IPG - NYSE

Good morning. Welcome to the Interpublic Group Second Quarter 2025 Conference Call. All parties are in a listen-only mode until the question and answer portion. 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 Krakowsky, and by Ellen Johnson, our CFO. We have posted our earnings release and our slide presentation on our website interpublic.com. We will begin with prepared remarks to be followed by Q&A. We plan to conclude before market open at 9:30 Eastern Time. During this call, we will refer to forward-looking statements about our company. These are subject to the uncertainties and the cautionary statement that are included in our earnings release and the slide presentation. These are further detailed in our 10-Q and other filings with the SEC. We will also refer to certain non-GAAP measures. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of financial and operational performance. At this point, it is my pleasure to turn things over to Philippe Krakowsky.

Thanks, Jerry, and thank you all for joining us. This morning, I'll begin with a high-level view of the quarter, and the strong progress we are making on our program with strategic transformation. Ellen will then add details on our performance, and I'll conclude with an update on the tone of the business and where our clients are focused as well as on the status of our acquisition by Omnicom and the significant value the combination will drive for all of our stakeholders. Starting with revenue in the quarter, our organic decrease was 3.5%, fully consistent with the revenue outlook and phasing we shared with you earlier this year. As we've discussed on previous calls, organic growth this year is being pressured by the impact of account activity that concluded in 2024. As expected, those headwinds intensified sequentially from our first quarter. Our three largest losses in 2024 weighed on growth by approximately 5.5% in Q2, as reflected in our results across a number of geographic regions and disciplines, with the greatest impact on media and healthcare. That said, our growth underlying those headwinds showed sequential improvement precisely in those historically strong areas of media and healthcare. New business performance in 2025 is showing marked improvement as well. And further, we believe that the significant changes we've already made in the business, combined with a very strong strategic fit with the capabilities and geographies at Omnicom, means that our resulting offerings will be significantly strengthened on the other side of the acquisition. In the quarter, client sector growth was led by strong increases in the food and beverage, financial services, and tech and telecom sectors. Headwinds due to prior period losses weighed on the retail, healthcare, and consumer goods client sectors. Turning to expenses and profitability in the quarter, adjusted EBITDA was $393.7 million with a margin of 18.1%. That's a very strong result that reflects significant structural cost reduction due to our program of strategic transformation, as well as the strong underlying performance in media and healthcare. During the quarter, we continued to demonstrate significant progress in greater functional centralization, leveraging our enterprise-level focus on tech-driven platform benefits in key areas, including client-facing capabilities such as production and analytics, as well as corporate functions such as IT, finance, and HR management. As is clear in our report today, these initiatives have traction across the organization, and we expect to exceed our initial objectives for enterprise redesign, client service delivery enhancements, and ongoing operating efficiencies. Charges for restructuring in the quarter were $118 million. Our adjusted EBITDA excludes those charges, as well as $11 million of deal expenses related to the combination of Omnicom, which appear in our SG&A expense. Our diluted EPS in the quarter was $0.44, which includes the restructuring investment, while our adjusted diluted EPS was $0.75. During the quarter, we returned $98 million to shareholders under our share repurchase program, bringing total year-to-date share repurchase to $188 million. We currently expect to repurchase shares consistent with recent levels and the $325 million annual cap in our merger agreement. Turning to some observations on our outlook for the full year, the macro environment has been more volatile than anticipated as we entered the year, and we are, of course, staying close to clients. This, in turn, allows us to report that marketers as a whole are not reacting reflexively to the changing business and geopolitical landscape. In fact, clients are assessing developments very methodically and continue to engage with us constructively in order to evaluate their alternatives. Whether that means assessing investment levels, messaging channel mix, or the mix of marketing disciplines required to deliver against their desired business outcomes. This is specific to each of their business situations, whether due to the industry, geography, or competitive dynamic of the sector in which each of them operates. And that means that while there can be puts and takes by individual clients, our overall experience in Q2 and the first half has netted out at levels that are consistent with what we expected, and we've not seen a marked change in net client activity. We therefore remain on track with the full-year target for organic net revenue that we shared earlier this year, which is an organic decrease of 1% to 2%. On a full-year 2025 adjusted EBITDA margin, our transformation work and evolving business mix have put us ahead of plan. At our expected level of revenue, we're confident that our actions to date, along with ongoing expense discipline, can drive adjusted EBITDA margin for the full year that is well ahead of the 16.6% we had previously shared. This increase reflects the significant progress to date on our strategic transformation efforts as well as improving underlying performance in some of our stronger offerings. The charge associated with our transformation program, which we'd previously asked, will likely increase to $375 million to $400 million, as you know, has a substantial non-cash portion. It's encouraging to see this work trending so positively. And over the long term, the additional benefits will accrue to the new Omnicom. In moving through this transformation process, it was always our ambition to make Interpublic the strongest possible company as it came into the merged organization. And we're clearly making good on that goal. Finally, I'd like to close with a few words about our proposed acquisition by Omnicom. We've now secured antitrust clearance in all but four of the jurisdictions required, having been cleared in Australia last week. Importantly, this includes FTC clearance in the US, which took place in late June. We therefore remain solidly on track to see the transaction completed in the second half of the year. Notwithstanding noise from certain competitors about distractions or inward focus, since the acquisition was announced, we've never lost sight of the needs of our clients and the teams that deliver value to marketers around the world. The level of interest and support from clients continues to be extremely strong, and there's eagerness on the part of practitioners across both organizations to unlock the value that the combination will create. By bringing together our deep pools of talent, and our complementary capabilities, geographic strength, and platform assets, what we know will result is an organization with unmatched ability to deliver business outcomes for marketers in every industry sector around the world. Together, we'll be creating a company that can drive growth for clients with the most comprehensive and powerful range of marketing and sales solutions that incorporate creativity, data, and technology. An exciting vision and, as you heard from John, one that will become a reality in the near future. As always, we thank our people, and our partners, as well as those of you on this call for your support. And with that, let's open the floor to your questions.

Thank you. At this time, if you would like to ask a question, our first question comes from David Karnovsky of JPMorgan. Sir, your line is open.

Hi. Thank you. For Philippe or Ellen, just last quarter, you had identified, I think, annualized savings over $300 million, but you chose to maintain the margin outlook. Just can you speak to what allowed you to realize maybe some of those benefits faster? Is there any overlap with the Omnicom deal synergies? And then I know you spoke to the full-year margin now significantly ahead of that 16.6%, but I wanted to see if you could put any guardrails around that. Because if we look to your kind of typical seasonality for margin, it would imply a fairly large lift for all of 2025. Thanks.

That's a lot at one go. I guess maybe in reverse order. You realize you, you know, you're building a model. So I'd say, you know, north of a hundred basis points on your last question. And then on your two prior questions, look. We said when we started this process that it was gonna be a strategic process and a comprehensive process. So what we were looking for is not a restructuring that focused on, you know, costs without an understanding of where we're trying to take the business and how we're trying to make the business stronger. And as I said, obviously, make it as strong as possible from a capabilities set as we come into this new organization. So the restructuring has been focused on kind of improving service delivery as well as delivering structural efficiencies. And, you know, I think transformation is organizational change, which is hard for people. There's probably three things that have helped us move it along at the rate that we have. I mean, we obviously prepared for it. We know it knows let you know that we were doing this and that we've been looking at it towards the back half or, you know, more or less the back half of last year. But I think that industry pace of change, so there's clearly a lean in and an understanding on the part of folks across our organization for the need to do this. And, obviously, there's some IPG specific issues. Know, given the top line challenge and we've adjusted to that on a sort of capabilities and offerings point of view. But I think that driving to a moment in time, knowing that the acquisition is there, has also helped us move, you know, at the rate that we've done. And so I think it's a streamlining and modernizing of the business model. And it's trending very positively. And so know, kinda the read across would be that a thing that we've talked about for a long time, which is that we think that there's earnings power in our model. And then I think there's, you know, clearly gonna be, you know, more if you think about the longer term, kind of the business model can continue to progress both top and bottom line.

Okay. Then just one more if I can, Philippe. Your guide from here does imply an inflection in organic. Just don't know if you can segment that out between kind of lapping that or at least lapping part of that account loss headwind versus the underlying improvement.

Look. I mean, we don't excuse ourselves for the losses. Right? But, I mean, I think that if you, I mean, you know, we said impact to Q1 was 4.5. Impact in Q2 was 5.5. That's kinda consistent with what we've seen and what we've modeled. I think, you know, we're pleased to see that underneath that, you're seeing that there's real growth and that there are parts of the business that are performing well if you basically take away those three sizable, you know, two in media, one in pharma, you then have our two largest and historically strongest performing units, both, you know, sort of showing up in a way that if you think about kind of broader industry, context is pretty solid. So we knew that that would be how the year phased out. And then, you know, you saw sequential improvement in the US, quarter to quarter, which is obviously important given the scale that has in our business and the fact that it is a leading indicator sort of broader macroeconomics. And then, you know, we're liking what you know, we're able to show up with the integration through Interact. Obviously, having moved fast to build a very modern kind of approach to buying is resonating in market and all of that probably really has modest impact in the back half for us. But, you know, hopefully, that helps also give you some context on that, David.

Thank you. Our next question comes from Stephen Cahall of Wells Fargo. Your line is open.

Thank you. So Philippe, I think Omnicom said that their creative was slightly down through the first half of the year. And I know your integrated advertising and creativity faced some idiosyncratic losses that you've just been cycling through. I was wondering if you could just give us an update on the context of how creative is performing overall, maybe excluding some of that account churn that you're seeing. It just seems like we've had a long-term industry tailwind from media, probably due to consumer fragmentation. And I don't know if that has an equally negative impact on creative as attention spans on things like TikTok and YouTube maybe devalue creative a little bit. So I'd love to just get your check-in on creative. Then on the outcome-based work that you're doing, I think you said that that's a growing trend. Could you help us maybe think about what percentage of the business is outcome-based today and where you think that can go over time? And is that a better financial business to be outcome-based versus sort of time billing based than I think the preponderance is today? Thanks.

Alright. That's a lot in one go. So I guess, I'd point out to you that, you know, IAC for us is, as you put it, idiosyncratic because it has our, quote, traditional creative assets in it, and it also has our healthcare specialty business in there. And I think the one of the very sizable losses from last year impacted them. So there's probably the largest single impact on a year-to-year basis from the three losses is in IAC, and it's probably not where you would expect it to be. Because it's not in the, quote, traditional advertising parts of the business as we called out, respectively, Ellen and I, in our scripts. The healthcare specialty business is performing well. And so if you essentially just sort of strip out or at least look through that one-time event, I think that the challenge on traditional creative, which is industry-wide, broadly speaking, is something that we will kind of address through and maybe it's the sort of segue into your second question. It's something that will address because as I said, and I think you've all heard me say this before, if you take the value and the impact, I mean, we were just in a pitch not long ago. We were talking to the client about all the uplifts that we can deliver. We were essentially doing a lot of a kind of metric modeling for them and showing them where and how we can help them achieve a growth target for their business overall. And pieces of it had to do with what we can drive through data and pieces of it had to do with how we can kind of optimize on the media and the precision side of the business. But a piece of it also does have to do with the fact that the creative work, when it's connected to all of this, so it's informed by those audience insights. It's tailored and targeted to those growth audiences. And then you connect it back through to, you know, through your production spine to the taxonomies and the KPIs and so on and so forth. You begin to be able to do, you know, something that we've done in those precision in the media businesses. Is that we're much, much more kind of focused on and connected to outcomes. And so to answer the last part of your question, no, outcomes-based components on the media side, you know, are baked into more than 50% of the contracts. And so I think it's a journey, and I think that that part of the business across the industry is still, you know, in the early innings. But you can do, you know, you can clearly do asset-based work because now you're doing much, much more work that still comes out of that content engine. And then you're able to understand the impact it's having in market, and then you can tie that, you know, in the way that, you know, you've heard us say for a long time that media for us is consistently, you know, margin accretive and growth accretive. So our traditional consumer ad agencies inside of IAC definitely dragged, and I think it's about this broader sort of industry issue. But we're leaning into how we connect them through into the data stack. And as I said, the usage on Interact with the kind of the advertising, talked a bit about, obviously, kind of what we're doing at some of the PR agencies to create models that allow us to connect that craft to the stack all the way from, you know, data for understanding the business opportunity, data for understanding the audiences, and then moving it all the way through. So, you know, work in progress. Thank you.

Thank you. Our next question comes from Adam Berlin of UBS. Sir, your line is open.

Yes. Hi. Good morning there. Three quick questions if I can. Following up on the earlier question. So it looks like H2 is gonna be broadly flat. Can you give us just to get to the guide bottom end of the guidance range, can you give us some indication of how that's different between Q3 and Q4? Like, I'm assuming that you get a sequential improvement, but is that right? Or are they gonna be kind of similar? Q3 and Q4 in terms of organic net sales growth? Second question is, can you just clarify where we are today in terms of run rate cost savings versus the original $50 million target and where you think you'll be at the end of the year? And then thirdly, Philippe, you made a comment that you expect 2026 tailwinds from the net wins you've had this year. Can you give us a sense of the size of that?

On the third one, it's too early in the year. I mean, I think we obviously have six months to go, give or take, and that requires that we'd be super focused on clients, you know. And as I pointed out, we've got, you know, some of our competitors happily talking about, you know, how we're distracted, which apparently we're not. And so there's too much that needs to happen, whether it's continued focus on clients and, you know, there's still a solid amount of new business activity going on out there. I mean, I think the pipeline is middle of the road, but it's inconsistent. Media's very active. Healthcare, you know, despite maybe some specific policy challenges in certain parts of the world, is also active, and then integrated pitches that call upon the holding company and, you know, ask us to bring all of these things together and tie them together with the tech and the data are definitely taking place. But in other areas, activities may be trending a bit light. So I think there's just too many variables for us to give you specificity. It was just a, you know, a broader point as we think about, you know, there's a lot of uncertainty in the world, and we obviously have some competitors kind of reading the macro and the client situation differently than we are. So we want to put that in there. And then in terms of the other two points, I think Ellen will correct me, you know, but I think in-year savings, about $300 million and run rate north of $300 million from the restructuring activity. And then on Q3, Q4 revenue, I think it's actually kind of fairly, I mean, I think it's definitely a stronger back half. But I think Q3 and Q4 are kind of more or less at the same level. And you had us at flat. I think that's about right.

And sorry. Just one more for you, which was the run rate of savings at the end of Q2?

I mean, I don't, I think, like I said, we think about it. It's a long-term thing. So it'll be $300 million in-year this year and more than $300 million as ongoing structural savings beyond that point.

Thank you.

Thank you. Our next question is from Bank of America.

Yep. Yep. Hello. Thank you. Morning, Ellen. So I just have a few questions if you find on the topic of...

Yeah. We don't, we're not hearing you. I don't know if you've got a, if you've got a mic nearby, but we're just not gonna be able to pick you up.

Is that working now?

Much better. Thank you.

Okay. Okay. Sorry about this, Philippe. So thank you for squeezing me in. So a couple of questions please on the margin points. As the business returns back to growth hopefully next year, do you think you will need to staff up again? Or do you think you can basically hold the business where it is today, 51,000 people? And maybe related to that, I mean, did I hear you correctly, Philippe, that you think your model can basically deliver better operational leverage than it historically has? If I can squeeze in one last question. You touched on that on healthcare. So, you know, lots of talks on policy reforms, as you said, in some parts of the world. Just wondering how that's impacting, like, marketing spending for those clients and if you think that there's going to be a pullback in healthcare marketing spending as a result of those policy reforms.

Alright. Apparently, every question this morning gets answered, you know, kinda backwards. So on the healthcare side of things, I'd say that it is, there's a lot of sort of volatility and lack of clarity. And I think that some of those policy challenges have really hit in very specific ways. So, you know, we've got some in some of our marketing services businesses, we've got parts of a federal or, you know, national government that are charged with communicating about broader public health, for example, and that's clearly got a big question mark around it. Or, you know, if you kind of compare and contrast where things would have been a few years ago, say, around vaccines. So I think right now, it's, we're seeing it, but it's showing up in pockets. But there's the bigger kind of question about is there gonna be some meaningful, you know, kind of policy change. And when we think about that, it's harder to mitigate for what might be happening to a specific client at a moment in time. We feel much more comfortable with a bigger question because, you know, our position in the market is very significant. The expertise that sits inside of that organization is very powerful. And the need for those clients to reach consumers at a time when they're clearly empowered and when there's a great deal of fragmentation. If you think about what's gone on over time, we've been able to flex and evolve, advise clients on how to make that happen. So if there are ultimately changes in terms of how you reach all of the stakeholders in the healthcare ecosystem, we feel like we'll be able to navigate that and help clients navigate that successfully. The one-offs around something that, you know, maybe really kind of turned on or off due to some of these, you know, kind of more kind of policy or political things. That's a little bit kind of beyond our control. And then your other questions were around, I mean, long term, I think we have always, as Interpublic, shared with you that we saw the opportunity to continue to improve margins. And so against a bigger platform, you know, the joint company, not for me to speak on, you know, behalf of what that's gonna, what's gonna be possible there. But as I said, I think if you see the benefit, the fact that we've done well with our program, my read across would be that there's a lot of earnings power in this larger entity. And obviously, that's sort of TBD and will be flushed out for you all, you know, kind of in due course. And then the last question, I guess, you know, I'll let Ellen, you know, sort of speak to your kind of headcount question. I mean, I think the industry overall has clearly seen some contraction. And you've seen that we are definitely adopting technology in ways that is definitely making us more efficient. A lot of what we're doing is around, you know, centralization and platforming.

Sure. I mean, what we've done is very structural. You know, as Philippe said, implementing common systems, reengineering processes, automation, right shoring. So those things, you know, are structural and should be enduring. At some point, you know, with growth, you will need to add heads. But different heads. And we think that we're really seeing the benefits from the extensive transformation efforts that will be done faster. The other thing which we've seen and experienced is because of the reengineering of our processes, we've been able to close previously budgeted open positions, and we haven't needed to fill backfill attrition. So, again, we think all of those things are structural and permanent. And will accrue to the benefit of margin going forward.

Very clear. Thanks, both.

Thank you.

Thank you. Our last question comes from Jason Bazinet of Citi. Your line is open.

I just had a quick question on the pro forma entity. Can you just spend a second and talk about maybe the two or three areas you're most excited about as a pro forma organization? Either via the capabilities that stand-alone IPG has today, and then are there any gaps that you see? Or even if you put these two companies together, you know, you still feel like some of your rivals might have a better solution in the marketplace. Thanks.

I mean, look, I think it's something that you'll have heard, I think John and I talk about together. I mean, strategically, we really believe and we see immense power here. And so, I would say to you the, you know, I was talking a bit about it. So the data assets that we bring combined with the commerce capability that resides inside of Omnicom at this point. I think that if you listen to, you know, one of our competitors who, you know, whose French, whose English is French-inflected. He talks a lot about the scale that he has on the media side. And so, obviously, you know, those things combined in our case will be, you know, we think really, really powerful and would do a lot to help our clients win in the marketplace. I think there's a lot, geographically, where, you know, when you deal with clients on a very regular basis and you think about kind of where you wish that you had more resource or deeper resource, there's a really, really strong fit. In that regard, I think I talked a bit about the fact that this industry is moving really fast. So the capacity to invest on the side of, you know, the platform is meaningful and really powerful. So to my mind, it's not that, I mean, sitting here in this moment, the portfolio is very complete. And as I think I said in my remarks, I don't think anybody will have anything that compares to it in terms of the kinds of problems we can solve and the talent that we can bring to bear and the tools and, you know, the data and tech. And then it does move fast, but I think it'll be, you know, the new entity as it were will be very, very well positioned to ensure that it can continue to invest both organically and then if and as required in things that fill in, you know, any opportunities. And I think there'll be opportunities and won't be gaps per se. There'll be areas where you see something and you wanna move to kind of build that into your stack. So hopefully, that helps, Jason.

That's great. Thank you.

Please. As I mentioned, we support and the interest and we look forward to keeping you up to date.