity and collaboration.
All our clients' success.
In an increasingly digital economy.
Over the past three years, we organically added $1 $2 billion of revenue to our business.
Well increased adjusted EBIT by over $360 million since the start of 2020.
Credit to our teams for those very strong results.
Throughout this period, what we're seeing play out or the accelerated technology driven shifts in media in consumer behavior.
Our company had anticipated and against which we have made significant investments.
Our expertise and first party data management performance.
Performance media and accountable marketing solutions are all areas relevant to marketers looking to build their brands, while also delivering business outcomes.
Vital to our strong performance for media data and healthcare offerings.
These specialized assets of evolve their offerings to combined marketing services.
With emerging communication channels and technology.
To help clients find new ways to identify and interact with individual consumers.
As you saw in October we continue to look for strategic areas of investment.
With our Raptor one acquisition, we brought a talented and specialized team into the IPG network.
<unk> implement scaled Salesforce solutions.
<unk> brands with customers through end to end commerce experiences in.
In both B to B and B to C settings.
Or after one team will help us deliver creative campaign that work smarter for our clients by building meaningful relationships.
In digital marketing platforms.
Enterprise marketing suite like Salesforce and Adobe form the foundation of so many brands marketing technology stacks.
Our company can serve as a bridge between those brands their consumers and these platforms shrink.
Strengthening every touch point in the customer journey.
We continue to invest in this important growth area and recently announced that we brought on board our first Chief Commerce strategy Officer.
He joins us from Accenture, where he oversaw their omnichannel commerce practice.
At IPG, so connect our existing channel and platform expertise, including strong and scaled teams at MRM Rafter won reprise media and IPG platform services.
As well as others across our entire portfolio.
And he'll orchestrate Howard company supports clients as they build out commerce solutions and integrate them with our full breadth of their marketing programs.
Turning now to the highlights of agency level performance in Q4.
As we've mentioned results were once again led by our media data and technology offerings.
Media performed very strongly to close out a successful year and during the quarter. We saw a series of notable wins, including celebrity cruises that media hub.
Energy, Australia, the retention of major client Merck and the addition of assignments on AWS It initiative.
And the on boarding of money supermarket group at U M.
We're earlier this week, we also announced that we welcomed a new global excuse me global CEO <unk>.
To the agency.
As we speak IPG media brands also hosting their third annual equity upfront.
Which provides opportunities for clients and our agencies to engage directly with diverse owned media partners, including Black API. Hispanic and LGBTQ I E owned media, which is vital to establishing the kinds of partnerships that can change buying patterns in the industry.
Axiom continues to be a strong contributor.
The performance of our media agencies as well as others in the group who've incorporated audience lead methodologies into how they developed strategic insights and creative work.
During the quarter.
Axiom brought a new logo wins and contract renewals.
The automotive CPG financial services insurance retail and travel and entertainment sectors.
They were recognized as a leader in the Snowflake modern marketing stack report and also launched a new integration with a customer data platform telium to enhance deterministic modeling capabilities.
Turning to IPG health that network continued to deliver strong results for us in the quarter compounding very strong trip excuse me again trailing growth since we created the group approximately 15 months ago.
While growing with nearly every existing client IPG helped wholesale focused on expanding its presence globally through some strategic alliances notably in Europe .
And the caliber of their creative work was honored with the 2022 and Eminem Awards, where the network was named large healthcare network of the year.
But our global advertising networks, we continue to see the benefit of our investment strong differentiated agency cultures.
Which are driving distinctive ideation and creativity.
And we're seeing that recognized again and again in the industry.
FCB one significant accolades during its first full year under its new leadership team.
He was named as one of the 10, most innovative advertising agencies are 2022 by fast company.
It was honored as the number two network overall and con.
Once again named the festivals top ranked North America network. Thanks to powerhouse offices in New York, Chicago, and Toronto, which it bears, noting are all leaders in leveraging data to power audience insights and creativity.
With a new CEO in place at the beginning of the fourth quarter Mccann saw new business wins, with Smirnoff, which make it part of the roster and post consumer brands.
<unk> also launched work for recently won clients Congress and Prudential.
Additionally, the agency was named network of the year to 2022 Epica Awards for the fifth time six years.
Mccann, New York, one because innovation Grand Prix for Mastercard's touch card.
Festival card standard for blind and partially sighted people.
More recently Mccann also announced a series of senior organizational changes.
Elevating key internal leaders and adding new executives to the agency.
Mullen Lowe group continued to secure new business as it had throughout the year. So.
So the addition of Ferro International Tetley tea.
National highways in England.
Lifestyle fashion in India in the Barcelona Football club in Spain.
We also announced a new global CEO for Mullen Lowe promoting the key female leader from within our organization, who has known across the industry as a champion of creativity, a strong growth driver and someone fully committed to diversity and inclusion.
Among our domestic independent agencies as part of.
The agencies goal to help reshape our industry, the Martin agency announced a commitment to hire a minimum of 50% directorial and editorial talent from underrepresented groups for all of their video content production.
But our earn an experiential agencies performance was led by Octagon, Jack Morton and momentum.
All of which posted strong growth in the quarter.
With more than three decades of World Cup experience Octagon who's very active with a range of clients with this year's tournament.
For example, with a longtime client Budweiser the agency ran a range of on site Activations in Doha.
And it's complex global Influencer campaigns and hosted nearly half a million consumers, who are fans and viewing events around the world.
Jack Morton continued to deliver outstanding performance and launched the sponsorship consulting practice, which is chubb dubbed Jack 39.
And continued to build out Jack X, which is their global experience innovation practice, which creates events that combined content with web three point O Tex.
Among our public relation firms during the quarter Golin had several wins, including a product launch.
For new alcohol brand corporate communications work for food products and services brand and being named the Influencer AOR for household appliances manufacturer globally.
Weber Shandwick announced new client wins with HP in North America, and Ikea in the U K.
The network also launched what it's calling the business Society and Society Futures, which is a C suite offering.
<unk> Public Affairs corporate affairs as.
As well as organizational design and consultancy.
During the quarter Dextra health posted strong gains.
A large global oncology assignment from major pharma client and.
And in addition, it's leader was named to pure weeks healthy Influencers 30, which is the annual list of most influential individuals and health care communications.
At the holding company level as you know we have a long standing commitment to ESG and DNI its key strategic priorities.
And as you may have seen last week, we announced that IPG has been included on the Bloomberg gender equality index for the fourth consecutive year.
And was recognized for the first time as a top rated ESG performer by sustained alerts.
We were also once again included in the FTSE for good index and Newsweek's America's most responsible companies 2023.
And Forbes featured us on both its America's best large employers list as well as the worlds top female friendly company for 2022.
As a business in which human capital is so vital to our success our culture, including an intentional approach to ESG has long been an important part of our strategy for attracting and retaining top talent.
Whether in strategic creative data analytics or engineering roles.
We're across a range of other skill sets.
That it would compete or evolving offerings.
Looking ahead, we believe IPG remains well positioned for the future.
Much of our growth in recent years as well as in 2022 was fuelled by disciplined that most actively tapped in Georgia and precision marketing capabilities as.
The wells are exceptional health care marketing offerings.
These are growing parts of our portfolio to continue to develop in a more structural and secular revenue streams.
We know the world in which we live in an increasingly digital and that more than ever clients need help from us and using audience led thinking solve for a widening set of business problems and opportunities.
We've been leaders in this space in 2023 will be a year in which we consolidate those gains and prepare to further evolve the way in which we deliver this expertise to marketers.
So as to elevate the value of the services and solutions we provide.
In addition.
We're confident that our commerce and experiential disciplines, which not today could be occurring is large in our revenue mix will continue to grow going forward.
As stated earlier.
Despite the broader uncertainty.
We're seeing a macroeconomic level, we expect to deliver growth in 2023, a 2% to 4%.
On top of a very strong record is compounded for a number of years and.
And consistent with that level of growth, we foresee <unk>.
Adjusted EBIT margin expansion to 16, 7%.
Of course, another key area of value creation remains a strong balance sheet and liquidity.
And our ongoing commitment to capital returns is clear and the actions that were announced by our board today.
It also speaks to the confidence in our strategic position and future prospects.
Part of our balanced approach to capital allocation.
We will continue to further invest behind the growth of our businesses by developing our people and continuing to differentiate our offerings.
This includes a disciplined approach to M&A.
Focusing on opportunities that are consistent with strategic growth areas, primarily commerce and performance media.
This transformation and consultancy.
We thank our clients.
Our people and those of you on this call for your continued support and with that let's open the floor.
Florida for questions.
Thank you to ask a question. Please press star one on mute your phone and record your name clearly if you'd need to withdraw your question Press Star two again to ask a question. Please press star one one moment for the first question.
And our first question is from David Karnofsky with J P. Morgan you May go ahead.
Alright, thank you.
You know you noted client uncertainty out of conviction to stay invested wanted to see if you could provide some insight into your conversations with marketers, how they manage that balance and.
And kind of what factors are keeping them tip into decided for me to go to market and then just on the guide overall.
Range is a little wider than we're used to seeing that all due to the economy and should we think of macros, maybe the main driver in pushing you towards the lower or upper end.
Maybe I'll take them backwards. If that's okay with you I mean, I think if you think about our budgeting process right. It's bottoms up with our operators. We do in fact as you suggest go client by client we look at pipeline.
And then with our larger clients, obviously, we were able to engage with them directly.
And I think what what we're pointing out there is just that I think what's happening is that.
You know the caution that we're seeing is less a function of the specifics of what's going on right. Now I think it's just the open endedness, they're concerned about a potential downturn somewhere along the line as we get further into 2023.
But again, if you go back to how we build the budget you know that bottoms up look at clients Baxter in the pipeline clearly factor and a view of the macro.
And we're gonna have a geographic or a client or even a business mix. That's that's specific to us.
And then we did call out a couple of places.
You know I think we're quite direct and kind of clear about what's going on in the business where are we taking the business. So we called out a couple of places where some things require attention and some things are having an impact as we look at the year ahead. So I would say that that's how we got to the the range. The fact that the ranges.
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Broader than one would see in <unk>.
Other years is reflective of that sense of of uncertainty I think youre seeing broader ranges when you know.
Companies are going out there and I would say we're comfortable at the midpoint of that range.
Okay, and then maybe one for Ellen I wanted to ask a question about longer term margin. So as IPG pushes to become more of a higher valued solutions partners you guys phrased. It how does that potentially impact your margin trajectory should we necessarily think of higher value services is translating to higher Martin.
In addition, a higher group or are there other kind of consideration like specialized labor that could offset that we should consider.
Sure. Thank you for the question.
Very optimistic about the opportunity to increase our margins going forward.
I would point to we have a long track record of doing so I mean, if you look at the past couple of years, we've increased our margins 260 basis points since 2019.
It's a combination of several factors one as you point out I think high value services is a continued opportunity for us.
But also I think we have a good track record of translating growth.
<unk> into margin expansion.
Manage our costs in a very disciplined way and you know we're continuously looking at opportunities on business transformation with a large portion of our revenue in shared services, we manage our rapid our real estate portfolio essentially to put all those things together I do think that there is opportunity.
For margin expansion as we move ahead and one just quick add there. David is just that you know across the senior teams, whether it's corporate or any of the other units are incentives are fully aligned to that objective right. So the plan is.
Honestly more heavily weighted to margin than revenue and so to our mind that insurers that where there is growth there is profitable growth.
And that when were in a circumstance. It's got more uncertainty, we're still able to as Alan said make good on that.
Consistent record of where there's growth we've demonstrated that we can convert it to incremental profit.
Okay. Thank you.
Thank you. The next question is from Lena Galer with BNP Paribas you May go ahead.
Good morning should deepen in Jimmy Choo for taking my questions I have three PS.
One is on the guidance could you elaborate a tiny bit more on the guidance regarding the impact of inflation on the revenue.
And Martin you ready what change do you expect it to be for example, H one doses H two.
Michigan, one capsule and then on wage inflation, how much what was wage inflation in 'twenty, two and what have you.
Taken from 'twenty to 'twenty three.
And your assumptions.
And yes, he just to come back on your point at the beginning of your remark could you comment on the gentleman by sector. I think you mentioned that he comes could you elaborate and add Morgan at what is the attitude of Japan's Nice picture ahead of time G suite. Thank you.
Sure that's a lot so on in order to get there to inflation questions I'll take the so in terms of inflation vis vis our growth.
Yes.
The majority of our contracts have written into them the ability to as the world changes sort of go back to clients and talk about the cost of the services that we provide to them.
That's something that triggers automatically.
It requires that you enter into a conversation or ultimately kind of a negotiation with clients. So if I were to talk about what's gone into our thinking and how.
We build the forecast that leads to the guidance.
Revenue growth is primarily from growing scope with our existing clients and we definitely believe that there is that the primary avenue for growth. The most the one that we're most keen on is growth with existing clients.
So deepen the relationship bring additional services then secondarily clearly you have the opportunity to add when there are new business opportunities.
And and pitches.
So I think that that's really what is baked into it and then you know as we've discussed where we are beginning to in some instances be able to go to clients with some of these services that are new services based on the data and the technology part of.
What we've been building. So I think that's one part of the question and then Ellen I'll, let Ellen take the cost as it bakes into our business and then the second part and then I'll come back for your for your third piece on sectors.
So as far as inflation on our cost base, we've been very transparent that theres been modest.
Inflation in the in the salary line, but but ones that we feel are very manageable and that will not take us off the growth trajectory on our margins and at nor deter us from our expanding them. Accordingly, so that was factored into our guidance for twenty-three incoming with my wife.
And then I guess on sectors.
So auto and transportation is strong and we see it continuing health care.
Financial services for us.
Given the mix of clients that we've got in retail.
You know that has continued to be a place where we've got quite progressive.
Modern clients.
And then the other category as I mentioned I think the a lot of the headlines and a lot of the sort of sector specific issues that we're seeing in tech.
Our manner.
Manifesting in conversations with clients and there what we're seeing is.
Clients either.
<unk> reductions or or being.
You know not committing for them for a full year. So I think as we said what we saw there was.
Something that I think is we're seeing the impact of duration on that is perhaps open ended and then food and beverage for us will have the run off of a very large consult industry consolidation that took place at the holding company level in in late 'twenty, one and as we said it impacted Q4 most heavily.
But we will still see some impact so in terms of the revenue Delta is.
You know, it's definitely for us the other.
The items that we've identified for you, which we are addressing are definitely going to impact first half whether it's the.
Agencies, and where they are in their cycle of transformation as the macro becomes a bit more challenged.
And then some of these and then some of these clients.
Items, so for us it's definitely.
A stronger back half is very much you know where and how we've gotten to that to that guidance.
Yeah.
Thank you.
Thank you.
The next question is from Steve Cahall with Wells Fargo. You May go ahead.
Thank you good morning, maybe just a follow up on that theme a little bit first so Felipe can you give us an idea of what the net new business impact is for 2023. It sounds like it's probably modestly negative. So just want to make sure I'm I'm piecing all that together and I'd love to include some.
To this question, which is how does kind of health care set up from a growth rate perspective in 2023 since that's such a big part of the revenue mix.
And RGA and huge you know it sounds like those will be drags. This year historically, they've kind of been some real superstar agencies for IPG. So I guess, how do you kind of think about you know the journey of these digitally native agencies is it still an area of investment and how do they kind of fit in the portfolio going forward.
Sure.
Sure look I think I think you're right there are premium providers its.
It is largely project based business.
Which.
I think both of those a premium provider.
So uncertain macro project based business again, you know projects showed up in Q4 for us at a very solid level I'd say in line with overall Q4 growth.
<unk> was strong.
P. R was maybe a bit below the segment growth, but the digital projects that that you would see at those very high end agencies, we're definitely not at the levels. They were they were weak and so I think that.
Every three to five years these agencies needed to kind of reinvent and reconfigure because they are to your point at the at the leading edge.
But I think that in the current environment.
Now that that's where we find ourselves with M. P. S. There also.
Probably more exposed to tech than many of our businesses. So you know we've seen client attrition and lower growth there.
And huge has.
A pretty clear line of sight into out into what their new value proposition is and you know that'll be going you know in the market.
Towards the end of the first quarter here.
So they've also had been because of the strength that you would call out.
Tying them more into whether it's open architecture or whether it's the kind of the overall data stack that we built is clearly something that we need to focus on.
So it may be that that long term success and a measure of independents is something that you know it was going to need to be addressed.
And then on the question around.
New business.
Again, we now see new business in the Big media pitches and then in some of the more traditional parts of the business.
Probably the the creative AD agencies and to some degree P. R. We don't see the new business within health very much and then and then a lot of what's going on as I said has become project spur.
Specific so I'd say, we were going into the year exactly as you said with a modest headwind.
Headwind.
And then was there one piece of the question that I'm forgetting at this 0.0 and then health.
I think we see health at scale now having put these assets together and.
And as we said trailing very very strong performance doing high single digit in the quarter.
That's probably consistent with what they did for the year and that's consistent with the expectation that we have for them as we go into 'twenty three.
Great and then maybe just a short follow up for for for Ellen working capital was a a big use in 'twenty. Two I think it was favorable in 'twenty. One you know I know.
The timing of the year can be.
Range line to draw in the sand, but should we expect it to then be back to probably a benefit in 'twenty three thank you.
So as we pointed out you know working capital is volatile.
We get paid on that 31 to the first you're right. When you print near our balance sheet and cash flow makes a big difference. It is something that we spend a lot of time and have a lot of discipline around and carefully manage and if you go back over the past four years I think we've generated $1 billion board and working capital. So I would expect going forward.
It will normalize them, but you're right you know in any one year you can get an aberration.
Thank you.
Thank you.
Thank you. Our next question is from Michael Nathanson with Moffett Nathanson you May go ahead.
Thank you good morning.
How are you I believe that I'm. Good how are you alright.
Alright.
Oh cool.
We have I want to ask about the Raptor one acquisition.
Is it the biggest deal since the axiom that if you go back through the history of the company.
Probably one of the biggest deals we've seen right. So can you talk a little bit more about.
The necessity to do with the multiple of the skill sets and what.
And whether or not like this is the beginning and it's it's it's not a critique but at the beginning of it maybe more tuck in acquisitions like that and then.
You know given the FX volatility what's what's your thinking on the year ahead for FX and any impact.
Acquisitions, and divestments turn to revenue this year so thanks.
Look I think I think that's a really I mean, it's very apt observation right I can definitely speak to Raptor, one and what it is about them and why right. So you know to our mind.
A very strong asset in a very in a very specific space that is growing very fast right. So obviously salesforce as a platform.
It means a lot more to more of our clients. So they're ascendant and then.
Yeah for the dollars that go into a major sales force implement salesforce implementation. There's there's a multiple there's you know of all of <unk>.
Four of $5 that goes to the service providers. So that's a there's a large service economy around that and we're very strong in Adobe and to US. We were building that sales force capability started working with.
This company as a partner and got to know them and it was actually preemptive on our part because I don't know that their ownership was you know their their owners were necessarily thinking that this was a moment in time at which they would trade the asset.
But from where we sit.
Uh huh.
Tech implementation direct to consumer work the internal platform services.
Group that we've created so that we are bringing kind of bigger presence into those kinds of engagements. So you know I think salesforce I mean.
After one is is 500 experts I think eight or 900 certifications and both.
B to B N b to C expertise, but I think what you said that that's very that's very accurate.
Accurate is that we're a bigger company by a fair bit as of the last three years. You know so you used to think of us as doing tuck ins and they were quite small and they were much more.
Sort of agency like in our mind I think we want to concentrate that.
Buying power and then focus on these areas, where what you've got is sort of a hybrid of.
Marketing expertise.
Some measure of creativity against a of an emerging channel and then some piece of what they do which bring some technology expertise. So I think you probably will see us do fewer and you know scale wise they'll have gotten bigger what tuck in means will be I think more like this.
Okay.
And with regards to FX 22 with.
A larger impact than what we typically see with negative 3% on revenue growth and actually 20 basis points on margin.
For the most part our revenue expenses you know if you look historically are pretty well matched and so going forward. We're expecting you know based on what the rates are today.
That impact on revenue and a de minimis impact on margin.
I'll kind of follow up I remember asking you. When you started about that question about margin why was it a drag on margin from that Texas here I think you answered previously it wasn't there wasn't much difference for what happened this year on margin it didn't happen in the past it was more of an impact of what happened in the currency markets right. If you look at 'twenty two.
The currency markets moved more than they historically do but for the very vast majority of our businesses revenue expenses are matched by currency and that was probably the largest impact we've seen in a very long time, and we do not expect that type of impact at all going forward.
Okay. Thanks.
Thank you. Thank you our next.
Our next question is from Tim Nolan with Macquarie You May go ahead.
Alright, thanks, very much can I ask a couple of cost related questions. Please if my math is right your $20 million in real estate savings equates to about 30 basis points of margin.
Is that the kind of scope of upside we could expect in 2023.
And maybe an offset to that or maybe a boon to that I don't know would be any comments you could make on.
On staff I heard your comment on managing the staff cost inflation versus the revenue growth.
It sounds like you guys.
Maybe net net might still be hiring rather than reducing staff and there's a lot of talent now available from all of these layoffs at lots of other companies and I'm. Just wondering what you could talk about your expectations in terms of staffing levels and end and growth in costs. This year. Thanks.
Sure maybe I'll start with your second question first.
We always have.
Hiring always lags revenue growth and so we're you know we are forecasting growth for next year and underneath growth was a little higher responsibly in a disciplined fashion.
Conversely, you know when we have contraction we take actions.
As far as the real estate I think your math is a little bit aggressive on the 30 basis points and the $20 million that we noted on the call will happen over more than one here you need to sublease some of the properties in order to realize the full benefit but we're very optimistic.
About the numbers, we've put out there we feel really good that we've taken another look and really have been able to optimize our real estate portfolio like I mentioned, it's a very centralized process and the way we manage it here and we've really taken the learnings that we've had over the last couple of years and then applied it in a way to become more efficient.
Great. Thanks, a lot.
Thank you.
Thank you. Our next question is from Jason Bazinet with Citi. You May go ahead.
A quick question is in terms of the macro how's it going in terms of the macro uncertainty.
Is there anything that you would call out in terms of either higher or lower risk profile as it relates to account reviews. It just doesn't seem like it's been.
Because I would've thought.
Any color you have.
That's an interesting question and a fair one right because we've all been assuming that there was going to be a backlog going all the way back to pandemic understandable that.
There were fewer but everybody sort of waited for the floodgates to open.
And I think 'twenty. One was it was just a great deal of opportunity are growing with your existing clients doing more of the kind of new services that we have been building for some period of time.
The word is that they're there likely will be as I said scale.
We use these days tend to come in.
In media and then to some extent in health care.
But at the moment, it's it's more kind of in the murmurs than the reality, but we'll obviously you all know I mean there.
Our folks on the ground at agencies are you know growth leader here at the center are all saying that they believe that it will begin to pick up steam but right now I don't I don't have a ton of of hard data that says that's the case.
Okay. Thank you very much.
Yeah.
Thank you and that was our last question I will now turn it back to Felipe for any final thoughts. Thank you Sue.
Thank you all for the time and the interest.
We're looking forward to the year, we've got a lot of work to do and we'll.
We will keep you posted as we go thanks again.
Thank you and that does conclude today's conference. Thank you all for participating you may disconnect at this time.