Jerry Leshne - VP of IR Michael Roth - CEO Frank Mergenthaler - CFO.
Alexia Quadrani - JPMorgan John Janedis - Jefferies David Bank - RBC Capital Peter Stabler - Wells Fargo Securities Tim Nolan - Macquarie Group Dan Solomon - BMO Capital Market James Dix - Wedbush Securities Brian Wieser - Pivotal Research.
Good morning. And welcome to Interpublic Group First Quarter 2015 Earnings Conference Call. All parties are in a listen-only mode until the question-and-answer session. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce, Mr.
Jerry Leshne, Vice President of Investor Relations. Sir, you may begin..
Thank you, good morning and thank you for joining us. We have posted our earnings release and our slide presentation on our website, interpublic.com. This morning we are joined by Michael Roth; and Frank Mergenthaler. We will begin with prepared remarks to be followed by Q&A. We plan to conclude before market open at 9:30 eastern.
During this call, we will refer to forward-looking statements about our company. These are subject to the uncertainties and the cautionary statement that are included in our earnings release and the slide presentation, and further detailed in our 10-K and other filings with the SEC. We will also refer to certain non-GAAP measures.
We believe that these measures provide useful, supplemental data, that while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance. At this point, it is my pleasure to turn things over to Michael Roth..
Thank you Jerry and good morning, we'd like to thank you for joining us as we review our results for the quarter. I'll start out by covering highlights of our performance, Frank will then provide details and I'll conclude with an update on our agencies to be followed by the Q&A.
We're pleased to report another quarter of strong performance, organic revenue grew 5.7% in Q1 on top of 6.6% a year ago. Our growth was driven by increases in all major disciplines in most geographic regions. It's worth noting that in the quarter acquisitions added 1.1% to growth and currency translation was a 4.4% drag on revenue.
Given the further strengthening of the dollar during Q1 currency translation would be a full year headwind of 5.1% at recent exchange rates. It's also important to note that because our revenue and expenses are evenly matched at current exchange rates we expect currency would be neutral to our percentage operating margin for the year.
Operating profit was $8 million compared to a loss of $12 million a year ago, as you all know our first quarter is seasonally small in terms of revenue while costs are distributed fairly evenly throughout the year.
Our first positive Q1 result in terms of profit in over a decade is therefore yet another milestone that points to the continued progress at Interpublic. During the quarter we achieved leverage on both our principal expense categories, driving breakeven earnings per share compared to a loss of $0.05 per share in the same period a year ago.
Turning to more color on revenue, our growth reflects both increases with existing clients as well as new business wins. We were led by increases in the healthcare, food and beverage, tech and telecom and retail sectors. In the U.S., organic growth was 6.1% with outstanding performance across a broad range of agencies and disciplines.
International organic growth was also strong at 5.1% with nearly all major regions contributing. We had increases in Asia-PAC, the UK and the Middle East as well as a welcome return to growth in continental Europe. LatAm decreased less than 1% on an organic basis.
Turning to expenses and margin, total operating expenses increased 1.2% compared with our reported revenue growth of 2.4%, as a result Q1 operating margin improved by a 120 basis points. Cost discipline and margin enhancement remain a top priority and we were able to execute against that objective again during the quarter.
Our capital structure also continued to be a source of value creation. Earlier this month S&P raised our credit rating to investment grade, this is the culmination of an extended process and reflects significant positive developments at IPG in recent years.
We are now rated investment grade by all three major credit rating agencies, according to us an important recognition of financial strength and fulfilling a long standing management objective.
As previously announced in February, our board approved a 26% increase to our quarterly dividend and authorized an additional 300 million share repurchase program.
During Q1 we repurchased 2.5 million shares using $51 million, since the inception of the repurchase programs in February 2011 we've repurchased a 124 million shares at an average cost of $12.63 per share.
We are encouraged that our performance in the quarter continues to reflect the competitiveness of our agencies, the quality of our offerings of course the full spectrum of digital services within our advertising, marketing services as well as media agencies was once again a key contributor to our strong results.
Our strategic focus remains on delivering outstanding creativity, top tier digital capabilities embedded across the portfolio and on crafting integrated solutions for our clients.
This combination will ensure that we continue to be called upon by clients for higher value services thereby allowing us to grow and win in today's world of dynamic technology enabled consumer marketing.
Given the strength of our offerings and our first quarter performance, we believe that we remain well positioned to achieve our financial targets for the full year.
At this stage I'll turn things over to Frank with some additional details on our results, after his remarks I'll be back to provide an update on our agencies and the tone of the business to be followed by the Q&A. .
Thank you Michael, good morning. As a reminder I'll be referring to the slide presentation that accompanies our webcast. On Slide 2 you see an overview of our results. Organic growth was 5.7% in the first quarter, 6.1% in the US and 5.1% in our international markets.
Q1 operating profit was 8 million in our seasonally small first quarter, an improvement of 20 million compared to last year. Operating margin was 50 basis points compared with negative 70 basis points in Q1 2014. Turning to Slide 3 you'll see our P&L for the quarter; I'll cover revenue and operating expenses in detail in the slides that follow.
Turning to revenue on Slide 4, revenue was 1.68 billion in the quarter, an increase of 2.4%. Compared to Q1 2014 the impact of the change in exchange rates was a negative 4.4% while net acquisitions added 1.1%. The resulting organic revenue increase was 5.7%.
With the strengthening of the US dollar against most currencies its worth pointing out that revenues and expense of our businesses are very well matched in functional terms. FX change had minimal impact on our change in operating profit and margin in the quarter.
It's also worth noting that our pass through revenue decreased slightly compared to Q1 2014 which is offset by a decrease in our O&G expense.
As you can see on the bottom half of this slide organic growth was 6.7% at our integrated agency network segment with contributions from all major disciplines with notable increases at all three of our global network McCann, FCB and Lowe. CMG grew 1.6% organically with continued solid growth in our PR businesses.
On a net basis growth at CMG was in the mid-single digits. Moving on to Slide 5, revenue by region, US organic growth of 6.1% was broad based across a number of our agencies, led by McCann, FCB, Deutsch, Mediabrands and CMG. Leading client sectors were healthcare, tech and telecom and food and beverage.
Turning to international markets the UK grew 6.4% organically which is on top of 10.7% a year ago. We had strong growth at all three global integrated networks, McCann, FCB and Lowe, as well as our digital specialist HUGE and R/GA. Most client sectors grew as well notably retail, consumer goods, and food and beverage.
Continental Europe increased 3.5% organically on top of 3.8% a year ago. We were led by Mediabrands, Lowe and R/GA. Geographically this will result [included] growth in Spain and model decreases in both Germany and France.
In Asia-PAC our largest international region Q1 organic growth was 6% with increases in many national markets led by China, India and Singapore. Lowe and McCann were very strong across the region as were HUGE and R/GA. In LatAm we decreased 0.7% organically on top of 18% growth year-ago as well as 16% growth in Q1 2013.
The decrease was driven by increase in the challenged economy in Brazil and time and appliance spending partially offset by growth in other markets such as Argentina and Mexico. Our other markets increased 10.4% organic in Q1 driven mainly by growth in the Middle East.
On slide six, we tried the longer view of our organic revenue change on a trailing 12 month basis. The most recent data point is 5.4%. Moving to slide seven, our operating expenses. In the first quarter total operating expenses increased 1.2% from the year ago compared to our reported revenue increase of 2.4%.
Our Q1 ratio of salaries and related expenses to revenue was 72.5% this year compared with 72.6 a year-ago, an improvement of 10 basis points.
It is important to note that the decrease in pass-through revenue, which is offset dollar-for-dollar and lower O&G expense resulted in some deleveraging on SRS and some leveraging on O&G by resulting in no impact on operating profit. Adjusted for change in pass-through revenue our SRS leverage is 40 basis points.
Our base salaries benefit tax was 60.5% of revenue compared with 60.3 a year ago an increase of 20 basis points. Expense for temporary labor was 3.9% of revenue the same level as a year-ago. Incentive expense as a percentage of revenue was also unchanged from year-ago and severance expense improved 20 basis points as a percentage of revenue.
All other salaries and related expense was 3.2% of revenue compared with 3.3% a year-ago. Total headcount at quarter-end was approximately 48,000. Headcount increased during the quarter by approximately 1% from Q4 of 2014 on higher growth areas in the portfolio and to support new business wins.
Turning to office and general expenses on the lower half of the slide. O&G expense was 27% of Q1 revenue an improvement of 110 basis points from year-ago that leverage across most major expense components.
We had 50 basis points of leverage on occupancy expense, 30 basis points of leverage on telecom, office supplies and travel and 30 basis points on our category of all other O&G expense as pass-through expenses decreased. On slide eight, we show our operating margin history on a trailing 12 month basis.
Most recent data point is 10.7% which reflects solid progress towards our full year target of 80 basis points to 100 basis points. Turning to the current portion of our balance sheet on slide nine, we ended the first quarter with 741 million in cash in short-term marketable securities.
It's worth noting that our cash level is seasonal and it tends to peak at year-end. On slide 10, we turn to cash flow. Cash used in operations in Q1 was 797 million compared with 726 year-ago.
Operating cash flow is also seasonal, as our business generates significant cash and working capital in the fourth quarter and uses cash and working capital in the first quarter. During this year's first quarter, cash used in working capital was 801 million compared with use of 723 million a year-ago.
Investing activities in Q1 used 20 million 20 million for capital expenditures. Financing activity used 51 million mainly in capital return to shareholders partially offset by increased short-term borrowings. We used 51 million for share repurchases and our common stock dividend was 49 million.
Typically the pace of our share repurchases geared to our fourth quarter when our cash flows are strongest. Our net decrease in cash and marketable securities for the quarter was 926 million compared with 866 million a year-ago.
On slide 11 we showed debt deleveraging from the peak of 2.35 billion in 2007 to 1.76 billion at the most recent quarter-end. In summary on slide 12 we are pleased with our revenue growth and profit performance in the quarter which represents a good start in terms of achieving our financial objectives for the full year.
With that let me turn it back to Michael. .
Thanks Frank. We are obviously pleased with the results we’re announcing this morning. Organic revenue performance was not only competitive it looks to have come in at the top-end of our sector. If there is noting that digital services across the Group were significant contributors to organic revenue growth.
Other highlights in terms of organic growth includes the fact that we saw contributions from across the portfolio including all three global networks, McCann, FCB and Lowe. Performance at media brands and at our PR agencies continue to be strong. Asia and the UK grew well and we saw a positive growth quarter in Continental Europe.
The deceleration we experienced in LatAm largely reflects macroeconomic issues in Brazil as well as the fact that we were facing difficult comps in that region. We continue to demonstrate disciplined cost management and we remain focused on converting the appropriate levels so as to deliver on our margin improvement target for the year.
Investment and talent supplemented by strategic acquisitions should ensure that we maintain the very high level of our professional offerings. We also remained committed to robust capital return programs that can drive further value creation for our shareholders. Moving on to the tone of the business.
What we are hearing from our operators and in our conversations with major multinational clients is that there is a consistent commitment to investing behind brands as company seeks to drive their business forward. We are seeing areas of macro uncertainty such as Brazil, Russia and certain markets in the Middle East.
Of course it’s still early in the year with only three months in the books at this point. But the overall environment is such that we continue to see sufficient opportunities for us to achieve our stated growth objectives for the year.
The marketing mix that is right for each of our clients in order to meet a range of marketing challenges is becoming increasingly complex. We therefore need to be able to customize our approach for each specific situation as we continue to have at our disposal all of the tools required to meet the evolving needs of the marketplace.
Our new business pipeline is sound and we are tracking solid activity at most of our agencies. The first quarter saw some notable wins and we’re involved in the full range of major opportunities that are currently being contested, other than those we are conflicted and unable to participate.
Our performance in new business was very strong last year and we want to keep building on that result.
Highlights at our agencies include a very strong quarter from McCann with continued new business momentum, increased levels and integration within Worldgroup and in working with a range of IPG agencies, as well as a very strong showing in terms of industry honors including the recent news from the Global Effie Awards that McCann has been named the industry’s second ranked network in terms of marketing effectiveness.
We’re rank number four globally on the Effie Index in terms of marketing effectiveness and one of its campaigns for Unilever was recognized as the best in the world in terms of driving marketplace results. The integration of Profero continues to go well and that’s providing Lowe with a strong digital partner on a range of client engagements.
As previously mentioned, our focus with Lowe remains to scale the network more broadly in the U.S. and unlock potential growth in the U.S. based multinationals. Progress as FCB continued to be evident in its results especially domestically and in the UK with a merger with Inferno has been a success.
The agency’s flagship Chicago office won significant assignments during the quarter with IN BEC and more recently the New York agency was named AOR for Vonage. We see further promise at the FCB health operations, especially as we add the ICC Lowe assets to that portfolio.
At leading brands the management succession has been quite seamless, Henry Tajer moving from his global COO role to CEO initiatives [and UM] are strong in competitive networks.
We continue to be a leader in addressing the change that technology is bringing to the media landscape as evident by Cadreon’s recent announcement that it will be the first in programmatic radio, our investment in Samba TV and Magna’s global creation of our consortium of 15 cable networks to enable targeted automated buying of TV inventory.
It bears noting here that our overall organic growth results do not benefit from taking inventory positions and media particularly the programmatic space where our offering is strong but predicated on a whole consulted model in which our impartiality and expertise are key differnetiators.
CMG agencies continue to perform well in the quarter led by public relationships.
We were consistently winners in market share new assignments from clients such as Unilever, Mattel, Field Air, the United Nations and most recently the American Cancer Society as well as major awards including Weber Shandwick once again being an agency of the year by PR Group. Our U.S.
integrated independent agencies continue to be a source of strength with Interpublic coming off outstanding overall performance in 2014 Mullen and Deutsche continue to be leaders in the marketplace. Carmichael Lynch added U.S. Bank after a highly competitive review that just concluded in early April.
Along with the Martin Agency and Hill Holliday all of our domestic independents provide clients with a breadth of service including full-fledged creative digital experiential, analytics and social capabilities. Huge MRM and RGA of all leaders in the marketplace.
MRM is among the leading industry’s top global digital networks with 30 offices in over 20 world markets. The growth as huge has been significant and the agency continues to be known for its best in class capabilities in the area of marketing utility. RGA remains the leader in innovations that have defined digital marketing since its inception.
We are also very proud that this year the Cannes Festival recognized Bob Greenberg with his most prestigious owner for and I quote having helped show the way forward for the industry. Some among our peers have approached digital primarily by means of headline grabbing, M&A transactions and a siloed approach to this key competency.
We continue to see the benefits of our long term approach from investing in talent and embedding digital expertise and capabilities throughout our portfolio of agencies. We believe this is consistent with the changing dynamics of media usage and consumer behavior.
This strategy places our integrated marketing solution at the center of a client centric connected world and continues to be evident in our strong organic growth performance.
As we look to the balance of the year we see some geographic markets that will require monitoring and we will of course remain vigilant on cost and on the appropriate levels of margin conversion going forward.
While first quarter results were quite positive it bears repeating that is our seasonally smallest quarter and there's work ahead for us to deliver the year. At this point we believe that we remain well positioned to achieve our organic growth target of 3-4% and to improve operating margins by 80 to a 100 basis points.
Combined with our company’s financial strength and commitment to robust return of capital we have been and will continue to be a source of significant value creation. This will allow us to further enhance shareholder value. With that I thank you for your time and open up the floor to questions. Operator, can we have the first question please..
Our first question comes from the line of Ms. Alexia Quadrani from JPMorgan, ma'am your line is now open..
On new business wins which continue to look very-very strong and just trying to get a sense of how much that contributed to organic growth in the quarter and I guess sort of any further color on how you see the recent new business wins sort of in terms of is it a tailwind for the rest of the year and then I have a quick follow up..
Alexia, I'm sorry, we missed the first part of your question was it basically about our net new business positive. .
Yes, the net new business being so strong how much of it contributed to your growth and how do you see it, is it a tailwind for the rest of the year..
Well, we continue to be net new business positive, and as what we said at the end of last year we have tailwinds going into this year of approximately 1%, and going into the second half we seem to flatten out. But we don't break out our revenue by net new business. I will tell you that we see a good organic growth from our existing top 20 clients..
And then on the-- what I would qualify as sort of a long overdue upgrade by the last rating agency the S&P, I guess how is -- does that at all change I guess your cost to capital and sort of your outlook in terms of capital returns to shareholders..
Look as we've always said thank you for recognizing that, this has certainly been one of our key objectives and we're pleased to see S&P move the way they did. Look, now that we're investment grade from all three rating agencies what it does give us is additional flexibility on liquidity.
It should open up an opportunity for us to utilize commercial paper. That will add to our existing lines of credit that we have which are almost $1 billion. So clearly that gives us financial flexibility as we go forward.
We can’t tell you when but we are looking at all opportunities on commercial paper and that frees up cash on our balance sheet that will be factored into our needs for the business in terms of acquisitions and certainly dividends and buybacks will be reflective of our balance sheet strength and excess cash we have.
So I think that it gives us an additional cushion if you will as we move forward. We still have a significant amount of authorized buyback from our board, 390 some odd million dollars and obviously at this point that's sufficient and we will continue to monitor that as we go forward.
We are committed to returning cash to our shareholders in both dividends as well as buyback methodology..
Our next question will be coming from the line of Mr. John Janedis from Jefferies, sir your line is now open..
Frank, I was hoping you can touch on, the leverage on and the relationship between the SRS and ONG line, I know you talked about the pass through revenue but with the strength in organic and the SRS fund flattish year-over-year do you have to spend for the growth..
Yes, John it works real with a 120 basis point of margin improvement and we're fairly disclosive on those key metrics and the pass through [indiscernible] clouded a bit.
But we're coming off a very strong fourth quarter growth wise, a very good quarter growth wise in the first quarter and we got to bring those people on to do the work and sometimes the revenue and the hiring doesn’t align in the quarterly timeframe, but we still need to get leverage out of SRS to meet our overall targets, it’s an area of focus for the entire management team..
Yes, when we put out 80 to a 100 basis point improvement as Frank says the big opportunity for us is in SRS and with the pass throughs how it reflects our ONG. So we’ve got three more quarters to go and within that period we expect to see leverage with respect to the SRS.
It's clearly a key priority, it's in our management objectives and that’s how we come up with our forecasted margin expansion. .
Maybe just separately can you wane on the rebase discussion from the IPG point of view and can you also speak to Brazil and to what extent recent headlines may or may not be impacting business?.
Let me talk about the rebate first.
Now the total issue of ABBs and rebate is not new to IPG and some 10 years ago you may recall that we made that as an important issue as we became Sarbanes compliant at that point in time you recall we set up the significant amount of liability to pay back to our clients and we embarked on a full transparency program with IPG to make sure that there is transparency and then any rebate will be properly reflected in our contracts and given to our clients.
So consistent with that in those markets first of all in the U.S. we have no rebate and therefore it's not an issue for us in the U.S.
And in those markets where there are rebates were in fact encouraged by our clients to get as much volume rebates as possible, and our contracts are clear that those rebates belong to our clients or how they instruct us to treat those rebates. So we’re extremely comfortable with the notion that we don't have any issues with respect to that.
And in fact all of our contracts are fully transparent and consistent with that notion that we established 10 years-ago. So we’re comfortable there. On issue of Brazil of course we’re disappointed in what happened in Brazil.
I might point out that we in fact investigated that’s review of prior to what news that you saw in the media and in fact we had an extensive review of what was going on in Brazil we took action internally in the fact that we dismissed one or two employees within that organization and based on the review that we seen this is been an isolated case of those one or two individuals.
We have cooperating with all the authorities with respect to that. We do not see a systemic issue here with respect to that this is the action of one or two individuals from a financial point of view. The numbers that are involved are not material to both IPG and our revenue numbers and our profitability.
And we are following up on this very carefully and cooperating. We do not believe that this is a systemic issue for us in Brazil and we’re cooperating as best we can. By the way part of your question might be that we did see a decline in Brazil in this year, that had nothing to do with this particular issue.
This was a -- with a decline in two fold, one is we had a very strong company versus last year well in double-digits, and two the macroeconomic environment in Brazil is difficult at the current time. .
The next question will be coming from the line of Mr. David Bank of RBC Capital. Sir, your line is now open. .
Michael I know you are always concerned about what you call the backdoor they need to continually improve service for clients make sure you keep them and win new ones. Frank I know the S&P rating is a lifetime appointment; you don't want to take it for granted.
But it seems like for the first time in both your guys administration together the near-term business is operating about a smoothly as it can knock wood. So I guess my question is as you settle into that we’re in a period of unprecedented change in an unprecedented short period of time in marketing and media.
Can you take your focus or do you take your focus and shift it a little longer-term, and whatever can you talk a little bit about like in five years how does IPG need to be different, what are you working toward over the longer-term now that I would imagine get a little bit more flexibility now that the business is sort of taking care of itself. .
We can spend an hour talking about that, David and we probably will. It's interesting I just addressed [Harris] had a global meeting of McCann grow well group of 500 people down in Florida. It was a great meeting. And I was addressing the very issues that you are talking about. First of all we don't settle in.
This business as you know is very difficult and if you settle in anything you lose. So we are continually focusing on as you pointed out keeping the backdoor closed.
And if you look at as I answered the question before of our top-20 clients we had very nice organic revenue growth from [indiscernible], and clearly the fact that we were keeping the backdoor closed is one of those reasons and we do not take clients for granted.
We frankly -- the mantra around here is that we treat existing client as if we are pitching them for new business because that’s the way we should treat existing clients. And settling in is hardly a thing to do when we had this large fragmented media environment, very competitive from our clients in terms of prices and so on.
And what our main mantra is going to be we have to be client centric.
And that means we have to continue to focus on the needs of our clients and in order to do that we have to invest in talent, we have to invest in all the technology that’s out there, we have to provide integrated offerings that clients are looking for one place or places that give them the edge of on the competitive situation and clearly media, digital talent, creative all come together finally in this business.
For years it’s always been solid and now as we don’t provide an integrated offering clients will look for it elsewhere so we are not taking anything for granted. Obviously we’re very pleased with both the last year’s results and the first quarter but we are constantly focusing on how to be better.
We don’t have to bigger but we have to be best in class in terms of meeting the needs of our clients and that is what our operators are focused on and the results of that you’re seeing in the organic growth that we’re having and the margin improvement because we are still focused on narrowing that gap.
So I think the key to the future of IPG is not being the biggest we have to be client centric, we have to be the place where talent wants to go.
One of the things that I really am pleased about is the fact that we’ve been able to recruit high caliber talent across all of our networks and frankly we like the fact that IPG is viewed as a good place to be within our peers groups because of the fact that we are client centric and we are focused on meeting the needs of the clients directly.
Other than that we don’t pay attention to it David. .
Thank you. Our next question will be coming from the line of Mr. Peter Stabler from Wells Fargo Securities. Sir, your line is now open..
Good morning, and thanks for taking the question, I’ve got two. First of all Michael thanks for your comments on digital and lack of benefit to organic growth.
So, just wanted to get a little more color here and ask you is it really your stated policy not to pass media through your income statement today and/or in the future do you -- can you give us that assurance or is that something that could change? And then secondly and trying to find areas of weakness here, just on the CMG side, you called out TR is performing well.
Is there anything in there that you can or color you could offer on what didn’t go so well this quarter? And it seems like some marketing services kind of across the group appear a little weaker over the last couple of quarters. I am just wondering if there is anything there to be concerned about at that marketing supports or anything.
Thanks very much..
Let me talk about your comment about media. We have historically been different than our competitors certainly more recently on the issue of taking inventory the reason that there is gross versus net with respect to some of our competitors is that they take inventory on their own behalf and then in essence sell that inventory to their clients.
We act as in essence agents for our clients we do not take inventory. And as a result when you see our gross versus net the only item that affects our gross versus net is our experiential and pass through type expenses. And by the way those expenses do not carry margin along with it.
So we do not have a gross up in our organic revenue that reflects media owned and it is our stated policy and frankly we believe that being agnostic in the marketplace is a competitive advantage to us versus our competitors because it’s hard to be an advisor when on one hand you’re giving them advices to where they should place their media dollars and on the other hand you have an inventory component that you are -- equity interest in getting rid of it at a profit so we believe that is a distinction that we will maintain in the marketplace.
Now if as some of our competitors say it makes no differences as long as the net of buying and effectiveness is there if we see the marketplace develop over a period of time where in fact that is recognized and not giving us advantage in terms of meeting the needs of our clients then we will rethink it but right now as recently as this month we looked at that again and we believe as you will see in some of the pitches that taking that inventory position is not consistent with our overall model on as being agnostic in the marketplace.
And frankly if I were a consumer that’s the way I would look at it, so that’s our strategy. And the accounting follows your business practice and therefore our accounting does not require us to gross anything other than the pass-throughs that we have. As far as CMG, I’ll let Frank talk about..
On the CMG side Peter the PR firms grew high single digits. The overall segment was relatively flat because we had a fairly large project in the UK from our experiential business that didn’t repeat this year, it happens every three years.
And that’s a good example as Mike pointed out a lot of that was pass through revenue so when you look at the overall segment on a net basis growth was in the mid-single digits so it did very well in ’14 and we’re very confident that it did very well in ’15..
There is one other point and I think I have to bring up we have stated we do have a business called ORION which is the [barter] business. Frankly all of our competitors or most of them have [a barter] business.
In that particular niche we do take inventory position, but it's not an inventory position, it’s acting on behalf of our client with respect to that inventory which is why we don’t gross that up either.
So, yes, there is a part of our business that does have some -- it’s not an equity but we do take inventory but it’s on behalf of our client for a specific reason, so our [barter] business is a little bit different than the rest of our business and in fact it's a separate and distinct business, so I have to clarify that point..
And that's small, Michael..
Yes, well it’s -- when you say small, it’s a profitable part of our business but its small compared to the overall media business. Thank for the clarification both of you..
Thank you, our next question will be coming from the line of Mr. Tim Nolan from Macquarie Group, sir, your line is now open..
I'd like to continue on this topic of programmatic. You guys set out a number a year or two ago which I never really took as a realistic but more like a reach figure of doing somewhere toward half of totally buying on a programmatic basis in a few years' time.
Your acquisition or your partnership with Samba TV seems to be a step in that direction, wonder if you could talk a little bit more about how you're moving toward programmatic buying in online video and then in more traditional media like TV and radio. Thanks..
Thank you, Tim. We never said that 50% was going to be programmatic, it may be over a period of time but when we said 50% was going to be automation, and that's a little bit different than putting everything under the programmatic. Frankly our media business we're using cables and faxes so our main objective was moving towards automation.
We do see a significant rise in programmatic but it is not at the levels of 50%. And we have been rolling that out on a global basis, because we think it is a very efficient and effective way to handle video certainly on the digital side of the business.
So we are committed to it, Cadreon was one of the leaders in the business, we keep investing in Cadreon and talent and tools and as you point out we enter into all these agreements with various cable operators in fact radio now and our investment in Samba TV all of these things are related about having the right data to place the media dollars in the right place to reach the right people at an efficient way.
And we believe that it should be -- automation should play an important part of it and programmatic falls within that automation..
Do you think traditional media owners will be willing to open up more of their inventory to programmatic buys?.
Well you know, what I did say and you're correct in remembering this I did say it's going to be difficult for TV, premium content on TV to be put into that fold because of you know the control of it and maybe arguably is not there and therefore it's hard for them to negotiate premiums.
You know what the marketplace will determine whether that happens. And as it grows and as it becomes more efficient and as clients and media owners become more comfortable with it we may see it but we're not seeing it right now..
Thanks very much..
Thank you, our next question will be coming from the line of Mr. Dan Solomon from BMO Capital Market, sir your line is now open..
Frank, maybe could we start by just returning to the balance sheet with Publicis having acquired Sapient with Omnicom having used up their balance sheet capacity.
If we look at your leverage you're back down to sort of the low end of where the group is, if you could maybe just update us on your thoughts on where you'd like to see target leverage head to you eventually.
And then Michael just quickly on Brazil and Russia, could you cite the issue we were talking about earlier with Lowe, not an IPG specific issue, but those markets appear to be going through a little bit more than just a little economic blip right now.
How are you thinking about them, how are clients thinking about them? Is there may be easing off the M&A pipeline in those markets, but I’d be interested in your updated thoughts on the sort of the geopolitical macro issues there..
I wish I can solve all of those problems. Let me take Brazil and Russia and comment a little bit about our balance sheet.
First of all Russia, obviously the Russian markets are not the strongest right now, but recently -- I've actually had some direct conversations with our clients because frankly for years now we've been talking to our partner in Russia and in fact we've got some approval in Russia for us to do a transaction with respect to our partner on some of their properties there -- enabling us to have better control over the quality of the product with respect to our multinational clients in Russia and we’re planning on going forward with that, that transaction.
So you might say, gee in this environment why are you doing that in Russia, and the answer is our client still believes that Russia is an important market and consistent with that it's important for us to have the top talent and resources servicing those clients in Russia, so we're going forward with our transaction with ADV, I have to say it, it's at a cheaper price obviously in terms of both the movement of the currency as well as the economics in Russia and we took advantage of that but we are still moving forward and believe Russia is an important market and frankly it’s a place that we still believe we have to be there to service our multinational clients.
Brazil everyone knows is going to a difficult time right and there was a pullback and we saw it in our multinational larger global agencies down there. It was partially offset by other areas in Latin America that were positive, Mexico for example.
But Brazil we’re watching very carefully, we hope to return to growth in Brazil throughout the year but the benefit of being a multinational and global service provider that we are where one region becomes little difficult fortunately there are other regions that are strong, when I am particularly pleased to see the growth in India.
We went through a period in India where the growth wasn't there during the elections and now that Modi is in place and things are happening we had double-digit growth almost double-digit growth in India. So I think that’s a positive sign. And obviously China continues to grow for us at a double-digit rate. And of course we’re very strong in U.S.
So we’re watching Brazil carefully, we still have top tier talent and our agencies down there are best-in-class, and as Brazil we will get through this. Look the growth of the middle-class in Brazil is a real and I think eventually and with all the event the Olympics and so on I think will see a snapback in Brazil once this all happens.
On our balance sheet we've always said we wanted to be strong, have a strong balance sheet maybe that’s part of the DNA of our company given the difficulties we had many years ago. And there might be a little room in our leverage right now and frankly [we were that] way to make sure that we get we finally get F&B over the finish line.
And we will take a hard look in terms of our leverage and use as I said at the commercial paper market.
And then maybe some opportunity for us in terms of buybacks, but if we make a business decision in terms of what we do with our cash, and that cash is decided either it goes to a reinvesting in our business whether it would be strategic acquisitions investments in talent or just overall investment in our businesses versus returning it to our shareholders and if we return it to our shareholders we will take a look at the mix between dividends and buybacks.
And obviously we’re very sensitive to the needs of our investors and in fact every investor meeting we have we ask them what their preference versus dividend versus buybacks and we listen to our investors and we respond accordingly.
The good news is we will have the financial flexibility to do both, and what that mix is will be decided by the marketplace and the needs of our businesses. .
The next question will be coming from the line of Mr. James Dix from Wedbush Securities. Sir your line is now open. .
Two questions, just first if you’ve been hearing from some competitors that the level of pitch activity seems to be ticking up industry wide there is some [trade press] on some potentially big reviews coming up.
Just any color you could give on the puts and takes where you see relative net opportunities versus where you might be defending maybe a little bit more business might be helpful. And then just second you’ve given good color in terms of the margins in terms of where the leverage is coming from especially adjusting for things like pass-throughs.
I guess just from a business perspective as you look across your agencies, are there certain things which you are seeing that's driving the leverage growth in terms of greater share of wallet from existing clients or just better utilization of personal or individual basis or just hitting more performance incentives across your contract.
Just anything from a business perspective that you are seeing as you look across your agencies which is starting to kick in for you?.
All of the above. This is a very competitive environment right now.
Now you did see the announcement of PNG for example they are anticipating cutting an agency fees if you will by a significant amount, clients overall and it's not new to the industry our clients are always looking for more for less and what we have to be able to do is twofold, one the most important thing is we have to show that we’re adding value to what we are delivering, and therefore we have to be responsive to the effectiveness -- the creativity and effectiveness of the work we do.
And then we have to be able to measure it and be accountable for it. So I think the pressure is much greater now given that these tools are out there for measurement to prove the return on investment with respect to marketing dollars. And we’re in a position to be able to do that, and clients appropriately are asking to see that return on investment.
And at the same time they are looking to have savings and be able to show that the effectiveness of what they are spending is greater and spending less also gives them a similar response rate. And frankly that’s where we add value.
If we can show that if you spend dollars in one place versus another and the one that’s cheaper is as effective if not better then it's a win-win. We add value, we get paid for the value that we’re adding, clients show effectiveness and market share and they spend less and that is going to be a dialog between us and our clients forever.
And as these tools become sharper, as media plays more and more an important in terms of the integrated offering we have to have the best talent tools and resources and scale in order to be able to make that happen.
And that’s the dialog that’s going on every day with our clients and frankly when I was a client that’s what I would do and that’s what’s happening. And we’re being responsive for it and if you look at our organic growth that’s a good indication that we’re able to overcome and be able to have those conversations.
As far as pitches I think the big pitches that are out there are principally media. In every couple of years every multinational client looks at their media agencies and puts it through a pitch and a lot of these pitches are focusing on efficiencies which is exactly what I just said. And so you see Coca-Cola having a media pitch.
You have Unilever having a media pitch. These are global clients L'Oreal is having a media pitch.
These are global clients that not necessarily unhappy with the services that they’re getting but they want to make sure they’re optimizing the use of their media dollars in an efficient way and moving the needle and we’re responsive, we have a good track record in those pitches and we expect to see that continue.
On the creative side, we do have a couple of big pitches coming up particularly contractual pitches, for example the army which is a mandatory review and the navy has a mandatory review both of which we’ve been successful in retaining and obviously we hope to do the same moving forward.
And on the other side, there are pitches out there of what we call opportunities because we aren’t in those pitches, we aren’t existing client relationships and this is an opportunity. For example Chrysler has a digital pitch out there and we’re participating in that one.
So yes the marketplace is -- and by the way there are fair amount of pitches out there that aren’t public and those are the ones where we have existing relationships where we’re looking for a larger share of the wallet.
So I think that bodes well for us frankly in the industry in that there are these opportunities where we can get to go head to head with our competitors and show where we add value. So it’s a pretty exciting time..
On the margin question the key thing around that is growth and converting that growth at an efficient rate. And that’s the challenge for us because as Michael pointed out the growth has been driven by investment talent.
We all focus on SRS so we need to invest and this is aligned with John’s earlier question, we need to invest and that drives the growth and then we’ve got to convert that at efficient rate and that’ll improve the margin..
Great, thanks very much..
The key to our existing client relationships being important here because if you do look at our top 20 clients we do have a nice organic growth within those 20 clients and that tells us that the relationships are good, the products and services we’re providing to those clients are working and they are viewed as partners to those clients..
Thank you. The next question will be coming from the line of Mr. Brian Wieser from Pivotal Research. Sir, your line is now open..
Two quick ones, just question at the quarter’s working capital figure, I was wondering how much of the expansion of that number is due to business growth versus somewhat pressure on payments terms? And separately just a question on Europe, we’re hearing I guess a lot of relatively positive comments on the region in general.
I was wondering what your thoughts around whether or not it’s turned the corner for the [indiscernible]?.
I’ll let Frank talk about working capital. No one is raising a flag on Europe. We have -- obviously it’s nice to have positive growth in Continental Europe. Certainly the number seems to indicate that from a growth perspective there seems to be some light at the end of the tunnel here and anecdotally seems to be stronger.
I love what’s happening in the UK is very strong market for us now and hopefully that will still over to the rest of Continental Europe. But for our planning purposes for the rest of the year, we haven’t built into it a big recovery in Continental Europe.
So to the extent that we continue to be successful in growth in Continental Europe that will bode well for us for the full year, but we’re basically counting on to being flat up or down 1% and we’ll see how that develops..
And Brian on the working capital it’s normal to seasonal flows you look at we have significant working capital cash generation in the fourth quarter and then we have outflows in the first quarter.
And you look at the outflows this first quarter and take a look at Q4 ’14 that correlation is pretty consistent with prior years, none of it relates to changing in terms, terms have been pretty consistent..
I just mean the Q1 this year versus the prior year’s Q1s but it’s nothing unusual..
No if you look at Q1 versus the previous Q4 and they trade pretty much in a band if you look back over the past five or six years..
At this point, I’d like to thank you all for participating. As we said, we’re very pleased with the quarter but we have three more quarters to go. Look forward to talking to you soon. Thank you..
Thank you. And that concludes this conference. Thank you all for participating. You may now disconnect..