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Interpublic Group of Companies Inc. (NYSE:IPG)

February 26, 2013 6:15 pm ET

Executives

Michael Isor Roth - Chairman, Chief Executive Officer and Chairman of Executive Committee

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

Okay. Good afternoon, everybody, we're going to get started. I'm Ben Swinburne, Morgan Stanley's media analyst and please note important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures all appear in the hand out available in the registration area and on the Morgan Stanley public website. And with that, behind me, I'm thrilled to have to my left, Michael Roth, Chairman and CEO of the Interpublic Group. Interpublic is one of the world's premier advertising and marketing services companies with agency brands covering a spectrum of market disciplines and specialties, agencies that I'm sure you've heard of, including McCann Erickson, Draftfcb and Lowe Worldwide. Michael, thanks for being here.

Michael Isor Roth

My pleasure. Continue.

Benjamin Swinburne - Morgan Stanley, Research Division

And I know this time zone is working against you. So we really appreciate it. If you could keep the coffee coming as we move to the questions.

Question-and-Answer Session

Benjamin Swinburne - Morgan Stanley, Research Division

I know you reported earnings on Friday last week, everyone wants to hear about sort of the state of the industry and trends right now. But before we do that, can you just sort of step back and give us the IPG evolution over the last couple of years and sort of the company today versus where it was 2, 3 years ago, so people get a sense for how much has changed, and how much you've put in there?

Michael Isor Roth

Well, my tenure goes back a little more than 2 or 3 years, and it's kind of interesting as you think about my first year as -- actually, my first earnings call, I announced a restatement and actually, we weren't going to file financial statements until we got a lot of the stuff cleared out and fixed. So that was my opening volley with the street in terms of earnings call.

Benjamin Swinburne - Morgan Stanley, Research Division

Nothing but upside.

Michael Isor Roth

Right. And here we are on Friday with our other earnings call, and 2 out of the 3 rating agencies have us as investment grade. We had done a financing earlier on at the lowest rates in the history of IPG. We announced an increase of our share buyback by $300 million and we increased our dividend by 25%. So I'd say the company is quite different than it was a couple of years ago. Our offerings are highly competitive. We announced an objective to getting to peer level margins, and we were on track to get there and then the economy turned against us. We got back on the horse, and so we're back on there, driving towards competitive margins. And well, we said on the call, it's an environment of 2% to 3% organic growth, we should expand margin by 50 basis points, which would put us in the low 10s, 10.3% margin, and we see a line of sight to get into the competitive margin in the next couple of years. So it's a totally different company.

Benjamin Swinburne - Morgan Stanley, Research Division

Sure. How should investors think about organic revenue over the longer term. It's been a tough couple of years after sort of the financial crisis bounced back. It's been a little bit more modest. What are the things that you're looking at to help reaccelerate top line?

Michael Isor Roth

Well, look, when we put together our Investor Day, we were using a 4% to 5% organic growth, which historically was sort of how our industry was growing. And now I think all the forecast, including Magna which is ours, has it in the 2% to 3% range, maybe some have it at 3% or 3.5%. So I think the economic environment and the uncertainty that surrounds us all has directly impacted our revenue forecast. And I know I heard everyone is very bullish at this conference. I don't want to throw cold water on it. I think we're in a growth mode, that's a good thing. But until a lot of this uncertainty is cleared up, whether it'd be what happened yesterday with Italy or what's going on in Washington, I still think we're going to have some overhang in terms of uncertainty and reluctance to spend investment dollars. And that has an impact on our industry.

Benjamin Swinburne - Morgan Stanley, Research Division

Can you sort of take us maybe around the big regions for you, starting in the U.S., and how clients are feeling and how the tone of business is when you move around the world?

Michael Isor Roth

Well, the U.S. is very competitive, highly competitive, and there's money to be spent. And the challenge for us in the United States is the competitive environment, the fact that accountability is -- in fact, that's on a worldwide basis. But we have to show that there's an ROI for the dollars being spent, and it's in a low-growth environment. I mean, the United States is low single-digit growth environment, and I think the spend in that environment is consistent with that. That said, it's 55% of our revenue and therefore, we obviously have very strong offerings in the United States. There, we have our global networks and on top of that, all our independent networks, the Deutsch, Hill Holiday, the Mullen agencies, Campbell Ewald, these are great fully servicing agencies that are performing well. So they're operating in a lower-growth environment, but they're doing very well, and I'm very pleased with their ability to generate revenue and margin contribution to IPG. So the United States consistently will be a core market for us. We're seeing some of our global clients starting to invest in the United States again. We saw it with -- Unilever, for example, launched the Magnum Ice Cream and we've participated in and are involved in, and it was a very successful launch for Unilever. And so I think it's kind of weird to look at the United States as an emerging market, but in some context, it is. You know you go to Latin America and you contrast it to their -- coming off of last year, we had very high growth in Latin America and this year, we were over 10%, so very strong. We have very powerful global networks there, McCann performing well. Draftfcb and Lowe, very solid offerings. Our media offerings in our PR business in Latin America are strong and we continue to invest there because we see that growth continuing. So we're very pleased with our position there. In India, the same thing. I think we're the second largest holding company in India. All of our global networks are very strong as is our media businesses. We just did an acquisition in India on PR, so we're going to be expanding Weber Shandwick in India. Good growth in India, and so we're very well situated to service multinationals and local clients in India. In China, we have, again, global offerings. Not quite as big as some of our competitors, but growing very, very nicely. So Asia Pac, I said it on the call, Asia Pac now is past Continental Europe in terms of our second largest economy, and so it's important for us. 24%, 25% of our revenue is from emerging markets. So Japan, we have a very -- we're probably #1 in Japan outside of Dentsu, so we have strong offerings there. So I think -- and in Europe, we did -- we had growth in the U.K. and Continental Europe, negative. Germany is performing okay for us. So I think the benefits you get for an IPG is a global presence and sustainable competitive offerings throughout the world. Growth on markets like Turkey and Africa, those markets I see is up and coming and we're making investments in those markets as well.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Taking your point on competitive offerings, can you talk a little bit about accounts and some of the activities last year, which is now thankfully behind you. Can you update everybody on sort of the account situation? And you've also put some wins on the board recently that are pretty important, so.

Michael Isor Roth

Yes. We went into 2012 -- actually, we went into 2011 as well with 300 basis point headwinds, and in '11, we overcame them, and in '12, we didn't quite overcome them. And so with that, if you had the luxury of adding back the headwinds, we had competitive revenue for the year. But what that does is it tells you the competitiveness of our offerings now. And so when we go into '13, it's 50 basis points to 100, some tailing headwinds more towards the first half of the year that we have. So we're really entering 2013 in a good position, not having to overcome those kind of headwinds. We've had some good wins, Draftfcb with Fidelity and a couple of other wins in terms of properties, Cox Communications and so on. So there's delivery. The big one was SABIC in Saudi Arabia. That one was a global bake off, if you will, in Saudi Arabia for one of the largest petrochemical companies, one of the biggest businesses in Saudi Arabia. And all the holding companies were pretty much up against each other, and we put together an offering at the world -- McCann Worldgroup, Weber Shandwick and an initiative with some other disciplines, and we prevailed. So that's pretty exciting for us. And going forward into 2013, we have a couple of pictures out there now. Honda, for example, is up for review, and we have 2 of the 4 finalists in that page, so we got a 50% chance on that one, and we have strong offerings. We have Mullen and the Martin Agency, 2 of our independent, very solid offerings. And we have a couple of media pictures out there as well. So the tone of the businesses is good, and we see more daylight in terms of existing client wins and some wins that we can't talk about. They aren't out there in terms of review, but I'm hopeful that pretty soon, we'll be able to announce some wins there as well. So we're feeling much better going into '13 as far as our pipeline than we did in '12.

Benjamin Swinburne - Morgan Stanley, Research Division

You mentioned the SABIC win at McCann and just saying that.

Michael Isor Roth

It's a nice feeling...

Benjamin Swinburne - Morgan Stanley, Research Division

It's a nice thing to say. You made some changes at McCann in this past year, pretty recently at this very senior level, and I think you're still doing some more movements on the executive front at McCann. Can you talk about the last couple of years there? And what you see going forward with Harris in place and how that changes, hopefully, the trajectory of the business. I mean, I don't know if it changes the strategy or not, but I'd love to hear what are your thoughts on that.

Michael Isor Roth

Well, what we did was -- McCann is a big operation. And I don't like to say it, but it is a holding company. And as a holding company, it has multiple verticals within it. And really what we needed was solid business leadership and certainly, Harris, having run CMG and Weber for all the years that he had, those are -- in total, that's $1 billion business. So his business expertise is clearly there. His client relationship skills have always been present. And what I did was put Harris in there and we elevated Gustavo Martinez and Luca Lindner to the Office of the Chairman. So there, what we have is real global advertising expertise, coupled with business client relationship skills that Harris has, and I think we've got a winning combination there. I know we'll do it because I've been touring all our major international clients with them and they're performing real well. They've been well received by our client base. So I'm feeling really good about that.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. The other one that I want to ask about is Draft, where you guys are, I think, close to a CEO announcement. Feel free if you want to make it here, this announcement, you have the option.

Michael Isor Roth

Not quite yet. But well, that one was different. In McCann, it wasn't a voluntary normal attrition, unfortunately. At Draftfcb, Laurence Boschetto has done a terrific job with Draftfcb and he will be retiring. So we've had a search going out there for awhile, and we're very close to announcing that. And so we hope to announce it certainly by the end of the first quarter. And that, too, would be a good lift for Draftfcb. They've been overcoming some of the big headwinds that we had and they're putting up some client wins. And I think with a new leadership there, it's really going to give a jump start to their 2013. So we're feeling good about it.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Let me just step back from the macro and some of the IPG specifics, definitely last couple of years and talk about what's happening in the business, particularly around marketing services and digital in particular. Tomorrow, we're going to have Facebook present and Google is on Friday -- on Thursday, excuse me. We're coming closer to Friday, I don't know what we're going to do.

Michael Isor Roth

I'll be in Chicago.

Benjamin Swinburne - Morgan Stanley, Research Division

But there's a lot going on in this space. How is the agency role in helping your clients market and reach consumers changed? And what does it mean to the economics of your business given all that's happening on -- particularly at social and mobile, I'd love to get your thoughts on.

Michael Isor Roth

Well, I think it's good for our business, actually. Whenever you have new media, new outlets, new ways of communicating brands, that's good for our business, and it's good for us because someone has to help guide our clients to this confusing distribution system that's out there. And that's, frankly, what we're being called upon. What's interesting about social media is it crosses many disciplines. And for example, Weber Shandwick has a very strong social networking practice where they manage a couple a hundred, maybe 300 now, social media sites. Because messing with your brand on social media, it's got good upside, it's got tremendous downside. If something goes wrong, you can destroy your brand virtually overnight. So it's very important to have it professionally managed and dealt with. And frankly, you can think of it as a PR type of tool. So plus our global networks and even our independent networks have very strong social networking skills. So it's part of the offering. So whenever we do an integrated offering now, it has to have a component of social networking. Now whether it's Facebook or Google or something else that's coming down the pipe, it doesn't matter to us. As long as it's helping us get reach for our clients in terms of the connection with the consumer and the brand, that's good for our business. And I think the issue there is whether these social networking platforms are doing it on their own or are they working closely with their agencies. And I think it's difficult to do it on your own because ultimately, we need an impartial agnostic view of what works and what doesn't. And frankly, that's where we come into... We don't care where the money is being spent. Now certainly, when digital versus traditional, we end up doing more of the production side of it, so we get a bigger piece of the pie. But we're really agnostic in terms of where the money goes. And our industry is -- because of the accountability aspect of our business, the tools and the research and the accountability and the measurement become that much more important. So that's what we bring to the table and we just have a pool of money that we work with our clients in terms of making sure they're getting the best bang for their buck. So whether it's Facebook or Google or Twitter or YouTube or whatever else is down the pipe, all that does is enable us to develop that relationship with the brands that our clients are looking for.

Benjamin Swinburne - Morgan Stanley, Research Division

What are your sort of smartest mobile folks at IPG in terms of advising client. Is mobile still sort of one of those things that's kind of out there in the future or is it happening?

Michael Isor Roth

It's happening. I'm a big zealot on mobile. What my mobile folks would do is try to keep me out of their hair because I think mobile -- core mobile, whatever mobile is, okay, is a significant part of the future of our business. And we really haven't cracked the code yet.

Benjamin Swinburne - Morgan Stanley, Research Division

What are the challenges there?

Michael Isor Roth

Well, the challenges are monetizing the advertising platform on mobile. It's not an easy thing to do. Clearly, pop-up stuff doesn't work on mobile. But there is some very powerful stuff that's out there that we're working with, we see it in our emerging media lab. We've made some small investments in these start-up innovating companies in the space. And we just did an acquisition in Australia on mobile platform and search. So I think it's clearly a real force that we're going to have to deal with. We just haven't gotten there yet, but it's going to grow, I believe, significantly.

Benjamin Swinburne - Morgan Stanley, Research Division

The money is spent on mobile?

Michael Isor Roth

Oh, yes, yes. Because let's face it. I mean, it's the one device, if you will, that virtually everyone has it. It's global. It's instant. It's when you want it, how you want it and it serves -- and more people access the Internet via these devices than their computers. So it's got all the features that everybody wants to have at their command. And 40% of the people watching TV are also on some sort of device, where they're doing social networking, where they're doing research. So it's real and we have to figure out how to connect that all at one place.

Benjamin Swinburne - Morgan Stanley, Research Division

That's definitely good for attention spans.

Michael Isor Roth

Right.

Benjamin Swinburne - Morgan Stanley, Research Division

You have a number of stand-alone digital networks. You also have integrated offerings, thinking of R/GA and Huge on the stand-alone front. But a lot of your holding company competitors have been more acquisitive and certainly, in terms of absolute dollars. They're going after digital. How do you think about build versus buy in digital. Why do you think your strategy has been the right one?

Michael Isor Roth

Because it's our strategy. Look, you can pay up and buy -- when we looked at our media business, when we're repositioning our media business, we looked at buying versus building. And frankly, we decided to build it and fill in with acquisitions and that's proven to be the right strategy for us because Mediabrands is performing extremely well for us. In terms of digital, we sort of de-bulked. As you mentioned, we have R/GA. We have Huge. Huge was an acquisition that we've grown organically. It was a small little business in Brooklyn. And now it's global, it's growing very nicely. It's not quite R/GA, but they have R/GA in their site. And it's a very important piece of our offerings. But digital is embedded in everything we do. We keep saying that and it's true. It's in experiential marketing, it's in public relations, it's in our independent agencies, it's in our global agencies. So everything has to be well versed in digital. And to go out and buy uber digital agencies, that's, frankly, are going to be difficult to fit into this silo approach of the business, I think is not the way to go. And we don't -- we compete against the big silos all the time. And we win our fair share of business from them. So it's not that they have a competitive advantage to us. In fact, I believe it's the other way. And that is because it's embedded in our businesses. So you don't have to bring in another agency to work with you. When we need to, we bring in R/GA or coincidentally, R/GA is working on the same clients as one of our global networks. But that's a resource, as well as a stand-alone business. But the key is that all of our agencies have digital capabilities. They don't have to pick up the phone and bring in another agency. So our clients know that they don't have to ask the question as to whether digital is being brought to the table. It's already part of what we do.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Let me ask one more question around capital allocation and then we'll see if the audience has any questions and just reach for a microphone, if you can. You bought back quite a bit of stock in the fourth quarter and this is under the new IPG question list.

Michael Isor Roth

Okay.

Benjamin Swinburne - Morgan Stanley, Research Division

How are you thinking about allocating capital in 2013? You've got some convert stuff going on as well. How should shareholders think about your expectations, particularly around share repurchases, but also acquisitions this year?

Michael Isor Roth

Yes. We pre-funded. We had -- we've accessed the capital markets very attractively. And frankly, we didn't make a secret about it. We did it because we called the converts, $11.86 or $11.90 something like that is the strike price on the converts. So right now, we don't probably...[ph]

Benjamin Swinburne - Morgan Stanley, Research Division

One's coming up in March.

Michael Isor Roth

Right, right. And so that's $200 million, and we have a 10% coupon in July that we'll take care of. So that's $800 million. And the trade on that one is pretty good. If you work the numbers, we are like $40 million interest expense. So we -- that we save, so we -- it's about $0.05 a share in 2014. So that's one way of thinking about it. And the share buyback, we've already returned $1 billion since we've started our share buyback program and dividends and we added -- we had authorizations when we sold our Facebook investments. We increased the authorizations, so I think it's pretty clear that our view is that we had excess -- we have, had and have some excess cash on our balance sheet. We promised our investors that when the turnaround became clearer to us and we had clearer trajectory in terms of achieving our goals, we'd start returning that to our shareholders, and I think we've stood by that statement very clearly. And in acquisitions, we don't see any big transactions out there that would require us to use -- we budget $150 million to $200 million in acquisitions and we've been within a little higher, a little less in the last couple of years. So we generate cash flow and there's no other thing else for us to do with that cash flow, but give it back to our shareholders where it belongs.

Benjamin Swinburne - Morgan Stanley, Research Division

Great, thank you. All right, let me see if we have any questions in the audience. Actually, the microphone is on this side, why don't we start over here. And there's 2 more over there.

Unknown Attendee

I'm Jared, I'm from a social intelligence agency in New York. My question naturally enough is about measurement. I really like the acknowledgment that integrated offerings now have to include social, which is super interesting. But I'm really curious as to what you see the main challenges are in reporting back measurable results to some of your clients that this is new for them.

Michael Isor Roth

Yes. I mean, it's a new medium for them and therefore, you have to prove that it's being effective. So measurement is really what it's all about. And again, you can measure different things, as you know. I mean, so every one of our clients have a different goal in terms of social media and what they want to get out of it, so I think that's where we come into the picture. And how you measure it is -- lends itself to the credibility of the offering and we can prove that there's an ROI to it. Second of all, it leads to, frankly, our compensation. I'm a firm believer in pay for performance. So if we can go to our clients and say, "Hey, wait a minute, here's the value add, we think this is where you should spend your money and we're going to move the needle the way you would like it moved, and this is what's going to cost. We're willing to put skin in the game to make sure that we deliver against that promise, and if we do, we'll get returns, and if we don't, we'll get the returns anyhow." No. If we don't, we put something at risk, I mean, that's the way it should be. Frankly, I think that works through all of our different offerings. I'd like to see the day when pay for performance is a much greater part of what we do. Right now, it's part of the media offering that we have. More than 50% of our contracts have some pay for performance on the media side. So we're putting our money where our mouth is. Spilling it over to the rest of our businesses has been a little bit more difficult, and frankly, the reason for that is the measurement. So the more you measure, the better we look. And if that's true, I'm all in favor of it and it adds credibility to our clients because they don't really know what they're getting for their dollars. It just sounds cool. It's a lot of fun. Everybody is talking about it. And Coca-Cola has the most friends on Facebook than anybody else, but what do you do with it and how does it move the needle, and that's where we come into the fray.

Benjamin Swinburne - Morgan Stanley, Research Division

We've got time for one more question.

Unknown Attendee

Sure. In spite of the headwinds you guys faced in 2011 and 2012, EBITDA generation has been fairly steady. However, when you got down to the free cash flow generation, you've had sort of big hits on working cap, which hasn't been traditionally the case for the industry. Is there something specific in those years that occurred? How do you see that reversing? Any sort of details around those...

Michael Isor Roth

Now we've done an amazing job in terms of managing working capital. Frankly, until we had our systems in place, we couldn't measure it effectively. And we compensate our agencies on working capital. So yes, I think, one way of looking at working capital is media. And what you have to do is look at the ups and downs and the timing of media spend. So that has an impact on working capital. And you're right, we were very strong in generating working capital a couple of years ago, and then some of that reverses, there's a big benefit and then it reverses out later on. So the ins and outs on working capital are very complex. And I just look at it, as our business progresses, as we grow, we're going to generate free cash flow, period. And that's how you have to look at it.

Benjamin Swinburne - Morgan Stanley, Research Division

All right. We're out of time. Michael, thank you very much.

Michael Isor Roth

It's been my pleasure. Thank you.

Benjamin Swinburne - Morgan Stanley, Research Division

Thank you.

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