Interpublic Group of Companies, Inc. (The)

Good morning and welcome to the Interpublic Group fourth quarter and full year 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 Leshne, Senior Vice President of Investor Relations. Sir, you may begin.

Good morning. Thank you for joining 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 will begin our call with prepared remarks to be followed by Q&A. We plan to conclude before market open at 9.30 Eastern Time. During this call, we will refer to 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. 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 10-Q and other filings with the SEC. At this point, it is my pleasure to turn things over to Philipp Krakowski.

Philipp Krakowski Thanks, Jerry, and thank you for joining us this morning. As usual, I'll start with a high-level view of our performance in the quarter and the full year and our outlook for the year ahead. Ellen will then provide additional detail And I'll conclude with updates on key developments at our agencies to be followed by Q&A. We're pleased to share another year of strong performance. Before turning to the numbers, I'd like to once again thank our more than 58,000 colleagues around the world whose dedication to our clients and one another are exceptional. Along with their expertise spanning creative marketing services, technology and data management, that's what continues to be at the heart of our performance. Turning to our results for the full-year organic growth was 7 percent, and our adjusted EBITDA margin was 16.6 percent. Both are at the levels we shared with you in our last update in October. It's worth noting that a year ago at this time, we looked ahead to full-year 5 percent organic growth on top of very challenging multi-year comps, and performance throughout the year drove consistent increases to that 7 percent. We grew in every world region and broadly across client sectors. Our three-year organic growth stack therefore stands at 14%, the level of performance that speaks to the strength and relevance of our offerings, particularly in services and sectors demanding precision and accountability. In our fourth quarter, organic net revenue growth was 3.8%, which brings three-year growth performance to 9.7%. That means that, as expected, growth slowed in the fourth quarter, consistent with global macroeconomic and geopolitical crosswinds, which we're all aware of. Notwithstanding slowdowns across the global economy, and with that, a broadly more cautious marketing and media environment, our growth continued in every world region during the fourth quarter. Overall U.S. organic growth was 2.4 percent, despite dilution from certain units in the portfolio. on top of a very strong 12.1 percent a year ago. Organic growth in our international markets was 6.1 percent on top of 11 percent a year ago. By sector, growth in the fourth quarter was led by our clients in the auto and transportation sector, followed by the retail, our other sector of industrials and government, and healthcare. Going the other way, second, telco, which for us is our second largest client sector, began to show the impact of what I guess we could refer as sector-specific issues, which we're forecasting will continue to present headwinds for us for at least the first half of 2023. Also in Q4, we felt the largest quarterly impact of the late 2021 loss of a large food and beverage client, which will finish running off at the end of Q1 this year. HR operating segments grew organically in the quarter. In media data and engagement solutions, organic growth was 5% led by double-digit growth at IPG Media Brands. Decreases at our digital specialists, which we've called out previously, weighed significantly on segment and group-wide growth in the quarter and the year. Our integrated advertising and creativity-led solution segment grew 2.6% paced again by IPG Health, which posted high single-digit growth performance. our segment of specialized communications and experiential solutions grew 3.5% organically with leadership from the full range of our experiential and sports marketing offerings. Turning to profitability and expenses in the quarter, our teams continued their outstanding execution, effectively navigating today's complicated economic environment. This, in turn, led to the strong fourth quarter margin performance we're reporting today. We've been able to deliver this result while continuing to invest in our offerings and to take significant real estate actions in the quarter that will further our structural operating efficiencies going forward. Fourth quarter net income was $297.2 million as reported. Our adjusted EBITDA was $568.4 million, which is before a non-cash charge in the quarter for those real estate actions. Adjusted EBITDA margin in the quarter was 22.3 percent, and that brings full-year adjusted EBITDA to $1.57 billion, and margin on net revenue is 16.6 percent. I think it's worth reflecting that at that margin level, we've successfully consolidated 260 basis points of margin improvement over the last three years, along with that very strong three-year growth stat that I mentioned earlier. Fourth quarter diluted earnings per share with 76 cents as reported and with $1.02 as adjusted for the real estate restructuring charge, intangible amortization, and the disposition of small non-strategic businesses. In sum, our fourth quarter completes a year of strong financial performance across the key performance metrics of growth, adjusted EBITDA, and earnings per share. During the quarter, we also closed on the acquisition of RafterOne, a leading e-commerce implementation partner, which brings additional scale and capability to our offerings in an area of growth and strategic importance. Over the course of 2022, we also returned capital to shareholders in the amount of $777 million between dividends and share repurchases. Given the continuing strength of our operating results and confidence in our strategic trajectory, our board has once again raised IPG's quarterly dividends by 7 percent to 31 cents per share. This marks our 11th consecutive year of higher dividends, which, as you know, continued uninterrupted through the pandemic. Our board also authorized an additional $350 million share repurchase program on top of the $80 million remaining in our previous authorization. Turning the discussion to 2023 and our outlook for the year, It remains meaningful degree of macroeconomic uncertainty. Visibility, therefore, is somewhat challenged. I think it's fair to say that clients are approaching 2023 with equal parts conviction in the need to be in the market as well as an increased level of conservatism. That's not to say that they're any less focused on the need to drive for growth into the new year or to invest in the transformation of their business. It's just that we're seeing budgeting decisions made with more deliberation. And it's also fair to say that there's significant variability within our client portfolio from client to client. We're confident that the strongest growth areas of our business such as consultative media services, healthcare marketing, experiential marketing, commerce, as well as data management and data sales will continue to perform strongly despite the broader economic situation. We're also confident in our operational rigor and flexible cost model. Our actions in the fourth quarter to further reduce our occupied real estate footprint by nearly 7 percent demonstrates our consistent and ongoing focus on identifying and acting on opportunities to rethink our business model and improve efficiency. So bridging all of these moving parts together, we expect organic net revenue growth for 2023 of 2 to 4 percent on top of those industry-leading multi-year comparators, and further expansion of our adjusted EBITDA margins to 16.7 percent for the full year. Our priorities for the year remain consistent. First, to build on IPG's strategic differentiation, which for us means to focus on the people, talent, and capabilities that enable us to solve a broader set of business problems and which further our evolution into a higher-value solutions provider, as well as strong execution when it comes to integrating our agency's expertise through open architecture solutions. Second, to combine those client-focused offerings with operational excellence, which is always important but never more so than in an uncertain economic climate. Delivering on these goals and on our new financial targets, as well as our long-standing commitment to return of capital, should lead to another year of value creation for all of our stakeholders. At this point, I'm going to hand things over to Ellen for a more in-depth view of our results.

Thank you. I hope everyone is well. I would like to join Philippe and thank our people for their terrific accomplishments. As a reminder, my remarks will track to the presentation slides that accompany our webcast. Beginning on slide two of the presentation, worth quarter net revenue was essentially flat from a year ago, with organic growth of 3.8 percent. That brings organic growth for the year to 7 percent, and our three-year growth to 14 percent. Adjusted EBITDA in the quarter before a net restructuring charge was $568.4 million, and margin on net revenue was 22.3 percent. Our restructuring charge in the quarter resulting from having identified further opportunities to optimize our real estate portfolio. We reduced our occupied real estate footprint by approximately 500,000 square feet, or 6.7 percent. The net charge in the quarter was $101.7 million, which we expect will result in $20 million of permanent expect savings, which will be realized as we move forward. There was no severance involved in these most recent actions. You'll recall that in 2020, we reduced our lease footprint by 1.7 million square foot, and the additional actions are a recognition that in the wake of the pandemic, our operating model has changed with respect to office space. While we will still continue to optimize our square footage in the normal course of our business, we do not anticipate additional restructuring charges. Our diluted earnings per share in the quarter was $0.76, as reported, and $1.02, as adjusted, to exclude the restructuring charge, the amortization acquired as tangible, and a small non-operating loss from businesses' positions. Our adjusted diluted EPS was $2.75 for the full year. We concluded the year in a strong financial position with $2.5 billion of cash on the balance sheet and with 1.6 times gross financial debt to EBITDA, as defined in our credit facility. We repurchased 3.2 million shares in the fourth quarter, bringing our full-year repurchases to 10.3 million, returning 320 million to our shareholders in 2022. Our board increased our quarterly dividend to 31 cents and authorized another $350 million repurchase program in addition to the $80 million remaining on our prior authorization. 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. Turning to the fourth quarter and full-year revenue on slide four, a net revenue in the quarter was $2.55 billion, an increase of $1.6 million from a year ago. Compared to Q421, The impact of the change in exchange rates was negative 3.9 percent. Net acquisitions added 20 basis points. Our organic net revenue increase was 3.8 percent, which on the right-hand side of the slide brings us to 7 percent for the full year. Further down the slide, we break out segment net revenue performance. Our media data and engagement solution segment grew 5 percent organically on top of 11.9% in the fourth quarter of 2021. As you can see on the slide, the segment is comprised of IBG Media Brands, Axiom, Kineso, and our digital specialist agencies. IBG Media Brands grew a double-digit rate. As first noted on our third quarter call, RGAMU during the process of transforming their business models and had soft performance, which weighed significantly on the overall segment growth. That's something we will not lap until the back half of this year. At the right-hand side of this slide, organic growth was 6.4% for the full year. Organic growth at our integrated advertising and creativity-led solution segment was 2.6%, which was on top of 10.3% a year ago. As a reminder, the segment is comprised of IBG Health, McCann, Mullen-Lowe, SCB, and our domestic integrated agencies. Our growth in the quarter was led by a strong increase at IBG Health, which grew in the high single digits. For the year, this segment grew 7.1% organically. At our specialized communications and experiential solutions segment, organic growth was 3.5%, which compounds 15.2% in last year's fourth quarter. This segment is comprised of Weber-Shanlick, Golan, Jack Morton, Momentum, Octagon, and Dextra Health. We were led by high single-digit increases in our experiential solutions. For the year, the SE and E segment increased 8.5% organically. Moving to slide five, our revenue growth by region in the quarter. The UIF, which was 63% of our fourth quarter net revenue, grew 2.4% organically, on top of 12.1% in last year's fourth quarter. We had notably strong growth at IBG Media Brands, IBG Health, MRM, and Jack Morton and Experiential. Decreases at our digital specialists, RGA and UGE, weighed on our U.S. growth rate by 160 basis points in the quarter. International markets were 37 percent of our net revenue in the quarter and increased 6.1 percent organically. You'll recall the same market increased 11 percent a year ago. In the U.K., organic growth in the quarter was 9.4 percent, led by notably strong performance in media, experiential, and at millennial low. Continental Europe grew 5.7 percent organically. We were led by very strong growth in Spain, while Germany and France were relatively flat year over year. In Asia-Pac, organic growth was 3 percent in the quarter, with strong results in Australia, Japan, and China, while India decreased. In LATAM, we grew 5.8 percent organically, on top of 22.5 percent a year ago. Our other international markets group, which consists of Canada, the Middle East, and Africa, grew 6.9 percent organically, on top of 18.7 percent a year ago. which reflects notably strong growth in the Middle East, followed by Canada. Moving on to slide six, and operating expenses in the quarter. Our fully adjusted EBITDA margin in the quarter was 22.3 percent, compared to 19.3 percent in 2021, an increase of 300 basis points. As you can see on this slide, we had operating leverage on each of our major cost lines. Our ratio of salary and related expenses as a percentage of net revenue was 61 percent, compared with 62.2 percent in last year's fourth quarter. Underneath that ratio, we delivered on our expenses for base pay, benefits of tax, and headcount increase to support revenue growth. We ended the quarter with headcount of 58,400, an increase of 5 percent from a year ago. Our expenses for temporary labor, performance-based incentive compensation, and severance were all notably lower than a year ago. Our office and other direct expenses decreased as a percentage of net revenue by 160 basis points to 13.5%. That reflects leverage due to lower occupancy expenses. We also reduced all other office and other direct expense compared to last year as a percent of net revenue, which reflects lower client service costs, consulting and employee related expenses. Our SG&A expense was 1.2 percent of net revenue, a decrease of 10 basis points. Turning to slide seven, we spent detail on adjustments to our reported fourth quarter results in order to give you better transparency and a picture of comparable performance. This begins on the left-hand side with our reported results and steps through to adjusted EPTA, excluding restructuring, and our adjusted diluted EPS. Our expense for the amortization of acquired intangibles in the second column was $22.1 million. The real estate restructuring charges were $101.7 million and the related tax benefits was $26 million. The low operating expenses or losses on the disposition of small non-strategic businesses was $8.3 million, which is shown in column four. At the foot of the slide, you can see the after-tax impact for diluted share of these adjustments, which bridges our diluted EPS as reported at 76 cents to adjusted earnings of $1.02 for diluted share. Slide eight, similarly, depicts adjustments for the full year, again for continuity and comparability. Our amortization expense was $84.7 million. Our charge for restructuring was $102.4 million. Dispositions over the course of the year resulted in a book loss of $3.8 million. The result is adjusted EBITDA of $1.57 billion and diluted EPS of $2.75. Our adjusted effective tax rate for the full year was in line with our expectations at 24.8 percent. On slide nine, we turn to cash flow for the full year. Cash from operations was $608.8 million. Cash used in working capital was 672.3 million, compared with cash generated from working capital of 743.4 million a year ago. As we've pointed out in the past, working capital is volatile. In each of the previous three years, we had very strong working capital results. And over the last four years, we've generated a total of 1.4 billion. Our investing activities is 460 million. that mainly reflects our acquisition of Raptor One and our CapEx in the year. Our financing activities used $869.5 million, representing our common stock dividends and repurchases of our shares. Our net decrease in cash for the year was $719.1 million. Slide 10 is the current portion of our balance sheet. We ended the year with $2.5 billion of cash in equivalents. Slide 11 depicts the maturities of our outstanding debt and our diversified maturity schedule. Total debt at year end was $2.9 billion. As you can see on this schedule, we have $250 million maturity in 2024, and then our next scheduled maturity is not until 2028. In summary, on slide 12, our teams continue to execute at a high level. I would like to again recognize the accomplishments of our people, and the strength of our balance sheet and liquidity have us well-positioned to continue our track record of success, both financially and commercially. And with that, I'll turn it back to .

Thanks, Ellen. As you can see from our results, our strategy, talent, and culture continue to drive innovation, creativity, and collaboration that fuel our clients' success in an increasingly digital economy. Over the past three years, we've organically added $1.2 billion of revenue to our business, as well as increased adjusted EBITDA by over $360 million since the start of 2020. Credit to our teams for those very strong results. Throughout this period, what we're seeing play out are the accelerated technology-driven shifts in media and consumer behavior that our company had anticipated and against which we've made significant investments. Our expertise in first party data management, performance media and accountable marketing solutions are all areas relevant to marketers looking to build their brands while also delivering business outcomes. Vital to our strong performance are our media, data and healthcare offerings. These specialized assets have evolved their offerings to combine marketing services with emerging communication channels and technology. just to help clients find new ways to identify and interact with individual consumers. As you saw in October, we continued to look for strategic areas of investment. With our RafterOne acquisition, we brought a talented and specialized team into the IPG network to architect and implement scaled Salesforce solutions that connect brands with customers through end-to-end commerce experiences in both B2B and B2C settings. The RafterOne team will help us deliver creative campaigns that work smarter for our clients by building meaningful relationships in digital marketing platforms. Enterprise marketing suites like Salesforce and Adobe form the foundation of so many brands' marketing technology stacks. And our company can serve as a bridge between those brands, their consumers, and these platforms, strengthening every touchpoint in the customer journey. We continue to invest in this important growth area and recently announced that we've brought on board our first Chief Commerce Strategy Officer. He joins us from Accenture where he oversaw their omnichannel commerce practice. At IPG, he'll connect our existing channel and platform expertise including strong and scaled teams at MRM, Rafter One, Reprise Media and IPG platform services as well as others across our entire portfolio. And he'll orchestrate how our company supports clients as they build out commerce solutions and integrate them with a full breadth of their marketing programs. Turning now to the highlights of agency level performance in Q4, as we've mentioned, results were once again led by our media, data and technology offerings. Media performed very strongly to close out a successful year and during the quarter we saw a series of notable wins including celebrity cruises at Media Hub, Energy Australia, the retention of major client Merck and the addition of assignments on AWS at Initiative and the onboarding of money supermarket group at UM where earlier this week we also announced that we welcomed the new global CEO to the agency. As we speak, IPG Media Brands is also hosting their third annual Equity Up Front, which provides opportunities for clients and our agencies to engage directly with diverse owned media partners, including black, API, Hispanic, and LGBTQIA owned media, which is vital to establishing the kinds of partnerships that can change buying patterns in the industry. Axiom continues to be a strong contributor to the performance of our media agencies. as well as others in the group who've incorporated audience-led methodologies into how they develop strategic insights and creative work. During the quarter, Axiom brought in new logo wins and contract renewals in the automotive, CPG, financial services, insurance, retail, and travel and entertainment sectors. They were recognized as a leader in the Snowflake Modern Marketing Stack Report and also launched a new integration with a customer data platform, Telium, to enhance deterministic modeling capabilities. Turning to IPG Health, that network continued to deliver strong results for us in the quarter, compounding very strong, excuse me, again, trailing growth since we created the group approximately 15 months ago. While growing with nearly every existing client, IPG Health also focused on expanding its presence globally through some strategic alliances, notably in Europe. And the caliber of their creative work was honored at the 2022 M&M Awards, where the network was named Large Healthcare Network of the Year. At our global advertising networks, we continue to see the benefit of our investment in strong, differentiated agency cultures, which are driving distinctive ideation and creativity. And we're seeing that recognized again and again in the industry. FCB won significant accolades during its first full year under its new leadership team. It was named as one of the 10 most innovative advertising agencies of 2022 by Fast Company. It was honored as the number two network overall in Cannes. It was once again named the festival's top-ranked North America network, thanks to powerhouse offices in New York, Chicago, and Toronto, which it bears noting are all leaders in leveraging data to power audience insights and creativity. With a new CEO in place at the beginning of the fourth quarter, McCann saw new business wins with Smirnoff, which make it part of the Diageo roster, and post-consumer brands. McCann also launched work for recently won clients Converse and Prudential. Additionally, the agency was named Network of the Year at the 2022 EPICA Awards for the fifth time in six years. And McCann New York won EPICA's Innovation Grand Prix for MasterCard's Touch Card, the accessible card standard for blind and partially sighted people. More recently, McCann also announced a series of senior organizational changes elevating key internal leaders and adding new executives to the agency. Mullen Lowe Group continued to secure new business as it had throughout the year with the addition of Ferro International, Tetley Tee, National Highways in England, Lifestyle Fashion in India and the Barcelona Football Club in Spain. We also announced the new global CEO for Mullen Low, promoting a key female leader from within our organization who's known across the industry as a champion of creativity, a strong growth driver, and someone fully committed to diversity and inclusion. Among our domestic independent agencies, as part of the agency's goal to help reshape our industry, the Martin Agency announced their commitment to hire a minimum of 50% directorial and editorial talent from underrepresented groups for all their video content production. At our earned and experiential agencies, performance was led by Octagon, Jack Morton, and Momentum, all of which posted strong growth in the quarter. With more than three decades of World Cup experience, Octagon was very active with a range of clients at this year's tournament. For example, with long-time client Budweiser, the agency ran a range of onsite activations in Doha, managed complex global influencer campaigns, and hosted nearly half a million consumers who were fans at viewing events around the world. Jack Morton continued to deliver outstanding performance and launched a sponsorship consulting practice, which it has dubbed Jack39, and continued to build out JackX, which is their global experience innovation practice, which creates events that combine content with Web 3.0 textbooks. Among our public relations firms during the quarter, Golan had several wins, including a product launch for a new alcohol brand, corporate communications work for food products and services brand, and then being named the influencer AOR for household appliances manufacturer globally. Weber Shandwick announced new client wins with HP in North America and IKEA in the UK. And the network also launched what it's calling the Business Society and Society Futures, which is a C-suite offering that combines public affairs, corporate affairs, as well as organizational design and consultancy. During the quarter, Dextra Health posted strong gains, winning a large global oncology assignment from a major pharma client. And in addition, its leader was named to PR Week's Health Influencer 30, which is the annual list of most influential individuals in healthcare communications. At the holding company level, as you know, we have a long-standing commitment to ESG and DE&I as key strategic priorities. And as you may have seen last week, we announced that IPG has been included on the Bloomberg Gender Equality Index for the fourth consecutive year and was recognized for the first time as a top-rated ESG performer by Sustainalytics. We were also once again included in the FTSE for Good Index and Newsweek's America's Most Responsible Companies 2023. And Forbes featured us on both its America's Best Large Employers list, as well as the world's top female-friendly company for 2022. As a business in which human capital is so vital to our success, our culture, including an intentional approach to ESG, has long been an important part of our strategy for attracting and retaining top talent. whether in strategic, creative, data analytics, or engineering roles, or across a range of other skill sets that have become key to our evolving offerings. Looking ahead, we believe IPG remains well positioned for the future. Much of our growth in recent years, as well as in 2022, was fueled by disciplines that most actively tap into our data and precision marketing capabilities, as well as our exceptional healthcare marketing offerings. These are growing parts of our portfolio that continue to develop into more structural and secular revenue streams. We know the world in which we live is increasingly digital and that more than ever clients need help from us in using audience-led thinking to solve for a widening set of business problems and opportunities. We've been leaders in this space and 2023 will be a year in which we consolidate those gains and prepare to further evolve the way in which we deliver this expertise to marketers so as to elevate the value of the services and solutions we provide. In addition, we're confident that our commerce and experiential disciplines, which not today figuring as large in our revenue mix, will continue to grow going forward. As stated earlier, despite the broader uncertainty that we're seeing at a macroeconomic level, We expect to deliver growth in 2023 of 2 to 4 percent, on top of a very strong record that has compounded for a number of years. And consistent with that level of growth, we foresee adjusted EBITDA margin expansion to 16.7 percent. Of course, another key area of value creation remains our strong balance sheet and liquidity. And our ongoing commitment to capital returns is clear in the actions that were announced by our board today. which also speaks to the confidence in our strategic position and future prospects. Part of our balanced approach to capital allocation will continue to further invest behind the growth of our businesses by developing our people and continuing to differentiate our offerings. This includes a disciplined approach to M&A, focusing on opportunities that are consistent with strategic growth areas, primarily commerce and performance media, business transformation, and consultancy. We thank our clients, our people, and those of you on this call for your continued support. And with that, let's open the floor for questions.

Thank you. To ask a question, please 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 the first question. And our first question is from David Karnofsky with JP Morgan. You may go ahead.

Hi, thank you. You noted client uncertainty at a conviction to stay invested. Wanted to see if you could provide some insight into your conversations with marketers, how they manage that balance, and kind of what factors are keeping them tipped into the side of remaining in the market. And then just on the guide overall, that ranges a little wider than we're used to seeing. Is that all due to the economy and Should we take a macro as maybe the main driver in pushing you toward the lower or upper end?

Maybe I'll take them backwards if that's okay with you. I mean, I think if you think about our budgeting process, right, it bottoms up with our operators. We do, in fact, as you suggest, go client by client. We look at pipeline. And then with our larger clients, obviously we're able to engage with them directly. And I think what we're pointing out there is just that I think what's happening is that, you know, the caution that we're seeing is less a function of the specifics of what's going on right now. I think it's just the open-endedness, the concern about a potential downturn somewhere along the line as we get further into 2023. But again, if, you know, you go back to how we build the budget, you know, that bottoms up. Look at clients, factor in the pipeline, clearly factor in a view of the macro. And we're going to have a geographic or a client or even a business mix that's specific to us. And then we did call out a couple of places. As you know, I think we're quite direct and kind of clear about what's going on in the business, where are we taking the business. So we called out a couple of places where some things require attention and some things are having an impact as we look at the year ahead. So I would say that that's how we got to the range. The fact that the range is broader than one would see in other years is reflective of that sense of uncertainty. I think you're seeing broader ranges when companies are going out there, and I would say we're comfortable at the midpoint of that range.

Okay. And maybe one for Alan. I wanted to ask a question about longer-term margins. So as IPG pushes to become more of a higher-value solutions partner, as you guys phrased it, you know, how does that potentially impact your margin trajectory? Should we necessarily think higher-value services as translating to higher margins in addition to higher growth? Or are there other kind of considerations like specialized labor that could offset that we should consider?

Sure. Thank you for the question. Very optimistic. about the opportunity to increase our margins going forward. And I would point to we have a long track record of doing so. I mean, if you look at the past couple of years, we've increased our margins 260 basis points since 2019. So I think it's a combination of several factors. One, as you point out, I think high-value services is a continued opportunity for us. But also, I think we have a good track record of translating growth profitably into margin expansion. We manage our costs in a very disciplined way. And, you know, we're continuously looking at opportunities on business transformation. We have a large portion of our revenue in shared services. We manage our real estate portfolio centrally. So put all those things together. I do think that there is opportunity for margin expansion as we move ahead.

And one just quick add there, David, is just that, you know, across the senior teams, whether it's corporate or any of the units, our incentives are fully aligned to that objective, right? So the plan is modestly more heavily weighted to margin than revenue. And so to our mind, that ensures that where there's growth, there's profitable growth, and that when we're in a circumstance that's got more uncertainty, we're still able to, as Ellen said, make good on that consistent record of where there's growth, we've demonstrated that we can convert it to incremental profit.

Thank you.

Thank you. The next question is from Lena Gayor with BNP Paribas. You may go ahead.

Good morning, Philippe, Ellen and Jerry. Thank you for taking my questions. I have three, please. The first one is on the guidance. Could you elaborate a tiny bit more on the guidance regarding the impact of inflation on the revenue? And more generally, what shape do you expect the growth to be, for example, H1 versus H2? The second one perhaps for Hélène on wage inflation, how much was wage inflation in 22 and what have you taken for 2023 in your assumptions? And lastly, Philippe, just to come back on your point at the beginning of your remark, could you comment on the performance by sector? I think you mentioned telecoms. Could you elaborate? And more generally, what is the attitude of your clients by sector ahead of 23? Thank you.

Sure. That's a lot. So I guess there are two inflation questions. So in terms of inflation vis-a-vis our growth, yes, the majority of our contracts have written into them the ability to, as the world changes, sort of go back to clients and talk about the cost of the services that we provide to them. That's not something that triggers automatically. It requires that you enter into a conversation or ultimately kind of a negotiation with clients. So if I were to talk about what's gone into our thinking and how we build the forecast that leads to the guidance, revenue growth is primarily from growing scope with our existing clients. And we definitely believe that the primary avenue for growth, the one that we are most keen on, is growth with existing clients. So deepen the relationship, bring additional services. Then secondarily, clearly you have the opportunity to add when there are new business opportunities and pitches. So I think that that's really what has baked into it. And then, you know, as we've discussed, we are beginning to, in some instances, be able to go to clients with some of these services that are new services based on the data and the technology part of what we've been building. So I think that's one part of the question. And then, Ellen, I'll let Ellen take the cost – as it bakes into our business, and then the second part, and then I'll come back for your third piece on sectors.

So as far as inflation on our cost base, we've been very transparent that there's been modest inflation in the salary line, but ones that we feel are very manageable and that will not take us off the growth trajectory on our margins, nor deter us from expanding them. So that was factored into our guidance for 23 and going forward.

And then I guess on sectors, so auto and transportation is strong, and we see it continuing. Healthcare, financial services, for us, given the mix of clients that we've got in retail, you know, that has continued to be a place where we've got quite progressive modern clients. And then the other category, as I mentioned, I think a lot of the headlines and a lot of the sort of sector-specific issues that we're seeing in tech are manifesting in conversations with clients, and there what we're seeing is clients either taking reductions or being – you know, not committing for a full year. So I think as we said, what we saw there was something that I think is we're seeing the impact, the duration on that is perhaps open-ended. And then food and beverage for us will have the runoff of a very large industry consolidation that took place at the holding company level in late 21. And as we said, it impacted Q4 significantly. most heavily, but we'll still see some impact. So, in terms of the revenue deltas, you know, it's definitely, for us, the items that we've identified for you, which we are addressing, are definitely going to impact first half, whether it's the digital agencies and where they are in their cycle of transformation as the macro, you know, becomes a bit more challenged. and then some of these client items. So for us, it's definitely a stronger back half is very much where and how we've gotten to that guidance.

Thank you.

Thank you.

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

Thank you. Good morning. Maybe just to follow up on that theme a little bit first. So, Philippe, can you give us an idea of what the net new business impact is for 2023? It sounds like it's probably modestly negative. So just want to make sure I'm piecing all that together. And I'd love to include some components of this question, which is how does kind of healthcare set up from a growth rate perspective in 2023, since that's such a big part of the revenue mix. And RGA and HUGE, you know, it sounds like those will be dragged this year. Historically, they've kind of been some real superstar agencies for IPG. So I guess, how do you kind of think about, you know, the journey of these digitally native agencies? Is it still an area of investment? And how do they kind of fit in the portfolio going forward?

Sure. Look, I think you're right. They're premium providers. It's a largely project-based business, which is, I think, both of those. A, premium provider, uncertain macro, project-based business. Again, you know, projects showed up in Q4 for us at a very solid level. I'd say in line with overall Q4 growth. Experiential was strong. PR was maybe a bit below the segment growth, but the digital projects, that you would see at those very high-end agencies were definitely not, you know, at the levels they were weak. And so I think that every three to five years, these agencies need to kind of reinvent and reconfigure because they are, to your point, at the leading edge. But I think that in the current environment, you know, that's where we find ourselves with them. P.S., they're also... probably more exposed to tech than many of our businesses. So, you know, we've seen client attrition and lower growth there. And Huge has a pretty clear line of sight into what their new value proposition is. And, you know, that'll be going, you know, into market probably towards the end of the first quarter here. So they've also been, because of the strength that you call out, tying them more into whether it's open architecture or whether it's the kind of the overall data stack that we've built is clearly something that we need to focus on. So it may be that that long-term success and a measure of independence is something that is going to need to be addressed. And then on the question around new business, again, we now see new business in the big media pitches and then in some of the more traditional parts of the business, probably the creative ad agencies and to some degree PR. We don't see the new business within health very much. And then a lot of what's going on, as I said, has become project specific. So I'd say we are going into the year exactly as you said, with a modest headwind. And then was there one piece of the question that I'm forgetting at this point? Oh, and then health. I think we see health at scale now, having put these assets together. And as we said, trailing very, very strong performance, doing high single digit in the quarter, that's probably consistent with what they did for the year, and that's consistent with the expectation that we have for them as we go into 23.

Great. And then maybe just a short follow-up for Ellen. Working capital was a big use in 22. I think it was favorable in 21. I know the timing of the year can be a strange line to draw on the sand, but should we expect it to then be back to probably a benefit in 23? Thank you.

So, as we've pointed out, working capital is volatile. Whether you get paid on the 31st or the 1st, when you print your balance sheet and cash flow, it makes a big difference. It is something that we spend a lot of time and have a lot of discipline around and carefully manage. And if you go back over the past four years, I think we've generated $1.4 billion in working capital. So I would expect going forward it will normalize, you know, but you're right, you know, in any one year you can get an aberration.

Thank you. Thank you.

Thank you. Our next question is from Michael Nathanson with Moffat Nathanson. You may go ahead.

Thank you. Good morning, Philippe. How are you? I believe the, I'm good. How are you? I'm all right. Cool. I want to ask you about the Raptor One acquisition. I believe it's the biggest deal since Axiom. If you go back through the history of the company, it's probably one of the biggest deals we've seen, right? So can you talk a little bit more about the necessity to do it, the multiples, the skill sets, and whether or not this is a beginning, and it's not a critique, but the beginning of maybe more tuck-in acquisitions like that, And then for Ellen, given the FX volatility, what's your thinking on the year ahead for FX and any impact from acquisitions and investments to revenue this year?

So thanks. Look, I think that's a really, I mean, that's very apt observation, right? I can definitely speak to RafterOne and what it is about them and why, right? So, you know, to our mind, a very strong asset in a very specific space that is growing very fast. So obviously Salesforce as a platform means a lot more to more of our clients, so they're ascendant. And then for the dollars that go into a major Salesforce implementation, there's a multiple. There's a $4 or $5 that goes to the service provider. So there's a large service economy around that, and we're very strong in Adobe. And to us, we were building that Salesforce capability, started working with this company as a partner, got to know them. And it was actually preemptive on our part because I don't know that their ownership was – their owners were necessarily thinking that this was a moment in time at which they would trade the asset. But from where we sit – tech implementation, direct-to-consumer work, the internal platform services group that we've created so that we are bringing kind of bigger presence into those kinds of engagements. So, you know, I think Salesforce, I mean, RafterOne is 500 experts, I think 800 or 900 certifications, and both B2B and B2C expertise. But I think what you said that's very accurate is that we're a bigger company by a fair bit as of the last three years. So you used to think of us as doing tuck-ins, and they were quite small, and they were much more sort of agency-like. And to our mind, I think we want to concentrate that buying power and then focus on these areas where what you've got is sort of a hybrid of marketing expertise, some measure of creativity against an emerging channel, and then some piece of what they do, which brings some technology expertise. So I think you probably will see us do fewer and, you know, scale-wise, they'll have gotten, you know, bigger. What tuck-in means will be, I think, more like this. Okay, thanks.

And with regards to FX, 22 was a larger impact than what we typically see. It was negative 3 percent on revenue growth and actually 20 basis points on margin. For the most part, our revenue expenses, you know, if you look historically, are pretty well matched. And so, going forward, we're expecting, you know, based on what the rates are today, you know, a flat impact on revenue and a de minimis impact on margin.

Alan, can I follow up? I remember asking you when you started about that question about margin. Why was there a drag on margin from that text this year? I think your answer previously was it wasn't much different. So what happened this year on margin that didn't happen in the past?

It was more of an impact of what happened in the currency markets, right? If you look at 22, the currency markets moved more than they historically do. But for the very vast majority of our businesses, revenue expenses are matched by currency and And that was probably the largest impact we've seen in a very long time, and we do not expect that type of impact at all going forward.

Okay, thanks.

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

Hi, thanks very much. Could I ask a couple of cost-related questions, please? If my math is right, your $20 million in real estate savings equates to about 30 basis points of margin. Is that the kind of scope of upside we could expect in 2023? And maybe an offset to that or maybe a boon to that, I don't know, would be any comments you could make on staff. I heard your comment on managing the staff cost inflation versus the revenue growth. It sounds like you guys maybe net might still be hiring rather than reducing staff, and there's a lot of talent now available from all these layoffs at lots of other companies. I'm just wondering what you could say about your expectations in terms of staffing levels and growth and cost this year. Thanks.

Sure. Maybe I'll start with your second question first. Hiring always lags revenue growth. And so where we are forecasting growth for next year and underneath growth, we will hire responsibly in a disciplined fashion. Conversely, when we have contractions, we take actions. As far as the real estate, I think your math is a little bit aggressive on the 30 basis points. And the $20 million that we noted on the call will happen over more than one year. You need to sublease some of the properties in order to realize the full benefit. But we're very optimistic about the numbers we put out there. We feel really good that we've taken another look and really have been able to optimize our real estate portfolio. Like I mentioned, it's a very centralized process in the way we manage it here. And we've really, you know, taken the learnings that we've had over the last couple of years and then applied it in a way to become more efficient.

Great. Thanks a lot. Thank you.

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

A quick question in terms of the macro. How's it going? In terms of the macro uncertainty, is there anything that you would call out in terms of either higher or lower risk profile as it relates to account reviews? It just doesn't seem like it's been as active as I would have thought, but I'd love any color that you have.

You know, that's an interesting question and a fair one, right? Because we've all been assuming that there was going to be a backlog going all the way back to, you know, pandemic, understandable that there were fewer, but everybody sort of waited for the floodgates to open. And I think 21 was, it was just a great deal of opportunity growing with your existing clients, doing more of the kind of new services that we have been building for some period of time. The word is that there likely will be. As I said, scale reviews these days tend to come in media and then to some extent in health care. But at the moment, it's more kind of in the murmurs than the reality. But we'll obviously all know, I mean, they're Our folks on the ground at agencies are, you know, growth leader here at the center are all saying that they believe that it will begin to pick up steam. But right now, I don't have a ton of hard data that says that's the case.

Okay. Thank you very much.

Please.

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

Thank you, Sue. Thank you all for the time and the interest. We're looking forward to the year. We've got a lot of work to do, and we'll keep you posted as we go. Thanks again.

Thank you. And that does conclude today's conference. Thank you all for participating. You may disconnect at this time.