Interpublic Group of Companies Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 20, 2023

There are 12 speakers on the call.

Operator

Good morning, and welcome to The Interpublic Group Third Quarter 2023 Conference Call. All parties are in a listen only mode until the question and answer portion. This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Mr.

Operator

Jerry Leshney, Senior Vice President of Investor Relations. Sir, you may begin.

Speaker 1

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

Speaker 1

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

Speaker 1

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

Speaker 2

Thank you, Jerry. As usual, this morning, I'll begin with a high level view of quarter, after which Ellen will provide additional details. I'll conclude with updates on our agencies to be followed by Q and A. Before getting to the business of the call, however, it seems not only appropriate but necessary to speak to our collective shock and grief in response to the terrorist attacks perpetrated in Israel and their aftermath. Thankfully, our colleagues in Israel are safely accounted for, so many are being called into service.

Speaker 2

We're also clearly in the midst of the humanitarian crisis in the region, so our thoughts go out to all innocent lives that have been impacted by violence and those who remain in harm's way. Given the scale of our operations in Israel. We'll also spend a bit more time later in the call discussing the implications on IPG's business. Turning to 3Q performance, starting at the top with revenue, results did not measure up to expectations. The organic change of our revenue before billable expenses was a decrease of 40 basis points.

Speaker 2

For the 1st 9 months of the year, Our organic decrease is therefore 80 basis points from a year ago, inconsistent with the trailing 3 year growth of 15.7%. The same factors we've discussed is having impacted the first half of the year continue to weigh on the Q3. These are in order of magnitude: the decrease in client activity in the tech and telecom client sector, which has been evident across our industry this year and the underperformance of our digital specialist agencies. Decreases in both of these areas were at about the same scale as we identified in the 2nd quarter and together they weighed on our 3rd quarter growth by approximately 3.2%. As we've spoken to in recent quarters, major marketers in technology sector are consumers of our core services.

Speaker 2

And as a sector their budgets this year have seen significant cost cutting in line with the broader austerity efforts at those companies. While it's challenging to call the timing of the upturn in their marketing spend, we do believe that the current pressure on this sector will abate since these market leaders will need to return to growth mode. Another key factor negatively impacting our results is the broad concern about marketers related to macroeconomic conditions, which we've identified on our previous calls this year. Economic concerns have translated into what is now an unmistakably more cautious tone in the business. We saw those headwinds take several forms, including pauses in certain planned activities, fewer and generally smaller project opportunities and a slower than anticipated pace in conversion and onboarding of new business.

Speaker 2

Notwithstanding these challenges, it's worth noting and we did see progressively better performance from month to month during the Q3 with growth in September. We also saw aggregate growth among our top 20 clients in the quarter. We continue to anticipate that the new business that we've won across as their global media agency of record. Will handle all strategy, planning, buying, analytics, performance and commerce efforts across 36 markets for this important client. Also worth highlighting that in the quarter, we continue to see growth in areas of the business and have been key drivers of success for us over a number of years, namely our media offerings, which performed very strongly in the healthcare sector.

Speaker 2

In addition, we had solid growth in sports and entertainment marketing, public relations and our experiential offerings. 6 of our 8 client sectors grew during the quarter as has been the case in the 9 months year to date. We were led in the quarter by the strong growth of auto and transportation, followed by our other sector of diversified industrials and public sector clients, to the financial services and healthcare sectors. Healthcare grew in the quarter, though not at the more robust levels we'd expected. Food and Beverage and Consumer Goods sectors also increased in Q3.

Speaker 2

We had a slight decrease in the retail sector. The tech and telecom sector decreased in the high teens on a percentage basis. And this is not only due to the large trend in the sector, but also in the significant client loss at McCann. Regionally, we saw organic growth in the quarter across the UK, Europe, Latin America and our other markets group. The U.

Speaker 2

S. And Asia Pacific region decreased. Lower revenue in the U. S. Was predominantly due to the sector and agency specific challenges we've called out.

Speaker 2

As we look at the balance of the year, the geopolitical situation in the Middle East does add a degree of uncertainty to our business. Our operations in Israel include the full range of creative, marketing services and media offerings and they represent approximately 1% of total IPG Global Revenue. As you'd expect, economic activity in the country is at a stand which has already begun to have an impact during what is seasonally the business' largest quarter. The developing geopolitical crisis is of course foremost a human concern and our top priority is to do what we can to support our colleagues in the region. But in the context of this call, we did feel it was necessary to point out it will also have some business implications.

Speaker 2

Turning to segment performance. Media, Data and Engagement Solutions grew organically by 50 basis points in the quarter. We continue to see very strong growth in our media offerings, but that was again largely offset by challenged results in our digital specialty agencies. Our segment of integrated advertising creativity led solutions decreased 4.1% organically as the tech and telecom client sector and a more cautious spending climate weighed on our more traditional consumer advertising agencies. FCB's strong performance in the quarter was a notable exception, powered by its strategy of incorporating data informed audience led thinking into its core creative offering.

Speaker 2

Our segment, Specialized Communications and Experiential Solutions, grew by 6.5% organically. The quarter was highlighted by increases in Sports and Entertainment, Experiential and Public Relations. Turning to an overview of expenses and margin. Operating discipline continued to be a strength and was fully in evidence during the quarter. 3rd quarter adjusted EBITDA margin was 17.2%, up from 15.5% a year ago.

Speaker 2

Across the group, we're effectively managing our flexible operating model, which you can see in our expenses for temporary labor, performance based incentive compensation and SG and A. Total headcount decreased by 1.5% from a year ago. Occupancy expense decreased as well as we continue to benefit from actions taken on the real estate portfolio and other variable expenses such as travel or sources operating leverage. Our diluted earnings per share in the quarter was During the quarter, we repurchased 2,600,000 shares, returning $91,000,000 to shareholders. That brings our share repurchases for the 9 months to 6,100,000 shares using $219,000,000 The strength and strategic relevance of our offerings is evident in our new business wins year to date and our long term record of organic growth.

Speaker 2

That said, We had anticipated that the puts and takes in Q3 would have netted to better revenue performance than reflected in our results today. And I'll do more to unpack that for you in my closing remarks. Turning to our outlook for the remainder of this year. Given the trends we've called out for you since the beginning of the year, the fact that macro conditions have become more challenging as well as the incremental impact of geopolitical uncertainty. We believe organic revenue performance for the Q4 will come in at approximately 1% growth.

Speaker 2

Nonetheless, we remain committed to our margin goal for the year of 16.7%. The current level of performance is not up to the standards we've set over many years. We'll therefore be looking to close this year as strongly as possible and specific to identified areas of underperformance also assess structural internal solutions to improve our growth profile. At this point, I hand the call over to Ellen for a more detailed review of our results.

Speaker 3

Thank you, Philippe. As a reminder, my remarks will track to the presentation slides that accompany our webcast. Beginning with the highlights on Slide 2 of the presentation, our 3rd quarter revenue before billable expenses or net revenue increased 60 basis points from a year ago with an organic decrease of 40 basis points. Our organic decrease was 1.2% in the U. S, while we grew 1.1% organically in our international markets.

Speaker 3

Over the 1st 9 months of the year, our organic revenue decrease was 80 basis points. 3rd quarter adjusted EBITDA was $397,200,000 an increase of 11.5% from a year ago and margin was 17.2%. Our diluted earnings per share in the quarter with $0.63 as reported and $0.70 as adjusted. The adjustments exclude after tax impacts of the amortization of acquired intangibles and non operating losses on the sales of certain small non strategic businesses. We repurchased 2,600,000 shares during the quarter and 6,100,000 shares in the year's 1st 9 months.

Speaker 3

Turning to Slide 3, you'll see our P and L for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow. Turning to 3rd Compared to Q3 2022, the impact of the change in exchange rates was positive 70 basis points, with the U. S. Dollar weaker against the euro, pound and several lifetime currencies compared to last year, but stronger against most currencies in Asia Pac and the Canadian dollar.

Speaker 3

Our net acquisitions added 30 basis points. Our organic decrease of revenue before billable expenses was 40 basis points. For the 9 months, our organic decrease was 80 basis points. The performance of our segments is at the bottom of the slide. Our Media, Data and Engagement Solutions segment grew organically by 50 basis points.

Speaker 3

We had very strong global growth at our media businesses, though that was largely offset by the continued underperformance by our digital specialist agencies. Our Integrated Advertising and Creatively Glad Solutions segment decreased organically by 4.1%. Lower revenue from clients in the tech and telecom sector and a more challenging macro environment was felt broadly across a more traditional consumer facing agency. At our Specialized Communications and Exponential Solutions segment, organic growth was 6.5% with growth across our Sports and Entertainment, Public Relations and experiential disciplines. Moving on to Slide 5 and organic net revenue growth by region.

Speaker 3

In the U. S, which was 65% of our revenue before billable expenses in the quarter, our organic decrease was 1.2% against 4.4% growth in last year's Q3. Decreases among tech and telecom sector clients and a more cautious macroeconomic environment continued to weigh on our performance, notably at our digital specialists and at most of our creatively led agencies. We had strong growth at our media offerings, followed by increases at our Sports and Entertainment, experiential and public relations disciplines. International Markets, which were 35% of our net revenue, grew organically 1.1 percent in the quarter on top of 7.8% a year ago.

Speaker 3

The UK, which is 8% of net revenue in the quarter, grew 2.2% organically, on top of 4.9 percent a year ago. Growth was led by IBG Mediabrands, McCann and FCB. Continental Europe, which was 8% of net revenue, grew 3.9% organically in the quarter, compounding last year's 4.7 percent growth. We were led by growth in Spain and Germany as well as by increases in smaller national markets. Asia Pac was also 8% of net revenue in the quarter.

Speaker 3

Our organic decrease was 5% compared to 5.6% growth a year ago due to decreases in Japan and China. In LatAm, which was 5% of net revenue, our organic growth was 5.7% on top of 19.8% a year ago, with increases across all national markets led by Colombia and Argentina. In our other markets group, With this Canada, the Middle East and Africa, we grew 1.2% on top of 10.6% a year ago. Moving on to Slide 6 and operating expenses in the quarter. Our net operating expenses, which excludes billable expenses, The amortization of acquired intangibles and restructuring adjustments decreased 1.5% from a year ago compared with the growth in reported net revenue of 60 basis points.

Speaker 3

The result was adjusted EBITDA margin of 17.2%, an increase of 170 basis points from a year ago. As you can see on this slide, our ratio of total salaries and related expense as a percentage of net revenue decreased by 110 basis points to 66.3 percent from 67.4% in last year's Q3. Compared to last year, we delivered on our expense for base payroll benefits and tax, while our expense for temporary labor, Employee incentive compensation and severance decreased as a percent of net revenue. Each of these ratios is shown in the appendix on Slide 31. Headcount at quarter end was 57,700, a decrease of 1.5% from a year ago.

Speaker 3

Also on the slide, our office and other direct expense was 13.8% of net revenue compared with 14.3% in Q3 2022. Underneath that improvement, we continue to leverage our with 70 basis points of net revenue, an improvement of 10 basis points. On Slide 7, We presented detail on adjustments to reported 3rd quarter results in order to provide better transparency and a picture of comparable performance. This begins on the left hand side with reported results and from left to right steps through to adjusted EBITDA and our adjusted diluted EPS. Our expense for the amortization of acquired intangibles and the second column was $21,000,000 The adjustments to previous restructuring actions was a credit of 600,000 Below operating expenses and shown in column 4, we had a loss of $12,100,000 in other expenses due to dispositions of a few small non strategic businesses.

Speaker 3

At the foot of the slide, You can see the after tax impact per diluted share of each adjustment, which bridges our diluted EPS as reported at $0.63 to adjusted earnings of $0.70 per diluted share. Slide 8 to pick similar adjustments for the 9 months. Our diluted earnings per share was $1.64 as reported and $1.81 as adjusted. As a reminder, reported and adjusted EPS for the year to date period includes the benefit of $0.17 per share recorded to our tax provision in this year's Q2. On Slide 9, we turn to cash flow in the quarter.

Speaker 3

Cash from operations was $242,700,000 and operating cash flow before working capital was $365,400,000 As a reminder, Our operating cash flow is highly seasonal and can be volatile by quarter due to changes in the working capital component. And our investing activities used $48,600,000 essentially all of which was towards CapEx in the quarter. Our financing activities used $225,500,000 mainly reflecting capital return to shareholders. Our net decrease in cash for the quarter was $52,700,000 Slide 10 is the current portion of our balance sheet. We ended the quarter with $1,570,000,000 of cash and equivalents and $102,000,000 in short term marketable securities to be held to maturity, which is before year end.

Speaker 3

Slide 11 depicts the maturities of our outstanding debt. As you can see on the schedule, total debt at quarter end was $3,200,000,000 That includes our 300,000,000 10 year note, which we issued in June to prefund our $250,000,000 maturity in April of next year. 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 mean that we remain well positioned both financially as well as commercially. And with that, I'll turn it back to Philippe.

Speaker 2

Thanks, Ellen. Without question, Organic revenue performance to date this year is not consistent with our expectations or our long term track record. And continue to be in market with relevant and compelling offerings that are helping marketers accelerate growth and deliver business outcomes. And that has translated to new business success year to date. Now for many of you who've been with us over a period of years, you know that we were among the first to embed digital capabilities across media, healthcare and many of our marketing services as well as to recognize the importance of the integrated services in an increasingly complex consumer ecosystem.

Speaker 2

Similarly, we were early to understand the growing importance of data resources and first party data capabilities at scale as key tools to power the success of our clients. Given the very rapid rate of change we're all experiencing, We continue to further evolve our offerings, investing in ways that help brands compete in a dynamic world of New technology platforms and empowered consumers. This work has meant that increasingly large portions of our portfolio or better oriented secular areas of growth. Consistent with that objective, during the quarter, We launched our unified retail media solution, which is a dedicated business unit within media brands. It helps clients manage their investments across all retail media networks, one of the fastest growing advertising channels.

Speaker 2

That solution is already helping brands maximize Earlier this week, we also launched Real ID in the cloud, the tool powered by Acxiom and piloted at FCB. That modernizes identity resolution and addresses an industry need for identity tools in a post cookie world Built on ethically sourced data that prioritizes consumer privacy, Real ID creates the opportunity for us to do the kind of intelligent, data driven work that we've been doing in media for some time across all marketing channels and disciplines. Our AI steering committee includes leaders from across our network and it continues its work overseeing strategic partnerships and sharing use cases across the group. As you know, we've been using machine learning and other AI tools in our data and media business for a number of years. With hundreds of new AI pilots underway across the company.

Speaker 2

We're tracking a subset of promising programs with a particular focus on 3 new areas. 1st, using AI to generate content, including text, images, audio and video in our ideation and creative processes. 2nd, AI is a tool to uncover strategy and insights as well as business trends that can help our clients and their brands and finally, piloting the use of intelligent chatbots to automate tasks like program recommendations and other key steps on consumers' e commerce journeys. Given the impact AI will continue to have on all businesses, including ours. We're fully engaged with leading AI innovators, such as Adobe, Amazon, Google, Microsoft, NVIDIA and Salesforce.

Speaker 2

For example, during the quarter, NVIDIA worked with us specifically within our PR agencies to incorporate AI enabled processes into earned media and corporate communications workflows.

Speaker 4

Just to step back and

Speaker 2

talk a bit again about our reporting segments in some detail. As discussed earlier, within the MD and E segment. We had very strong growth at our media offerings, but that continued to be largely offset by challenges within the dataless digital specialty agencies. I think notably during the quarter, we brought 3 distinct media brand companies, Canessa, Matterkind and Reprise under the Canessa banner and brand to create a unified tech driven performance unit that enhances the effectiveness, and as mentioned earlier, General Mills is another great piece of news at Mediabrands. During the quarter, Acxiom announced that its info based consumer insights and audiences are now available in cloud data exchanges and received a Salesforce Partner Innovation Award for work it's doing with its Heathrow client.

Speaker 2

The company also recently launched Acxiom Health, which is its latest vertical offering and provides advertisers with quality audiences that span both consumers and healthcare providers with more effective reach and precision. At Huge, the agency had a number of wins with their new suite of consultative products that are tailored to specific client business problems, which allows them to deliver strategy through execution very rapidly and effectively. The agency expanded its relationship with Darling Ingredients, What it calls the AI Opportunity Mapper, which help clients anticipate big shifts that Gen AI will have in their specific industry and identify Agency announced new business wins in the U. S. From Bloomberg and the BBC and in LatAm from Banco Safra, which is Brazil's premier financial institution.

Speaker 2

RGA also launched the associates program, a unique approach to fractional hiring that offers flexibility and emphasizes adaptability and creativity. And the agency's work for clients like Procter and Gamble and the Ad Council was recently recognized as a finalist for Fast Company's Innovation by Design Awards. Within the IAC segment, As we mentioned, tech and telco weighed on our more traditional consumer advertising agencies, but FCB was a notable exception to that. The network is playing a key role in our integrated Pfizer team and also expanded relationships with existing clients, which is sorry about that with new clients such as Diageo, Denone and Upfield in global markets. IPG Health's focus on creativity, technology and data continue to be key to their clients.

Speaker 2

And during the quarter, the network launched the industry's first clinical trial diversity offering designed to help pharma and healthcare companies to ensure more inclusive treatment innovations. Last month, following a competitive pitch process, IKEA chose McCann as its first global brand marketing partner. Domestically, T. J. Maxx hired McCann as its creative AOR and wreck its Durex brand named MRM and McCann as brand leads in Europe and the U.

Speaker 2

S. In addition, the network launched McCann Content Studios, its new global hub for social and creative services. Mullen Lowe retained the DHRA account, which is the arm of the U. S. That includes advertising, CRM, database management, integrated media, social, digital and PR.

Speaker 2

Our SC and E Solutions segment, as we mentioned, saw growth across all disciplines, Following a strong new business track record year to date in Q3, Bowen won new business, including Eve Air Mobility Tapestry, the luxury brand holding company that owns Coach and Kate Spade as well as Neutrogena, the KenVue skincare brand. Momentum grew strongly with core clients, including Verizon and Nike and brought on a number of new clients, notably John Deere. Most recently, the company secured 3 AI patents for the machine learning of experiences, which makes them the 1st agency to do so in their area of expertise. Octagon signed the ACC of the new client at their industry leading media rights division in the Agency 1 new client brands, including Hilton Hotels and PowerAids, as well as working with current clients, Budweiser, Mastercard and Unilever to manage activations at major global sporting events. Jack Morton, Vivi, Agency's diversity driven inclusive marketing practice posted wins and new work with the NBA and TIAA.

Speaker 2

There are also additional new client adds with Paramount Plus and Comcast and a large scale reinvigoration of ESPN's support center. However, Shandwick saw growth in the health sector and in its government and public policy work. On the new business front, Notable wins included Dollar Shave Club and a significant new assignment with the CDC. The network Also expanded its predictive analytics and intelligence capability with a rollout of a new proprietary solution that measures the impact of earned media. Despite these highlights from across the portfolio, as you can see from our results, the Q3 didn't unfold along the lines we'd envisioned when we spoke with you in July.

Speaker 2

At that time, we shared our view of the second half inflection point for stronger growth driven by several factors. 1 was accelerating growth of our media business, which did materialize with notably stronger performance in the Q3 than we've seen earlier in the year. We also look forward to a similar trajectory in our healthcare vertical. And while healthcare did grow in the quarter across the category, It was not at the level we'd anticipated. However, with new business coming online stronger in Q4, We do see health returning to its more typical rate of revenue growth.

Speaker 2

And as I mentioned earlier, during Q3, While we saw the impact of new business coming on stream, it was slower to convert than the rate we've foreseen. Therefore, when we look to the Q4, as mentioned earlier, and this is historically our largest due to seasonal factors, as you all know, We believe organic revenue performance will come in at approximately 1% growth. And also to reiterate, We remain committed to our margin target for the year of 16.7%, which is 10 basis points ahead of last year. We're going to stay focused on closing the year as strongly as possible. But as I mentioned earlier, we're also specific to areas of underperformance assessing structural solutions to improve our growth profile.

Speaker 2

And an important additional area for value creation with our long standing and continued commitment to capital returns, which has been underscored by the execution of our share repurchase plan and consistent dividend growth over time. These remain important priorities for us going forward. As always, We thank you for your time and attention. And with that, let's open the floor to your questions.

Operator

Thank One moment for our first question. Our first question is from Adrian Descent Heilier with Bank of America. You may go ahead.

Speaker 5

Yes. Good morning, everyone.

Speaker 6

Thanks for giving me the opportunity. So hello, Philippe. A couple of questions, please. So first 1st of all, can you help us quantify the impact of the tailwinds that you alluded to from new account wins from perhaps recovery in tech into 2024. And then maybe a second question for Alain.

Speaker 6

So clearly an amazing job this year in terms Protecting the margin, is there a risk that as growth resumes next year and as you onboard new clients, we see cost growth Effectively exceed revenue growth in 2024? Thank you very much.

Speaker 4

Sure. I will take the one you gave me and then A little bit of the one that you sent to Ellen, if I may. I don't know that we can quantify the tailwinds for 2024 because we're not through to the So we're clearly, from a net new business perspective as we sit here this year positive.

Speaker 2

And

Speaker 4

there are still a few fairly sizable opportunities out there for us to go get. But we do think that we'll be heading into 2024 with the benefits of the wins from this year. And then unfortunately, some of the benefits of the fact that There's been a little bit of a slowdown in terms of onboarding them, but I don't think we can give you a quantified number for that quite yet. And then I think that as I mentioned in passing, when you think about Q3, there was An expectation on our part that on just the kind of work that you pick up course of business, not the sizable opportunities out there that isn't converting at the rate at which we're used to seeing. So that's something we're just going to have to monitor through the end of the year, so that we can then give you line of sight into how we are going into 2024.

Speaker 4

And then I'll hand over to Ellen, but I'll obviously point out that when there's growth, we do grow margins. So as we return to growth, I'm not sure that the cost question should be a concern. No.

Speaker 3

Just to add to Philippe's comments, I mean, we've been very disciplined about not hiring ahead of revenue, as well as Being able to really, as you've seen, this year included, really manage a flexible cost structure. So we do see the ability to continue to increase our margins.

Speaker 6

Thank you, both.

Speaker 4

Thank you.

Operator

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

Speaker 7

Thank you. Philippe, you noted that IPG would assess internal structural solutions to improve growth. I wanted to see if you could expand on what that means exactly. And then Just regarding the commentary you gave on healthcare before and that not performing as expected in Q3, was that largely related to new business or were there other factors? And just like new account wins aside, how do you kind of assess the health of that vertical?

Speaker 4

I'll take them in reverse order, if I may. So health, As you know, a very, very strong performer for us over a long period of time. So I think it was a period in which it was probably 14% or 15% of our overall revenue and it's now likely twice that. And long term, we see it as a sector that still sets up well for growth. So that's a strength in terms of our asset and business mix.

Speaker 4

What it Didn't do this quarter is what I was actually just referring to in Adrian's question, which is, some of the TPG conversion in the non high profile opportunities was not at the rate at which we expect from them. And yet As we look at Q4 and what has been brought in, we think it will get back to the levels that we see from a strong performer in the group. And in terms of healthcare, anything else, I guess there were 1 or 2, but it's course of business where you have A drug that has a lot of expectancy attached to it where there is going to be a meaningful budget where it fails late in an approval process, but that's something we do factor in. We did happen to see 1 or 2 of those in the quarter. Now relative to your first question, I do think it bears going into a bit more detail.

Speaker 4

So How I would frame it up for you is this. The comment is specific to parts of the portfolio that have been underperforming and have been taxing overall performance this year. And if you think about the long term history of those digital specialty assets, It's one where they've successfully gone through cycles of transformation every 4 or 5 years. So as we head into the year to us that meant there was a reason to be supportive as they look to make the necessary adaptation. But sitting where we are now, if you look at the weighting to technology clients that they have and then the speed of change in the operating environment, This has made it an especially difficult time both for what they do and for them to essentially reboot or reinvest.

Speaker 4

And then when it comes to tech specifically, I don't know that any of us have seen it retrench to the degree we've experienced or for this long this prolonged period of time. So we clearly have to ramp up the urgency on this front and be open to a broader range of solutions. And of course, those are conversations that involve the leaders of those operations as you would expect and that are ongoing. It's not something that we're in a position where I can say to you right now, Here's what we're going to do or not, but if you wanted sort of a broad guideline, if you look at our strongest performers across the portfolio, So the framework for what success should look like

Speaker 2

and I think that could

Speaker 4

be helpful, whether it's Healthcare and Media Brands, you have a coordinated approach to how you go to market. You benefit from scale. You're looking for ways to share complementary skill sets and identify very clearly where the centers of excellence sit across multiple units and I think it's all in the service of making it simpler for clients to engage with us. So I think those are the guidelines for us. I think we're going to look to define a way forward in terms of putting something into effect with a number of those assets as we head into 2024.

Speaker 4

So I hope that frames it up for you, David, but I mean, I can't give you a definitive answer.

Speaker 8

That's helpful. Thank you. Please.

Operator

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

Speaker 5

Thanks. Good morning.

Speaker 4

Hey, Frank.

Speaker 5

Hey, Frank. Thanks for all the color Earlier on the different segments, headwinds and tailwinds. I was wondering if you could just spend a minute, every agency holding company kind of reports differently as No, so it's hard to compare, but we try anyway. Your IAC segment, which does not include RGA and Huge, It's down 4.5% year to date. You talked about the healthcare business.

Speaker 5

That's still growing. You mentioned an account loss in McCann in your prepared remarks. But do you think is there a sort of underlying share erosion happening here? Or is this Just kind of creative is just a tougher business. I mean, we know it's a tough business, tougher than it used to be.

Speaker 5

But just any more sort of high level comments on how you're feeling about the assets within that group because that's obviously not including the digital specialty agencies. And then I guess just a question around kind of AI, which was maybe everyone's question back in January, February. How much of an investment priority is that for you guys internally? Because Protecting margins and margin expansion is something people obviously want and expect from IPG, but I'm sure you're also keeping your eye on the long game here and not wanting to miss anything as it relates to investing in tech and talent on the particularly on the AI front. Thanks.

Speaker 4

Okay. On your first question, I think that across the industry over the last year or more in fact you've seen folks call out that The more the traditional consumer advertising portion of All of our businesses is under some stress as you put it. So within IAC, you've got our healthcare business, which we spoke about. You've got FCB, which Again, I think we did speak to how they've leaned into incorporating data and precision thinking sort of an audience led approach and married it up to a very, very creative offering. And so for us, The rest of what is in that grouping is a McCann, which Kind of a portfolio of U.

Speaker 4

S. Independent agencies, where we do again, I think need to look a bit as It's sort of part of the answer that I shared with David around what does scale look like? How are we clear about Centers of excellence, how do we get complementary skill sets working together, and what's a simpler way for clients to engage there and For us just to be kind of have a flying formation for that grouping. So I think IAC definitely needs Not unique to us, right? As you called it out, that's a part of the business where I think everybody Just thinking about what the right way to integrate that.

Speaker 4

When you take creativity and it's part of an integrated offering, it's definitely much more powerful. And then on the AI question, it is an investment priority. It has been for some time, as I said to you, because whether it's inside of Media Brands or at Acxiom, there's quite a bit we've been doing there and ways in which AI is going to make it possible for us to get more done for clients or work smarter and take a lot of processes we have. So from a Efficiency point of view, it's clearly going to be a boon, but we also think it's going to open up opportunities to there's So much demand for content at this point given how many channels there are and how complex The consumer journey is across this incredibly fragmented tech ecosystem that we still see opportunities to Also have it be a revenue generator. So as I said, we've got an AI task force that has a handful of the top leaders from across the group and that's probably going to then become something that gets leadership at the center here and we prioritize investment that way.

Speaker 5

Thanks a lot.

Speaker 4

Thank you.

Operator

Thank you. And the next Question is from Michael Nathanson with MoffettNathanson. You may go ahead.

Speaker 8

Thanks. Good morning, Philippe. How are you?

Speaker 9

All right.

Speaker 8

Okay. So this is a long running Q and A we've been having. I guess when you get under

Speaker 4

I might know what the question is.

Speaker 8

Okay. Exactly. When you look at media, data engagement and backing away RGA and you're just taking it out, We're used to you guys growing top of

Speaker 4

the leaderboard. And this year has been

Speaker 8

a struggle, we know that.

Speaker 4

But I wonder when you look at

Speaker 8

some of your competitors, Those who bought data assets and those that have not look at what's happening under your hood. What do you think about the Strategic pivot that you made, what is slowing down maybe the growth ex those digital specialist assets? And is this something that you think strategically is on the wrong foot or is just execution because we see other companies just growing faster. I know your comps are hard, but I wonder like what do you think about the decisions you made to get here? And it's just basically a tough year that bounces back next year.

Speaker 4

Look, I mean, we've got a terrific media offering to your point. And I think that's been clear both And what we keep saying about the performance there and in the new business performance year to date, if you sort of consider Major pitches from GEICO at the early part of the year all the way through General Mills, which was yesterday. That said, I will I think you're clear, you have a point of view and it could very well be that we are missing out on additional source of growth there, right? So I think the questions come up before, it's a very valid question and we clearly have to be open to exploring every avenue for delivering value to our clients and that includes our trading model, by which I mean how we buy media on their behalf, Right. So clients value product and results were very strong in that regard.

Speaker 4

They also value efficiency. And we have to deliver on both sides of that equation or on both fronts. So I think that like you said, it's been a conversation we've had on a call like this one and then just when we've met independent of this and we're looking very hard at our model within the media component of this for that reason. Because you're right. I mean, There's no upside in leaving growth on the table.

Speaker 8

Got it. And then can I ask one Ellen, bill of expenses, I know there's no media there given what we know? The growth is pretty strong this quarter. Can you tell us what was that tied to?

Speaker 3

Sure. I think it's consistent with the growth you saw in our SC and E segment.

Speaker 8

Okay. Some netted out, some don't, Clearly.

Speaker 3

Those billable expenses are predominantly associated with that segment, and that segment grew nicely.

Speaker 8

Thank you, guys.

Speaker 4

Thank you.

Operator

Thank you. The next Question is from Steven Cahall with Wells Fargo. You may go ahead.

Speaker 9

Yes. Thank you. Good morning. So Felipe, you talked about the 3.2 percentage points growth drag from Tech and Telco and Digital, and I don't think that was Tuniu from Q2 to Q3 because we've talked about that a lot this year. And same with the macro concerns.

Speaker 9

I just know we've been talking about those this year. So I guess Question is, what has changed most from your perspective over the last 3 months? It seems like the business did deteriorate in some ways versus your prior I think we're trying to understand what of that is idiosyncratic related to a lot of the agencies you've talked about and then what might be just more broad based It can really flow and extend into a great deal of next year. So just love to have some incremental color on what's changed the most more recently. And then, Ellen, you said you're not hiring ahead of revenue.

Speaker 9

A lot of the labor market stats indicate things are pretty tight, but I've seen a lot of industry trade reports that there's also Headcount reduction. So when you look at the labor market today, do you think it's a buyer's market for the skills you need? Or is it a seller's market? Thank you.

Speaker 4

All right. Let me unpack that because I think most of the pieces are out there to your point. So the Tech Telco and the Specific entities within our world that, as I said, are taxing our performance is not new news. Over the normal course of business, there's always revenue to be generated. And I think your budget, your existing book and then that TVG and the operators are accountable for both creating those opportunities and converting those opportunities with existing clients, as well as winning ones with new clients.

Speaker 4

And I think that the incremental drag in Q3 Was really there and to a much lesser extent that some of the larger new business did not ramp at the pace that we anticipated. I'd sort of say that we don't like to see the delta because we've obviously been on the other side of that But I don't see that the delta to our key competitors has changed over the course of this year. And so there is Some of what's been on this call, which is things we talked about, what I just mentioned to you and then potentially The question Michael asked around media, a client mix question, or perhaps to some degree asset mix positive to us over time. Now clearly there's one competitor who credits them is benefiting from But I don't know that there's anything even outside of those that gets me to A dramatically different perspective.

Speaker 3

And then looking at our workforce, If you're looking for broad based trends, based upon your question, if I go back post the pandemic, Labor was tight, attrition was high. Those trends have attenuated. But we're not one business as you know. We are many businesses and we recruit many different types of talent. So where the skill sets are more scarce, there is that supply and demand mix, But we have truly great labor force in our talent.

Speaker 3

And so we are very competitive in that regard. But the broad based trends that were called out post the pandemic, those have attenuated a bit.

Speaker 9

Thank you.

Speaker 4

Thank you.

Speaker 3

Thank you.

Operator

And our next question is from Tim Nollen with Macquarie. You may go ahead.

Speaker 10

Hi, Philippe, Ellen. Thanks very much. Just I wonder if you could give a little bit more explanation around the new business trends. You've said it 2 or 3 times on this call that you've seen some, I guess, delays in the conversion and onboarding of some of the wins that you've been Talking about for

Speaker 2

a little while supposed to

Speaker 10

come through in the second half. I mean, maybe this happens sometimes. I just don't really recall that occurrence before. I just wonder if you can explain, is it part of these new clients seeing these slowdowns and worrying about spending in the 4th quarter and just sort of deciding to go slower or is it a change in the scope of work that's coming on and just hadn't really heard that Commentary before. And relatedly, the General Mills win sounds pretty big.

Speaker 10

I didn't check the numbers. I wonder if you could just help us Scope out kind of of the long list of wins that you've had in the last several months like which are the biggest ones? Thanks.

Speaker 4

I think on the large headline wins, The onboarding of those at a modestly lower in a smaller slower pace is not the key driver. It's So Stephen was just asking about around, I think that it's the TVG conversion that I would really point to in Q3. And then in terms of scale, I think that we've got quite a few. I mean, so from GEICO at the I think General Mills is at the scale of a GEICO. Bristol Myers Squibb is maybe modestly smaller than that.

Speaker 4

Constellation Brands is sizable. They do cluster into the media sector and then Pfizer is very large and is probably different in that clearly it was integrated across creative, The health and medical communications and expertise in public relations and some are global, one like that or General Mills, whereas a GEICO or a BM I mean a Constellation Brands are domestic. But I do think that as I said, it's not the scale. We have one of the larger wins that is onboarding a bit more slowly than anticipated. But broadly speaking, it's the TBG conversion.

Speaker 2

Thanks.

Speaker 4

I mean, Ellen can at some point we can break down for you kind of given as she said, it's a lot of businesses inside of business and a lot of them are project businesses. So where we drive new business is still significantly in the day to day

Operator

Thank you. The next question is from Jason Bazinet with Citi. You may go ahead.

Speaker 2

Just had a quick question on the Tech Telco weakness that you called out. When do we begin to lap that? Would you say that's a second quarter event? Think that's a Q1 number or is it more Q1 of next year?

Speaker 4

Well, I mean, I think Tech specifically, we would have been largely through it, but as I did call out, we had a significant loss at McCann in the telco space, which is then going to extend that into next year. And I don't think health falls into the same category. I think health is really just a we expected more from that Sector this quarter than we've seen, but that's not a long term heads into next year drag.

Speaker 11

Okay. Thank you.

Speaker 4

Thank you.

Operator

Thank you. Our next question is from Julien Roch with Barclays. You may go ahead.

Speaker 11

Yes. Good morning, Philippe. Good morning, Helane. Thank you for taking the question. 2, if I may.

Speaker 11

I was hoping you could give us the number of employees at And the second question is margin versus growth next year. So Publicis is doing 5% top line growth and Omnicom 4% for the full year, if they make their numbers in Q4 on flat margin, I. E. That costs including employees are up 4% to 5%, while yours are flat. So as talent and these days investment intake Is key to growth in agency land?

Speaker 11

Could that be an issue for next year?

Speaker 4

I don't know that we would break out the by unit employee numbers. I think the second question is a good question. And to Alan's point earlier, I mean, we are running a portfolio of businesses. And as you could see, a number of them, quite a few of them, whether it's media, health, a lot of the experiential PR businesses are performing well for us, and others are going through some challenges. So I don't know that you approach the Comp component of it similarly across the board and we haven't for quite a few years.

Speaker 4

So we've been finding talent in the growth businesses, which means that we're able to compensate them appropriately. And when you look at the model as it is now, you see a number for us, which is and all in number and it averages out. But what you're seeing in there are and a range of outcomes or a range of realities and making sure that we are rewarding and investing The folks who are driving the performance and who are the strong performers shouldn't be an issue. And there's There's clarity across our group and all of our operators in terms of how their incentives are very, very directly aligned to Our results and what we're accountable to you all for, people understand where and how they're earning of the compensation. So I don't see that as a meaningful concern.

Speaker 11

Okay. Thank you.

Speaker 4

Thank you.

Operator

Thank you. And that was our last question. I'll now turn it back to Philippe for any final thoughts.

Speaker 8

Thank

Speaker 4

you, Sue. Again, thank you all for the time and we look forward to Sharing better news with you in February.

Operator

Thank you. This concludes today's conference. You may disconnect at this time.

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Earnings Conference Call
Interpublic Group of Companies Q3 2023
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