Interpublic Group of Companies, Inc. (The)

Good morning, and welcome to the Interpublic Group Third 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.

Thank you. Good morning. I hope you are all well. 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 930 Eastern Time. We'd like to remind you that during this call, we will 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. To better align with the language in our financial statements, we will use the term revenue before billable expenses, as well as the more familiar net revenue interchangeably. They are identical measures, and there has been no change to the method of calculation. As you will recall, billable expenses in revenue are offset dollar for dollar in our operating expenses and therefore have no effect on our results of operations. We will also refer to forward-looking statements about our company. These are subject to the uncertainties and the cautionary statement that is included in our earnings release and the slide presentation and further detailed in our 10Q and other filings with the SEC. At this point, it is my pleasure to turn things over to Philippe Krakowski.

Thank you, Jerry, and thanks for joining us this morning. I hope you're all keeping well. As usual, I'll start out by covering the highlights of our performance in the quarter and the nine months. Ellen will then provide additional details, and I'll conclude with an update on our agencies and the tone of the business to be followed by your questions. We're pleased to report a strong third quarter and nine months. Third quarter organic growth was 5.6%. That's on top of very strong 15% growth a year ago, and it brings our three-year organic growth stack over the period of COVID to 16.9% in the third quarter. Over the first nine months of the year, our organic growth was 8.2% on top of 12% a year ago, which brings three-year growth to 15.7% for the first nine months. Those three-year numbers continue to lead the industry. We once again posted growth across our US and international markets. Domestically, organic growth for the quarter was 4.4% on top of 14.7% in last year's third quarter. and organic growth in our international markets was 7.8%, highlighted by growth in every region of the world, and that was on top of 15.4% growth a year ago. Our growth in the quarter was also broad-based across our portfolio, whether viewed by segments, agencies, or marketing disciplines. Each of our segments compounds double-digit growth a year ago. Our media, data, and engagement solutions segment grew 3.8% organically, which adds to 15.9% growth last year. Performance here was led by double-digit increases at IPG media brands, while two of our digital specialist agencies decreased from a year ago and are weighing significantly on the segment. At our integrated advertising and creative-led segment, organic growth was 6.7% on top of 12.8% growth last year. and we had growth in all of our largest agencies with clear leadership again this quarter by IPG Health, followed by McCann World Group. In our specialized communications and experiential segment, organic growth was 7.8%, highlighted by double-digit growth in our experiential solutions across Jack Morton, Octagon, as well as Momentum, along with solid single-digit increases in the public relations discipline. This result builds on the 18.5% growth in the segment that we saw last year. Across client sectors, our growth in the quarter was led by healthcare, retail, financial services, our other sector of industrial and public sector clients, and our auto sector. Turning to operating expenses and margin, our results again continue to reflect the strong cost discipline exercised by our operating teams. as well as our ongoing investment behind key growth areas. As you know, our comparisons to last year reflect the ins and outs of the pandemic, though we continue to drive margins at levels that are well above seasonally comparable pre-COVID periods. Net income in the quarter was $251.8 million as reported. Our adjusted EBITDA was $356.2 million, resulting in net revenue margin of 15.5%. As expected, that's below last year's third quarter when our growth had accelerated at a rate that was well ahead of hiring and when certain variable expenses were still at low levels due to the effects of the pandemic. Compared to a year ago and under our organic growth of 9.1% over the trailing 12 months, headcount has grown approximately 7%. Variable expenses have recovered to higher levels as well, as we've resumed travel and returned to office in far greater numbers. Our diluted earnings per share in the quarter was 64 cents as reported and 63 cents as adjusted for intangible amortization, restructuring adjustments, and our net dispositions. Under our share repurchase program, reauthorized earlier this year, we repurchased 2.6 million shares in the quarter. We're gratified that our ability to deliver marketing and media solutions, which bring together creativity, technology, and data, continues to drive growth with existing clients as well as new client wins. The growth you're seeing is driven largely by these very relevant capabilities, which can solve for an expanding set of marketer needs for more precise, personalized, and accountable engagements with their audiences at an individual level. The strength of our company is bringing talented people together in our client-centric model to create customized solutions that meet these higher order client needs, whether those engagements are led by one of our powerful agency brands or through a collaborative IPG open architecture team. These strong and relevant offerings are important for our long-term future as well as at this moment of heightened macroeconomic and geopolitical uncertainty. The current environment is making visibility more challenging, but given our strong year-to-date performance, we are upgrading our expectation for organic growth for the full year to 7%. With growth at that level, we expect to achieve adjusted EBITDA margin of 16.6%. Notwithstanding this update to our outlook, we are seeing a more challenging macro environment going forward. On a question following our last call, you'll remember that I mentioned some clients were asking us to help them scenario plan and think about how they might best redeploy media and marketing investment in the event of a downturn. A majority of our clients are now asking us to engage in this kind of contingency planning, prioritization of activity, and a focus on actions that will drive performance and sales. To a lesser degree, we're also seeing some deferrals of digital project work. Historically, we know that marketers that continue to invest through the cycle come out ahead in the long run with measurable gains in market share and growth. These days, that's a conversation that's ongoing with many of our clients who also know that given the duration of past downturns, reductions are generally short-lived. At IPG, Our differentiated resources of creative and marketing talent, data and technology as well as outstanding agency brands along with our diversified and flexible business model and proven management teams position us well. You can expect that we will hold true to our history of managing effectively even in more challenging times while also continuing to invest in and advance our offerings for success in an increasingly digital economy. We are, of course, staying close to our clients and to our people. And on that note, I'd like to close this part of my remarks by recognizing and thanking our people for their focus and their work on behalf of clients in support of each other and also for their engagement on the many vital societal issues that are consistent with our culture and values. So, at this point, I'm going to hand the call over to Ellen now 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. On slide two, our increase in total revenue, which includes billable expenses, was 3.8%. Our third quarter revenue before billable expenses, net revenue, increased 1.5%. and organic growth was 5.6%. We grew organically across all regions. The three-year organic stack in the quarter through the pandemic period is 16.9%, which demonstrates a historically strong momentum. Third quarter adjusted EVTA was $356.2 million, with margin of 15.5% on net revenue. Diluted earnings per share is 64 cents as reported and 63 cents as adjusted. Adjustments exclude the after-tax impacts of the amortization of acquired intangibles, a restructuring adjustment, and a non-operating gain from dispositions of certain small agencies and a business investment. We repurchased 2.6 million of our common shares during the quarter for 73.7 million. bringing share repurchases to $7.1 million through the first nine months of the year. Turning to slide three, this is CRPNL for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow. On slide four, we present net revenue in more detail. Our net revenue was $2.26 billion in the third quarter of 2021. Compared to Q3-21, the impact of the change in exchange rates was negative 3.6%, with the dollar stronger against currencies in nearly all of our international markets. The impact of net divestitures of certain small, non-strategic businesses was negative 50 basis points. Our organic increase was 5.6%. The result was net revenue of $2.3 billion in this year's third quarter. Further down the slide, we break out segment net revenue performance Our media data engagement solution segment grew 3.8% organically, on top of 15.9% in the third quarter of 2021. As you can see on this slide, the segment is comprised of IBG Media Brands, Axiom, Kineso, and our digital specialty agency. At one end of the spectrum, IBG Media Brands grew at a double-digit rate organically, while the other ends we experienced softness at RGA and UGE, which weighed on our results both at the segment and IPG level. Organic growth at our integrated advertising and creatively-led solution segment was 6.7%, which was on top of 12.8% a year ago. As a reminder, this segment is comprised of IPG Health, McCann, Mullen Law, FCB, and our domestic integrated agencies. Our growth in the quarter was led by strong increase in IPG health and solid growth at McCann. At our specialized communications and experiential solutions segment, organic growth was 7.8%, which compounds 18.5% in last year's third quarter. This segment is comprised of Weber-Chanlick, Golan, Jack Morton, Momentum, Optigon, and Dextra Health. we were led by double-digit increases in our experiential solutions and had mid-single-digit growth in our PR discipline. Slide five presents our organic change of net revenue by region. In the U.S., which was 66% of net revenue in the quarter, our organic increase was 4.4%. That is on top of 14.7% a year ago and was driven by disciplines and agencies across the range of our offerings. We were led by IPG Health, IPG Media Brands, Media Hub, Jack Morton, and Momentum. International markets were 34% of our net revenue in the quarter and increased 7.8% organically. That is on top of 15.4% a year ago. Continental Europe increased 4.7%. We were led by growth across France, Italy, Spain, and the Netherlands. Germany was down slightly in the quarter, on top of 13% growth a year ago. The UK increased 4.9% organically. Our performance was led by media, experiential, and IPG health. Asia-Pac grew 5.6% organically, with broad-based growth across the largest markets, including Australia, India, Singapore, and China. Our organic growth in LATAM continued to be strong at 19.8%, which, it's worth noting, is on top of 20% growth a year ago. We grew across all of our principal markets, which include Brazil, Argentina, Mexico, Chile, and Colombia. Our other markets group, which is made up of Canada, the Middle East, and Africa, grew 10.6%. We were led by double-digit growth in the Middle East and solid growth in Canada. Moving on to slide six and our operating expenses. Our rejected EVTA margin on net revenue was 15.5% in the quarter, which as expected decreased from 16.3% a year ago. You'll recall that last year's margin benefited from several transitory effects, which were due to both the sharp acceleration of revenue growth during 2021 and to the impact of the pandemic on certain operating expenses, which caused them to run at unusually low levels. These expenses include travel, meetings, and in-office work. You'll also recall that our hiring significantly lagged behind our top-line growth last year. I would point out that our Q3 adjusted E-to-TA margin is well above the pre-pandemic third quarter of 2019, which was 14.7%. This slide depicts our principal expenses as a percent to net revenue this year and last year. As you can see, our ratio of total salaries and related expense as a percentage of net revenue was 67.4% in the quarter compared to 66.8% a year ago. Underneath that SRS result, we delivered on our expense for base payroll, benefits and tax, due to the hiring that was required to support our 9.1% organic growth over the trailing 12 months. Headcount increased approximately 7% over the same period. Going the other way, our expense for temporary labor decreased from a year ago, and our expense for performance-based employee incentive compensation also decreased significantly. At quarter end, our total worldwide headcount was approximately $58,500. Also on this slide, our office and other direct expense was 14.3% of net revenue compared to 13.3% a year ago. We continue to leverage our expense for occupancy, which was 4.8% of revenue, an improvement of 20 basis points from a year ago. All other office and other direct expense was 9.5% of net revenue compared with 8.3% a year ago. The comparison reflects the return of variable expenses that I referred to earlier as a result of increased levels of business activities, though not fully up to pre-pandemic levels. Our SG&A expense was 0.8% of net revenue, a decrease of 60 basis points from a year ago. On slide 7, we present the detail on adjustments to our reported third quarter results in order to provide a picture of comparable performance. This begins on the left-hand side with our reported results and steps through to adjusted EBITDA and our adjusted diluted EPS. Our expense for the amortization of acquired intangibles in the second quarter was 20.2 million. Our restructuring adjustment was a 5.8 million credit, which here we have adjusted out of our results. The low operating expenses and shown in column five, we had a net gain of $15 million due to the disposition of a few small non-strategic agencies and a business investment. At the foot of the slide, you can see the after-tax impact per diluted share of each of these adjustments, which bridges our diluted EPS as reported at 64 cents to adjusted earnings of 63 cents per diluted share. Slide eight depicts a similar set of adjustments for the nine months, again, for continuity and comparability. Adjusted diluted earnings per share is $1.73 for the period. On slide nine, we turn to cash flow in the quarter. Cash provided by operations is 65.6 million. Cash used for working capital is 276.1 million. Operating cash flow before working capital was $341.7 million. As a reminder, our operating cash flow is both highly seasonal as well as volatile by quarter due to changes in the working capital component. This is largely a function of the variability and the timing of our collections and payments. In our investing activities, we used $36.4 million, mainly for CapEx, partially offset by the sale of our business investments. Our financing activities in the quarter used $209.8 million, primarily for our common stock dividend and share we purchased. Our net decrease in cash for the quarter was $211 million, and our cash position at quarter end was $1.77 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 EVCA, as defined in our credit facility covenant, was 1.7 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 updated 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. Our growth thus far this year builds on a record of success that goes back some time. and embedding digital across the portfolio, as well as adding a layer of data and tech to our offerings, have been important parts of that playbook, along with our commitment to talent and strong agency brands. Now, the convergence of media and entertainment with the impact of technology on the retail sector is leading to another major growth opportunity for brands, and that's the evolving world of commerce and direct-to-consumer business models. To date, we've been successful in helping our clients create engaging and effective customer experiences across a range of physical and digital environments. During the quarter, we took another important step along this journey when we announced our acquisition of RafterOne. The company is a leading Salesforce implementation partner that works with marketers and brands to deliver personalized content that engages and converts in a measurable, precise, and repeatable way across a range of marketing technology channels. With over 25 years of experience building digital journeys for clients and with more than 500 employees, RafterOne is a Salesforce Summit partner, and that's the highest tier awarded to implementation partners. By bringing IPG and RafterOne together, we're significantly enhancing our commerce capabilities on a key marketing technology platform in both the B2C and B2B Salesforce clouds. Now, RafterOne will continue to work independently with their own roster of clients, as well as work directly with IPG agencies, bringing specialized commerce capabilities, whether that's in strategy, service, data, or CX implementation, to clients across our entire portfolio. Commerce and other forms of business transformation work can be a significant growth driver for us going forward, and the addition of RafterOne is an important step in rounding out our offerings in this space. Turning the highlights of performance across the group in the quarter, a key sector that continues to show strength is healthcare. Reputationally, we continue to be the leader in this dynamic sector. IPG Health won Healthcare Network of the Year at the 2022 MM&M Awards. Collectively, our agencies took home 23 wins across 21 categories, making us the industry's most awarded network. During the quarter, we launched IPG Health Medical Communications, which aligns eight agencies to create what we believe is the industry's most comprehensive and interconnected MEDCOMS offering. And this type of specialized offering available to all of our healthcare clients is precisely the kind of benefit that we foresaw when we launched IPG Health just a little over a year ago. Importantly, The company's thought leadership and creative recognition also converted into growth as IPG Health continued to win new business and grow with existing clients, including AstraZeneca, Pfizer, Eva, and Boehringer Ingelheim. IPG Health is also a key part of a successful integrated media consolidation with Merck. In media brands, we continue to see a high degree of engagement with many of the world's most sophisticated marketers. During the quarter, we onboarded new clients, including Nike, and expanded our relationships with Merck and TiVo. Last week, Media Brands shared the fourth iteration of its Media Responsibility Index, which is proprietary research on the relative safety and fairness of media platforms. And this helps our clients make their media planning decision in ways that are responsive to issues such as dis- and misinformation. Notably, We also promoted Eileen Kiernan, who's exceptionally client-focused and strategic, naming her global CEO of IPG Media Branch. In this regard, Eileen becomes the first female leader of a major media management group in the industry. Staying in the media space, as we see travel continue to bounce back, Celebrity Cruises just selected MediaHub as its media agency of record for North America. Axiom played a significant role in this win, as the teams will develop custom audiences through addressable media to power this client's highly personalized marketing efforts. During the quarter, Axiom garnered recognition as a great place to work, with Fast Company naming it as one of the best workplaces for innovators, and Fortune naming the company a best workplace in technology and a best workplace for women. As Ellen indicated, The performance of two of our specialist digital agencies has been challenged as a result of the macroeconomic uncertainty that we're seeing. Both of these agencies are in the midst of evolving their premium offerings, which is a requirement to stay ahead in their space. When it comes to the strength of our brand in the creative advertising space, McCann, FCB, and Mullen-Lowe continue to distinguish themselves. During the quarter, we announced the new global CEO from McCann. Gerald Lee, who has a remarkable breadth of experience that spans all facets of our industry and the full range of IPG. As such, Gerald is extremely well positioned to advance the success of the network and drive it to further achieve its ambition, which is to be the global leader of creativity that drives growth for clients. We saw several wins in the quarter at McCann, including Beefeater Jim, MacArthur Glen Design Outlets, and Hankook Tire. The Global SE Effectiveness Index named McCann World Group the most effective agency network for the fourth year running. And McCann was also named Network of the Year by the Garrity Awards, where an all-female jury rewards the highest standard of creative excellence in advertising and communication. At FCV, the creative network won new assignments with existing global clients, including Kimberly Clark, Clorox, and AB InBev. And FCB's Global Chair and Chief Creative Officer was honored by the AEF, the ANA's Educational Foundation with the Inspire Award, recognizing her commitment to education and inspiring young talent as it makes its way into our industry. Mullen Lowe Group saw a number of new business wins in the UK market, winning the co-op retail chain, as well as Morgan Stanley, Value Retail, and the Tik Tok and Nutella candy brands. Mullen Low continued to be recognized as one of the industry's most creatively effective networks as well. The 11th year in a row was the top-ranked network score dollar for dollar in the FE Effectiveness Index. And during the quarter, we also created a new integrated agency called IX, which is based in London, to handle global creative strategy and advertising for new client Bentley Motors. Our agencies that specialize in live events continue their strong return to growth. The industry is seeing budgets shift from more traditional marketing to the kinds of engaging experiences that allow consumers to build emotional connections and lasting relationships with brands, often connecting the physical and digital space. And having three of the industry's premier global sports and brand experience companies within our organization is a point of differentiation for Interpublic. Notable highlights in the quarter here at Octagon included the creation and management of Coca-Cola's FIFA World Cup Trophy Tour, as well as the nationwide campaign highlighting the Home Depot's 20th season sponsoring ESPN's College Game Day. Octagon and RNC PMK also worked with our Amazon client to kick off a campaign celebrating the launch of Thursday Night Football on Prime Video. And the athlete representation group within Octagon negotiated an MLB record-breaking contract extension for Julio Rodriguez with the Seattle Mariners, making it the largest in baseball history. At Jack Morton, we saw significant wins with clients like McKesson, Siemens, Intel, Cigna, Riot Games, and McDonald's. The agency produced the Cadillac US Open Sponsorship at the US Tennis Center. and brought to life several major events for the first time since the pandemic began, including auto shows, large retail activations, and wellness conferences. At Momentum, the network was named Adweek's Experiential Agency of the Year and brought Jimmy Fallon's Tonight Show to fortnight. Among our public relations firms, Dolan won AOR duties for West Monroe, a Chicago headquartered digital services firm, and the agency was also named as PR agency in the UK for Specsavers, the optical retail chain. While at Weber Shanwick, new business wins included Bot Hero in North America and working alongside Future Brand and Jack Morton as part of a Dextra health team, Weber was awarded a significant brand launch by life sciences company Perkin Elmer. Our US independence during the quarter, the Morton agency stood out as it extended its run of new business by Winnie Santander, LegalShield, Bud Light Next, Bud Light Seltzer, Deutsche LA, Winstrava, the number one app for runners and cyclists, and Carmichael Lynch onboarded a new client in Hostess for Public Relations Remix. When it comes to our ESG programs, we continue to make notable progress during the quarter. We named our first Chief Sustainability Officer. We announced a new process for evaluating energy and fuel clients. And we once again released our domestic workforce data, which is a transparency commitment IPG established and has now become an industry standard. Our ongoing work in this area speaks to our commitment to embrace issues that are important not just to our people and our planet, but to our clients and other key stakeholders. For the year, we remain in a positive position from a net new business standpoint. and our net new business pipeline continues to be sound. Activity in new business does seem to be increasing as we head into the new year. Despite a more challenging macroeconomic environment, as you've seen, our expectation is given our strong performance through the first nine months, we're upgrading our view to organic growth for the full year to 7%. As you know, this compounds multi-year sector outperformance. and current results combined with the continued execution of our long-term strategy should remain significant drivers for sustained value creation going forward. Of course, given the macro, we're going to stay committed to sound financial fundamentals, as Ellen was mentioning, and that's allowed us to grow our dividend for 11 consecutive years, and we're also committed to continuing our strong share repurchase program. We're confident as well that the investments in talent and capabilities we continue to make position IPG well for the future with highly relevant and differentiated offerings underpinned by this sound financial foundation and a strong balance sheet. As always, we want to thank our clients and our people who are both essential elements of our success. And thank you as well for your time this morning. And at this point, let's open the call for questions.

Thank you. To ask a question, press star 1, 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 our first question. And our first question is from Stephen Cahill with Wells Fargo. You may go ahead.

Thanks. Good morning. Maybe first, Philippe, could you talk a little more about the deferral of some of the digital project revenue you talked about? Is this a lot of the project revenue that often comes in in the fourth quarter, or is this more of a kind of longer-term comment reflecting the way clients are doing some of that contingency planning for 2023? And relatedly, when your clients talk about contingency planning and you see them maybe pulling back a little bit in 2023, do you think they're just shifting the way they go to market? Or is that more of a sort of material slowdown in what they might spend on marketing? And then I have a quick follow-up for Ellen.

No, I think it's a shifting. I think it's just, as I said, it's being prepared and having both line of sight into how you're going to prioritize and where you're going to invest in order to drive performance, you know, given the macro. I think that, you know, on the project side, it is, I think it's a fourth quarter comment more than anything else. I think what you are seeing is that it's wanting to retain some optionalities. So my sense, I think, is that we won't necessarily have clarity or full commitment on some of those projects until a bit deeper into the quarter than we usually would. And so, yeah, I don't think we're talking about something that is, it's a long-term trend. It's just a function of the current uncertainty.

Yeah, makes sense. And then, Ellen, it sure seems like the stock is not reflecting some of the strength in the business. I've got it at about 10 times earnings. You've got a really healthy balance sheet. I don't think there's much in terms of maturity until 2028. So how do you and I guess Philippe and the board sort of feel about leaning more aggressively into the buyback now in a period of uncertainty as opposed to waiting until a period of rebound? Yeah.

Good morning, and thank you for the question. We believed in our equity before the sell-off, but we are very disciplined. We have a program that we execute against. We actively manage it, but it's a program, and so I think we'll stick with it, but definitely believe in the value of our shares.

Great. Thank you. Thank you.

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

Hi, thank you. Just following up on the commentary about clients engaged in scenario planning, can you just walk through a little bit more what that process looks like? Are clients looking to put kind of wholesale pauses into motion in case the macro suddenly gets worse, or is this more about shifting brand into performance or, you know, building a lot more flexibility to adjust across channels?

Well, look, I think it's everything that you said, and it really depends on where in our world we're having the discussion, right? But flexibility is a very big part of it at this point. And then understanding the implications of the decisions you make and ultimately, as I said, if it's a client where we're the advisor and the consultant on the media side of things, then it does focus on flexibility. where and how they're going to redeploy. If it's an open architecture client where we're working with them in a really broad macro sense, then we might dial up certain capabilities knowing that we're heading into this moment in time. So it's very kind of case-dependent, and within some client categories are feeling it to a greater degree than others. I mean, I'd sort of point out that You know, where the macro is impacting is clients who are particularly exposed to the changes that we're seeing. So if high interest rates impact your business, if commodity input costs impact your business, then you're thinking this through. So there isn't one answer, but I think it's around that set of conversations, just making, you know, the most informed decisions. and getting the mix between brand and performance and up and down the funnel and actually linking those two increasingly and keeping some optionality, as I said earlier.

And then, Luke, you noted continuing strength in healthcare. Can you remind us of your clients' split there in terms of sort of large pharma versus biotech? And then just with biotech, how should we think about maybe the medium-term outlook just given some of the kind of pressure that sector is taking in the public markets, you know, or is the country-run pipeline just really removed from the macro? Thanks.

Sure. I mean, in health, I'd sort of point out a couple of things. So we're fortunate in that we are very, very well represented among the largest players in the space. IPG health clearly has been a focus by, you know, the nature of what we've just done a year ago and how we've put that together. But it's been a long-term investment that has led to that growth for us, right? And then there are trends, underlying trends, that are clearly tailwinds to all of that. We have some biotech, but we've got a very balanced portfolio. I'd say that specific to biotech, have we seen the market dislocation have some impact on funding there? Sure, but is that something that's having a significant impact from where we sit given the breadth of what we do? Not really. And then beyond IPG Health, there's sizable health business inside of media brands, inside of marketing services. PR is very strong in that regard. Dextra Health, where we're bringing a lot of the marketing services agencies together. So that continues to feel to us like it's an area that's going to be pretty resilient.

Thank you. Thank you.

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

Thanks. I have two. One is it feels to us that the macro in Europe and UK is obviously going to get worse through the winter. I wonder, is the tone of business discussions different by geography there? So, again, let me talk about where the questions are coming about budgets. They're askew to Europe. And then given the potential for slowdowns in those markets, what are you doing on the cost side to continuously plan, right? I know it's hard to – if you had to take people out of capacity, it's slower. But what are you doing and thinking about just planning for budget expenses in 23 and the growth of budget in 23?

So thanks. The impact definitely is not only disparate when you think about client sectors, but, you know, you can see it in our results where we've got, you know, a really strong LATAM, AsiaPAC, other markets. Although everything, you know, does grow, every region was up. So there isn't a – a holistic answer that tells you what happens in each of those markets. Although clearly economically, you have to assume that that's a region that's going to be kind of heading into something before the rest of the world, or maybe heading into something that other parts of the world don't experience. Right. On the cost side, you know, we're very clear and we've been really consistent as to all of the ways in which we can address, you know, those issues, right? So whether you think about the fact that the model is flexible and that's clearly beneficial, whether you think about the fact that you do approach some of those markets with the understanding that the underlying, you know, the ways in which You bring people on, and the ways in which you think about staffing are different in those markets just based on, you know, the local laws. And so, you know, we're very, very focused and disciplined around open recs as we see change or more uncertainty in the macro, and that's consistent across the board anywhere we operate. We look very hard at discretionary expenses, and clearly the Some of that has come back into the business in a way that I think is beneficial because travel has meant seeing clients and getting together with colleagues, and some of those costs have also been around teams being together, which is important as we develop new capabilities. So we'll look at those. Freelance is another place we'll look. Our incentive plan, by its nature, is going to be – a governor on some of that. But it definitely has our attention, and it's just going to require execution. So there isn't a one-size-fits-all, but Europe is definitely an area of focus for it.

Thanks, Luke.

Sure.

Thank you. Next is Ben Swinburne with Morgan Stanley. You may go ahead.

Thanks. Good morning. Maybe just shifting away from the macro for a minute, unless you want to keep talking about it.

Everybody else seems to.

Right, exactly. On Raptor One and sort of that kind of business broadly, Philippe, I know calling them STEM integrators is probably, you know, that's probably an old and limiting definition versus what they do today. But can you just talk about your strategy there and, like, how big is that business, you know, any sense of sort of the size and, and profitability of that business, not Raptor One per se, but the entire IPG set of service offerings in what we might call software services, software integration. It would be interesting to hear. I'd be also interested on experiential and sponsorship, which you highlighted a bunch of successes at Octagon and Momentum. That's an area where I would agree it seems like there's some secular growth. Is that an area you think – the company may want to get bigger in organically or inorganically over time. I'd be interested on both those topics. Thank you.

Sure.

And I think commerce is an interesting one. I mean, you said software, and obviously there's a technology layer at Axiom, and then there's what we're doing with data and tech with media. So it's not by any means the only place where we've got businesses that are sort of services plus a software layer of some kind. But on commerce, I guess, I mean, just breaking it down, you know, there's a D to C part, right, where clients need our help with everything from the design of a site, the build of a site, the content creation, the CRM piece, And then business processes, because you often really have all the way down to payment, transactional stuff, right? And for us, the leader in that space has been MRM, so they excel in those areas. And so to our mind, RafterOne kind of meaningfully bolsters that offering. Then there's the marketplace side, and so that's where we optimize media. We do SEO. We leverage social commerce. you know, and you're sort of doing a lot of message amplification and you're finding places where you intersect with the consumer. And then that, for us, it's inside of reprise commerce. So that's a big part of the story for us there. So those are two sizable places where we've housed a lot of that capability. And it all comes together on this umbrella of IPG commerce. And then what we do is we activate, you know, a company like a Chase design for in-store, you know, campaigns. or, as you said, a momentum for promotions and activations. But we also have, you know, specialist agencies and influencer management, for example. You have paid placements. And another big piece of it is going to be retail media. And so, you know, we're very active. You saw, you know, Magna put out a, you know, how big is this? How big is it going to get? And I think it's net going to be you know, a growth area for brands and, therefore, for people who provide advisory services. So we kind of draw that from a number of our agencies, and then that's kind of the MarTech side of it. But when you follow the consumer along the purchase journey and you're going awareness, purchase, but you're also going loyalty, lifetime customer value, then you want it to play into Axiom and the data that's there, and you want to decide, you know, where and how you get Martech and AdTech working together. So, you know, that's why I said we see it as a really big opportunity for us. And then on the experiential piece, you know, when the pandemic hit, you know, we scoped that for you all to say, you know, circa maybe, you know, a little bit shy of 5% of our revenue. And, you know, it, you know, The world closed, so that was clearly a very difficult time for them. But we see that as something that is a differentiator for us collectively, those assets. And the question for us is, you know, to get them more focused on where clients are going, which is ROI and accountability and the digital component, building out digital into and with those organizations we think is going to make the nature of what they do more precise and more accountable. It's also a really interesting place to talk to clients about using all of that activity as a way to onboard first-party data about your customers in a way that's very, very transparent and therefore very, very compliant. So we do think that that's an area where there's the opportunity for growth for us. Thank you. Sure. Sure.

Thank you. Our next question is from Julianne Roque with Barclays. You may go ahead.

Yes, good morning, Philippe and Hélène. Thank you very much for taking the question. Two, one for Hélène, one for Philippe. Hélène, on net interest, both Publicis and Omnicom said that debt was fixed, so no impact on interest expenses, while higher interest meant more interest income. What about IPG? Same, i.e., lower net interest. Could you quantify it? You have 1.8 billion of cash. Yield on cash went from zero to four, so 64 million benefits. And then, Philippe, some agencies are saying that in case of downturn, some advertisers have learned their lessons from the last couple of downturns, and therefore we cut less. However, a recent survey from the World Federation of Advertisers, polling 55 of the world's largest advertisers, conclude that the economy will be the main driver of the budget next year for 74% of them. which would indicate they intend to cut the same. So if we go into a global recession next year, do you believe that advertisers would cut as in the past, or will they behave differently? Thank you.

So I will start, and thank you for the question. Good morning. Yes, you know, as someone pointed out earlier, we do have a very strong balance sheet and lots of liquidity, and we do sit with cash. We actively manage our cash. maximizing interest income. We also have a very nice maturity profile with all fixed rate debt. So yes, I do believe it's a benefit. We can follow back up with you with some quantification, but it's something that all items on our balance sheet liquidity, we put a lot of time and energy and manage it very carefully.

The bigger question, as I said, in the prepared comments It is a conversation that's ongoing with the vast majority of our clients. There is an understanding and an acknowledgement that there's a meaningful benefit to staying the course. We don't break this out for you, but our top 20, say our top 40 clients, have been growing consistent with the overall growth of the company, although there are lots of ins and outs because as I said, if you've got certain factors that are impacting your business or your business model disproportionately. And it's, you know, interesting because even supply chain, we were talking about at the very beginning of the year with all of you, and we said we don't see it, we don't, you know, think it's in the conversations with clients. It might be later in the year, and there are, you know, one or two categories where it's come into the conversation with clients. So I do believe that clients understand it, and so it will be a function of where they sit if their company has the wherewithal to move through the period and stay invested. And then the other thing that we've also talked about is the tools available to clients and the ways in which we and some of our competitors have capabilities that can move much further down into the funnel or can do, as the question earlier alluded to, can do work that connects brand and performance. So it really is dependent on how significant a downturn would we be looking at and whether people are in a position to do something that they know will benefit them in the long term or whether they might have to take some action, kind of corrective action, to get through a period that might be more challenging for them.

Okay. Very clear. Thank you very much. Thank you.

Thank you. Thank you. Our next question is from Tim Nolan with Macquarie. You may go ahead.

Good morning, everyone. Thanks a lot for taking the question. I'd like to actually ask the recession question again, if you don't mind, but in a different way. Let's ignore the Q2 2020 recession because that was such a sudden weird thing. And let's go back to like 09 or 01, 02. In those days, you were very much a traditional media business. And now you're very much a digital media business doing lots of different things beyond measured media. And I wonder if you could help us understand maybe if we all assume that, you know, measured media spending might drop in a recession, perhaps at similar rates as it did last time around. Who knows? But you do so many other things right now. Is there a way to qualitatively or hopefully quantitatively assess what the spending might be, you know, with Axiom, Kineso, you know, on, you know, IT, consulting, all those sorts of things beyond just traditional media?

I'm not sure that I can answer. quantitatively assess. I mean, I can point to some of the things we've been talking about. Healthcare, likely a place that is more resilient. E-commerce and areas where you have line of sight to ROI and much more either clarity on that or ability to go directly to the consumer, I think you know, those feel like they're going to be areas that are going to be less cyclical. Axiom, as you said, if you think about the fact that, you know, two-thirds of their revenue is long-term, you know, fixed fee contracts. And so those are all areas which we believe will stand up better when 20 hit, you know, areas where we had a more consultative business model, areas where we had more clarity around accountability and outcomes, which also includes our media business, all of those fared better. And it's a big, diversified portfolio. So that does mean, to your point, that you wouldn't, I think, be looking at what we saw in 08-09, independent of whatever 20 was, which, to your point, is sort of super anomalous and still kind of having impacts all through every part of economic life, right?

Yeah. Thanks, Philippe. And just maybe one point of quantification could be that all these things you're talking about, I mean, you probably have it in your slides, but this is half or more than half of all the business you do, right? The traditional measured media stuff is way less than half, isn't it?

Well, look, I mean, that's a place where, you know, there have been times when folks in our sector said, you know, our digital revenue is X, you know, X percent, Y percent. And our point of view on that was always that it's so embedded into everything we do because we try to go to market when we engage with clients with something that's integrated and something that solves for them and is right for their business that we then don't spend the time trying to unpick it. And so I can't give you a, you know, kind of a gap-compliant measure that gives you that number. But it is a You know, it's a substantial part of our business, but our deal is that's what drives growth. So if our organic growth is strong, then you've got to assume that all of those things are a pretty big chunk of what we do. Okay, great. Thanks.

Thank you. Our last question comes from Craig Huber with Huber Research Partners. You may go ahead.

Hi, Craig. Hi, Craig.

Hey there. Hi. Quick question. Let's go back to the cost outlook for next year. Let's say hypothetically, let's not make any big bets here. Let's assume next year's organic revenue is flat. Alan, I'd love to hear what levers you think you could pull to potentially keep your margins flat next year in a scenario like that. Do you have much leeway to be able to do that?

Hi, Craig. Sure. You know, if revenues were flat, given that scenario, it clearly would be our objective to be able to maintain our margins. The things that I would point to that give us line in sight is we're an experience-managed team that has, you know, navigated together through many economic environments. As Felice has pointed out, we have a flexible cost structure, right, between open reps, attrition, temp help, and incentive comp, which varies very closely with performance. All those things will help. And then, you know, ultimately it will depend upon the revenue mix that causes that, right? But it's something that it would clearly be in our objective, and we think we have line in sight, too.

Great. That's all I had. Thank you.

Thank you. I think we are out of time, so thanks again all for Your time and interest, we are back at it, and we look forward to sharing with you how we can close the year.

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