Q2 2023 Interpublic Group of Companies Inc Earnings Call
Speaker 1: Good morning and welcome to the Interpublic Group second quarter 2023 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 1.
Speaker 1: This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Mr. Jerry Leshney, Senior Vice President of Investor Relations. Sir, you may begin.
Speaker 2: Good morning. Thank you for joining us.
Speaker 2: This morning we are joined by our CEO , Felipe Krakowski, and by Alan Johnson, our CFO .
Speaker 2: We have posted our earnings release and our slide presentation on our website, intrapublic.com.
Speaker 2: We will begin our call with prepared remarks to be followed by Q&A. We plan to conclude before market open at 930 Eastern.
Speaker 2: During this call we will refer to forward-looking statements about our company.
Speaker 2: These are subject to the uncertainties and the cautionary statement that is included in our earnings release and the slide presentation.
Speaker 2: These are further detailed in our 10Q and other filings with the SEC.
Speaker 2: You will also refer to certain non-GAAP measures.
Speaker 2: 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.
Speaker 2: At this point it is my pleasure to turn things over to Halif Krakowski.
Speaker 3: Thank you, Jerry. Good morning.
Speaker 3: As usual, I'll begin our call with a high-level view of the quarter.
Speaker 3: Ellen will then provide additional details, and I'll conclude with updates on our agencies to be followed by Q&A.
Speaker 3: Starting at the top with revenue, the organic change of our revenue before billable expenses was a decrease of 1.7% against last year's second quarter organic growth of 7.9%.
Speaker 3: For the first six months of the year, our organic decrease was 90 basis points.
Speaker 3: During the second quarter, we saw the same puts and takes on revenue that we've identified and discussed with you since the beginning of the year.
Speaker 3: Those factors continue to weigh significantly on our performance in the second quarter.
Speaker 3: Concurrently, we continue to grow in areas of the business that have been key drivers of success for us over a number of years, namely our media offerings and the healthcare sector.
Speaker 3: We saw solid growth as well in disciplines such as public relations and our experiential offerings.
Speaker 3: Consistent with the items we've called out previously, during the quarter we continued to see reduced spend from clients in the tech and telecom sector as it moved through a challenging period that has included significant cost cutting.
Speaker 3: Those reductions significantly impacted on our ability to grow in the second quarter and for the first half.
Speaker 3: Our digital specialist agencies also continue to underperform in the quarter.
Speaker 3: As we've discussed previously, the transformation of those offerings continues to move forward, and we've seen some good wins there recently.
Speaker 3: Restoring those brands to consistent growth is proving slower than anticipated, however.
Speaker 3: due largely to continued challenges in the tech sector, as well as modestly heightened macro uncertainty.
Speaker 3: Taken together, the second quarter impact on our growth due to the second telecom sector and our digital specialists was approximately 3.5%.
Speaker 3: Along with the strength of our media offerings and the healthcare sector, it's worth highlighting that six of our eight client sectors grew during the quarter and in the six months here today.
Speaker 3: We also continue to win some of the largest new account opportunities in market so far this year.
Speaker 3: Our very strong new business momentum encompasses a diverse set of client industries.
Speaker 3: including pharma, financial services, autos, and food and beverage.
Speaker 3: These wins span the full range of marketing disciplines, especially in media, as well as global integrated solutions that bring together creative, public relations, experiential and data.
Speaker 3: As such, we return to the chat fourth.
Speaker 3: They underscore the role that we play as a critical partner to the world's most sophisticated and demanding marketers.
Speaker 3: To cite an important example, we're proud to have recently significantly expanded our relationship with Pfizer having been named their lead global creative public relations and medical affairs partner.
Speaker 3: Most of the new revenue from our wins has yet to ramp given that the transition periods between announcement and onboarding are the norm in our industry.
Speaker 3: As these winds come on stream in greater magnitude during the second half of the year, we expect their impact to be evident in our results.
Speaker 3: Looking at client sectors in the second quarter, we were led by strong growth in automotive and financial services.
Speaker 3: followed by growth in food and beverage, healthcare, consumer goods, and our other sector of diversified industrials and public sector clients. Our retail sector decreased modestly against very strong multiyear comparable performance and as discussed.
Speaker 3: Second telecom was the significant outlier.
Speaker 3: Regionally, the U.S. decreased to 2.5 organically in the quarter.
Speaker 3: predominantly due to the sector and agency specific challenges that we've called out.
Speaker 3: our international markets decreased slightly by 10 basis points organically with mixed performance by region.
Speaker 3: In terms of our segments...
Speaker 3: Our media data and engagement segment solutions segment decreased 1.5% organically in the quarter where we saw good growth at the media offerings offset by challenged performance.
Speaker 3: the digital agencies.
Speaker 3: Our segment of integrated advertising and creativity-led solutions decreased 3.8% organically.
Speaker 3: This is a place where tech and telecom in a somewhat more cautious spending climate is weighing on several of our more traditional consumer advertising agencies and that's impacting segment performance.
Speaker 3: Within the specialized communications and experiential solutions segment, we grew 3.7% organically.
Speaker 3: on top of 11.1% growth a year ago.
Speaker 3: The quarter was highlighted by increases at both our public relations and our public relations.
Speaker 3: and experiential disciplines.
Speaker 3: Turning to expenses and margin in the quarter, our operating discipline continues to be a strength.
Speaker 3: As our management teams demonstrate that we have the talents and tools, as well as the flexible business model, to deliver favorable margin results.
Speaker 3: quarter adjusted EVIT margin was 14.2%, which is ahead of our pre-pandemic second quarter 2019 margin.
Speaker 3: As expected, our Q2 margin was lower than a year ago, when additions to headcount had lagged a robust pace of multiyear growth.
Speaker 3: We are effectively managing our flexible operating model, which is clear in our expense for temporary labor, performance-based incentive compensation, and SG&A.
Speaker 3: Each was notably lower than a year ago.
Speaker 3: Total headcount decreased by 1.2% over the course of the first half of the year.
Speaker 3: Expense for severance was elevated in the quarter as we continue to both address areas of the business where performance is lagging.
Speaker 3: as well as further accelerate business transformation and integrate delivery of services in our very strong media offering. We'll see the benefit to margin of those actions going forward. Occupancy expense decreased from a year ago as we continue to benefit from actions taken in our real estate portfolio.
Speaker 3: Saluted earnings per share in the quarter was 68 cents as reported and 74 cents as adjusted for intangible amortization and other items.
Speaker 3: We want to make sure to call out that our EPS, both as reported and adjusted, includes the benefits of 17 cents per share related to the resolution of routine federal income tax audits.
Speaker 3: our EPS, both as reported and adjusted, includes the benefits of 17 cents per share related to the resolution of routine federal income tax audits previous years.
Speaker 3: During the quarter, we repurchased 1.3 million shares, returning $50 million to shareholders.
Speaker 3: That activity brings our repurchases for the six months, the 3.5 million shares, using $128 million.
Speaker 3: Turning to our outlook for the full year.
Speaker 3: and having just completed our usual mid-year update with our operators.
Speaker 3: We're positioned to resume solid organic revenue growth in the range of 3.5 to 4% over the course of the year's second half.
Speaker 3: As we move ahead, we expect that the benefit of net new business will be increasingly meaningful and that underlying growth from several of our larger businesses will also strengthen.
Speaker 3: Nonetheless, even our first six months.
Speaker 3: which in Q2 reflect what we believe is modestly heightened macro uncertainty.
Speaker 3: We are revisiting our full year organic growth expectations, the 1 to 2%.
Speaker 3: At the same time, with strong operating discipline,
Speaker 3: we remain committed to our margin target for the year of 16.7%.
Speaker 3: which represents an increase relative to our 2022 full year margin.
Speaker 3: The strategic relevance of our offerings is evident in new business performance year to date which as I've mentioned has been exceptional.
Speaker 3: And while we're disappointed in Q2 organic revenue performance,
Speaker 3: We will continue addressing certain areas of the business with urgency during the back half of the year.
Speaker 3: We'll also continue to invest in the multiple growth drivers in the portfolio.
Speaker 3: Now, I'm going to hand things over to Alan for a more detailed review of results.
Speaker 4: Thank you, Felipe. As a reminder, my remarks will track to the presentation slides that accompany our webcast. Beginning with the highlights on slide two of the presentation, our second quarter revenue before billable expenses.
Speaker 4: or net revenue decreased 2% from a year ago, with an organic decrease of 1.7%. Our organic net revenue decreased with 2.5% in the U.S., and with 10 basis points in our international markets.
Speaker 4: Over the first six months of the year, our organic revenue decreased with 90 basis points.
Speaker 4: Second quarter adjusted EVTA before a small restructuring adjustment was 330.2 million and margin was 14.2%.
Speaker 4: Our diluted earnings per share is 68 cents as reported and 74 cents as adjusted.
Speaker 4: The adjustments exclude the after-tax impacts of the amortization of acquired intangibles.
Speaker 4: The small adjustment to our previous restructuring actions.
Speaker 4: and non-operating losses on the sales of certain small, non-strategic businesses.
Speaker 4: It's important to note that our EPS includes the benefit of 17 cents per share related to the settlement of normal course federal income tax audits.
Speaker 4: We repurchased 1.3 million shares during the quarter and 3.5 million shares in the first step of the year.
Speaker 4: Turning to slide three, you'll see our P&L for the quarter.
Speaker 4: I'll cover revenue and operating expenses in detail in the slides that follow.
Speaker 4: Here, I would just point out that our interest expense and interest income were both elevated compared to a year ago due to higher prevailing market interest rates and the pre-funding of our upcoming April 2024 maturity with the issuance in June of our $300 million ten-year note. This year, our financial loss isoulos English Sign Language manage feed on the Understand least and increase Origins for more information on our general tier places focused on globalkinetic water and water witch may be given Cloud winner for the language
Speaker 4: Turning to the second quarter revenue in more detail on slide four.
Speaker 4: Our net revenue in the quarter is $2.33 billion.
Speaker 4: Compared to Q2-22, the impact of the change in exchange rates was negative 1%.
Speaker 4: With the dollar stronger against currency in nearly all international markets, with a notable exception being the euro.
Speaker 4: Net acquisitions at its 70 basis points.
Speaker 4: Our organic decrease of revenue before billable expenses was 1.7%.
Speaker 4: For the six months, our organic decrease was 90 basis points.
Speaker 4: The bottom of this slide is a look at our segments. Our media data and engagement solution segment decreased 1.5% organically. Good growth at our media businesses was more than offset by the performance of our digital specialist agencies as Felipe has noted.
Speaker 4: Our integrated advertising and creatively led solution segment decreased organically by 3.8%.
Speaker 4: lower revenue from clients in the tech and telecom sector, and a somewhat slower macroeconomic environment would fell broadly across the more traditional agencies.
Speaker 4: IPG help was relatively flat in the quarter due to the timing of various campaigns ahead of what we believe will be a strong second half.
Speaker 4: At our specialized communication and experiential solution segment, organic growth was 3.7% growth across public relations and experiential disciplines.
Speaker 4: Moving on to slide five, an organic net revenue growth by region. In the US, which was 66% of our net revenue before billable expenses in the quarter, our organic decrease was 2.5% against 8.3% growth a year ago.
Speaker 4: decreases in tech and telecom, and as our digital specialists, outlaid growth at our media, public relations, and experiential offerings.
Speaker 4: International markets with 34% of net revenue in the quarter and decreased by 10 basis points organically against 7.1% growth last year.
Speaker 4: The UK grew 1.7% organically on top of 4.4% growth a year ago.
Speaker 4: We were led by broad-based growth across our media, public relations, creative, and experiential operating.
Speaker 4: Consistently Europe decreased 4.3% organically in the quarter compared with an 8.3% increase a year ago. Lower revenue was mainly a result of decreases in Germany due to lower client spend and a higher client loss in the market.
Speaker 4: In Asia-Pac, we decreased 2.2% organically, compared with growth of 4.8% a year ago.
Speaker 4: Increases in India and China were more than offset by decreases in Japan and other national markets.
Speaker 4: Our organic growth in LAPTM was 6.3% on top of 8.8% in Q2-22 with increases across nearly all our national markets.
Speaker 4: In our other markets group which is Canada, the Middle East and Africa we grew 1.6% on top of 11% a year ago with notably strong growth continuing in the Middle East.
Speaker 4: Moving on to slide six, and operating expenses in the quarter.
Speaker 4: Our net operating expenses, which exclude billable expenses, the amortization of acquired intangibles and the restructuring adjustments decreased 30 basis points from a year ago compared with reported net revenue decrease of 2%.
Speaker 4: The result was our adjusted EVA TA margin of 14.2%.
Speaker 4: As expected, our margin decreased from a year ago when organic growth was very strong at 7.9% and hiring lagged and severance was lower as well.
Speaker 4: It is worth noting, however, that at 14.2%, our second quarter margin is well above the comparable pre-pandemic quarter of 2019.
Speaker 4: As you can see on this slide, our ratio of total salaries and related expense as a percentage of net revenue was 68.7% compared with 66.9% a year ago.
Speaker 4: Underneath that result, we delivered on our expense for base payroll, benefits and tax.
Speaker 4: which was 59.4% of net revenue, compared to 56.5% a year ago.
Speaker 4: Our performance-based incentive compensation decreased as a percent of net revenue from 4.5% to 3.4% consistent with our Advise Outlook for the year.
Speaker 4: Severance expense was 1.7% in net revenue which is somewhat elevated from typical levels in comparison to only 50 basis points a year ago.
Speaker 4: Our actions in the second quarter reflect steps to recalibrate the more traditional areas of the business where performance is lagging, as well as to accelerate business transformation in our high performing media vertical.
Speaker 4: We expect that we will increasingly see the benefits to margin of these severance actions as we mope forward through the year. The labor expense was 3.2% of net revenue compared with 4.4% in Q2-22.
Speaker 4: which is consistent with its role as a variable and flexible expense when revenue growth slows.
Speaker 4: Each of these ratios is in the appendix on slide 31.
Speaker 4: Also on the slide, our office and other direct expense was 14.6% of net revenue, compared with 14.7% in Q2-22. Underneath that improvement, we continued to leverage our expense for occupancy, which was 4.6% in net revenue.
Speaker 4: compared with 4.8% a year ago. All other office and other direct expense was 10% of net revenue, compared with 9.9% in Q2-22, which primarily reflects higher new business expense.
Speaker 4: Our SG&A expense was 60 basis points of net revenue.
Speaker 4: On slide seven, we present the detail on adjustments to our reported second quarter results in order to provide better transparency and a picture of comparable performance.
Speaker 4: This begins on the left-hand side with our reported results, and from left to right steps through the adjusted eBIT-TA and our adjusted diluted EPF.
Speaker 4: Our expense for the amortization of acquired intangibles in the second column was $21.2 million.
Speaker 4: The restructuring adjustment was a credit of $1.7 million. Below operating expenses and shown in column four, we had a loss of $4.1 million in other expenses due to the disposition of a few small, non-strategic businesses.
Speaker 4: At the foot of the slide, you can see the after-tax impact, the diluted share of each adjustment.
Speaker 4: which bridges our diluted EPS as reported at $0.68 to adjusted earnings of $0.74 per diluted share.
Speaker 4: It is important to note that our tax provision in the quarter includes a benefit of $64.2 million related to the settlement of US federal income tax audits for the years 2017 through 2018, which is primarily non-cash.
Speaker 4: That is 17 cents per share. We are technically not permitted to adjust for it, but it is a large, discreet item that impacts comparability, which is why we want to make sure we call it out for you.
Speaker 4: Slide 8 depicts similar adjustments for the six months.
Speaker 4: Adjusted diluted earnings per share was $1.11 for the period. This also includes the same $0.17 per share benefit in our tax provision.
Speaker 4: On slide nine, we turn to cash flow in the quarter. Cash used in operations was $35.2 million.
Speaker 4: which was due to working capital use of $281.2 million. The total cash flow before working capital was $246 million.
Speaker 4: As a reminder, operating cash flow is highly seasonal and can be volatile by quarter if it changes in the working capital component.
Speaker 4: The magnitude of our receivables and payables means that the timing of collections and payments within any single quarter can significantly affect the working capital results.
Speaker 4: In our investing activities, we used $121 million. We invested a portion of the proceeds of our note issuance in short-term Treasury securities, maturing before year-end.
Speaker 4: CapEx in the quarter is $46.4 million. Our financing activities reflect death issuance proceeds of $296.3 million.
Speaker 4: He paid $119.4 million in dividends and returned $50.2 million in share repurchases.
Speaker 4: Net cash from financing was $109.8 million.
Speaker 4: Our net decrease in cash for the quarter is $50.4 million. Slide 10 is the current portion of our balance sheet.
Speaker 4: We ended the quarter with $1.63 billion of cash and equivalents.
Speaker 4: We added $103 million in short-term marketable scarrities to be held to maturity, which, as I mentioned, is before year-end.
Speaker 4: Slide 11 depicts the maturities of our outstanding debt.
Speaker 4: As you can see on this schedule, total debt at quarter end was $3.2 billion. That includes the new $300 million Ten Year Note, which pre-funds our $250 million maturity in April 2024.
Speaker 4: Thereafter, our next maturity is not until 2028. In summary, on slide 12, our strong financial discipline continues and the strength of our balance sheet and liquidity means that we remain well positioned both financially as well as commercially. I would like to express my gratitude for the efforts of our people.
Speaker 3: offerings that help marketers enhance their brands, grow share, and deliver business outcomes. Since the start of the year, IPG has consistently led the way in new business.
Speaker 3: And this positive momentum should provide strong tailwinds as we move into the back half of this year and even more so in 2024.
Speaker 3: positive momentum should provide strong tailwinds as we move into the back half of this year and even more so in 2024. As mentioned earlier...
Speaker 3: Also during the quarter, Initiative was named US Media AOR for Constellation Brands.
Speaker 3: UM was appointed Global Media AOR for Upfield, the global leader in plant-based foods, and Media Brands was awarded the US media account for Bristol-Myers Squibb.
Speaker 3: This followed the Q1 headline win of Geico, which also awarded sports marketing work, the Octagon.
Speaker 3: along with a first-quarter SCODA win, in June Intuit QuickBooks selected FCB as its creative AOR.
Speaker 3: And McCann World Group won the highly competitive Air India review.
Speaker 3: During the quarter, IPG also received numerous accolades, including being named Most Effective Holding Company at the USFE Awards.
Speaker 3: At the Conlion Festival, our agencies have remarkable success during many of the festival's top honors.
Speaker 3: including one of only four titanium lions and five category Grand Prix. McCann World Group had a particularly strong showing as it worked for long time client MasterCard 1-9 Lions.
Speaker 3: including the festival's top honor.
Speaker 3: The Titanium, or its Where to Settle campaign, a digital tool that aggregates employment and real estate data, as well as spending insights to help Ukrainian refugees make new lives in Poland. For Microsoft, Macan created the Adline project.
Speaker 3: and digitized a popular West African language spoken by over 60 million people, which previously had no written alphabet. That work went seven lines, including two grand prix.
Speaker 3: Other significant honors include IPG Health's performance as Healthcare Network of the Year and Area 23 earning the prestigious title of Times Healthcare Agency of the Year, both of which reflect our continued excellence in the healthcare space.
Speaker 3: The festival also named FCB its North American Network of the Year for the fifth consecutive year which demonstrates the consistent outstanding work done by that agency for leading brands in this important region.
Speaker 3: Looking ahead, it's clear that artificial intelligence, which already plays a role in our data and for media and performance businesses.
Speaker 3: We'll begin to have an impact on our industry as a catalyst for creativity.
Speaker 3: Technology provides new canvases for brands to work with, and we're seeing the advent of AI tools that strategists and creative people can use to quickly generate and scale ideas.
Speaker 3: given that every competitor will have access to these same kinds of tools.
Speaker 3: It stands to reason that great creative ideas will remain essential for brands to stand out and win in the marketplace.
Speaker 3: During the quarter, we announced a partnership with a leading quantum computing developer to build new software tools and solve complex data-intensive problems.
Speaker 3: The partnership combines Quantum Cloud services with proprietary data drawn from IPG agencies, clients, and media partners.
Speaker 3: Together, we're helping clients identify high-value audiences and deliver more tailored messages at the right time in the right setting.
Speaker 3: This is one of many such partnerships as we engage with leading AI innovators, including Amazon, Microsoft, Google, Salesforce, Adobe, and NVIDIA, to establish the matrix deployment strategy that benefits all of our clients.
Speaker 3: On the important subject of retail, during the quarter we continue to strengthen IPG's commerce offering with a launch of our creative commerce labs which are finding new revenue streams for marketers through cross-channel collaboration and partnering with key commerce providers. You will have also seen earlier this week that we launched a new business development
Speaker 3: are performing best for our clients.
Speaker 3: and can allocate spend to maximize sales and profitability.
Speaker 3: Brands can augment existing audience data via proprietary Axiom datasets.
Speaker 3: And our solution automatically aggregates this cross network data using AI.
Speaker 3: The solution automatically aggregates this cross-network data using AI, power planning and activation.
Speaker 3: This offering will allow our clients to solve an important pain point in the growing retail media space, which is the lack of standard measurement, thus to make informed investment decisions.
Speaker 3: Turning to segment performance, we saw strong growth in our media offerings within the MDE group.
Speaker 3: As I mentioned earlier, those assets continued to win major client assignments. Initiative was just ranked number one by RECMA for new business over the past three-year period.
Speaker 3: And the UM was named Campaign's media agency Global Network of the Year. Moving to our digital specialists, at RGA we saw progress in new business, including a significant AOR win with Intuit TurboTax in the US.
Speaker 3: announced just last week. RGA was also selected by Mexico's largest sporting goods retailer, Innova Sport, for its digital commerce work.
Speaker 3: Huge launched and deployed a proprietary AI powered engine to inform creative platforms on live and drive business growth.
Speaker 3: And during the quarter, Huge's new productized and consulting offering helped to secure business transformation assignments from Driven Brands.
Speaker 3: which is the largest automotive services company in North America.
Speaker 3: During the quarter, Axiom announced its win of one of the largest auto groups in the U.S.
Speaker 3: to implement a customer data platform across their networks and dealerships. The company also continued to renew with many of their premier clients in the financial services, insurance, and telecom sectors.
Speaker 3: These renewals and new wins highlight the value of Axiom's customer intelligence cloud offerings.
Speaker 3: which include the management of brands' first-party data to improve customer acquisition, retention, and growth.
Speaker 3: At our Integrated Advertising and Creative-led Solutions segment, FCB was named the number one global network and FCB the number one agency in the world by the One Club. And FCB New York also won a sports Emmy for outstanding digital innovation for the AI-driven work.
Speaker 3: McEnroe versus McEnroe for Michelob Ultra.
Speaker 3: Campaign named McCann World Group the best network in Europe for the fourth time and MRM was named large agency of the year at the ANA 2023 B2B awards. The global 2022 SE effectiveness index ranked McCann as the most effective agency network in Europe .
Speaker 3: and the number two most effective network globally. And Mullen Lowe was named US Agency of the Year at the One Show.
Speaker 3: Turning to the specialized communications and experiential solutions group, we saw strong balanced growth in the segment with Golan performing particularly well.
Speaker 3: However, Shandwick showed continued solid growth in Q2, driven by the healthcare sector, and with the most awarded PR agency network in CUN.
Speaker 3: Our experiential assets also posted solid performance.
Speaker 3: Highlights at Octagon included the agency's work with Cisco to negotiate the company's sponsorship for the 2023 FIFA Women's World Cup, as well as activation of global sponsorships for Budweiser and Unilever in New Zealand at the World Cup.
Speaker 3: Strong growth at Momentum was driven by clients in the retail.
Speaker 3: finance, and food and beverage sectors, as well as the continued integration of technology into live activation.
Speaker 3: Looking ahead, as mentioned earlier, we are revising our full year organic growth expectation to 1 to 2%.
Speaker 3: while remaining committed to our margin target for the year of 16.7%, which is ahead of last year's result. We view our very strong new business tailwinds.
Speaker 3: coupled with growth in our existing client base, notably in media and healthcare, as key drivers of our outlook for the balance of the year.
Speaker 3: and will also benefit in 2024. Another factor will be our long-standing open architecture model based on collaboration by design and a foundational data and technology infrastructure through which we integrate our services from agencies across segments in the solutions we deliver for clients.
Speaker 3: This approach continues to be core to our offerings. Another ongoing commitment that's been a hallmark of our culture is our work in ESG and DE&I has remained vital in a talent business.
Speaker 3: Our flexible cost model is an important lever, not only for improving margins in times of growth, but also to consolidate those gains as we've demonstrated this quarter. And additional areas for value creation, as Ellen called out, include our strong balance sheet and liquidity.
Speaker 3: IPG's ongoing commitment to capital returns has been underscored by consistent dividend growth and the execution on our share repurchase program. As always, we thank our partners and our people, as well as those of you on this call, for your support.
Speaker 1: And with that, let's open the floor to questions. Thank you. To ask a question, please press star 1, unmute your phone, and record your name clearly. If you need to withdraw your question, press star 2.
Speaker 1: Again, to ask a question, please press star 1. One moment for the first question. Our first question is from Ben Swinburne with Morgan Stanley . You may go ahead. You may go ahead.
Speaker 3: Thanks. Good morning.
Speaker 3: Then, could you talk a little bit more about the x sector offness that you know, impacting IPG organic growth. We obviously have heard for a while from you about some of the specialty agencies at IPG but it's it feels like it's broader than that.
Speaker 3: And so I'm just curious if you could maybe talk a little bit about where that pullback is occurring. If it's in media project work, I know it's all kind of client specific, but would just help us try to think about how much of this is...
Speaker 3: sort of idiosyncratic to certain clients or part of a broader theme, because it would certainly seem logical that technology companies are gonna be growing their investment over time. But it would be helpful to try to think through how much of this is sort of video versus structural. And then I was just curious, you know, what your.
Speaker 3: What are your focus areas with AI at IPG? In a year or two, what would you like to see the company doing or not doing? What are clients asking you about as you think about this technology opportunity and obviously the risk around them as well? Thank you. Sure. On the first question, Ben, I mean, I can speak to it without, obviously,24 hours a week.
Speaker 3: going to the level of a specific client given, you know, how we want to be thoughtful. But what we have seen is that the sector is under a lot of stress. If you think about it, it was probably 15% of net revenue for us a year ago in this quarter. It's down to about 12, right?
Speaker 3: And I don't think that we're going to be able to call the turn, although in the long run, I think it is still an industry that's going to return to being a strong growth driver for us. You know, what we've seen is that given the stress that that sector is feeling,
Speaker 3: and you obviously see it. We're talking about a relatively small group of large companies, right? We're not talking about a long tail or VC-backed or smaller companies. We're talking about a relatively small group of large companies, and as the....
Speaker 3: decisions that they're having to make around cutting costs and obviously, you know, resizing their employee base, et cetera, we have definitely seen it in cuts, I would say in project-based businesses, definitely. They allow incentives to help cut costs, therefore discovery You know you can have a more expensive aesthetic in quarter Sven Linden up that trusts Dustin
Speaker 3: you know, our two digital agencies that, as we've pointed out, are in turnaround mode, over-indexed to those are important clients for them. And then I think we've seen the kind of curtailing activities in some of the more traditional areas of the business.
Speaker 3: So, you would sort of think maybe the consumer ad agencies for us, which I think also does dovetail with a broader trend that we've seen, which is that whether it's...
Speaker 3: the turnaround there or the slightly more uncertain macro is something that we are feeling more in certain areas of the business than others. So the really strong performers and the engines of our growth.
Speaker 3: are not being impacted, and yet other parts of the portfolio are. So hopefully that helps on the tech part of the question.
Speaker 3: not being impacted, and yet other parts of the portfolio are. So hopefully that helps on the tech part of the question.
Speaker 3: In terms of AI, it's a very, very broad question, right? And so, you know, we're operationalizing AI across the group in a number of ways and actually have been for some time, right? So, predictive AI in precision and data heavy...
Speaker 3: parts of the business, so whether that's media brands, performance media, Axiom, that's something that's been part of the model for some time. I think that in commerce we're starting to use it, so you're seeing
Speaker 3: Personalization, scale of content informed by it. You're seeing, you know, user support and product recommendations, so chat bots and creating instances in which you're using reviews and a lot of the information that a client has, that is their own information, as the training set.
Speaker 3: with which to inform an AI which can then be put to use with a production platform or that can feed into some creative campaign. It's funny, we won a lion at kind for a really interesting piece of work that we did with a very large baked goods company in Latin America.
Speaker 3: to actually generate a lot of branding work for a very long tail of vendors that are important to them. I think what you're going to see with us is, we're definitely leaning now into what are the applications and how are we going to be addressing this.
Speaker 3: on the content creation side of things and in the strategic side of when and how we do content creation.
Speaker 3: And what you'll see is the kinds of programs that I'm talking about that we've been working on for some time, and now partnerships with some...
Speaker 3: you know, scale experts in the AI space. I think I, you know, noted a number of them where we're thinking about, you know, how do we incorporate that into...
Speaker 3: think that portends any greater slowdown in broader client activity? Thank you. Sure. On the former, again, understanding that client business and confidentiality around client business is what it is, yeah, I think you read on is that more a tech than a telco set of comments? Yes, it is. And it is the case that we talk about sectors globally, but when you think about our revenue mix all in being two thirds US, it would have there would have to be a pretty significant outlier for it for it not to also apply domestically. So we're definitely seeing it. I mean, you see the disproportionate.
Speaker 3: drag on performance that, you know, U.S. growth, lack thereof, had on us. So, yes, more tech and yes, very much something we're feeling domestically. On the second question, I don't think that I would read that as you have. You know, the segment was....
Speaker 3: created because we have like entities there in terms of the digital component of what they do. But the impact of those digital specialists is what's leading to what you're seeing as deceleration. And you know, as we've called out, media...
Speaker 3: is very strong for us, has been, and given performance year to date in terms of
Speaker 3: securing, you know, new assignments will continue to be so I don't I don't think I would extrapolate that last piece.
Speaker 3: Great, thank you, please. Thank you.
Speaker 1: Thank you. Our next question is from Michael Nathanson with Moffitt Nathanson. You may go ahead.
Speaker 2: Thanks. Two for Felipe, one for Ellen. To beat the dead horse a little bit more, let's focus on tech weakness again. If you were to go under the hood, I'm sure you've done. When do you think kind of the normalization of spend from those large tech domestic?
Speaker 2: companies will start to normalize, right? So, you know, put yourself in our shoes under the hood. When does it ease?
Speaker 2: The second question would be, now that we see another one that only appears
Speaker 2: showing the size of their principal media buying business, I asked you last quarter. Do you think that is a structural disadvantage that you guys are not in that business? Any update on your latest thinking on that following my question last quarter? And then Ellen, just surprised that you guys raised debt this soon at the rates.
Speaker 2: The balance sheet is pristine. How did you debate whether you're just paying off the debt when it came to next year versus raising debt at, you know, when, you know, the rate's not high, but you could have waited a bit. So walk me through that function. Thanks.
Speaker 3: All right, I'll let Ellen start. Sure.
Speaker 4: So we have as we do from time to time hedge interest rates. So the coupon that you're seeing on that debt is, you know, the face value or what we issued at, but we had previously hedged...
Speaker 4: largely the treasury component of that. So the rates that we're actually paying are better. And when we looked at it, you know, from that perspective and looked at the opportunity to take it off the table and then where interest rates are, I had the opportunity to invest it, as we talked about in the securities we had.
Speaker 4: it was a good economic decision.
Speaker 3: Two answers, Michael.
Speaker 3: As I said, I don't know that we can call the turn on you on tech, and as I also said, our outlook at this point is not contingent on recovery in kind of the rate of revenue change that we're seeing, you know, in that space, and that was also having an impact.
Speaker 3: So we sat on our two digital agencies that were in turnaround mode.
Speaker 5: You know?
Speaker 3: Not necessarily something that you can sit here where we are. We talk to those clients often. We engage with those clients. Not that they are not...
Speaker 3: active as marketers and yet they clearly are meaningfully more cautious as marketers. They're often letting, you know, folks go who are budget owners whose projects then might...
Speaker 3: sit somewhere or not get actioned at all. You know, and given the cost cutting that they're taking, nobody is exempt in that part of...
Speaker 3: you know, of the economy, but...
Speaker 3: again, think about all the other things we talked about, they're going to enable everything that happens with AI. They continue to undergird a pretty significant part of the ad ecosystem, and in another year or two, we're going to be up to
Speaker 3: 80% of media being bought programmatically. So there's no sense that it won't turn, it's just they're clearly going through a process that is more protracted than any of us thought.
Speaker 3: programmatically. So you know there's no sense that it won't turn it's just they're clearly going through something that is more protracted than any of us thought.
Speaker 3: Your media question, I thought about it some because you'd asked the last time and I thought, Michael, we'll either connect at some point or it'll come up here. So media has been a very strong performer for us. And it continues to be a strong performer for us.
Speaker 3: So our model works well.
Speaker 3: And the question you're asking is, is there something missing, a dimension missing? Can it work better? So, we are looking at that. And, um...
you know, even Ellen called out severance, you know, we're looking at how we can re-engineer processes there and align or further integrate offerings. But if the objective is to deliver value to clients.
and we've demonstrated we can do that. And the way that we've done that is by...
Powering it with data, making it about precision, and therefore, to my mind, value as greater marketing effectiveness.
So, for clients whose focus is on other KPIs.
which might be efficiency.
might be, we'll call it efficiency. We're looking at ways to evolve our offering to meet those needs because what's most important to us is we've got to meet the needs of...
as many clients as possible. And if what value means is something that is changing or evolving or a pendulum is swinging on that, you know, we clearly want to be positioned to do that. So, the analytical focus that happens in your space on this issue, we understand. For us, it's going to be, are we solving for client needs? Can we show up in ways?
operating in this space and then cash flow. And I hope that that is at least directionally helpful thinking, but we're definitely looking at it and being pretty thoughtful.
Thank you for that.
Thank you for that. No, no worries.
Yes, good morning Philip, good morning Alain, good morning Jerry. One short-term question, one long-term question. On the short-term after being down 1% in the first half in terms of organic, you need to be up 3% in the second half to reach the bottom end of your guidance of 1% and up 5% to reach the top end of 5%.
And then on AI, a longer term question, to put it in terms of simple numbers, if you have a creative budget of 100.
You make 15 margin 85 of course, thanks to AI So that cost goes to 60 you keep your 15 margins. So revenue is 75 I believe advertisers will reinvest but you believe they will invest in creative in which gets kind of neutral or media which actually would be negative because the media take
As I said, we are no longer expecting the...
turnaround as you put it, right? So our outlook as it stands now does not factor in either
significant recovery in Tech and Telco and clearly the timeline on the digital specialty agencies given this greater uncertainty is pushed. So how the year lays out for us in terms of
to your point, doing three and a half plus in the back half, three and a half to four is...
three and a half plus in the back half, three and a half to four is the
The drag from Tech, Telco, and Digital becomes a given, so it's not going to recede at mid-year. It will likely be with us for most of the year.
The negative net new business position that we had coming into 23 impacted the first half, will not impact beyond that and has now been turned around and is now a strong positive.
So, if you look at the second half, and then in the first half we had, you know, strength of media and healthcare. So, if you look at the second half, the growth is roughly 50% from net new business that comes on stream.
and 50% from stronger underlying performance at those two large entities.
And on new business...
You know, all those wins bring a significant plus up, but we have not...
assumed all of it at one go. We have assumed essentially that, you know, full run rate for all of those is not in effect until close to the end of the year, which is why we pointed out that clearly it'll have a benefit for us in 24. So that's a very significant full run rate number, but we're not forecasting.
that full run rate until late in the year. And then on media and healthcare, I think our view reflects, you know, Ellen talked about timing on work and campaigns, and then on the media side, I would say business mix and seasonality. So hopefully that helps you understand how we are...
seeing what that three and a half to four for the back half looks like. On the AI question, which as I said, I think merits a lot of conversation and is getting a lot of thought.
It is early days in the application of it on the creative and content creation side of things. I do think that when you begin to...
see what's possible given the volume of content that can be created, then it isn't necessarily the case that one is going to replace the other. It's that you're going to be supplementing because you're going to be creating much more and much more complex sort of ecosystems of content. And then the other thing that we've seen in the businesses where we've already applied machine learning Mormons have been very vacuous with this and we're starting to reintegrate now to create something that's Mohamed that probably has all the United Things in it thatb repetitiveized in all into one standard way without committing to any environmental change gets people VA aAssuming the he
take some of that young digital talent and upskill it or you can have them focus on areas of
All along, the efficiency piece of this will be important. The new ways of being compensated will be important. But for at least a foreseeable future, we're figuring out what it means relative to the very sort of direct for instance that you put out there. But it's a concern or at least an issue that we're all thinking to address. I don't have an answer for you sitting here right now.
Okay, very good. Thank you for overrunning the opening bell. No, those are important questions. We appreciate them.
Thank you for the time. We look forward to updating you on progress in October .
We'll get to it. And that was our last question. I'll turn it back to Felipe for any final thoughts. And this concludes today's conference. You may disconnect at this time. Okay.