Interpublic Group of Companies, Inc. (The)

Good morning and welcome to the Interpublic Group second quarter 2022 conference call. All parties are in a listen-only mode until the question and answer portion. At that time, if you would like to ask a question, you may press star 1. This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Mr. Jerry Lushney, Senior Vice President of Investor Relations. Sir, you may begin.

Good morning. Thank you for being with us. This morning, we are joined by our CEO, Philippe Krakowski, and by Ellen Johnson, our CFO. We have posted our earnings release and our slide presentation on our website, interpublic.com. We plan to begin our call with prepared remarks to be followed by Q&A. We plan to conclude before market open at 9.30 Eastern. During this call, we will refer to forward-looking statements about our company. These are subject to the uncertainties in the cautionary statement that is included in our earnings release and the slide presentation, and further detailed in our 10-Q and other filings with the SEC. 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 for greater transparency in the review of our financial and operational performance. At this point, it is my pleasure to turn things over to Philippe Krakowski.

Philippe Krakowski Thank you, Jerry, and good morning. I hope you're all keeping well. These days, that's no small ask. Before turning to our results, it's important to acknowledge that as individuals we're living through and as organizations we're operating in quite unusual and challenging times. In all our conversations with clients, the question of purpose is something that increasingly comes up. That topic is also at the forefront of our thinking. And it's essential that we as IPG continue to be clear about our values because living into those values is something that our colleagues across the company take very seriously, which is particularly important when you consider that we're a talent-based business focused on ideas, creativity, and IP. So I wanted to call out to the teams across Interpublic that are making contributions to alleviating the impact of crises such as the war in Ukraine and the political upheaval in Sri Lanka, as well as to all our people who are leaning into our equity and inclusion efforts and are playing their part in programs that seek to address other key areas of ESG, which remains an important priority for us. I think that was evident after the Supreme Court decision on Roe v. Wade, when we assured our people that we would update our healthcare benefits to provide funding for travel to ensure consistent and equal access to healthcare, including reproductive choice for all our employees. We understand that decisions regarding healthcare and our families are by their nature ones that each of us makes with a great deal of thoughtful deliberation and in keeping with our individual circumstances and beliefs. As an organization, we want to ensure that we live up to our values of mutual trust and respect, which have been core to our longstanding commitment to inclusion and equity. Turning now to the immediate purpose of this call, we'd like to share with you our Q2 and first half results. as well as updates on the highlights at our agencies and on the tone of the business to be followed by answers to your questions. We're pleased to report a strong second quarter in H1 in which we continue to build on our industry-leading performance over a period of many years. Second quarter organic net revenue growth was 7.9 percent. It's worth noting that's on top of very strong 19.8 percent growth a year ago. And this brings our three-year organic growth stack over the period of the COVID crisis to 16.5% in the second quarter, which is well ahead of industry norms. Over the first six months of the year, our organic growth was 9.6%, which brings three-year growth to 15.2% for the first half. We saw consistent growth both in the U.S. and our international markets. Domestically, organic growth for the quarter was 8.3 percent on top of 17.4 percent in last year's second quarter. Organic growth in our international markets was 7.1 percent, highlighted by growth in every region of the world, and on top of 24.4 percent growth a year ago. Growth in the quarter was also broad-based across our portfolio of solutions, whether viewed by segments, agencies, or marketing disciplines and client sectors. This reflects the increasingly integrated nature of our offerings and progress in infusing more of our portfolio with data-led thinking. Specific to segments and agencies, it's important to call out the fact that growth at each of our segments compounds double-digit growth a year ago. Our media, data, and engagement solution segment grew 6.2 percent organically, which adds to 25.1 percent growth last year. This strong performance was led by double-digit increases in our media, data and tech, and e-commerce offerings. Our digital specialist agencies were dilutive to this result as we saw deceleration in certain speculative client categories and related project work. At our integrated advertising and creativity led segment, organic growth was 8.5%. we had growth at all of our largest agencies, significantly outpaced by IPG Health, followed by strong growth at Mullen Low and FCB. In our specialized communications and experiential segment, organic growth was 11.1 percent, highlighted by double-digit growth in our experiential solutions and solid single-digit increases across the public relations discipline. As you'll recall, when we launched this enhanced disclosure, We believe the new segments are important in that they reflect the key areas of activity in which we are providing services to our clients and the broader evolution we are seeing across the industry. However, we remain a highly client-centric culture and organization and our major engagements with clients involve custom solutions which draw on services from all segments in integrated open architecture teams. Our growth in the quarter was also broadly shared across client sectors. We were led by double digit percentage growth in our other sector of leisure, government, and industrial clients, as well as by double digit growth in the financial services and healthcare sectors. Turning to operating expenses and margin, our results again reflect our leadership team's demonstrated capacity to run their businesses with the appropriate discipline while at the same time continuing to invest behind key areas that will drive further growth. And while our comparisons to last year continue to reflect the ins and outs of the pandemic, it's encouraging that we're driving margins at levels well above seasonably comparable in periods prior to the pandemic. Then income in the quarter was $229.6 million as reported. Our adjusted EBITDA was $370.1 million. resulting in net revenue margin of 15.6 percent. As expected, and as shared with you on our last call, that is below last year's second quarter of 17.9 percent, when our growth had begun to accelerate very significantly, yet certain variable expenses were historically low due to the effects of the pandemic. Compared to a year ago, and under our organic growth of 11.4 percent over the trailing 12 months, our headcount has grown approximately 9 percent. Variable expenses have recovered to higher levels as well, as we've resumed travel and returned to office in far greater numbers. It's worth pointing out that margin in the quarter of 15.6 percent compares quite favorably to margin in the pre-pandemic second quarter of 2019, which was 13.4 percent. That's a result of both our growth and the benefits of the strategic restructuring actions taken in 2020. Our diluted earnings per share in the quarter was 58 cents as reported and 63 cents as adjusted for intangibles, amortization, and dispositions. Under our share repurchase program, reauthorized earlier this year, we repurchased 2.7 million shares in the quarter using $84.8 million. A differentiator of our performance in the quarter and over a period of many years now has been our ability to bring together creativity, digital technology and data to create higher order marketing and media solutions that are responsive to the evolving business transformation needs of our clients. The growth you're seeing is driven largely by these very relevant capabilities with which we can solve an expanding set of marketer needs for more precise personalized and accountable engagements with their audiences at an individual level with respect for data ethics and consumer privacy. Looking ahead, we fully appreciate that we're at a moment of macroeconomic and geopolitical uncertainty. In this environment, it's fair to say there is a high degree of volatility and visibility is challenged for every company. That's no less true for us at IPG. given that we're a global and diversified client service business. Despite these uncertainties, however, and having very recently refreshed our bottom-up outlook for the year in meetings with our operators, we have not seen macroeconomic concerns significantly weigh on the growth outlook for the year that we shared with you back in April. While we appreciate the environment is dynamic, the demand we're seeing for our services remains broadly strong, and we are committed to delivering on our growth expectations for the year. You'll recall that in April, we upgraded our 2022 organic growth expectations to 6 percent. Given our growth through the first half of the year, we see upside to that and believe we will exceed 6.5 percent organic growth for the full year. We continue to expect that we'll deliver adjusted EBITDA margin of 16.6 percent. While there are always puts and takes as we progress through any given year, we've not to date seen anything of the size or significance that would put us off those objectives. We are, of course, staying close to our people and our clients, carefully managing expenses, and as always, we'll keep you apprised as the year develops. Understandably, clients are considering how best to factor a slower macroeconomic picture into their plans for the balance of the year. but that varies significantly on an industry-by-industry basis. And marketers are also giving consideration to the disadvantages of being out of market during a slowdown, especially if one doesn't fully materialize or is short-lived. Our diverse business model, which as you know, encompasses about 5,000 clients, 100-plus countries, and a full range of marketing, media, e-commerce, and data services, is a core strength of our model. It means we're always working across a broad range of client strategies and addressing an even broader range of evolving consumer behaviors. Marketers remain focused on leading with strong brands, which can help mitigate the impact of higher inflation, and brands are critical to their continued transformation to DTC at scale, all of which matches up well with our strong portfolio of agency brands, fueled by top industry talent, differentiated capabilities and data, and the ability to customize our offerings on an open architecture platform. The skill and commitment of our IPG colleagues have helped us to reach the halfway point of the year on a strong footing. I'd therefore like to, in this part of my remarks, again recognize and thank our people for their work on behalf of clients and in support of each other, as well as their engagement on vital societal issues consistent with our culture and values. One additional important item As you'll have seen, there's significant news related to senior leadership within our organization, which we will be releasing a bit later this morning. Our people are key to IPG's long-term success, and another thing that's core to our culture is the ability to develop outstanding talent and find new opportunities for colleagues across our organization. So it's gratifying to have elevated a number of our most exceptional and experienced leaders to new roles within two of our key business units. Daryl Lee, who's been most recently serving as the CEO of IPG Media Brands, has been named the CEO of McCann World Group. Eileen Kiernan, CEO at UM Worldwide, will succeed Daryl at IPG Media Brands. And at McCann World Group, Bill Kolb will continue in his role as the network's chairman. We know they'll all contribute to the future success of IPG and our clients. At this point, I'd like to hand over the call to Ellen for a more in-depth view of our results.

Thank you. I hope that everyone is well. I would like to join Philippe in the recognition of our people and add my thanks to them. As a reminder, my remarks will track to the presentation slides that accompany our webcast. Beginning with the highlights on slide two of the presentation, our second quarter net revenue increased 4.7 percent from a year ago, with organic growth of 7.9 percent. Organic growth was 8.3 percent in the U.S. and growth was 7.1 percent in our international markets. Organic growth was 9.6 percent in the first half of the year. Second quarter adjusted EBITDA was 370.1 million, and margin was 15.6 percent. Diluted earnings per share was 58 cents as reported and 63 cents as adjusted. Adjustments exclude the after-tax impacts of the amortization of acquired intangibles and non-operating losses associated with the disposition of certain small non-strategic businesses. We repurchased 2.7 million of our common shares during the quarter for 84.8 million, bringing repurchases to 4.5 million shares through the first six months of the year. Turning to slide three, you'll see our P&L for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow. On slide four, we present second quarter revenue in more detail. Our net revenue in the quarter was $2.38 billion, an increase of $105.9 million. Compared to Q221, the impact of the change in exchange rates was negative 2.6%, with the dollar stronger against currencies in nearly all of the international markets. Net divestitures for certain small, non-strategic agencies were negative 60 basis points. Our organic net revenue increase was 7.9%. At the bottom of the slide, we break out segment revenue performance. Our media data and engagement solution segment grew 6.2% organically, on top of 25.1% in the second quarter of 2021. As you can see on this slide, the segment is comprised of IBG Media Brands, Axiom, and our digital and commerce specialist agencies, which include MRM, RGA, and MUGE. Media, data, and tech and MRM grew at double-digit percentage rates in the quarter, while we experienced softness at RGA and MUGE. Organic growth at our integrated advertising and creatively-led solution segment was 8.5%, which is on top of 16.1% a year ago. As a reminder, the segment is comprised of McCann, IPG Health, Monlo Group, FCB, and our domestic integrated agencies. Our growth was led by double-digit increases at IPG Health and FCB. At our specialized communication and experiential solutions segment, organic growth was 11.1%, which compounds 15.5% in last year's second quarter. The segment is comprised of IPG Dextra and Dextra Health, Weber Shandlick, Golan, Jack Morton, Momentum, and Octagon. We were led by double-digit increases in our experiential solutions and had mid-single-digit growth in the PR discipline. Moving on to slide five, our organic revenue growth by region. In the U.S., which was 66% of net revenue in the quarter, our organic increase was 8.3%. That was driven by very broad-based growth across segments, agencies, and client sectors. International markets were 34% of our net revenue in the quarter and increased 7.1% organically. We grew in every international region. Continental Europe increased 8.3%. It's worth noting that's on top of 27.9% a year ago. We had double-digit growth in Germany, France, Italy, Portugal, and Switzerland, as well as several other of our smaller markets. The UK increased 4.4% organically. Our performance was mixed in the market, with notably strong growth in media, data, and tech, experiential and IPG health, and with softness in certain other parts of the portfolio, which was due to client-specific actions. AsiaPac grew 4.8% organically. Among our largest national markets, we had strong growth in India, Japan, Australia, and Singapore, while China decreased from a year ago. Our organic growth in LATAM was 8.8%, which is worth noting is on top of 49% growth a year ago. Our increases were led by media and by age. Our other markets group, which is Canada, the Middle East, and Africa, grew 11%, led by very strong performance in Canada. Moving on to slide six, operating expenses and margin in the quarter. Our adjusted EBITDA margin was 15.6% in the quarter, which, as expected, decreased from 17.9% a year ago. It's worth noting that margin in the quarter compares to 13.4% in the pre-pandemic second quarter of 2019. You'll recall that last year's second quarter margin benefited from several transitory effects which were due to both the sharp acceleration of revenue growth in the quarter and to the impact of the pandemic on our operating expenses. A year ago, certain expenses were running at unusually low levels. Those include expenses due to travel, meetings, and office work. You'll also recall that our hiring lagged behind top-line growth. Compared to 2019, this year's second quarter margin is significantly higher, which reflects both leverage on growth and the ongoing savings from our 2020 restructuring program. As you can see on the slide, our ratio of total salaries and related expenses as a percentage of net revenue was 66.9% in the quarter compared to 65.4% a year ago. Underneath that, as a result, we delivered on our expense for base payroll, benefits, and tax due to the hiring that was required to support our 11.4% organic growth over the trailing 12 months. Headcount increased approximately 9 percent over the same period. Going the other way, our expense for performance-based employee incentive comp decreased from a year ago from 6.4 percent to 4.5 percent of net revenue. At quarter end, total worldwide headcount was approximately 57,600. Also on the slide, our office and other direct expense with 14.7% of net revenue compared to 13.3% a year ago. Underneath that, we continue to leverage our expense for occupancy, which was 4.8% of net revenue and improvement of 20 basis points from a year ago. All other office and other direct expense was 9.9% of net revenue compared to 8.3% a year ago. The comparison reflects the return of variable expenses that I referred to earlier as a result of increased level of business activity, although not up to the pre-pandemic levels. Our SG&A expense was 0.8% of net revenue, a decrease of 50 basis points from a year ago. On slide seven, we presented 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 with our reported results, and steps through to adjusted EVTA and our adjusted diluted EPS. Our expense for the amortization of acquired intangibles in the second column was $21.1 million. Below operating expenses and shown in column four, we had a loss of $4.2 million in other expense due to the disposition of a few small non-strategic businesses. At the foot of the slide, you can see the after-tax impact per diluted share of each adjustment which bridges our diluted EPS at 58 cents to adjusted earnings of 63 cents per diluted share. Slide eight depicts similar adjustments for the six months, again, for continuity and comparability. Adjusted diluted earnings per share was $1.10 for the period. On slide nine, we turn to cash flow in the quarter. Cash used in operations was $90.8 million, which was due to a working capital use of $382.1 million. Operating cash flow before working capital was $291.3 million. As a reminder, our operating cash flow is both highly seasonal and can be volatile by quarter due to the changes in the working capital component. The magnitude of our receivables and payables means that the timing and collection of payments within any single quarter can significantly vary and affect the working capital results. With that, it's worth noting that over the past three calendar years, we have generated cumulatively $2 billion from working capital and that our cash position at the second quarter end was historically high, exceeded only once in the past 20 years. In our investing activities, we used $61 million mainly for CapEx and the deconsolidation of the subsidiary in which you hold a minority interest. Our financing activities in the quarter is $233 million, primarily for our common stock dividend and share repurchases. Our net decrease in cash for the quarter was $418.6 million, and our cash position at quarter end was $1.99 billion. Slide 10 is the current portion of our balance sheet. Slide 11 depicts the maturities of our outstanding debt. As you can see on the schedule, total debt at quarter end remained at $3 billion, Our next maturity is April 2024 for only $250 million. Thereafter, our next maturity is not until 2028. Gross financial debt to EBITDA, as defined in our credit facility covenant, was 1.68 times at quarter end. In summary, on slide 12, our teams continue to execute at a high level and have us well positioned to deliver on our expectations for the year. I would like to reiterate our pride in and gratitude for the efforts of our people. The strength of our balance sheet and liquidity means that we remain well-positioned, both financially and commercially. And with that, I'll turn it back to Philippe.

Thanks, Ellen. Turning now to highlights from the quarter, much of the demand we're seeing, and in many cases converting into growth, comes from more transformational services as clients seek to tap into the areas where IPG has made significant investments in recent years. The business transformation agenda crosses all client sectors, and the consumer sits at the center of these changes. We're being asked by marketers to address not only the all-important questions regarding the positioning and articulation of their brand, which are key long-term equities, but also the activation of that brand's value proposition in ways that engage with consumers and drive marketplace performance. That combination of our creativity and expertise in marketing services coupled with the use of data and technology to identify and understand audiences means we have an important role to play going forward in helping companies define their businesses and unlock growth. A key component of that formula is our continued ability to deliver best-in-class creativity across all marketing disciplines and around the world. Our very strong showing at the Cannes Festival of Creativity just a month ago, demonstrates that our capabilities in this regard continue to be world-class, as IPG agencies won 110 Lions at Cannes, including five Grand Prix and one Titanium Lion. Earlier this year, as you'll recall, we were also the number one holding company in North America at the Effie Awards, which recognized the effectiveness of the programs we create for our clients. An ongoing success story for us is IPG Health, which continued to deliver very strong business performance in the quarter. And at Cannes, their creative strength was also on full display, as the network marked its one-year anniversary by winning 17 lines, more than any other healthcare agency group. FCB Health was named Healthcare Network of the Year, and McCann Health came in second in that category for an unprecedented showing atop those rankings at Cannes. Area 23, also an IPG health company, was named Healthcare Agency of the Year and won the Grand Prix for Good, which recognizes campaigns for nonprofits that use creativity to make a positive impact in society. The creative success of IPG Health comes as the group continues to leverage its broad reach, scale, and diverse talent to evolve its capabilities. In the second quarter, the network launched a new agency offering called 90 North, which is a software-based advisory that enables pharmaceutical, biotech, and life sciences companies to tackle complex issues beyond traditional marketing communications. Another standout for us at Conn this year was FCB, which despite a more modest number of entries than many much larger global agencies, was honored as the number two network overall, following up on last year's number one overall ranking. In North America, FCB was the Conn network of the year for the fourth consecutive year. The network took home the Creative Effectiveness Grand Prix for its work for Michelob Ultra, which is a remarkable campaign in that it's a platform idea that seeks to impact long-term sustainability and goes well beyond traditional advertising. FCB Lisbon won Portugal's first ever Grand Prix in the design category for work that directly addresses the country's history of fascism. And FCB Inferno, based in London, won a titanium line in their partnership with Virgin Group and LinkedIn for their effort to make dyslexic thinking recognized as a term that should be celebrated and a skill set that should be valued. Noteworthy developments at McCann, other than those I called out a bit earlier, during the quarter included several new business ones. Prudential Financial selected McCann as its lead agency, creative agency of record following a competitive pitch. The agency won creative duties from MacArthur Glen, which is Europe's leading owner of designer outlets. And in collaboration with Golan, McCann expanded its remit with Nomad Foods, Europe's top frozen food company, to support the development of a sustainability marketing strategy and communications framework for 2023. McCann also won a Grand Prix at Cannes for its serious and thought-provoking work related to global food shortages, which was done on behalf of the Swedish Food Federation. In Mullen-Lowe Group, the New York office was named USAOR for Buyer's Pain Reliever, Aleve. And in the UK, Mullen-Lowe Group successfully renewed their remit for the National Health Service following a highly competitive review. Highlights in media brands in the quarter included continued strong new business performance as the network helps clients make data-driven decisions that are central to effectively investing marketing dollars in an increasingly complex digital and addressable media landscape. We saw initiative win significant new assignments in Spain, Canada, Australia, and the UK during the quarter, including media planning for meal kit delivery giant HelloFresh. UM was named media agency of record for Upwork, the platform that connects companies and freelancers. In April, Magna held its second annual equity upfront, which seeks to accelerate support of diverse owned media businesses. By enabling collaborative workshops between brands and media owners, as well as arming those media owners with the tools to engage with major marketers, Media Brands is helping upstream investments take hold in media that are minority-owned or those that serve critically important diverse audiences. During Cannes, IPG also announced a partnership with SpringHill, the global entertainment company created by LeBron James and Maverick Carter. While additive to our own creative capabilities, This partnership will provide a new avenue for our clients to access SpringHill's exceptional range of diverse creators. We're active across the breadth of communications channels and formats. We've already seen strong interest and demand for this new partnership, notably from the MediaBrands content studio, which is a high growth unit within MediaBrands. Media also continues to benefit from close connectivity with our Axiom unit and use that Axiom during the quarter includes the enhancement of its marketing cloud practice with new offerings in both the Salesforce and Snowflake environments. During the quarter, Kineso continued to focus on its marketing intelligence engine suite of technologies, which help brand manage all the data, marketing software, and ad tech services required for growth. In bringing those complex capabilities into one comprehensive offering, Kineso is helping our clients connect with audiences in a flexible, and respectful way, deriving insights that can power creative campaigns as well as media investment decisions. During the quarter, Media Hub, which is another very dynamic IPG media agency, was appointed by Lyft to handle U.S. media planning, buying, analytics, and measurement duties. And for this win, Media Hub worked in close collaboration with Axiom to understand and identify key consumer audiences for the transportation company. MediaHub also won US Media for Amazon's new live radio app, AMP. And in Australia, the agency was named MediaAOR for Global's CPG brand, Arla. MRM Commerce continued its strong growth performance, winning assignments from General Mills and Electronic Arts, as well as an enterprise-level assignment in CRM and first-party data integration with Johnson & Johnson. Among our specialized communications agencies, We continue to see strong marketplace performance. An integrated cross-discipline dextra health team was appointed by Moderna as the brand's global enterprise agency of record. The solution draws on talent and expertise from Weber Shandwick, Golan, and Jack Morton, and they've been tasked with enhancing Moderna's reputation globally as well as expanding awareness of Moderna's leadership in mRNA technology. Weber Shandwick continued to win significant assignments from major brands, including expanded responsibilities from client Mars for their Skittles, Orbit, and Extra brands. Group Black, a media collective and accelerator rooted in the advancement of Black-owned media properties, also recently announced that it had hired Weber Shandwick to lead its external marketing and communications activities. All our PR agencies continue to stand out for their creativity and effectiveness during the quarter. At Cannes, Weber won 20 Lions, including three Grand Prix. And at this year's North American Sabre Awards, our PR agencies combined to win 14 awards, which was more than any other holding company. And this was led by Golan, which was named both Large Agency of the Year for the second consecutive year, as well as Overall Agency of the Year. In terms of notable developments on the ESG front, we published our 2021 ESG report, which covers a range of environmental, social, and government topics. And this report is the first from a U.S.-based advertising holding company to receive limited external insurance on certain ESG data, and the first to disclose in accordance with the recommendations of the Task Force on Climate-Related Financial Disclosures. This work builds on our evolution of enhancing disclosure following our 2020 report, in which IPG became the first company globally to publish in alignment with the sustainability accounting standard board's advertising and marketing standard. It's a mouthful. In summary, we are pleased with our quarterly results as they contribute to a strong first half of 2022, which comes on top of exceptional 2021 comps, especially in Q2 of last year. And despite increased volatility and growing caution due to macroeconomic concerns, the tone of the business is broadly strong. and we remain net new business positive. As stated earlier on the call, we believe organic growth for the year will exceed 6.5 percent, along with our expectation for an adjusted EBITDA margin of 16.6 percent. Given the macro uncertainty that does exist across multiple economic and geopolitical factors, we're clearly going to stay very close to our clients and our people just to be in position to respond as required if there are unforeseen developments. A key value creation, an area of value creation, I think, which Ellen just pointed out, remains our strong balance sheet and liquidity. And our ongoing commitment to capital returns was underscored by another increase to the dividend earlier this year and the resumption of share repurchases. And I think these initiatives also reflect our board's confidence in the longer-term prospects for Interpublic. Going forward, our teams remain highly focused on operational execution. just as our companies continue to provide the kind of higher order business solutions to clients that can help them drive growth across a range of marketing activities and economic conditions. With that, I'd like to just thank our client partners, our people, and those of you who are on this call for your continued support and open the floor to questions.

Thank you. To ask a question, please press star one unmute your phone and record your name clearly. If you need to withdraw your question, press star 2. Again, to ask a question, please press star 1. One moment for the first question. Our first question is from Tim Nolen with Macquarie. You may go ahead.

Tim Nolen Hi. I guess the obvious First question I'll kick off with is about the macro outlook, which just seems to be so conflicting between what you and your peers are saying you've seen thus far and what clients are telling you and then everything we're reading in the press. I just wonder if you could just maybe help us understand why the numbers seem to be so strong and like really what should we think about for the second half? Clearly, you know, your full year guidance implies slower numbers. Just wondering what, you know, what kind of, what gives between those two kind of sets of info? And if I could ask a second broader question, there's been a lot of news recently with new regulations passed in Europe, the Digital Markets Act, Digital Services Act, and now we've been reading about Google possibly considering splitting out its ad stack business. Just very broadly, if you wouldn't mind kind of zooming out and giving us your opinions on what all of this might mean for your business, positive or negative. Thanks.

Sure. That's a lot of, so I don't know that I can, you know, human nature is what it is, right? So I think the headlines are the headlines, and I think it's about sort of a broader mood, whether it's, you know, the combination of headlines around, you know, inflation, around what and where governments around the world are going to be doing, you know, about that. So I can't reconcile why I wouldn't suggest, as you said, that, quote, what clients are telling us in a broad sense. I mean, my sense is, yes, some clients are asking us to think about contingency plans, but many more are still committed to any number of things. They're committed to figuring out how to get the most from brand-led creativity and combining that with performance marketing, or they're committed to you know, a digital transformation journey or really taking control of their first party data and building out an ID graph. So, I mean, I guess the first half relative to second half question to my mind comes down to, you know, you look at very strong first half performance. You think about we come in north of six and a half on top of 12, that's strong performance for the year, right? And You know, our comps are very challenging, and I'll take that. I think it's good to be able to keep saying, as we do, our comps are very challenging. So I think a lot of that is just the math. And I'd reiterate that the momentum in the business is healthy, and as we said, the demand for what we do is healthy, right? So, you know, I'd look at, again, on the back half, Q3, 21, we're up against maybe a 15% growth number. Q4, we're up against 12%. And on a two-year stack, that's probably, I don't know, 11 and 6, give or take. So it would stand to reason to me that you'd expect to see some deceleration against that, independent of the macro. And to my mind, what that means is the macro is manageable. And I think that's why we're telling you that we see, you know, what we see for the back half of this year. And, you know, again, we're clear on more visibility into Q3 than Q4. And the fact that there's some... There's definitely uncertainty, but I can't reconcile for you why the noise doesn't necessarily connect into what we're seeing in the business, which is, as we said, broadly speaking, strong demand. It is variable. You do get different on a client basis, on a sector basis. different parts of the world, you know, there are folks for whom some of these signals lead to more caution or, you know, action than others. Your second question, to my mind, you know, I think we've always thought that a number of things were going to come together that would get us to a moment in time when there would be appropriately a focus on consumers having control and agency as relates to their data. And again, to our mind, that's kind of consistent with a series of things that we've done going back a long time, whether that's agnostic relative to media, whether clearly that's a strong first party and data management capability at the core of what we do. And I think that clients are intelligently focused on how they are going to continue to reach, you know, the right people, whether it's the right cohorts of people or whether it's the right individuals and how they're going to activate the data that they do have or how they're going to pool data with like-minded clients or interesting, you know, sort of partners, second-party partners. You know, so again, I think to our mind, none of what's happening strikes us as if it's, you know, surprising, and we continue to see it as opportunity, and we see the need to have both the consultative, you know, authoritative consultative capabilities and a partner to go on that journey with. But none of that strikes me as if it puts us off our view that all those capabilities and services are only going to become more valuable to our clients.

Great. Thanks for the insights, Philippe.

Thank you. The next question is from Steve Cahal with Wells Fargo. You may go ahead.

Thank you. Philippe and Ellen, the guidance implies a big slowdown in the second half. And as you said, we know some of that is conservatism in the comps. I think there's also been some announced agency reductions, places like RGA and Huge. So I guess my question is, are you proactively managing headcount in anticipation of a slowdown? Or is the business actually still pretty strong? Those are more idiosyncratic agency announcements and things would kind of have to get worse from here before you started taking, you know, sort of aggressive action on the cost base. And then the second question is, if we do see a bit of a slowdown, particularly into next year, how should we think about EBITDA margins? They're up a lot from where they've been historically. Even with the good growth this year, you know, they're kind of staying flat. So I guess the question is, if growth kind of decelerates in the future, what does that kind of mean for margins from here? Thanks.

Sure. I mean, why don't we, maybe we'll split them. I mean, you know, I think... you know, the business is growing, right? And you've seen that with that growth, we've been bringing people into the organization. You know, I think I've talked about the fact that the skill sets we're bringing in may not necessarily be the ones that we would have been bringing in had, you know, we've been talking about this a couple, three years ago. But, you know, in the high growth areas and disciplines, there is still need on our part. And so I'd say we've We've largely caught up on hiring relative to what 21 represented, but there isn't a proactive need to do what you suggest. And, you know, the two examples you called out are, you know, whether you call it idiosyncratic or they're, you know, they're specific to things going on within those entities or the client base, you know, at those agencies. And then, you know, I'll sort of segue into or maybe hand off to Ellen in thinking through the margin question, but I think that we also have, you know, the variability of costs like temp labor and, you know, clearly the fact that our incentive programs are really, really synced up to how it is that we give you visibility into the business and what our goals are, which is to grow organically and to improve margins. So I think those questions provide a lot of what we need to continue to manage the business, you know, as we look to the back half of the year, right? And in terms of margins go forward, I'll pass it over to Ellen to start.

Sure. Thank you. You know, I would say, you know, start with our track record, right? We do have a track record of being able to manage our margins very effectively in a variety of different circumstances. And Philippe mentioned, I think, some of the things that really help us do that is that our flexible cost structure. So whether, as Fleet mentioned, it's temporary help versus permanent labor or our performance-based incentive comp, which provides variability as well or buffers, absolutely help us. We're very disciplined on how we manage costs. As Fleet also mentioned, you know, our incentives are aligned with that. And, you know, we're continuously looking at offshoring and nearshoring and other ways that will make us more efficient, in addition to the fact that we're growing our higher value services, which should also help us expand our margins. So, yes, we do believe that we can expand our margins going forward.

Great. Thank you. Thank you.

Thank you. The next question is from David Karnovsky with J.P. Morgan. You may go ahead.

Thank you. Maybe to follow up on the macro questions, Philippe, you know, one thing we've heard from some of your peers on earnings calls this week is that marketers have largely learned from prior recessions or crisis periods that, you know, if you cut spend too quickly, there's a real price to pay, you know, later on in terms of market share sales. So I'd love to get your take on that and whether you think that mindset can kind of keep ad spend relatively steady, even as macro trends potentially worsen. And then just to follow up on the digital specialists, you know, I think you had mentioned some weakness in speculative categories and project work. You know, do you view these headwinds as sort of temporary and the underlying performance remains strong? or are there kind of more structural factors at play? Just wondering, you know, these firms, at least in the pre-pandemic period, were real standouts for IPJ. Thank you.

Sure. Look, I mean, I think, you know, in the remarks, I, you know, spoke to the fact that I do think that the conversations with clients go to a place of, you know, past cycles, even obviously 2020, where there was a bit of a knee-jerk we were all facing something we'd never seen before. And I do think that there are ways in which you internalize that and you think hard about whether or not pulling back, whether it's share a voice, whether it's the presence of your brand, which is a very powerful equity, as I mentioned, would make sense. So I think people are definitely doing that calculus. And then, as I said just a few minutes ago, You know, there are some who are asking for contingency plans, but there are many more who are still, you know, very, very committed. I was with a large CPG client less than a month ago, and they're in the midst of a digital transformation, and they see all the things we see. They see input costs rising, and they see, you know, the ability for the brand to help mitigate that, and they're looking at a multiyear journey, and they're still committed to that. So, you know, to my mind, I think that that sense of, you know, I mean, people's mix is very different, right? I think that on that journey, if you've gone from having, you know, sub, say, less than 25% of your spend being digital channels to twice that, and you're on your way to trying to get to, you know, well above that, and some of the categories that have been sort of slower to make the shift over time, which accelerated during the pandemic, You know, so I think all of those things do give you a sense that, you know, we've collectively made progress in evolving, you know, the model. And none of us knows, again, there's a lot of noise around what it might be and how, you know, bad it might be. And we're not seeing that, right? So you see that. You see places in our business that are clearly going to be sturdier. You know, a data business, it's an enterprise-level business. It's on multi-year contracts. you know, healthcare where you've got sort of baked into it very integrated disciplines and capabilities, a lot more science in terms of what we bring in the way of expertise to those clients, and then a lot more data in terms of how we push, how we, you know, sort of kind of make decisions. So it's clearly TBD, but there is, you know, there's definitely... there's been underlying change in marketing since we last went through something like this. Specific to the two agencies you call out, you know, I think that we were clear that, you know, client mix can make a meaningful difference. I think you've got two premium players, you know, and the industry has clearly evolved, and so there's some rethink going on on the part of both of those management teams in terms of how do they reinvent so that they are – in a place where those premium positions can continue to prevail. So I think there we're looking about, you know, at both things that are specific to their mix and then perhaps where they are in their cycle as companies. Thank you. Thank you.

Thank you. The next question is from Michael Nathanson with Moffitt Nathanson. You may go ahead.

Hi, Michael. Good morning, Felice. Good morning. I'm asking for a reconciliation also. I love to know, when you look at your client mix in total, how much of the growth do you think has come from the speculative categories? I think back to 20 years ago and all the dot-com bubbles. I wonder, is this time different because you guys didn't benefit from either the growth in speculative categories or the growth of SMBs? Is there anything you can tell us about client mix now versus pre-pandemic? That would, to me, I think, help reconcile why we keep a digital weakness we're seeing at Facebook and the rest versus maybe what you're seeing.

Now, look, I think that the comment about speculative categories was very, very specific, right? And so, you know, as always, we're going to want to give you, you know, as much detail as we can when we are taking you through the results. And so within that new segment... to try to give you clarity. We wanted to pull apart, you know, that there was double-digit growth in parts of it and that where you had something that was dilutive, what was it that was impacting that? So in my mind, we weren't saying that those speculative categories have an impact on the macro portfolio because, you know, we tend to do more work, you know, with some of those categories in the places where we're doing some of the most, you know, and whatever we're going to call it, sort of the most bleeding edge work, right? You know, I read what you put out this morning, and I think that the bigger question around where and how large-scale digital is undergoing a transformation of sorts, I'd say to you there's substantial growth that's happening outside of what you might kind of call the big three. So there's diversification happening in the you know, in what is now the primary way in which companies go to market, which is on digital channels, right? So you might have year-on-year growth slowing at the really big players there, although they're clearly still growing. And I think to my mind, you know, the three big factors that are changing things on that side of the house are TikTok, absolutely. Then, you know, the fact that there's much more e-commerce going on and retail media networks are clearly seeing a lot of that growth heading their way, right? And that's kind of interesting from where we sit because you can clearly do some interesting things with first party data that's sitting inside of those channels that are growing, and then what we can do with first-party data. So, you know, partnering there is interesting. And then digital video is, you know, sort of benefiting lots of people, including, you know, some traditional marketer, you know, media owners who've come into that space with interesting and necessary, you know, streaming channels. So, I mean, that's a bit of a, you know, divergence. But I think, you know, I found what you thought was wrote was interesting, but I think that's got a lot more to do with it than, like, our client mix isn't really going to impact, you know, that math for us.

Thanks, Blake. I appreciate it.

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

Thanks. Good morning. I was curious if the lockdowns in China, you know, brought our Asia impacted that region's growth at all this quarter. It was still pretty solid. I think you mentioned China was down year on year, but just trying to get a sense for how mature that might have been. And then I wanted to ask about the media business. In 2020, as the pandemic came on, brand spending really collapsed, and we saw much more of a focus in bottom of funnel performance. Some of that, obviously, because we're all stuck at home staring at our phones, stimulus checks being sent out. But I'm just curious, Philippe, like we've talked to your media, your smart media people. What do they think happens if things just get even incrementally tougher, let alone recession? Is there parts of their media spend that sort of is more defendable or they're more focused on than others? And I'm sure you'll tell me that it depends by client, but I'd still love to hear your answer.

Thanks. Sure. I mean, I think Ellen can give you the answer to your Asia slash China question.

Absolutely, yes. China was diluted to the overall continent. If you look at it ex-China, our growth would have been there high single digits, closer to double digits.

Got it. And in terms of media, you know, in the event of or, you know, should there be a slowdown, It's interesting because in 20 we saw that it was a place people went to because it was the place people could sort of turn off the spigots very, very quickly. And I think that we definitely, it's the logical, you know, it's sort of the equivalent of what used to be, you know, a project that you could perhaps, you know, choose not to go forward with. in, you know, a difficult economic climate in certain, you know, back in the day. So it's not that there isn't a sense that it would be a place clients might go, but I think that, you know, there's going to be more thought that goes into, you know, can I interrupt the consumer journey? Can I interrupt the flow of information I get back from those channels? And I think people will probably just be more choiceful. I mean, I think it'll be like anything in a circumstance such as that. And I mean, again, you're asking me for a supposition and we're telling you that in the business and in the bulk of what we're, you know, the interactions and the conversations we're having with clients, the reality we're dealing with isn't the story that, you know, to the very first question we had that you're seeing in the headlines. And so I think that there would be sort of a flight to kind of quality in essence. There would be a What can I not afford to turn off? Where am I getting the best returns? What makes the most sense? Because it really is getting me to intersect with audiences. So it's not that you mightn't see some issues there, but I think it would be about the quality of the platform. It would be about the quality of the back end and the data you're seeing as a result of making that investment. You know, but I think it's naive to suggest that if, as you say, we got to that point, you know, you wouldn't have some of what we saw more recently. All right. Thank you, Flint.

Thank you. Our last question comes from Jason Bazinet with Citi. You may go ahead.

Jason. Hi. Good morning. Just had a real quick one on inflation since I don't think any of us have covered a firm like yours in a high inflation environment. Can you just spend a second and talk about what items you feel like would be impacted sort of coincidentally with the rate of inflation and which items, either revenue or expenses, you feel might lag the rate of inflation where it doesn't show up until a little bit of time goes by?

This is within our company, so it's not what happens on the client side. I mean, look, I think we are seeing – modicum of wage inflation inside of our four walls. Right. So I think, you know, we're going to, if I look at it, I go, okay, so growth lead hiring over the last 12 months, probably by a couple of percentage points. Right. And as I said, there's still a bit of hiring to be done, you know, but if you think about that Delta, it goes to what we said to you, which is that we see that as manageable and, And then I think the other thing I'd sort of call out on the most evident place where inflation is impacting us is that if I had to give you kind of a qualitative sense of it, the pressure on labor markets is less evident than it would have been a quarter ago, right? So I'd say that hasn't fully abated, but it's definitely slowing. And then in terms of other places in our cost base where we'd see inflation, I don't know if there's anything, Ellen, we want to call out, but obviously, You know, SRS for us is, you know, an important part. You know, it's where we get the folks we need to make the model work. So I don't know if anything else would be a lagging component of inflation in our world.

No, and I would just add that, you know, again, we're always focused on continuing to offshore and nearshore. And there's, you know, things that we're looking at that also help mitigate.

Yeah, the internal transformation efforts are definitely going on in a number of places. And, you know, how we do a lot of the back end on media and how we do production and how we automate that and how we connect that back to the data stream. So, yeah, nothing. I mean, I think I think it really is. You know, I think you're seeing, you know, we've been talking about it. It's the one we would obviously stay focused on and and be able to be very vigilant about.

And how about revenues of inflation? Would you say that sort of lagging or coincident or.

I mean, you know, so far as I've said, I think that, you know, clients continue to see it, you know, marketing as a way to mitigate that. And we do have the capacity in many cases, you know, contractually to, you know, to sort of share that with them as we see it impact. So, again, I don't see it impacting revenue at this point.

Okay. Okay. Super helpful. Thank you.

All right. Well, as always, we appreciate the time and the interest, and we will keep you posted as we go forward. And, you know, very, very focused on execution for the back half, and everybody on the teams is on the same page with us. So thanks again.

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