The Interpublic Group of Companies, Inc. (IPG) on Q2 2024 Results - Earnings Call Transcript
Operator: Good morning and welcome to the Interpublic Group Second Quarter 2024 Conference Call. All participants are in a listen-only mode until the question-and-answer portion. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Mr. Jerry Leshne, Senior Vice President of Investor Relations. Sir, you begin.
Jerry Leshne: Good morning. Thank you for joining us. This morning, we are joined by our CEO, Philippe Krakowsky and by Ellen 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&A. 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. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow greater transparency in the review of our financial and operational performance. At this point, it is my pleasure to turn things over to Philippe Krakowsky.
Philippe Krakowsky: Thank you, Jerry. As usual, I'll begin our call with a high-level view of our results and the business overall. Ellen will then provide additional insights on the quarter and I'll conclude with highlights at our agencies to be followed by your Q&A. This morning, we are reporting a solid second quarter highlighted by moderate acceleration of our growth as well as margin expansion from the same period a year ago. To begin with revenue, second quarter organic growth before billable expenses came in at 1.7% bringing organic growth in the first half to 1.5%. In the quarter, we were paced by growth in Continental Europe, LatAm and the U.K., followed by increases in our other markets group and the U.S. Each of our 3 operating segments grew organically from a year ago. And underneath that, consistent with our performance over some time, we were again led by IPG Health and IPG Mediabrands. We saw strong performance as well at Deutsch LA, Golin and at Acxiom, we saw solid growth in the quarter. Also in keeping with recent quarters, underperformance at our digital specialty agencies weighed on our consolidated growth. That drag was about 1% of organic growth in the second quarter. From the standpoint of client sector performance, growth was driven by health care, food and beverage and consumer goods. Retail was approximately flat and we saw decreases in financial services, tech and telecom and auto and transportation. As we've called out previously, the tech and telecom sector continued to weigh on growth by approximately 1% organically in the quarter. Most of that decrease was due to the loss of a large AOR assignment with a telco client late last year. For the sake of clarity, I would note that excluding double counting, the tech and telco sector and our digital specialist combined weighed on Q2 organic revenue growth by negative 1.7%. Turning to expenses and margin; our teams continue to effectively balance cost discipline with ongoing investment in the evolution of our business. Second quarter adjusted EBITA margin was 14.6%, an improvement of 40 basis points from a year ago. We had strong leverage on base payroll which helped drive 180 basis points of operating leverage on salaries and related expenses compared to a year ago that was partially offset by planned investments in technology, business transformation and senior talent particularly for centralized platform resources which resulted in increased office and other and SG&A expense. Diluted earnings per share in the quarter was $0.57 as reported and $0.61 as adjusted for acquired intangibles amortization and a small impact from net business dispositions. During the quarter, we repurchased 2.2 million shares, returning $68 million to shareholders. On our last call with you, we noted that due to a decision by a major and ongoing health care client in late March related to their global consumer advertising work, the high end of the 1% to 2% growth range, that we had targeted as we entered the year would not be achievable. As the year has progressed, we are seeing modest incremental uncertainty in the macro environment and in domestic consumer sentiment. Our view is, therefore, that we expect to achieve approximately 1% organic growth for the full year. And with that level of growth, we continue to target adjusted 2024 EBITA margin of 16.6%. Looking ahead, we anticipate that the strongest and most consistent growth areas of our business such as our data and tech-driven media offerings, specialist health care marketing expertise, PR and experiential marketing capabilities are positioned to continue their strong performance. The common thread in the growth of our 2 largest businesses, IPG Mediabrands and IPG Health which are also our most successful businesses, has to do with the specialized high-value services that they provide to marketers. These rely on skill sets that are more technical, reach audiences with greater precision and lead directly to outcomes that we can assess and optimize. As you heard from us in the past, these include audience segmentation work, predictive analytics and data-driven decisioning, much of it powered by Acxiom and all of which has been built by in-house engineering talent creating technology solutions that rely on machine learning algorithms and more recently, newer AI capabilities. The developments we're seeing in Generative AI will be equally fundamental to the transformation of a broader set of our offerings. Collaborations with Adobe, Amazon, Blackbird.AI, Getty Images, Google, Microsoft and others have given us secure enterprise access to advanced AI tools and large language models which are increasingly informing every area of our business, including insight generation, creative ideation in production and work in our earn and experiential communications practices, as well as further enhancing our media and precision marketing capabilities. Over the past 12 months, our progress with these emerging technologies has been significant. The ongoing upskilling of our people has been central to this process. We see this as a strategic imperative and have made it the responsibility of every operating leadership team across the company. Generative AI produces foundational capabilities and new canvases for us to work more expansively with our clients. Over time, this offers the promise of reigniting many of our creative offerings as engines of value creation. As you heard last quarter, we recently became the first company to unite all facets of the content supply chain by integrating Adobe's GenStudio AI product into our marketing technology platform, the IPG engine. That engine sits at the enterprise level and is a unified set of standards, practices and a technology layer which in turn is built on consumer insights at scale, fueled by our Acxiom data and identity products. It seamlessly connects media strategies and targeting, including predictive modeling of what we call high-value audiences to creative concepts and messaging across all marketing disciplines. We then move from data all the way through activation by which we mean the production and dissemination of campaigns, whether on marketing technology platforms in earned media or in paid media investments across all formats and channels. Our engine then analyzes the impact of this activity for purposes of attribution and optimization. This allows us to do with our communication strategies, creative assets and all forms of marketing activity what we've been doing in media which is true personalization at scale. This is an end-to-end solution which helps our clients better engage, convert and retain customers through the entire funnel, assessing and understanding the value of their investments across media, marketing and sales channels. In a world in which data-driven audience insights are key to delivering performance for our clients and one in which AI will play an increasingly important role, access to high-quality proprietary data at scale will be essential to success. Acxiom continues to have the industry's top-performing audience data to engage with customers at an individual level without the need for cookies or other proxies. Our tech stack and marketing engine optimized performance using this global data spine, of 2.5 billion real people with Acxiom ID attributes that are meaningfully greater than those available from any other industry data set in which we can match to significantly more global device IDs and our closest competitors. The engine at Acxiom are now core to every significant engagement across the company and help power many of the new business wins I'll cover later in my remarks. Now though, let's turn things over to Ellen for a more detailed view of our quarterly results.
Ellen Johnson: 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 second quarter revenue before billable expenses or net revenue was flat from a year ago, with an organic increase of 1.7%. Our organic net revenue increase was 1.3% in the U.S. and was 2.6% in our international markets. Over the first 6 months of the year, our consolidated organic revenue increase was 1.5%. Second quarter adjusted EBITA was $338.9 million, an increase of 2.6% from a year ago and our margin was 14.6% compared with 14.2% a year ago. Our diluted earnings per share was $0.57 as reported and $0.61 as adjusted. The adjustments exclude the after-tax impact of the amortization of acquired intangibles and a non-operating gain from sales of certain small nonstrategic businesses. It is important to note that our EPS in last year's second quarter included the benefit of $0.17 per share related to the settlement of normal course, federal income tax audits. We repurchased 2.2 million shares during the quarter and 4.1 million shares in the first half of the year. Turning to Slide 3; you'll see our P&L for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow. Turning to second quarter revenue in more detail on Slide 4; our net revenue in the quarter was $2.33 billion. Compared to Q2 '23, the impact of the change in exchange rates was negative 60 basis points. Our net divestitures were 1.2%. Our organic net revenue was 1.7%. For the 6 months, our organic increase was 1.5%. In terms of client sectors in the second quarter, our growth was led by very strong performance in health care and in the food and beverage sector. Consumer goods and our other category of public sector and diversified industrials also grew in the quarter. Retail was approximately flat. Going the other way, we saw decreases in the financial services, tech and telecom and auto and transportation sectors. Lower revenue in the auto sector was due to a client loss at Mediabrands at the end of last year and lower spend from existing clients. The bottom of the slide is a look at our segments. Our Media Data & Engagement Solutions segment increased organically by 80 basis points. We again saw strong growth in our media businesses, whose out performance was largely offset by decreases at our digital specialist agencies as Philippe noted and by decreased revenue at MRM. Our integrated advertising and creativity-led Solutions segment increased organically by 3%. We were led by strong growth in IPG Health at Deutsch LA. At our Specialized Communications and Experiential Solutions segment, organic growth was 1.3% led by very strong performance at Golin in public relations, while our experiential group decreased in the quarter, largely due to cost cutting by a major client at Jack Morton. Moving on to Slide 5, organic net revenue growth by region. The U.S. was 66% of net revenue in the quarter and grew 1.3% organically. We were led by strong growth at IPG Mediabrands and IPG Health. We also saw notable contributions to growth from Deutsch LA, our PR offerings and Acxiom. That was partially offset by headwinds at our digital specialists, decreased revenue at MRM as a loss of a telecom client at McCann late last year. International markets with 34% of net revenue in the quarter and grew 2.6% organically. The U.K. grew 3.4% organically. We were led by growth at our creative agencies and by growth in Media and Golin in Public Relations. Continental Europe grew 6.3% organically in the quarter, led by strong performance at McCann that included new business wins as well as increases with existing clients. We had growth in each of our largest national markets. Asia Pac decreased 2.4% organically. Strong growth in India, where we are the second largest holding company was paced by Mediabrands and FCB but that was more than offset in the region by decreases in most other national markets. Other -- organic growth in LatAm was 4.1%, led by IPG Mediabrands. We continue to see notably strong growth in Mexico. In our other markets group which is Canada, the Middle East and Africa, we grew 1.5%, led by growth in the Middle East. It is worth noting as well that Israel grew in the quarter. Moving on to Slide 6 and operating expenses in the quarter. Our net operating expenses which exclude billable expenses, the amortization of acquired intangibles and restructuring adjustments decreased 50 basis points from a year ago compared with reported net revenue that was flat of last year. The result was our adjusted EBITA margin expanded to 14.6% from 14.2% a year ago. As you can see on the slide, our ratio of total salaries and related expense as a percentage of net revenue was 66.9% compared with 68.7% a year ago. Underneath that result, we lowered our expense for base payroll, benefits and tax which was 57.8% of net revenue compared to 59.4% a year ago. Our performance-based incentive compensation increased slightly as a percentage of net revenue to 3.5% from 3.4%. Severance expense was 1.5% of net revenue which is somewhat elevated from typical levels and compares with 1.7% of net revenue a year ago. Our actions in the second quarter address areas of the business where performance has lacked. Temporary labor expense was 3% of net revenue compared with 3.2% in Q2 '23. Each of these ratios is presented in the appendix on Slide 31. Also on this slide, our office and other direct expense was 15.4% of net revenue compared with 14.6%. Underneath that comparison is planned investment in technology and business transformation. We continue to leverage our expense for occupancy which decreased 10 basis points from last year. Our SG&A expense was 1.2% of net revenue compared with 60 basis points a year ago. The increase reflects higher levels of strategic investments in senior enterprise leadership and the implementation of centralized platform. On Slide 7, we present the detail on adjustments to our reported second quarter results in order to provide better transparency and a picture of comparable performance. This begins on the left-hand side of the reported results and from left to right, exterior [ph] to adjusted EBITA and our adjusted diluted EPS. Our expense for the amortization of acquired intangibles in the second column was $20.4 million. The other adjustments in the quarter are small and related to previous restructuring and sales of nonstrategic businesses. At the foot of the slide, with the bridge per diluted share between EPS as reported at $0.57 to adjusted earnings of $0.61. Slide 8 depicts our adjustments for the 6 months. Adjusted diluted earnings per share was $0.96 for the period. On Slide 9, we turn to cash flow in the quarter. Cash from operations was $120.7 million compared with $35.2 million in the second quarter of '23. Operating cash flow before working capital was $249.1 million compared with $246 million a year ago. As a reminder, our operating cash flow is highly seasonal and can be volatile by quarter due to changes in working capital. In our investing activities, we used a net $40.4 million, primarily consisting of $34.8 million in CapEx. Our financing activities used $451.2 million. This reflects the maturity of our $250 million senior notes in April which we paid in cash as well as our regular quarterly dividend and share repurchases. Our net decrease in cash for the quarter was $383.6 million. On Slide 10 is the current portion of our balance sheet. We ended the quarter with $1.55 billion of cash and equivalents. Slide 11 depicts the maturities of our outstanding debt. As you can see on this schedule, total debt at quarter end was $2.9 billion. 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 really remain well positioned both financially as well as commercially. I would like to express my gratitude for the efforts of our people. And with that, I'll turn it back to Philippe.
Philippe Krakowsky: Thank you, Ellen. As I mentioned earlier, our organizational structure continued to evolve and we're working at pace to enhance the parts of our business that are growing and also to address underperforming areas of the portfolio. Going forward, we're going to continue to move to more holistic solutions and make greater precision and performance a part of all of our service offerings. Our interactions with major marketers will also increasingly be guided by senior functional and client leaders at the corporate IPG level. This ensures that we're connecting more of the portfolio to horizontal platform capabilities such as data, commerce, media activation and production. The common denominator across our strategic priorities is to broaden the range of business issues that we can help clients address with our best-in-class assets. Our goal is to continue to become a more strategic partner supporting client needs as they seek to derive more value from connecting marketing and technology in order to power their businesses. An example of this is retail media which is one of the prominent growth sectors we've mentioned to you previously. As more retailers build digital media networks and increase their call for standards and as marketers look to increase investment in this dynamic space, we see this as a promising area of growth. IPG's unified retail media network solution which is housed within Mediabrands and grounded in Acxiom data is differentiated in the market because it allows our clients to evaluate their brand's retail media buys across audience, measurement, optimization and business intelligence criteria, so as to determine which retail networks are performing best for their business objectives. This solution played a significant part in our successful defense and expansion of our assignment for Ulta Beauty during the quarter. Ulta Beauty selected a bespoke unit within Mediabrands which includes teams from Mediahub, Kinesso and Acxiom to handle Ulta's media needs in programmatic, addressable and social as well as the marketers retail media unit, UB Media which had formerly been serviced by a competitor. The client specifically noted the combination of a creative and data-driven approach as assets in fostering connections with Ulta Beauty consumers, ensuring consumer engagement and delivering business building results. Another significant win announced earlier this week will see us take on creative, production, shopper and PR earned media responsibility for driving growth for a number of Kellanova's iconic priority brands. This is the result of an integrated offering combining FCB globally, Weber and Momentum supported by MullenLowe and the Martin Agency in key international markets and on certain brand assignments. And as mentioned, our production capability and the IPG engine also played important roles in our proposal to the client. Notable wins in the quarter saw a Generative AI search platform Perplexity, appoint UM as its media agency of record. After Levi's had consolidated its global media account with UM which builds on a 4-year relationship between UM and Levi's in the Americas. UM was also named media AOR by Alliance Pharma. Reckitt capped McCann content studios which is a core component of our production offering as its social and influencer agency of record for its U.K. health brands. And at General Motors, Buick appointed McCann Worldgroup China as its full-service agency. Another of our core multinational clients, Unilever, named Golin its global PR agency of record for laundry detergents. Top American champagne maker, Korbel chose Carmichael Lynch as its media and brand AOR. And Deutsch LA, we mentioned earlier continued to expand both its relationship with Adobe to include social work for Gen AI app Firefly, Acrobat, Photoshop and other brands. Weber Shandwick was selected by 5-Hour Energy as its partner on creative, media relations, social media and influencer strategy and Mazda Canada named FCB/SIX to lead its strategy, creative and tech work for CRM. Of course, even in a world where technology and platform capabilities are so essential. Creativity remains at the heart of what many of our clients need in order to build their brands and business. Integrating ideas into audience-led and accountable solutions is a must that creativity can be a differentiator and our performance of creative competitions continues to indicate we're well placed when it comes to the talent and craft required to make work that makes a difference for ambitious marketers. Just last week, the New York Festivals Advertising Awards named Interpublic as its Holding Company of the Year. This is a competition that recognizes our industry's best and is judged by our peers which makes it an important hallmark for the quality of our work. In May, we were also honored as Creative Holding Company of the Year at The One Show. And at the Cannes Lions Festival of Creativity which is our industry's largest global award show, Interpublic also outperformed our peers, winning 10 of the festival's highest honors, the Grand Prix more than any other company and almost twice as many as the nearest competitor. Notable categories where we won a Grand Prix include gaming, live brand experience, digital craft and data-enhanced creativity. In terms of client sectors, we won Grand Prix in both the health and pharma categories. Also at the festival, FCB was named Regional Network of the Year in North America for the sixth year in a row. IPG Health was named Healthcare Network of the Year for the third consecutive year and Area 23 won Healthcare Agency of the Year for the fourth year in a row. Unique to the public relations arena, Golin and Weber Shandwick, both won multiple Grand Prix. Our success going forward rests on our ability to combine this kind of creative excellence and innovative thinking with our deep data and tech capabilities. And that's the key reason that during the quarter, we announced that we're further unifying our data engineering, martech and ad tech resources under one leadership team. This move fully aligns Acxiom's data, identity resolution and marketing cloud services with the teams responsible for the engineering behind IPG's integrated marketing engine. Within this centralized technology and data stack, we're powering workflow, customer experience, media, commerce and production. And by unifying marketing on one platform, we can drive marketing performance for clients in real time as well as build brands for long-term success. As you know, this combination of data, tech and marketing expertise has been key to our long-term success at IPG Mediabrands. And while our tech-enabled media offerings are consistently ranked as best-in-class by marketers, during the past 12 to 18 months, we have seen a number of clients place a greater premium on efficiency and costs. Given that marketplace evolution, we have pivoted and are now able to deliver value not only with advanced and effective media solutions but also through our growing practice in principal media buying. This new component of our media practice will take time to scale fully but represents an incremental option for media value creation for current and prospective clients as well as the new avenue for growth for what has consistently been our strongest performing business. As mentioned at the outset of my remarks, we continue to see disparate performance across the portfolio due in part to an asset mix that features more concentration in certain traditional practice areas than some of our peers. An area that's become a regular feature of these conversations is the performance of 2 of our specialty digital agencies, R/GA and Huge. Having made adjustments to the workforce at each of those operations and co-located their headquarters within the IPG Innovation dock, we are now formally evaluating strategic alternatives for these premium agency brands. The right partner could help unlock greater value for their clients and people. We'll keep you posted on progress in this process as appropriate. And those teams remain focused on delivering the top-tier service and innovative solutions for their clients that they're known for. As you know, we spent a number of years outperforming the sector when it comes to top line growth and continue to consistently win many of the industry's most competitive pitches. That said, the challenges we're facing at certain of our agencies, coupled with the shift in the media landscape to principal buying have led to recent losses that will weigh on our results, particularly as we head into 2025. We have a solid new business pipeline for the remainder of this year and are finalists in several large ongoing reviews. These opportunities, organic growth in our existing client base and accelerating the development of new capabilities in areas such as retail media and commerce, we'll continue to have our full focus as we look to deliver the best outcome this year and reignite a higher level of growth going forward. In certain high-growth areas where scale would benefit our competitive position and the company's overall growth profile such as commerce, retail, media and business transformation, we will also consider M&A as an avenue to effect a more rapid transformation of our portfolio. As mentioned earlier, for the full year, we expect to achieve organic growth of approximately 1% and at that level, continue to target adjusted EBITDA margin of 16.6%. Additional areas for value creation include our strong balance sheet and liquidity as well as our long-standing and ongoing commitment to capital returns. As always, we thank our partners and our people as well as those of you on this call. And with that, let's open the floor to your questions.
Operator: [Operator Instructions] Our first question is from Adrien de Saint Hilaire with Bank of America.
Adrien de Saint Hilaire: Philippe, first of all, you talked about 3 factors impacting organic sales growth for the second half. I'm curious how do you think those factors impact 2025 as well? And then the second question I would have is Europe has been outperforming the U.S. at IPG but also at many peers and that also seems to be true across the ad market. From my seat, that seems a bit counterintuitive, given the different GDP growth in Europe versus the U.S.? I'd be curious as to why that is in your opinion?
Philippe Krakowsky: Sure. The first question I can unpack only obviously up to a point. So what I think I would call out for you is we've obviously mentioned that with a number of the recent headline decisions, those are clients who remain very important and sizable partners to us. So the focus here is clearly going to be on delivering the best possible service and solutions because unlike other "losses", there's clearly the opportunity to regrow some of those relationships. And the other thing I would point out is I think you're right that at this point, the impact of wins and losses sort of from a net new business perspective, sitting where we are sitting right now, we're essentially neutral. We had a pretty sizable string of wins, say, about a year ago. And so the new business headwind is a question for '25 and yet, we don't have a budget for '25. And it's kind of early to project that far out, given that we've got about half a year to go. And so I think the focus is going to be the new business pipeline growing, new capabilities with existing clients. Obviously, when that large telco loss, it is maybe 70% of what's in that segment down goes away, some recovery in tech would clearly be wind in our sails. And then the strategic assessment of options that we talked about for the digital specialists would also change the math a bit. So I can't really quantify that for you. I can just give you a sense of what the moving parts are. And then I think I'm going to ask Ellen to just sort of step in. Because on the Europe question, you've heard us before, it gets very, very specific with us. It's not a very big region. So it really becomes client specific in a market that can have an impact.
Ellen Johnson: Sure. Yes, Europe is about 9% of our revenue and we did see growth across all major markets, Spain, Germany, France, in particular. We had some nice wins through our creative agencies, particularly McCann. But we also had growth at IPG Health. And really, it was a decent breadth of the portfolio that grew; so both, across clients and client sectors. So it has been a relatively strong region for us.
Operator: The next question is from David Karnovsky with JPMorgan.
David Karnovsky: You spoke earlier to some incremental uncertainty and softening in consumer sentiment. Just wanted to see if you could expand on that a bit, what you're hearing from clients in terms of their level of confidence and investment. And then you also mentioned the capability in principal media as being a factor on your views over the past 18 months. As you're now scaling up your offering there, do you see Mediabrands in a better position at this point to compete for new business?
Philippe Krakowsky: Well, look, I mean I guess I'll take them in order. But -- so on tone of the business, I would broaden the aperture fairly significantly. And I would say to you that given the levels of uncertainty that we are seeing across the world and I'm talking geopolitically, socially. And then the sense that domestically, fiscal policy is kind of stuck in neutral. It stands to reason that the operating environment has become more challenging. And I know that you heard as much from a couple of our competitors, right? I think we're all seeing the same thing. Now if I wanted to give you a bit more texture to that or detailed granularity from the kinds of conversations you're talking about with clients, I don't think it's like a year ago where there was this pervasive, an almost universal feeling that there was a recession right around the corner. But in the time since the last call that we had with all of you, there is a bit more caution. And the way we see it is decisions on reviews, decisions on client spend are either taking a bit longer to be made or sort of delayed with a little bit of a hey, it's indefinite, we'll get back to it. And that's in certain areas of the business or at some marketers. It's not across the board. But to the extent that it's begun to be something that we're factoring into our thinking, we felt that it needed to be called out. Your principal buying question; look, I think it tracks and it's really consistent with discussions that we've had with you and with all of you when we see each other in settings unlike this one, we've completed the foundational work that incremental dimension to our media offering is now up and running. It is early. It will need time to ramp up. We will and are approaching clients and media partners in a way that's measured because as that part of our buying mix increases steadily over time, we're always going to be a client-first organization. So it's essentially a question of which clients want to opt in which clients want to access the market in this mode. Our media business has been really, really successful for a long time without that. So there are plenty of folks in our portfolio who are part of the franchise because they want the effectiveness, the tools, the data powered kind of decisioning and the platform approach to it. But in essence, we're going to be operating with multiple buying models. So we'll definitely bring principal into pitch situations because we've seen circumstances, I'd say going back to -- we mentioned a loss of Mediabrands in automotive last year where, clearly, the nature and the quality of the product was not in question and yet, that -- the premium on efficiency is something that, as the world has become more uncertain and there's been a lot of this pressure on client P&Ls, cost of money, this broader uncertainty. So we definitely think it will be a benefit because we've seen in circumstances where late in a process, that's become a gating item and a decision that obviously didn't go our way.
Operator: Our next question is from Steven Cahall with Wells Fargo.
Steven Cahall: That was a lot of helpful context there at the end around the shift in media buying to the more principal-based model. And how you're looking to reposition that with some of the internal changes you mentioned around centralization as well as inorganic opportunities in places like retail marketing. Could you just expand on how we should think about the time to do things internally, maybe specifically as it relates to the principal-based media buying you were just discussing. And then how significant your inorganic opportunity appetite is. I think your last big deal was Acxiom; that was very transformative.
Philippe Krakowsky: I'm kind of going for folks who've been following us probably if you look at like a 20-year horizon only; but yes.
Steven Cahall: Yes, that's true. So only -- and you've delevered really quickly from that or at least shown that you can delever as needed. So it sounds like you're kind of teeing up potentially some bigger M&A to come. So I just want to make sure I am understanding that correctly and that we're thinking about that correctly. And then, where do you kind of think about the trend for creative and all this. I think some of our concern is that while creative is never going to go away, it's maybe being devalued, whether it's due to retail marketing expansion or whether it's just due to some of the AI capabilities that makes it a little cheaper. It's still a big part of the business. So where do you see the future of the creative part.
Philippe Krakowsky: Sure, that's a lot. So on principal, it will take, as I said, sometime, we're very focused on it. We're -- obviously, you have to go into the market, you have to engage with the media owners and secure the inventory in that way. You've got to get clients who opt into the model and understand the benefits. And then, obviously, that volume yields a kind of benefit. So I think that, that will be range and bearing over the course of the next year. And we're going to go -- we're going to move thoughtfully but at pace, as I said, about a few other things. On your M&A question, I think what I would say to you is that I do talk a bit about how our asset mix doesn't tilt as heavily to some of these, at least in terms of scale, the capability sets are there. We show up and win with them. But whether it's that scale is valued by certain kinds of clients because you can sort of show up with something that's a very comprehensive solution and again, efficiency, not even in the media space. But also, clearly, the more sale to win that you have, the better it is. So we are going to look in commerce and retail media in particular. And then I guess the business transformation but I would define it as further down the stack sort of less focused on the comm side and more on engineering and kind of how can you help clients rework processes so that they can be much more digital in the ways that they work, including their marketing. So I think those are areas where we will probably look for inorganic opportunities. And I -- look, you know us very well. We're very thoughtful about how we approach M&A. That's not going to change. We're very balanced in that, as you said, we delevered very quickly. We were very transparent with you about why we were doing it and how we were going to do it given the scale of it. But I think that you could change the growth profile of the business with something out there or maybe one or 2 things that might not be at the scale of what we did with Acxiom. But they're clearly going to be larger than the very modest kinds of deals that we've been known for, for some time. So hopefully, that helps unpack the thinking. And no, you -- I forgot. And then you had the creative question. I guess my observation for you is that creative is still very important and a big idea still matters. If you look at the Kellanova news this week, clearly, a client who we're excited about because they believe that big ideas can have a big impact for them in terms of driving growth and what their mission is coming out of their spin. So I think that creative is important but it is important that you integrate it, that you basically figure out how FCB has done a terrific job for us to plug into the data stack, get more precise about what you do and have that, in essence, incorporated into your strategy and have your strategy be about where business opportunities sit and where business outcomes can be driven. And then you engage all of the deep understanding of brands and the craft around creativity. And then you can actually have pretty good outcomes, right? And so I think there's a way. And then I think the other thing, as I said at the outset also is if you incorporate certain components of what Gen AI tools provide and you can take creativity and bring it to bear in a lot of new ways. You can sort of do ideation faster and get to hypotheses -- good hypotheses, better hypotheses faster. You can democratize creativity and distribute it in ways that reach a lot of your clients. Ancillary audiences or partners that you might not have been able to do in the past; so we're still focused there. We probably, as I said, that's one of those might we have more exposure to traditional relative to some of our peers, yes. And the question is going to be a version of both what I said which is we're going to look at underperformance and think about what needs to be addressed or streamlined but we're also going to keep pushing them to transform.
Operator: Our next question is from Tim Nollen with Macquarie.
Tim Nollen: I wonder if you could comment, please, on the news this week that Google is not going to be deprecating cookies. And I'm asking -- I'm interested in IPG's perspective, in particular, because of all the work you do with Acxiom in first-party data and all the good stuff there. So I'm just curious, it seems like this is sort of a positive for the ad industry and that the risk of later disruption seems to have gone away. But for you guys, I wonder, is it positive? Or is it maybe a little less positive than if cookies had been removed and all the great stuff that Acxiom can do with first-party data is maybe not quite as important as it was before. Just don't know how to interpret the news.
Philippe Krakowsky: Well, stop, start, stop, start, right? So it is not necessarily unexpected at this point. It's something that they've announced and kind of pulled back on and redefined. And even now, I don't know that we know exactly how it's going to play out. I think you've heard us say for a long time that we feel very comfortable with and prepared for a world where proxies go away. And I think you're right that, that would be a world in which Acxiom would be even more valuable to clients. And so when GDPR rolled out, we lost less than 1% of our data. So I think it speaks to the quality of what's there and then the know-how in the first-party data management space. So we would be more than happy. I think you're right, we would welcome and it would probably be a modest accelerant if that Band-Aid eventually gets fully ripped off. But what the stop-start of it has done is that it's made it really clear to clients that they need to take control of their first-party data and they need to have a lot more kind of agency and autonomy when it comes to that. So in a lot of conversations with clients, including some of the wins that we called out, that complexity and the understanding that we can help them figure out how to build and own their own ID Graph means that we're still seeing the benefit of it and we're still seeing opportunity from it. And I think everybody has gotten used to the lack of clarity about whether or when it's really going to fully happen. You're right. I think if we finally cross that line, it would be a modest incremental upside to us.
Operator: Our next question is from Cameron McVeigh with Morgan Stanley.
Cameron McVeigh: Philippe, you mentioned a bit earlier about personalization at scale with AI. I'm curious if you're currently seeing any impact on creative revenue from AI tools and what the potential opportunity looks like to increase the total volume of creative output? And what success ultimately looks like to you in implementing some of this Gen AI technology?
Philippe Krakowsky: Sure. Look, I mean, I think personalization -- mass personalization, personalization at scale done right. The demand for that is going to be significant for some time, right? Because I think we've all gotten used to sort of a world where you say marketers always need more of everything. So I would break down the AI thing maybe into a couple of buckets. I'd say to you that there are parts of our business where AI has been core to what we do for some time, right? And we talk about that, media, data, performance. And so there, it's going to help us keep up with a very, very rapid rate of change and I think further accelerate what are already our most successful businesses. Then areas where platform and tech solutions are required like production in commerce and CRM, I think Gen AI is an incremental opportunity because I can't think of any client who doesn't leave activities that they know need doing undone due to some kind of constraint, right? So either the tech is limited, the output isn't what you want it to be, there are budget limitations, you don't have the right talent. So even as you see like sort of some of the economics of this, you're kind of going, okay, the unit cost of whatever asset we're talking about goes down. But the resources can be reinvested. We've seen this in our media business where tech allowed us to become a higher-value partner to clients, right? And you saw that in the scale of engagement. You saw that in -- because we had highly skilled folks with skill sets that clients couldn't find anywhere else. What we were able to, in essence, command in the way of the labor hours get redistributed and they go upstream. So I think what you're going to sort of see is resources get reinvested, the nature of the work changes, the nature of the talent evolves. And then what folks in our space bring -- and some of our clients who are very, very sophisticated say, we need people with a lot of experience, people who bring terrific judgment and understand how to use all these tools, we need your objectivity. In some cases, I think we also have the ability to sell tools and tech, whether it's the licenses or something SaaS-like there. And then I think the last thing I'd point out is back to the prior question, quality of data at scale is going to be really important. Because once everybody begins to have all of these same tool sets, then how you build and train the models and what you actually are able to give them that is unique data from which to. Because you're going to be bringing a lot of the discipline that you've got in the more quantity areas of the business too, the content creation and the creative part of the business. So again, there's a ways to go but we do see areas -- I mean, right now, we're actually doing a lot of not only insisting that our folks get trained but we're doing a lot of training for our clients and that's become a line of business for us. So I can't tell you with kind of clarity that it's going to be X percent this and it's going to be X percent that but these are all places where we're seeing conversations and opportunities showing up.
Operator: And our last question comes from Julien Roch with Barclays.
Julien Roch: The first one is, can we get organic on a revenue basis rather than a net sales. Publicis gave us both for the first half '24. Second question is, are your production capability unified under one roof like Publicis WP [ph] and now Omnicom and how many employees do you have in production? And then lastly, why move to 1% rather than a range? Q4 is an adjustment quarter. So 1% is surprisingly precise to me. Does 1% actually mean more like 0.7%, 1.3% or is it really 1% on the dot. And before you answer, I'm afraid I have to correct you as patented French wines [ph] now but there is no such thing as American champagne.
Philippe Krakowsky: [Indiscernible] but you know what, it's what we call it here, so I don't know what to tell you. So on production, we have a global integrated production engine. In the last 3, 4 years, it's evolved because production used to be about creativity and it's obviously become far more strategic. And you've heard us talk quite a bit about the way in which we are moving to scaled platform services, data, the engineering talent centralized, media activation, retail, media and commerce. So production has been moving along that track for us for a while. It is very strategic. It has to be very upstream. And the connectivity to what we do with Acxiom, what we do with the Kinesso teams, what we now do with the Adobe Gen AI studio so that we can tag and get the right taxonomy sitting underneath that and go sort of from data all the way through to audiences, all the right formats, to push it out, not just in the ad tech ecosystem but across martech and earned media. And then optimize in flight while it's live. So I called out what we've just -- and a win with Reckitt obviously, it was part of the work that we've just won with Kellanova. So I think there is still going to be the need to -- we still have a few outliers here and there that have built specific production capabilities either with deep digital expertise or with some kind of domain expertise but we're well down the way to having that operate as a unified haul. So that's one question. I'm not sure I understood the first question because I'll take a look at what -- I didn't know that we were putting our organic growth number out in any way that was different than somebody who was also reporting on a net basis. And then what was the middle question? Remind me, I apologize.
Julien Roch: So the last question is why move to 1% rather than the range with Q4 being an adjustment quarter, 1% sounds surprisingly precise. So do you actually mean more like 0.7% to 1.3% when you say 1%? Or is it really 1% precisely?
Philippe Krakowsky: We said approximately. I mean I think we had taken 2% off the table the last conversation which you know we're always very direct. And there's definitely a bit more chop in the water at the moment. It feels like there's a measure of uncertainty that has worked its way back into conversations since 3 months ago. And so when we say approximately 1%, that feels to us like there's still some ranginess to that but it's only the middle of the year. So, it feels to us as if -- we're not being that precise; we're telling you that it's kind of -- it's moved from 1% to 2% to closer to 1%.
Operator: Thank you. And I'll now turn the call back to Philippe for any final thoughts.
Philippe Krakowsky: Thank you, Sue. We appreciate the time and the interest. We look forward to updating you again in October. Thank you.
Operator: Thank you. That does conclude today's conference. You may disconnect at this time.
