Jerome J. Leshne - Interpublic Group of Cos., Inc. Michael Isor Roth - Interpublic Group of Cos., Inc. Frank Mergenthaler - Interpublic Group of Cos., Inc..

Alexia S. Quadrani - JPMorgan Securities LLC John Janedis - Jefferies LLC Peter C. Stabler - Wells Fargo Securities LLC Steven Cahall - RBC Capital Markets LLC Omar Sheikh - Credit Suisse Securities (USA) LLC Tim Nollen - Macquarie Capital (USA), Inc..

Good morning and welcome to the Interpublic Group Fourth Quarter and Full Year 2016 Earnings 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. 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 AM Eastern.

During this call, we will refer to forward-looking statements about our company. These are subject to the uncertainties in the cautionary statement that is included in our earnings release and the slide presentation and further detailed in our 10-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 thank you for joining us this morning as we review our results for the fourth quarter and 2016. As usual, I'll start out by covering the highlights of our performance as well as our outlook for the new year. Frank will then provide additional details and I'll conclude with an update on our agencies to be followed by our Q&A.

We're once again pleased to report strong performance for both the fourth quarter and full year. Among our financial highlights, organic revenue growth was 5.3% in the quarter, bringing full year organic growth to 5%, the top of range to which we had raised our growth target. In the fourth quarter, U.S.

organic growth was 3.3% and was a very strong 4.7% excluding the impact of lower pass-through revenues. We grew organically in every region of the world during the quarter as well as the full year with very broad participation across all our agencies, disciplines and client sectors.

It's worth highlighting that excluding the impact of lower pass-through revenues, worldwide organic growth was 6.4% in the quarter and outstanding results. Fourth quarter operating margin was 21.4%, an increase of 60 basis points from a year ago.

Full year operating margin was 12%, an increase of 50 basis points from 2015, achieving our margin target for the year. 2016 full year diluted earnings per share were $1.49 and were $1.37 is adjusted for certain items, a 13% increase over comparable 2015 diluted earnings per share.

The adjustments exclude certain gains and losses below operations in both years which are reflected in other expense due to the disposition of small, non-strategic businesses and certain discrete tax items.

This morning, we're reporting on 2016, but it's worth noting that these accomplishments build on our company's strong record of organic growth and margin improvement over a number of years.

In fact, over just the last three years in our very fast changing and competitive industry, we have achieved total organic revenue growth of 17%, which surpasses the performance of our principal peers.

During that three-year span, we've increased the operating margin by 270 basis points, operating profit by $279 million or 42% and comparable diluted earnings per share by 76%. That's great performance and all of our people can take pride in these accomplishments.

Their talent and the great work they do every day on behalf of our clients is what drives such terrific results in the marketplace and for our shareholders. We thank them for their hard work and dedication.

It's important to note that concurrent with this very strong performance, we have sustained our investments in outstanding talent across our agencies as well as in the tools and capabilities that keep us on the leading edge of our businesses, especially, in the digital space and in key growth areas like data analytics, programmatic, creative and consulting services.

At the same time, we've continued to return capital to our shareholders at significant and increasing levels. Returning to the fourth quarter, organic revenue growth was 5.3%, currency had a negative 2% impact on revenue, while net business disposition were negative 20 basis point. Regionally, as I mentioned, U.S.

organic growth was 4.7% excluding the impact of lower pass-through revenues. International growth in the quarter was 7.8%, reflecting strong Q4 performance in every major international region. Q4 growth also reflects contributions from all major disciplines, including advertising, media and public relations.

As we've seen all year long, we again had especially strong performance at digital specialist R/GA and Huge. And from our digital services embedded across the portfolio, whether in our media operations, public relations, at our integrated ad agencies and another specialty areas such as healthcare and shopper marketing.

In addition to our digital specialists, a wide range of our agencies contributed to growth, led by Mediabrands, McCann, and Weber Shandwick, while the top performing client sectors in Q4 were healthcare, retail and food and beverage. Operating expenses in Q4 were again well-managed.

Under our reported revenue growth of 3.1% in the quarter, our operating expenses increased 2.3%. The result was Q4 operating margin expansion of 60 basis points. For the full year, margin expansion of 50 basis points reflects strong leverage on our office and general expense, and on expenses for base payroll benefits and tax.

Turning to share repurchase. During Q4, we've repurchased 5 million shares using $110 million. For the full year, we utilized $303 million for the repurchase of 13 million shares, which compares with $285 million in 2015. Our total share count eligible for dilution at year-end, decreased 2% compared to 2015.

This activity builds on a program of consistent capital return that we initiated in 2011. Since that time, we've returned total of $3 billion to shareholders through a combination of common share dividends and repurchases and we have reduced our outstanding shares eligible for dilution by 28%.

In addition, on the strength of our operating results, we're pleased to announce this morning, our board's decision to raise IPG's quarterly dividend by 20% to $0.18 per share. This marks our fifth consecutive year of higher dividends with annual increase of 20% or more, tripling our quarterly dividend per share over the last five years.

We also announced that our board has authorized an additional $300 million for repurchase, combined with the $155 million remaining on our existing authorization as of the beginning of the year, this brings the total amount available for share repurchase to $455 million.

These actions based on our operating success in recent years and IPG's substantial financial strength as well as the confidence in our future prospects. Turning to our outlook for 2017. It's encouraging to see our agencies competing so successfully in the marketplace.

We continue to convert growth to operating profit at high levels and we remain committed to disciplined use of capital that can further drive shareholder value. As you can see in our results today, the tone of our business remains solid through year-end especially in the U.S., which is a key market for us.

We all know that marketing is becoming increasingly complex and that our industry is undergoing transformation, which brings with it both risk and opportunity. And those of you who've been following us, know, we have for some time been transforming our company with the singular goal of helping clients navigate this increased complexity.

Of course, our industry leading results over the past three years sets the bar that's much higher for comparable performance in 2017. But given the opportunities for our industry and the overall strength of our offerings, we are well-positioned to continue to deliver solid growth.

From a macro standpoint, as we all know 2016 was a year of profound geopolitical change in key world markets, which has the potential to bring new uncertainties to the business world as we head into the new year. With respect to the U.S.

and the UK, while these uncertainties bear watching, we have not to-date seen significant underlying changes to the solid demand for our services that has characterized the last few years.

Beyond that, generally slow growth macro conditions in markets such as Brazil, Continental Europe and the Middle East continue to present challenges which we nonetheless overcame last year. On balance, for 2017, we are therefore targeting 3% to 4% organic growth.

On a reported basis, our net business dispositions to-date will be a negative 90 basis points to our top line. It's worth noting, however, that our dispositions were either unprofitable or non-strategic, and that we will be stronger in the long run on account of these actions.

Our estimates are that FX at current rates, should impact our top line as well as our operating expenses by approximately a negative 1% for the full year. Along with this level of growth, we expect to continue to build on a longstanding record of operating margin expansion.

We are targeting an additional 50 basis points of margin improvement in 2017, which would bring us to 12.5%, closing in on our objective of 13% operating margin. As always, as the year unfolds, we will regularly review our perspective with you during our quarterly calls.

In sum, we believe that the drivers of shareholder value, creation and growth, margin expansion, and capital returns remain in place and we'll continue to work well at Interpublic as we enter a new year.

At this stage, I'll turn things over to Frank for additional detail on our performance and then I'll return on an update and highlights of our business.

Frank?.

Thank you, Michael, and good morning. As a reminder, I'll be referring to the slide presentation that accompanies our webcast. On slide 2, you'll see a summary of our results. Fourth quarter organic growth was 5.3%, U.S. organic growth was 3.3% and was 4.7% excluding the impact of lower pass-through revenue.

International organic growth was 7.8% with increases across all regions. For the full year organic growth was 5% and all regions increased organically. Q4 operating margin was 21.4% compared with 20.8% a year ago. For the full year operating margin expanded 50 basis points to 12% and operating profit increased 8%.

For the quarter, diluted earnings per share was $0.78 and was $0.75 excluding expense of $0.06 per share for business dispositions, which is reflected pre-tax in our other expense line and also excluding the impact of certain discrete items that benefited our tax provision and totaled $0.09 per share.

Full-year diluted EPS was $1.49 per share and would have been $1.37 per share excluding losses on dispositions and the benefit of certain discrete items in our tax provision. We repurchased 13 million shares for $303 million during the year.

As Michael mentioned, we announced this morning that our board has once again significantly increased our common share dividend by 20% to $0.18 per share quarterly and added $300 million to our share repurchase authorization. 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. Here it's worth noting a few below line items. First, the $25 million of net expense from business dispositions is reflected in our other expense line below operating income and it's primarily non-cash.

Second, our effective tax rate as reported in the quarter was low at 24.1%, adjusted for the dispositions and for discrete tax items, our adjusted effective tax rate was 31.2%. For the full year, our adjusted tax rate was 33.4%. As you can see our tax rate continues to be volatile from year-to-year.

This is due to the utilization of loss carry-forwards and adjusting valuation allowances based on sustained operating performance. As our profitability continues to improve around the world, our underlying trend is toward a lower effective consolidated tax rate.

Accordingly, we expect our normalized effective rate will be in the range of 35% to 36% in 2017, which is a couple of percentage points better than we've targeted in recent years. It's also worth noting here that our cash tax rate 2016 was 29% of pre-tax income, which is also our expected 2017 tax rate. Turning to revenue on slide 4.

Fourth quarter revenues $2.26 billion compared to Q4 2015, the impact of changes in exchange rates was a negative 2%, while net dispositions were negative 20 basis points, the resulting organic revenue increase was 5.3%.

Revenue growth for the full-year was 3.1%, consisting a 5% organic growth and a positive 20 basis points from net acquisitions, while currency was a negative 2.1%. Our organic pass-through revenue decreased $24 million in Q4. Excluding that impact, organic growth would have been 6.4%.

For the full year, our organic pass-through revenue decreased $17 million organically and reduced organic growth by 20 basis points. These pass-through revenues are in our events, sports and direct marketing businesses and changes in pass-through revenues are offset dollar-for-dollar by changes in our O&G expense.

As you can see on the bottom half of this slide, Q4 organic growth at our Integrated Agency Network segment was 6.7%, led by Mediabrands, McCann, R/GA and Huge. At our CMG segment, our marketing services specialists, a decrease in pass-through revenue weighed on organic growth in the quarter.

Excluding that effect, CMG's organic growth was a solid 4.7% in the quarter, led by mid single-digit performance by our public relations agencies. For the full year, you see that organic growth rates were 5.3% IAN, and 3.6% at CMG. Moving onto slide 5, revenue by region.

In the U.S., Q4 organic growth was 3.3% and was 4.7% excluding the change in pass-through revenues on top of 6.2% a year ago. These are led by IPG Mediabrands as well as Huge, R/GA and MullenLowe. Pass-through revenues decreased due to the timing, projects and our events business.

Among client sectors, healthcare was our growth leader and food and beverage was also strong. For the full year, U.S. organic growth was 4.4% with increases across all of our principal disciplines in most client sectors, including food and beverage, tech and telecom, healthcare, retail, and government services.

Turning to the international markets, the UK grew 11.7% organically in Q4. It's our notably strong performance at a number of our agencies, notably Mediabrands, R/GA, Jack Morton and McCann. For the full year, UK organic growth was 8.5% and was still strong at 5% including the impact of higher pass-through revenue.

Total revenue growth was 1.2% which includes both the positive impact of acquisitions in the market, and negative impact of FX when the pound starts depreciation. In Continental Europe, we had another double-digit quarter with 11.1% organic growth, held by new business wins.

Among our largest markets, we had very strong growth in Germany and Spain, while France and Italy decreased. For the full-year, organic growth for Continental Europe was 5.7%. In Asia-Pacific, organic revenue growth was 7.5% Q4 on top of 7.9% a year ago. We had double-digit increase in three or four largest markets, India, China and Japan.

Australia grew in the mid single-digits. We had growth across most of our agencies including Mediabrands, McCann, MullenLowe and Weber Shandwick. For the year, organic growth in the region is 1.7%, would have been 4% if not regional decrease in the pass-through revenues. In LatAm, we grew 5% organically in the quarter.

We continue to see strong performance in Argentina, Mexico, Chile and Colombia, which offset the decrease in Brazil. Our growth in the regions led by Mediabrands, Huge and R/GA. For the year, organic growth was 12.2%, a strong growth in all of our major country markets.

In our other markets group, organic revenue growth was 90 basis points in the quarter. This group is made up of Canada, the Middle East and Africa. For the year, organic growth was 4.8%, a very strong performance from Canada. On slide 6, we chart the longer view of our organic revenue change on a trailing 12 month basis.

The most recent data point is 5% for calendar year 2016 on top of 6.1% in 2015 and 5.5% in 2014. As Michael mentioned, this is industry leading performance. Moving on to slide 7, operating expenses, which remained well controlled in the fourth quarter. Total operating expenses increased 2.3% compared with reported revenue growth of 3.1%.

For the full year operating expenses grew 2.5% supporting revenue growth of 3.1%. Our ratio of total salaries and related expenses to revenue for the full year was 64.2% compared with 63.8% a year ago.

Underneath that we continue to drive efficiencies on our investment and base payroll, benefits and tax, which is our largest cost catered, 10 basis points of operating leverage for the year and 30 basis points excluding the impact of lower pass-throughs. Our expense for incentive compensation increased in 2016 to 4% of revenue from 3.7% in 2015.

That was mainly driven by the increased expense of our long-term incentive comp programs, a reflection of strong operating performance over the past three years, against both our revenue and operating margin targets. Expense for temporary labor was 3.7% of revenue for the full year 2016 compared with 3.6% a year ago.

Severance expense was 0.9% of revenue the same levels a year ago. Our other salaries and related categories 3% of revenue compared with 2.9% in 2015. Year end head count was approximately 49,800, an increase of 1.3% from a year ago, while average head count over the course of 2016 increased 2.4%.

As you'd expect head count increased in growth areas of our portfolio including digital services, media, P&R and a support of new business wins. Turning to ops and general expense, O&G was 23.8% of full-year revenue compared with 24.7% a year ago giving us 90 basis points of operating leverage.

For the year, we continue to drive leverage across our O&G categories. The exception was occupancy expense where it benefited from a one-time credit 2015, as we have previously described. We had 20 basis points of leverage on our expense for T&E, office supply and telecom as well as 10 basis points on professional fees.

In addition, we had 80 basis points of leverage on our category of all other O&G expense, as pass-through expenses decreased from a year ago along with the related revenue. As I mentioned in connection with revenues, pass-through expenses are primarily in our events, sports, direct marketing disciplines.

On slide 8, we show our operating margin history on a trailing 12 month basis with most recent data point at 12%. We have made sustained and significant gains. There is still work to be done and we remain highly focused on attaining our long-term goal.

Turning to slide 9, we present more detail on below the line adjustments to our reported fourth quarter results, in order to give you a better picture of comparable performance, with a loss in the quarter of $25 million in other expense related to disposition of a few small non-strategic businesses. The after tax impact was $0.06 per share.

As you can see, the impact of the new accounting standard for share-based compensations was de minimis in the quarter. Moving to the right hand on the slide, we recorded benefit in the amount of $37 million for U.S. federal tax credits, which benefited from our diluted earnings per share by $0.09.

Result this fourth quarter adjusted diluted EPS $0.75 per share. Slide 10 depicts similar adjustments for the full year 2016, again for comparability.

You can see our loss of $0.10 per share, diluted share for business dispositions are benefited $0.03 per share for the new accounting standard, a share-based compensation with a benefit of $0.11 per share for U.S. federal tax credits. In addition, valuation allowance reversals related to business sales were a benefit of $0.03 per share.

We also released tax reserves upon the conclusion of previous year's tax examinations, which is a benefit of $0.06 per share, result is an adjusted full year diluted EPS of $1.37. Turning to slide 11, the current portion of our balance sheet.

We ended the year with $1.1 billion of cash and short-term marketable securities, which compared to $1.51 billion a year ago. We returned $542 million to shareholders during the year, through share repurchase and common stock dividends.

Under current liabilities, the increase to the current portion of long-term debt reflects the upcoming maturity of our $300 million, 2.25% notes due in November of this year. On slide 12, return on cash flow for the full year. Cash from operations in 2016 was $513 million compared to $689 million a year ago.

The comparison includes $414 million used in working capital compared with the use of $99 million a year ago. It is not unusual for working capital to be volatile from year-to-year due to the timing of collections and payments in our media business.

Investing activities used $268 million in the year including $201 million for CapEx and $52 million for acquisitions. CapEx was above the level of the prior year in our recent run rate due to a number of large agency moves during 2016.

Financing activities used $666 million, mainly $303 million for the repurchase of our common stock, $238 million for common stock dividends. 2016, our net decrease in cash and marketable securities was $409 million. Slide 13 is the long view of our debt decreasing from $2.3 million in 2007 to our current debt total of $1.69 billion at the end of 2016.

Slide 14, shows the total of our average basic plus diluted shares over time, that the far rights of the total as of year-end 2016. Our average total shares decreased by $156 million shares over this period, well our starting position for 2017 is $402 million on the right.

In summary, on slide 15, we are pleased with our performance in the quarter and the year. Our teams executed very well, achieving strong revenue growth while maintaining expense discipline. And our balance sheet continues to be a meaningful source of value creation as evident in the actions announced by our board today.

That leaves us well positioned entering 2017. With that, I'll turn it back over to Michael..

Thank you, Frank. Well, obviously we're pleased to have achieved very strong results across the board for 2016. Digital activity across all of the agencies continues to be a significant driver of our success. And we continue to see the benefits of the major strategic decision we made some time ago to embed digital expertise with all of our agencies.

The other strategic priority that has fueled us is a longstanding commitment to investing in people and creating a differentiated culture that draws so many of the industry's best and most entrepreneurial talent to our group.

Our commitment to diversity and inclusion is an integral part of our culture and we remain focused on diversity as a key ingredient to success in a global ideas business. We all know that our industry is changing at a rapid pace.

As you'd expect, we regularly monitor activity in adjacent sectors and among potential new entrants into our space, so as to ensure that we continue to develop our integrated model and deliver a range of emerging services to our clients. As mentioned briefly in my opening remarks, we've led the industry in organic growth from 2014 to 2016.

During that time, we have organically added $1.2 billion of revenue at Interpublic, although some of that has not been reflected in our reported results on account of the negative effects of currency.

Amplifying this organic revenue growth as a standalone entity, $1.2 billion company would be among the 15 largest marketing services providers in the world. It would rank close to the size of the marketing operations of the leading consultancies and we've accomplished that in just the past three years.

This doesn't mean we should feel any less driven to keep evolving the IPG offerings. But, it does demonstrate how well positioned we are to continue innovating and remain highly relevant to marketers in today's competitive and complex media environment.

What's more, unlike some of the new competition, we could increasingly be facing, we enjoy the significant added benefit of a full portfolio of best-in-class offerings that we can integrate and add to our digital services including creative, media and high growth specialty capabilities such as PR, healthcare marketing and CRM shopper marketing.

Consistent with recent years during 2016, we also demonstrated our ability to remain focused on and deliver against our stated financial targets.

Our record of sustained long-term margin improvement is something we're very proud of, as is the fact that we've made such great progress in terms of the company's balance sheet and its overall financial strength. Our capital return programs continue to be significant drivers of value.

And, last year, we surpassed the $3 billion threshold in total returns to our owners since reinstituting these programs in 2011. Our board's decision today to increase the dividend and add to our share repurchase program shows a continued commitment to return value to our shareholders as well as confidence in our future prospects.

I'd like to turn now to the performance at our agency levels in order to provide a progress report on the key developments within our portfolio. At Mediabrands, UM closed the year with an impressive wins as Fitbit and Hulu, which was an integrated effort with other IPG agencies as well as Tim Hortons, a major win in Canada to start the new year.

We saw new leaders join to head up the EMEA and Asia-PAC regions, as well as new global leaders for Initiative and Reprise.

As indicated previously, Mediabrands is the place where we will continue to further focus and invest behind our already considerable data and analytic capabilities, which we believe will become the data stack and platform that would serve all of our agencies and their clients, as we push for even more accountability in our marketing programs.

R/GA saw major award wins in significant new business such as Mercedes-Benz and Siemens, as well as further expansion in terms of its service offerings, notably in capabilities like business transformation consultancy and the connected office space.

The agency launched at its first UK based accelerator program and more recently we're pleased to announce that the first R/GA Venture Studio program cosponsored by Snap and IPG to focus on marketing tech and the rapidly growing mobile advertising.

Huge posted another year of very strong growth with leading edge capabilities in user experience design as well as strong tech development teams that are key to building the platforms for many of their clients' digital and e-commerce businesses.

McCann Worldgroup posted strong results, fueled by growth with existing clients and continued improvements that have made them a standout in global multi-disciplined marketing solutions. The agency's global creative is surging as well. They had the single most awarded campaign at Cannes, and two out of the Festival's five biggest winners.

Their amazing work for Lockheed Martin implementing a group VR experience for a virtual field trip to Mars, shows how much can be done when you connect great marketing ideas and technology expertise on behalf of the brand. CMG also continued to deliver strong results and outstanding creative work as well as taking further share in the PR space.

Weber Shandwick's acquisition of Flipside, a specialized mobile and social agency out of London, with strong development capabilities will ensure that they increase the lead they already enjoy over most of their competitors in the digital space.

All across the agencies in CMG play important roles in an integrated IPG engagements on our top 20 clients. MullenLowe posted improving results including very positive trajectory at its core U.S. business and played a lead role in our open architecture model in our wins at Harley-Davidson and Western Union.

Profero continued to perform well and their same senior team stepped up into new leadership roles within core MullenLowe operations, which will help to drive further digitization of the agency's hyper bundled model going forward. At FCB, there were notable new additions of key talents across the network.

The agency prevailed in the highly competitive Clorox consolidation pitch, and performance at its headquarter Chicago agency was strong, in terms of both business results and a significantly enhanced creative reputation. FCB Health also continues to be a standout agency, which features prominently in the agency's overall success. Our U.S.

independents round out our portfolio, each has a range of services that it can deliver on an integrated standalone basis to major clients or as part of a customized, open architecture IPG solution. As Deutsche does on our Global J&J ACUVUE business.

The Martin Agency on the global OREO account or Hill Holliday on the consumer side of the number of J&J former engagements. Carmichael Lynch also had a very successful year, and we look forward to including them in more integrated teams on a go forward basis. As you know, we focused on delivering on the vision of open architecture for nearly a decade.

Although this is become something that all of our competitors are talking about, we continue to feel that our approach seeks to integrate the best of our talent across the organization by means of fully customized and seamless teams is a differentiate for us.

We look forward to additional opportunities to develop this model for existing clients and utilize it in the pursuit of new business. It's clear from our overall results that the quality of our offerings is at the highest level in many years.

Globally at major competitions ranging from the Cannes to the EPPYs our agencies are recognized with the highest honest and our group performance is outstanding. This includes regional award shows, as well as those for specialties ranging from sports marketing to promotional and shopper marketing, PR, healthcare marketing and more.

In the recently released Ad Age A-List, we were the only holding company with multiple agencies in the top 10, and also at the top end of the industry in terms of the range of marketing services honored and recognized. Looking forward, despite macroeconomic and political uncertainty, the tone of the business remains sound.

New business activity is solid. The breadth and strength of our portfolio positions us well to participate in most all pitch opportunities, and there is growth to be had by addressing the emerging needs of our existing clients.

In light of these factors, we believe that we should continue to see competitive organic revenue performance and we are therefore targeting the 3% to 4% for 2017. Along with this level of growth, we expect to further improve operating margin by an additional 50 basis points, which will result in 2017 operating margin of 12.5%.

Combined with the strength of our balance sheet and our consistent commitment and proven record, when it comes to capital return, that means that they remain significant potential value creation and enhance shareholder value.

As always, we thank our clients, our people who've been the foundation for our long-term success, and we look forward to updating you on our progress at our first quarter's call. With that, I'll open it up to Q&A..

Thank you. We'll now begin the question-and-answer session. Our first question is coming from the line of Alexia Quadrani of JPMorgan. You may now ask your question..

Thank you. Just two questions if I may. First is, Michael, if you could provide a bit more color on what you're seeing in the U.S. ad market, it's been a big area of focus given the big swings from Q3 to Q4 and then of course, your standout performance versus some of your peers that have already reported.

I guess with Q3 an anomaly and would you sort of expect we'll resume to more normalized organic growth for this year kind of in line with your overall guidance for 2017?.

Yeah. Well, thank you, Alexia. Yeah. I think our standout performance is obvious in our results. We consistently say this, we look at it on a full year basis. I know we try to meet your objectives in terms of modeling on a quarter-by-quarter basis, but clients don't operate that way.

So as we said in the third quarter when we were a little softer in the third quarter, what we said was we saw some softening in our healthcare business and we had some deferrals if you will going into the fourth quarter due to some of the accounting rules on new business. So we believe if you look at on a full year basis, our performance in the U.S.

after pass-throughs of 4.8% is pretty impressive and that's indicative of the fact that the tone of the business in the fourth quarter was pretty solid. The one area in the fourth quarter that we did see some pullback was on some project based businesses, particularly in the events. But we did see a recovery in the U.S.

in the fourth quarter and it's really not a recovery, what we saw, what we expected to see for the full year. And so, as a result, we did not see the softening that some of our competitors see in the U.S. market. The U.S. market continues to be 61% of our business overall, that will fluctuate from 60% to 62%, but obviously it's important.

All of our businesses in the U.S. are very strong, particularly our digital agencies, our media agencies, our independent agencies as well as obviously, McCann, FCB, and MullenLowe had a good result in New York and U.S. So overall we're confident in the U.S. And, as the U.S. economy continues to grow, hopefully, we will see the benefits of that.

So the tone continues to be solid..

Thank you. And then, Michael, I also noticed in your opening comments or in your comments earlier, you mentioned consultants and sort of the new competition or competition from consultants..

Right..

Can you give us a sense on I guess how much more you're bumping into them or competing with them? And, is it a different kind of competition or is there just one of another group of competitors that you always deal with?.

Actually we have not seen head-to-head competition with them in most of our businesses. So, a lot of the stories are more anecdotal. But a lot of these consultants are already at our clients, and they're doing system integration.

And so, while they're doing the system integration, they've added digital capabilities and some of them have bought creative agencies to try to encroach on our space, if you will. But, what they cannot do is circling on the creative side. They're not going to have the firepower that we have across all of our agencies.

Just look at the awards at McCann, at FCB, at MullenLowe, on the creative side of our businesses. And on a head-to-head basis, they're not going to be able to compete on the creative side. And, the other key aspect of the integrated offering, which we bring to the table. That includes media, PR, digital, experiential.

So I don't see these system integrators being capable of competing with us if we deliver that integrated offering, which is why our open architecture model is so important in the competitive environment, because head-to-head they just can't possibly bring in all of these resources.

So I view it as some way down the road that consultancy more in the business transformation side of the equation is where they're going to be making some in roads.

And as a result, we are – we have frankly beefing up our areas on business transformation, R/GA has gotten a lead on that in terms of their practice and we see it in the strong results and frankly if you look at the right up of why they will pick this among the Ad Age A agencies.

The fact that they moved into that space was a good indication of their vision and frankly, we believe that's a space that all of our agencies are going to have capabilities in..

Thank you very much..

Thank you..

Thank you. Our next question is from Jaime Morris of Jefferies. Your line is now open..

Yeah, hi. It's actually John Janedis. Two questions for you guys. One is, I know it's small piece of the business, Michael, but the two quarters in Europe were I think the best in at least 10 years.

And so I wanted to ask, was the driver a couple of large account wins and how do you feel about your market share going forward? And then separately, as you know, a few weeks ago there was the news on the DoJ investigation.

I don't think you speak to that directly, but I was wondering if as a result, you changed any of your practices as it relates to the bidding process or production broadly? Thanks..

All right. Thank you. John. Well first of all, as I said, look we're very pleased with the results in Continental Europe. It represents 9% of our overall business and I've said in the past when our results were not that good in Continental Europe, we are not as big compared to the rest of our portfolio.

So client wins and losses have an impact on our performance, and fortunately between Mediabrands and McCann, we've had some good wins in Continental Europe including all the – at McCann, and we're seeing the positive results of that.

That said, I don't believe given the economic environment in Continental Europe, that we can continue to deliver high single digit results in that marketplace, especially our comps get a little harder as we go forward.

But the good news about it is, A, with positive results in Continental Europe, we get to use some of our NOLs, which is reflected in our effective cash tax rate, which is a good thing and our effective rate. It also – we're expanding some margin in Continental Europe, so all of that is positive.

But I wouldn't say that we should continue to have, I hope it's true, but we should continue to have the kind of the growth that we've seen in Continental Europe. We still think Continental Europe is going to be facing some issues.

And therefore we're not counting on a full recovery in Continental Europe, but it's great to have some great clients in Continental Europe as a base for our business there. As far as the Department of Justice, as you know, we were the first ones to come out and publicly announced the receipt of the subpoenas, if you will.

We had at one local agency in the United States. And after that, all of our competitors in the holding companies have received similar request. As I said before, we're certainly giving them whatever material we're collaborating as best we can. We have a – first of all it's not a big part of our business. In this case, it has to do with video production.

Production is in the low single digits of our entire business. And in this case, it's video production, and we do have a process of triple bidding if you will, we stick to that. At this point, we haven't changed significantly our internal policies, because we already have internal policies that we believe are very strong.

And we'll cooperate and see where this leads us, but we haven't seen any much action on that other than what you've read..

All right. Thank you..

Thank you, John..

Thank you. Our next question is from Peter Stabler of Wells Fargo. You may now ask your question..

Good morning. Thanks for the questions. A couple if I could. Michael, going back to the dispositions, I think you mentioned 90 bps, and just want to confirm that that's based on – that impact is based on actions to-date.

Looking ahead through the remainder of the year, would you anticipate further dispositions and then wondering if you could give us a little more color on – you said non-strategic or unprofitable, but is there any sort of theme to the types of companies in terms of the services they provide that you are disposing of.

And then secondly, wondering if you could just, Frank, briefly touch on the source of leverage, I might have missed it in 2017 that you're expecting and whether that is dependent upon the level of growth in IAN or CMG or kind of a irrespective of how those two segments perform that you feel comfortable with the margin targets. Thanks so much..

Yeah. Look, it's a good question. Every year, we look at unproductive assets if you will, that aren't delivering margin and are non-strategic. This is not us exiting a business within IPG. They are discrete businesses, and frankly some of them were losing money, as they didn't fit in our overall portfolio.

So, if you look back at the history of our company, we've had this before and as I indicated it will impact our revenue for 2017 by 90 basis points, but it should improve margin. And there is no theme to it other than, we look at our businesses, we see if they are adding value.

We look if they're going to need capital, whether they're adding to our margins and are they consistent with our overall future direction of the company. But it's not like we're exiting a particular business. One example, as you've read, the one that's public is daily (47:43). We sold it back to management.

They have some good client relationships which we continue to support and we think that this was a good transaction both for the clients to which they serve internal management. And frankly from a management perspective of IPG, we'd rather be spending a lot of our time managing our existing portfolio.

So that's the type of transactions that are in there. But we're not exiting a major business plan or anything like that. Frank will answer on the conversion.

But I think it's a subtle way of asking why our conversion in 2016 was not as high as it historically has been, and what are we assuming conversion in 2017? Let me just say that, we continue to convert at very high levels, if you will. As we get to our famous 13% target, which I'll say again is not the ceiling.

It's just a number we drew in the sand, gets a little more difficult to convert at the 30% which you have seen historically. That said, for 2016, we did convert at a healthy rate. 50 basis points is not something that we're hanging our head down on.

And one of the reasons that conversion wasn't quite where it should be is we did have some charges, if you will for the year, on some of our acquisitions.

The way this accounting goes in terms of valuations, if the business you've acquired is doing better than you thought when you did it, the accounting rules require us to have a charge which affects our margin.

For 2016, if you compared it to the same charge – a similar charge we had in 2015, which was not as large, it affected our margins by about 15 basis points. So, that was a drag on our margin for 2016. If you look at it from that perspective, our conversion rate was closer to 24%, 25% – 24% than the 30%.

Going into 2017 at a 3% to 4% organic growth and the conversion rates that we believe we can realize, the 50 basis point margin expansion reflects a higher conversion than we experienced in 2016. But it's in a range, this isn't exact science and we're very comfortable with the number we've put out for 2017. Frank, you want to....

Yes. The only thing I'd add, Peter, is, we're looking for 50 basis points of margin for 2017. I like to think we're going to get leverage across all of our respective cost buckets. So to point to a specific area of leverage I think that's not the point. The point is, our guidance is 50 basis points of margin.

The second point with respect to is the growth – is the margin target predicated on growth at one of our specific segments, the answer is no, both – well I'll take growth from anywhere..

Thank you, guys..

Thank you, Peter..

You're welcome..

Thank you. Our next question is from Steven Cahall of Royal Bank of Canada. Your line is now open..

Thank you. First question maybe to follow-up on Alexia's question, I think you mentioned that the U.S. market was solid, your peer earlier in the week mentioned that some of their U.S. clients were hopeful and bullish and economists and the S&P are telling us that the U.S. economy is going to look awesome by the end of the year.

So I was wondering if you could give us a little bit of sort of where the rubber meets the road with your clients.

Are they as bullish as the market or the economists are, are they still really sort of waiting and seeing what's going to happen in Washington, and how consumers are going to act this year, before increasing scopes of work or committing new funds into their marketing budgets? And then I have a quick follow-up..

Yeah. Fine. Look, as I've said before, everyone is hopeful that we'll see tax reform and what we've said before, if there is tax reform certainly in the corporate tax environment. That would benefit IPG, it would benefit our clients.

If there is a better environment and consumer sentiment is up, that's going to benefit us and it will benefit our clients. So yeah, I mean we're all keeping our fingers crossed, and hope something like that will happen in the marketplace. But we do our forecasting and we do our numbers based on a bottoms up.

Our clients, when you talk to our clients, they're wishing too, but they're not counting on it. And I think at this point the expenditures that we're seeing are based on a business as normal. Looking at markets where they can gain market share, looking at where we can add value in terms of increasing their goals if you will in terms of sales.

And so I think potentially it's on the upside, if we do see that and we do see consumer sentiment and the opportunity to bring foreign cash over into the United States. Whenever clients have more money to spend, they're going to look to grow their business.

And if they look to grow their business, I can't think of a better place for them to put their money than in advertising. So it's – we move the needle and we're ready, willing and able to help them do that. So I think the numbers that you're seeing that we've put out reflect more or less a business as usual, which isn't bad.

If you look at our performance in the U.S., I'll take it if we have business as usual for 2017. I think those are results that we can be proud of. And if we expand our margin at the 50 basis points that we're forecasting, I would say that's a good solid result..

Thanks. And then on the media side, I think you talked about some of the recent wins like Fitbit, Hulu, and Tim Hortons. I think it's been reported, you may have also had couple of recent losses on the media side.

So, number one, what can we expect for maybe the next few months from an agency review perspective? And how do you think you come out in that? And are you still net new business positive for the year based on where you sit today?.

Well, yes, and the biggest one actually you're referring to was MillerCoors. If you recall on the last quarter, we said that was in review. They had a business consolidation and unfortunately we didn't prevail on that one. Whenever you have a new CMO and a consolidation, it's hard for the incumbents to prevail.

Yes, we were net new business positive for 2016. We continue to be so in 2017, we've had a number of wins. Some of our wins if you recall are not publicly announced wins.

Our strongest growth – it's an important point, our strongest growth is from our existing clients and you don't see big announcements as we increase our businesses and it's historically always been a strength of IPG, particularly at McCann for example where they have longstanding multinational clients.

And they don't make a big deal about picking up brands or reassigning brands and growing their existing portfolio, but that's inherent in our portfolio here. So, the media business, we have a strong pipeline in new business.

We had some wins already on the media side for 2017 and we're confident that the numbers we put forth in terms of our forecast, that reflects wins and losses we anticipate for 2017..

Great. Thank you..

Thank you..

Thank you. Our next question is from Omar Sheikh of Credit Suisse. Your line is now open..

Thank you. Good morning, everyone. I've got a couple of questions, one for Michael and one for Frank. Michael, first of all, you talked a little bit about dispositions, I wonder whether you could talk about potential pipeline for acquiring companies. You mentioned you're thinking about perhaps building (55:46) Mediabrands, for example.

So, I wonder whether you could maybe just talk generally about how you think about the pipeline and whether M&A might play a part for that. And then secondly for Frank, I just want to make sure I understand the tax rate point that you made. Were you saying the sort of increased utilization of NOLs was driving the tax rate down this year.

And I just wonder if you could clarify whether that's in the U.S. or in Europe and if so kind of what sort of scope do you see for a tax rate to come down further, obviously the absent any tax reform. Thanks..

Okay. I'm insulted that you're asking a tax question to Frank, so giving the fact that my history as a tax lawyer, but aside from that, I'll go to the actual....

(56:32) Michael..

Our acquisition pipeline is consistent. Our whole strategy has always been to do strategic bolt-ons or strategic transactions in markets, or expertise that we would like to be thought. We set aside around $200 million in terms of acquisition money and which is pretty consistent with where we were in 2016. And we see the same for 2017.

We don't see any big transactions out there. We are always looking at transformational type transactions. For example, many years ago, we looked at (57:12) along with everyone else. And we choose not to do that unless as I said we see a transformational transaction out there.

But it doesn't seem to be one out there at the current environmental moment, that would have a big call on our capital. But if there is one, obviously, we'll be opportunistic and it will be consistent with our overall strategy of gaining market share. I'll answer the tax rate question, if you don't mind..

I don't mind..

The NOLs that we have principally in Europe, and the only way for us to use them are to generate income. And so, that's why I say it's encouraging for us to see positive growth in both the UK, and in Continental Europe. And we did in fact, use some of our NOLs. And that's consistently, we have a $1 billion of NOL and that's an opportunity.

So if we can really turn the corner in Continental Europe and build up consistent growth and cash taxable income, then we – that's an opportunity for us to continue a low tax rate, if you will, both on the reported side because we do get a benefit.

The reason sometimes we talk about, if we have losses in those markets, we don't get a benefit with it – for it in our effective tax rate. So that's one of the reasons our tax rate was slightly higher because we had losses without corresponding tax benefits.

If we have gains, it's a double whammy there because we can, in essence, we no longer have a drain from a lost point of view and we can use the NOLs. I might add that, on top of that we do a lot of work on the international tax planning side of our business.

And obviously, that's not something we've raised flags about, but what you're seeing in the effect of our tax rate or some utilization if you will of credits and structures that we have, there we believe our good tax planning on an overall basis from a financial and tax point of view..

See that is very clear. Thank you very much..

Sorry, Frank..

That's okay..

Thank you. Our last question is from Tim Nollen of Macquarie. Your line is now open..

Oh, great, thanks for fitting me in. I'll leave it to one since we're at right, here it's just about 9:30. And it's for Frank and it's about the operating margin guidance. Looking at the appendices in your slides, it looks like you brought down your real estate occupancy by somewhere in the neighborhood of 20% in the last few years.

It also looks like you have raised your incentives in 2016 which makes sense when you have a nice profitable year. So just wondering where does the extra squeeze out come from.

How do you get that margin up by the 50 basis points? And I heard your comments some, Michael, lot of conversion, but just wondering where else can you squeeze cost out if you're getting closer and closer to (1:00:12) level? Thanks..

It does get harder. And as I mentioned on one of the earlier calls, we're targeting 50 basis points. We're not going to guide to specific leverage points in our cost structure. Every dollar we spend, we're looking for to gain incremental efficiency. The biggest cost that we have is around our people.

And we did see some leverage in our base benefit tax this year and that's nearly we'll continue to be disciplined around. And to your point earlier, in synopsis is variable and based performance, it can go up or down. And that's based on performance as well..

Yeah. Let me just add to add on – leveraging on that. A part of the increase in our incentive is the effect of our long-term incentives. We have long-term incentives over a period of time two years or three years.

So what you're seeing is at these come through and we've had good years, that's where you see the incremental cost if you will on incentive expense. Frankly, that's a pretty good bid, because that shows that our incentive plans are working and that's what we want them to do..

So with that, I thank you all for your participation. As you can tell, we're very pleased with our results and we look forward to next year and hopefully having similar conversation. Thank you..

Thank you..

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