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Edited Transcript of IPG earnings conference call or presentation 12-Feb-20 1:30pm GMT

Q4 2019 Interpublic Group of Companies Inc Earnings Call

NEW YORK Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Interpublic Group of Companies Inc earnings conference call or presentation Wednesday, February 12, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ellen Tobi Johnson

The Interpublic Group of Companies, Inc. - Executive VP & CFO

* Jerome J. Leshne

The Interpublic Group of Companies, Inc. - SVP of IR

* Michael Isor Roth

The Interpublic Group of Companies, Inc. - Chairman & CEO

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Conference Call Participants

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* Alexia Skouras Quadrani

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Benjamin Daniel Swinburne

Morgan Stanley, Research Division - MD

* Daniel Salmon

BMO Capital Markets Equity Research - Analyst

* Jason B Bazinet

Citigroup Inc, Research Division - MD and U.S. Cable & Satellite Analyst

* Michael Brian Nathanson

MoffettNathanson LLC - Founding Partner & Senior Research Analyst

* Timothy Wilson Nollen

Macquarie Research - Senior Media Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Interpublic Group Fourth Quarter Full Year 2019 Conference Call. (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, Senior Vice President of Investor Relations. Sir, you may begin.

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Jerome J. Leshne, The Interpublic Group of Companies, Inc. - SVP of IR [2]

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Thank you. 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 Ellen Johnson. We will begin with prepared remarks to be followed by Q&A. We plan to conclude before market open at 9:30 a.m. Eastern time.

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.

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [3]

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Thank you, Jerry, and thank you for joining us this morning as we review our results for the fourth quarter and 2019. I'm pleased to be joined this morning by our CFO, Ellen Johnson. I'll start our call by covering the highlights of our performance as well as our outlook for the new year. Ellen will then provide additional details, and I'll conclude with an update on our agencies, to be followed by our Q&A.

We're very pleased to report strong performance for both the quarter and full year. At the top of our financial highlights, net revenue organic growth was 2.9% in the fourth quarter, which builds on the challenging 7.1% comp in the fourth quarter of 2018. That brings organic growth for the full year to 3.3%, which exceeds the high-end of our targeted range for the year and again, places us at the forefront of our industry.

Regionally, fourth quarter U.S. organic growth was 2.1%, which is on top of the 6.3% U.S. organic growth in the fourth quarter of the prior year. It's also worth noting that our growth in the U.S. this quarter includes and is in spite of the headwinds we have described in prior calls, which dragged on U.S. growth by 4.3% in the quarter.

International organic growth was 4.1%, which, on top of 8% growth a year ago, also represents continued strong performance. We grew organically across the U.K., Continental Europe, LatAm, Canada, the Middle East, with Asia Pac the sole exception.

Globally, we saw solid Q4 increases at both our IAN and CMG segments, which reflects very broad participation across agencies and disciplines. Our growth was led by media, data services and tech. We also saw contributions from our creatively led global integrated networks.

Among our marketing service specialists, fourth quarter growth was paced by sports and entertainment marketing and experiential marketing. Our top-performing client sectors were tech and telecom, health care, retail, financial services and food and beverage. For the year, it's worth noting that every client sector grew other than auto, where we are contending with the headwinds.

Turning to our operating income and EBITA. Fourth quarter operating income was $491 million. EBITA was $513 million in Q4 compared with adjusted EBITA of $504 million a year ago. EBITA margin was 21.1%. For the full year, adjusted EBITA was $1.2 billion, an increase of 11.3%. Our adjusted EBITA margin was 14%, an increase of 50 basis points from a year ago, attaining the high end of our target range for the year. Full year diluted reported earnings per share was $1.68 and was $1.93 as adjusted, which is comparable to $1.86 per share a year ago.

Our results for the year further demonstrates the strength of our client-centric, integrated offerings and the quality of our people, a combination that has produced leading organic growth and margin improvement over a period of many years. We're proud of our consistent level of achievement amid significant change in our industry and the dynamic environment in which we are all operating.

Along with strong performance, we have continued our investments in outstanding talent across our agencies and in the tools and capabilities that keep us on the leading edge of our industry. This is especially true in key areas like digital, data services and analytics, strategy and creative.

On the strength of these results and confidence in our future prospects, we're pleased to announce this morning our Board's decision to raise IPG's quarterly dividend by 9% to $0.255 per share. This marks our eighth consecutive year of dividend increases, over which time our quarterly dividend per share has more than quadrupled.

As we turn to our outlook for 2020, we do so with the foundation of highly competitive agencies, collaborating effectively in our open architecture framework and converting revenue growth to operating profits at margin-accretive rates. Further, we're extremely well-resourced with data science capabilities that are fundamental to a future of high-order offerings.

From a capital allocation standpoint, we continue to be focused on organic investment in our business to maintain growth leadership on deleveraging our balance sheet following the Acxiom transaction and as demonstrated in our actions this morning, on returning capital to shareholders. All of these priorities further our commitment to driving shareholder value.

As is apparent in our results, the worldwide tone of business among our clients remains solid through year-end. While there are macro issues that require continued attention, including the sustainability of economic expansion, the state of international trade and global political developments, the backdrop nonetheless appears sound as we enter the new year.

In addition, like all global companies, we are concerned about the coronavirus outbreak, and we want to convey our deepest support and commitment to the people of China. Naturally, we are focused on the well-being and safety of our own people as we have 2,500 employees in Greater China and thousands of more partners, clients and suppliers. Most of our people in China are working from home and are subject to travel restrictions. We have technology in place that makes it easier for our people to work remotely. We are closely monitoring the situation, and we'll take every necessary precaution to safeguard our people.

Nonetheless, we continue to see opportunity for solid growth in 2020 even as we are comparing, once again, against industry-leading growth rates. And we'll continue to contend with revenue headwinds in the first half of the year. For 2020, we are targeting organic growth of 3%. We will cycle through our large headwinds by midyear. And we're well positioned with world-class offerings, a distinctive go-to-market strategy and unique high value-added resources.

Turning to EBITA margin for 2020, we also expect to continue to add to our long-standing record of margin expansion in the upcoming year. We're targeting EBITA margin expansion of 20 basis points over our 2019 adjusted EBITA margin, which would bring us to 14.2% in 2020. As always, as the year unfolds, we will regularly review our perspective on the year during our quarterly calls.

In summary, we believe that the drivers of shareholder value creation are the quality of our people and resources, revenue growth, margin expansion and share dividends. And they all will continue to work well and into public as we enter a new year.

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

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Ellen Tobi Johnson, The Interpublic Group of Companies, Inc. - Executive VP & CFO [4]

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Thank you, Michael, and good morning.

As a reminder, my remarks will track through the slide presentation that accompanies our website.

On Slide 2, you'll see a summary of our results. Fourth quarter organic growth was 2.9% on top of strong growth a year ago. U.S. organic growth was 2.1%, and international organic growth was 4.1%. For the full year, our organic growth was 3.3%. Q4 EBITA was $513 million, and EBITA margin on net revenue was 21.1%. For the full year, our adjusted EBITA was $1.2 billion, and adjusted EBITA margin expanded 50 basis points to 14%. For the quarter, our adjusted diluted earnings per share was $0.88. Full year adjusted diluted EPS was $1.93.

Over the course of 2019, we retired debt in the amount of $400 million. Gross leverage at year-end was 2.3x, 2019 adjusted EBITA as defined in our credit agreement. As Michael mentioned, we announced this morning that our Board has once again raised our common share dividend. They have approved a 9% increase to $0.255 per share quarterly.

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. Fourth quarter net revenue was $2.43 billion compared to Q4 2018. The impact of the change in exchange rates was negative 1%, and the impact of net acquisitions was a negative 1.1%. The resulting organic revenue increase was 2.9%. Net revenue growth for the full year was 7.4%, consisting of 3.3% organic growth and a positive 5.8% from net acquisitions, while currency was a negative 1.7%. Net acquisitions for the year were chiefly Acxiom's revenue over the first 9 months, less the impact of certain small nonstrategic agencies.

Acxiom growth was included in our organic change beginning with the fourth quarter.

As you can see on the bottom half of this slide, Q4 organic growth at our integrated agency network segment was 2.9%. Growth in IAN was led by a range of our offerings, including IPG Mediabrands and Kinesso; Acxiom; McCann Worldgroup; FCB, notably FCB Health; MullenLowe and Huge. At our CMG segment, organic growth was 3.3% in the quarter, driven by strong performance at our Octagon sports and entertainment marketing group and by Jack Morton and experiential. Full year, organic growth was 3.5% at IAN and 2.3% at CMG.

Moving on to Slide 5, revenue by region. In the U.S., organic growth was 2.1% in the quarter, which includes a revenue headwind of 430 basis points that we've called out previously. Our domestic growth was led by a range of offerings, notably media, technology and data services, health care at both FCB and McCann and our creatively led services at MullenLowe and Carmichael Lynch. For the full year, U.S. organic growth was 1.9%. That's on top of 5.1% a year ago and includes the impact of headwinds of 3.3%. And again, the headwinds will begin to diminish in Q2 and are essentially cycled at midyear.

Looking at our international markets, we had another strong quarter in the U.K., with 4% organic growth. You'll recall, that's on top of 9.6% growth in Q4 2018. We continue to see contributions to growth across a number of our offerings and agencies, notably, IPG Mediabrands, Jack Morton and Huge. For the full year, U.K. organic growth was 3.7%, a solid increase against 9.7% growth in 2018. In Continental Europe, organic growth was 6.2%. This was highlighted by increases in most of our largest national markets, namely Spain, Germany and France. Q forecasts an outstanding year of 7.3% organic growth on the continent.

In Asia Pac, our primary concern, as Michael mentioned earlier, is the safety and well-being of our colleagues as well as all those affected by the coronavirus. Looking at our results in the region, our organic revenue decrease was 3%. Consistent with recent quarters, we continue to see mixed performance in our largest regional markets. Revenue in China and Australia decreased, while India was flat in the quarter and Japan increased. Our organic change in the region was negative 30 basis points for the full year.

LatAm was 17.1% organically in Q4, which is on top of 17.4% a year ago. We continue to see growth across the region that were led by our offerings in Brazil and Mexico, powered by both new client wins and growth of existing clients. Full year organic growth was 21.8%.

In our other markets group, organic revenue growth was 4.7% in the quarter, led by increases in the Middle East and Canada. Full year organic growth was 4.6%.

Slide 6 is a look at the expense drivers of our margin expansion in the quarter and the year. I will focus my remarks on the full year. Our ratio of total salaries and related expense to net revenue for the full year was 64.6%, which is an improvement of 140 basis points. Underneath that, we improved in all major expense categories, base payroll, benefits and tax, performance-based incentive compensation, temporary labor and severance. At year-end, our company-wide headcount was approximately 54,300, which is an increase of less than 1% from a year ago.

Our office and other direct expense was 18.1% for the full year and net revenue compared with 16.9% a year ago. The increase is mainly due to the consolidation of Acxiom for a full year, which has relatively more investment in data and technology.

SG&A expense decreased to 1.1% in 2019 from 2.1%, as reported in 2018. Excluding Acxiom deal expenses from 2018, the SG&A ratio was 1.7%. The change mainly reflects the greater expense allocation to our agencies in 2019 due to including Acxiom for the full year and lower expense for performance-based incentive compensation in SG&A.

Our depreciation -- our expense for depreciation was 2.2% of net revenue in 2019. That's an increase of 20 basis points. The amortization of acquired intangibles was 1% in 2019 compared to 0.5% in 2018 for both depreciation and amortization increases due to the consolidation of Acxiom for the full year in 2019 compared to only the fourth quarter in 2018.

Turning to Slide 7. We present details on adjustments to our reported fourth quarter results in order to give you better transparency and a picture of comparable performance. This begins on the left-hand side with our reported results and steps through operating income to EBITA and our adjusted diluted EPS. Our amortization expense for acquired intangibles was $21.4 million, resulting in EBITA of $512.7 million. Below operating expense, we had a loss from the quarter of $24 million in other expense related to the disposition of a few small nonstrategic businesses.

In our tax provision, we recorded a net benefit in the quarter through valuation allowance reversals totaling $25.3 million, which we have backed up here. While an adjusting item, the allowance reversal reflects fundamentally improved operating performance in the related markets. At the foot of this slide, you can see the after-tax impact per diluted share of these adjustments. The total is $0.04 per share, the difference between $0.84 reported diluted EPS and $0.88 as adjusted.

Slide 8 depicts similar adjustments for the full year, again, for continuity and comparability. This also brings in the impact of the restructuring charge from Q1. Our amortization expense was $86 million, and Q1 2019 restructuring charges were $32 million. Business dispositions over the course of the year resulted in a book loss of $46 million. The impact of discrete items from tax was a benefit of $39 million. The result is adjusted full year diluted EPS of $1.93. Note that our adjusted effective tax rate for the full year was 25.8%, which is at the low end of our targeted 26% to 28% range. In 2020, our forecast for our normalized effective tax rate is unchanged at 26% to 28%.

On Slide 9, we turn to cash flow for the full year. Cash from operations was $1.5 billion compared to $565 million a year ago. The comparison includes $443 million generated from working capital compared with $431 million used in working capital in 2018. As we have pointed out on previous calls, working capital can be volatile from year-to-year due to the variation and timing of collections and payments even by only a few days. The timing that was unfavorable to late 2018 resulted in a benefit to us in 2019.

Investing activities was $162 million in the year, reflecting our CapEx of $199 million. 2018 includes the Acxiom acquisition. Our financing activities used $843 million, which is mainly $403 million for the repayment of long-term debt and $363 million for our common stock dividend. In 2018, proceeds from long-term debt issuance were related to the Acxiom acquisition. Our net increase in cash was $519 million.

Slide 10 is the current portion of our balance sheet. We ended the year with $1.2 billion of cash and equivalents. Our $500 million, 3.5% senior notes matures in October this year and is reflected under current liabilities.

Slide 11 depicts the maturity schedule of our outstanding debt. Total debt at year-end was $3.3 billion, which is a reduction of approximately $400 million from a year ago and $500 million since the Acxiom financing in October of 2018.

In summary, on Slide 12, we are pleased with our performance in our -- in the quarter and the year. Our teams executed very well, achieving strong revenue growth in spite of significant headwinds while maintaining expense discipline. Our balance sheet continues to be strong and a meaningful source of value creation, as evidently actions announced by our Board today. That leaves us well positioned entering 2020.

With that, I'll turn it back to Michael.

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [5]

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Thank you, Ellen.

While we were pleased to have achieved strong results for 2019, highlighted by organic revenue growth that once again leads the sector, in each of the past 5 years, our growth rate has topped the industry average. This continued outperformance speaks to our talent, offerings and the differentiated holding company model.

For some time, we've seen our key role as supporting and nurturing strong agency brands, so that they can continue to produce great advertising for our clients.

Simultaneously, we have never lost sight of the evolving landscape and the disruption taking place in marketing, media and communications. To address these challenges, we've invested in key areas to create an IPG that is positioned for the future. These have included embedded digital expertise across the portfolio, leading edge media and data capabilities and open architecture solutions, all of which have helped us build a future-facing company.

Today, IPG is in a preeminent position to help brands reach consumers in a highly efficient and relevant way. Our company can unite data with creativity to deliver advertising that is valued by consumers and valuable for brands. We can help business leaders find tomorrow's growth through the combination of technology, craft and collaboration. And we have created a modern holding company with a culture of integrity and transparency, where IPG sets the standard regarding conscious and respectful privacy, accountability and brand safety.

As we have noted on prior calls, understanding data and its power is absolutely essential. And it's been a priority for us over many years, well before we acquired Acxiom. Today's IPG has the ability to help companies optimize the value of their own first-party data in the service of enhancing the customer experience and in helping our clients reach their business goals. Thanks to our long-term strategy, there are many more use cases with which we are increasingly involved, ranging from powering e-commerce to the execution of omnichannel media.

Sometimes, the job is to help a company determine if the data they hold has been sourced in a way that meets the most rigorous, ethical and regulatory standards. Other times, the challenge is to put first-, second- and third-party data to work to drive new insights and innovation.

To further enhance our media and data services and tech offering, last quarter, we launched Kinesso, a marketing technology company that leverages our data science skills to provide services that help marketers make media activation faster and more effective. Kinesso is currently working in close partnership with Mediabrands, where there is the most adjacency and therefore, the greatest opportunity. Acxiom and Kinesso capabilities are being brought to bear on all our major clients and new business opportunities. We have coupled these strategic moves with strong financial management.

Consistent with recent years, during 2019, we demonstrated our ability to remain disciplined on costs and to deliver against our stated financial goals. Our record of sustained long-term margin improvement is something we are very proud of. Our Board's decision today to increase the dividend shows a continued commitment to return value to shareholders as well as confidence in our future prospects.

In addition, in the future, as we return our debt levels to more historical ratios, we will return to including share buybacks in our capital allocation programs.

To provide a progress report on the key developments within our portfolio, let's now turn to the performance at the agency level during the quarter. At our integrated agency network, Mediabrands closed the year with a very strong performance. UM retained its relationship with GoPro and added Armor All, recently acquired by existing client, Energizer. Ad Age has just named UM a best place to work in 2020.

Initiative also posted a very good quarter and end of the year. The agency saw a notable win with Valvoline. At CES, IPG Media Lab was again on the convention floor, identifying the most exciting and relevant innovations and products and providing guided experiences for our clients. FCB also grew in the quarter, driven by strong performance from its health operations. FCB Health was named Global Healthcare Network of the Year for the third consecutive year and Area 23 named Global Agency of the Year and Regional Agency of the Year at the 2019 New York Festivals Global Awards.

McCann Worldgroup saw growth globally as well as in important industry accolades, notably Global Agency of the Year awarded by Adweek and Network of the Year at the Effie Awards. In addition, McCann's work from Microsoft featuring the first female and openly gay NFL coach in Super Bowl history has been widely heralded as one of the best of the broadcast, topping the major rankings. MullenLowe Group closed the year with a number of new business wins, including being made the global agency partner for Bayer. In the U.S., TaxAct and the Avis Budget Group were both added to Mullen's roster. Collaborating with the group's integrated media arm, Mediahub, MullenLowe won media and creative duties for Hawaiian Airlines, and Mediahub also added Pinterest.

After a year with IPG, Acxiom continues to expand its role with clients and our agencies. Today, our data and tech solutions have a seat at the table and are adding value with both existing and new clients. As mentioned early in the fourth quarter, IPG launched Kinesso, a marketing intelligence engine powered by Acxiom. Kinesso furthers IPG's vision as brands' trusted partner in data science by bringing together top data and technology talent with addressable media experts.

Turning to CMG for the first time -- for the fourth time in 6 years, the Holmes Report named Weber Shandwick Global Agency of the Year. Weber Shandwick and its consultancy, United Minds, launched a new suite of expanded offerings to help companies assess cultural risk within their organizations.

Golin had a trio of business wins in the quarter, including LEGO, Twitter and Miso Robotics. The agency also restructured leadership, naming a new CEO from within its ranks.

Octagon also had a solid quarter announcing new business wins at several sporting conferences. The agency is coming off a successful Super Bowl, where it represented 3 players in the game, many corporate clients and managed multiple activations in Miami.

All in, at the agency level, IPG continues to have many of the industry's most vibrant brands. Last month, IPG agencies and people swept the inaugural campaign U.S. agency of the year awards, taking home more honors than all other holding companies combined. These awards, which are unique in that they are judged by clients, recognize leadership, creative excellence and business performance.

We've also focused on creating a holding company model that is not just differentiated by our offerings, but by our culture and our commitment to diversity and inclusion as well. In 2019, IPG joined the business roundtable in redefining the purpose of a corporation, setting a new standard at how a company should operate as we continue to generate long-term value for our stakeholders through innovation, transparency and corporate responsibility. In addition, our focus on ESG continues to be a part of our business priority.

According to the Management Top 250 ranking, IPG ranked as one of the best managed companies in 2019, and was the only company from the advertising industry included in the list. Developed by the Drucker Institute and the Wall Street Journal, the ranking measures corporate effectiveness through customer satisfaction, employee engagement, innovation, social responsibility and financial strength. Additionally, IPG was named the top company to work for by LinkedIn and was the highest ranked company in the advertising sector on the list, which compiles the most -- the 50 most sought-after companies where people want to work and develop their careers.

Our differentiated culture and strategy are key reasons our long-term performance has been strong, notably in our organic growth performance, as this metric shows the foundational strength and competitiveness of our operations. It goes without saying that we remain focused on evolving the IPG offerings. But our results demonstrate how well positioned we are for the future with a company that remains highly relevant to marketers in an increasingly crowded and complex media environment.

Looking forward, the tone of the business remains sound. New business activity is solid. The breadth and strength of our portfolio positions us well to grow with our existing clients as well as participate in the pitch opportunities we see today. And our hard work to create a modern, highly collaborative company ensures that we are positioned to profit from opportunities that may come from outside our traditional arena going forward.

In light of these factors, we believe that we should continue to see organic revenue growth, and we are, therefore, targeting growth of 3% for 2020. Along with this level of growth, we expect to further improve EBITA margin by an additional 20 basis points, which would bring us to 14.2% in 2020.

On top of our recent success, we feel that there remains significant potential for value creation and enhanced shareholder value over the long term for our company. As always, we thank our clients, our people, who have been the foundation of our long-term success. And we look forward to updating you on our progress at our first quarter call.

With that, I'll open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Alexia Quadrani from JPMorgan.

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Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [2]

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A couple of questions. First, it sounds like business was so strong across the board in the quarter, and I'm -- but I'm wondering if there was one particular area that really outperformed that surprised you guys on the upside?

And then secondly, do you see this sort of momentum or maybe the healthy ad spend environment in general sort of continuing into 2020 when you speak with your clients? Is there a sense of optimism? And then I might have one more follow-up.

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [3]

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Thank you, Alexia. Well, the fourth quarter, obviously, came in strong, and it, frankly, was across the board. Our integrated networks came in strong. As I mentioned, Jack Morton and Octagon came in strong. And obviously, Mediabrands, data, Acxiom, pretty much FCB Health and all our units performed well in the fourth quarter. So that gave rise to our strong growth in the fourth quarter, notwithstanding the headwinds that we came in.

I mean it sets the tone for 2020. When we set a target of 3% for 2020, it's still -- we continue to have very difficult comps year-on-year, which is a good thing. As we continue to set the pace for the industry, we still are setting goals on top of that. And as Ellen indicated, we still have headwinds in the first half of 2020. So when we set a goal of 3% for the full year of 2020, that reflects cycling through those headwinds. So we continue to feel that the tone of the business continues to be solid. And the conversations with our clients indicate that we are offering value propositions to our clients that move the needle. And obviously, that bodes well with respect to our open architecture approach to meeting our clients' needs.

Now of course, there are wildcards out there. The coronavirus. I know the question is, how is that going to impact us? China is roughly 2% of our total revenue. It's important to us because our clients are there. In terms of revenue, it's not that significant, but what remains to be seen is what impact this will have on our suppliers and the chain -- the supply chain, and what impact that would have on U.S. companies and other global companies. So there are still some wildcards out there with respect to 2020, but the tone continues to be solid as we move into certainly the first quarter.

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Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [4]

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And just a quick follow-up on the new business you mentioned, and we see that from our data that there's headwinds still in the first half of the year. But do you think, when you look at the back half from what's happened or been announced sort of to date, do you find that you're going to see some actual tailwinds or they'll be more neutral in terms of the wins you've had more recently or in the last fall?

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [5]

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Yes, thank you. If we're forecasting a 3% organic growth, we hope we have some tailwinds. But we do have some recent losses that were -- the project business that Hill Holliday had with Bank of America should tail off in the second part -- half of the year. But we have new business wins coming on stream that should offset that. So when we look at a target, we look at -- we take into consideration business wins, potential business wins that we have in the pipeline and as well as losses that we've realized. So all of that gets factored into both the organic growth target as well as the margin expansion.

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Operator [6]

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And our next question comes from Ben Swinburne from Morgan Stanley.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [7]

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Michael, could you just give us an update on the Acxiom integration? I know, obviously, you've had the asset now for some time. But just you had talked about revenue synergies or revenue opportunities. I'm just wondering if you're starting to see those actually flow into the numbers, if the 3% has any sort of Acxiom bump, for lack of a better phrase, and how that's all tying into Kinesso, which you mentioned in your prepared remarks.

And then just for -- maybe for Ellen. In the fourth quarter, you had a -- your incentive comp was down, I think, as a percent of revenue. So you've got some nice leverage there. Base pay was up, offsetting that. Can you just remind us sort of how the bonus accrual process works and where that shows up in the P&L when you guys have a year as strong as you did last year?

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [8]

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Yes. Look, I'll -- what you see in Acxiom is our performance-based compensation. Some business units performed well, some didn't deliver on their targets. And remember, last year, our -- we exceeded our goals much higher than this year. So the incentive comp was working exactly as it's supposed to be working. And that is -- those units that outperformed were compensated. Those that didn't reflected it. So the incentive comp number that you see also in the fourth quarter because we do it on a full year basis, we had a catch-up and reflected in our final numbers. So the incentive comp worked exactly as we expected it to with respect to pay for performance.

As far as Acxiom goes, I've said in the last call, we're very happy with, first of all, how the integration is going. The integration is pretty much done in terms of all the necessary physical legacy accounts and all the different comp plans and all the things that integration from a mechanical point of view need to be done. But more importantly, the integration of Acxiom with IPG and our offerings and the seat at the table that Acxiom has with respect to our existing clients as well as a potential new business is real. And they have a seat at the table along as part of Kinesso as well with all business pitches and with our major clients. So as we indicated, that was one of the -- if you look at Acxiom, first is the management of first-party data, okay? So that business continues to be solid. As we said in the third quarter, it's performing consistent with our business case in terms of acquisition. I think we used like a 5% growth for that business. What I'll say is that it continues to perform well, and we're very happy with the first-party data management in the core business of Acxiom.

On top of that, with the formation of Kinesso, where we have putting together the ad tech, the martech and the service business, and obviously, Acxiom provides the data backbone. But Kinesso is the technology part of that. And then we have Cadreon in there, which would focus on the activation. And we're really pleased with how well that proposition is working both with respect to new business pitches and getting the attention of our existing client base. So of course, in the 3% number for 2020, we continue to bake into a solid performance for Acxiom, solid performance with Kinesso. We've said last time last year that we will start introducing new products through Kinesso in terms of a value-based offering. And we do have a pickup in part of the organic growth for 2020, which reflects the synergies between the Kinesso, the Acxiom and the Mediabrands, in particular, because what we said was we were going to focus on Mediabrands initially because that's the logical place for them to come together. Then eventually, we'll roll it out to our creative agencies as well.

So we're very pleased with how Acxiom is performing. I think it's very clear to us that it was the right decision for us to acquire Acxiom, and it gives us a competitive advantage when dealing with the full integrated offering in open architecture. I mean the stuff that Kinesso is doing with respect to focusing on high-value audiences and the value that it creates, creates an immediate impression with clients. Because they, frankly, haven't seen that type of offering, and we're really pleased and excited about the future of that.

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Operator [9]

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And our next question comes from Dan Salmon from BMO Capital Markets.

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Daniel Salmon, BMO Capital Markets Equity Research - Analyst [10]

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Michael, one for you and one for Ellen. Over the last year or so -- there's plenty I could ask you about Acxiom or Kinesso, but I think Ben covered a lot of it there. I wanted to ask maybe about R/GA. It's never easy to see an industry legend ease out of an agency, but the transition with Bob Greenberg, that's played out there over the last year, that agency has been such a huge contributor to your growth over the last decade or so. I'd just love to hear an update on how that's going.

And then, Ellen, the -- Michael's comments, I think, in the press release, reiterated the intention to get back to share buyback at some point. I know you won't give us a time line for that, but just maybe remind us, what are the milestones with your balance sheet that you're watching, you're executing on your cash flow generation for the company overall? What are the things you want to check the box on before you think of that again?

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [11]

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Yes. Unfortunately, I'll take that one, too. That's a topic very close to my heart. Believe me, we have Ellen and the entire -- all the finance team...

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Daniel Salmon, BMO Capital Markets Equity Research - Analyst [12]

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And the Board.

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [13]

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And the Board. We address this issue very carefully. In my remarks, I commented that our goal for 2020 is to continue to pay down debt. We have a $500 million tower there that we look to reposition and pay down in one form or another. And frankly, when you get to the levels that we were previously at in terms of maintaining our investment-grade, we see, given the cash flows, that sometime next year, we should be reaching those levels. So I think it would be reasonable to think that all things happening the way we want them to, we could be back into market-buying shares sometime next year. Obviously, that requires Board approval. We'll talk to rating agencies, which is very important to us, and we'll take into consideration the overall market conditions.

But it's certainly -- we believe strongly that one of the shareholder value creation opportunities for us is to continue to return cash to our investors. Up until Acxiom, we had a good mix between buybacks and dividends. We paid debt. We've distributed $4.4 billion already in terms of that type of mix, and we're very pleased with it. So the sooner we can get back to the mix between dividend increases, as we saw we did this year, and share buybacks, the better, we believe, it is for our shareholders. And we'll continue to focus on that opportunity.

Thank you for asking about R/GA. We have a new CEO, Sean Lyons, he's beefed up his team. He's repositioned some of the individuals within the organization. They're looking at their go-to-market strategy on a global basis. As any new CEO, Sean is taking a look at the entire organization in what markets they should be in, what offerings they have, particularly in terms of the consulting side of the business is a strong opportunity for them. So they're making investments in that, and they're showing very good traction in that area. So we continue to be excited about R/GA.

Of course, Bob Greenberg is, in fact, a legend. There aren't many legend -- real true legends in the business. And he continues -- he will be part of R/G, frankly, forever, but I'm really excited about what Sean and his team are putting together in terms of the go-to-market strategy, leveraging the expertise and the traditional strong base under the leadership of Bob Greenberg. So R/GA will continue to be a strong contributor to the overall performance of IPG.

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Operator [14]

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And our next question comes from Tim Nollen from Macquarie.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [15]

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I actually do have another Acxiom question, if that's okay. I just want to ask about, with so much concern amongst the market these days about data privacy and Google's changes to cookies, could you just give us a rundown of Acxiom's work with first as well as third party cookies? I think there might be a misunderstanding out there about Acxiom as just a third-party data seller. I think that's a vast or a very minority -- big minority of the business. I just wonder if you guys know sort of, in terms of doing your work, that is very much more about the first-party data management. And then in terms of the actual sales, just -- if you could just give us a sense of how much is -- of the importance comes from the first party versus the third party?

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [16]

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Well, if you want to call it sales, 2/3 -- approximately 2/3 of the Acxiom business is just managing first-party data. And we don't say that lightly, just managing. Remember, their management of first-party data is best-in-class. Forrester gives it the 5-star rating. It's well known in terms of their expertise in privacy. They are a trusted manager of first-party data. In fact, in the U.K., when they introduced GDPR, Acxiom played an important role working with the regulators and executing those type of rules and regulations and advising clients. So when we bought Acxiom, everyone misunderstood it to be, frankly, the info base, which is the third-party data management part of their offerings. Everyone focused on that part of the business. But the true core business of Acxiom is first-party data. And this year, they've added new logos. Their performance has been, as I said, very consistent with our business plan in terms of the acquisition. And that's a core competency that, frankly, you don't see anywhere else. And we're sort of scratching the surface in terms of having IPG access the first-party data management clients that Acxiom has and vice versa. And we wanted to make sure that we roll this out on a very even basis without overwhelming the Acxiom people.

So the core first-party data business is a gem, and it's well respected. And frankly, now with the California privacy rules and more privacy rules throughout the United States, we see their expertise even more in demand. And it just buttresses the fact that this will be a true game-changer for us as we move forward. So the first-party data is critical to the success of Acxiom.

The third-party data puts together sources from all over the globe, and it distinguishes Acxiom, frankly, from the competition. And one of the questions that's come up is we don't have to use the info base. Mediabrands has amped their own data source, which uses other third-party data. So it's up to our clients to make sure which one is best suited for them. But we certainly have all the tools and resources with respect to third-party data at our demand, if you will. And it's being used very effectively with Kinesso and Acxiom together in terms of the value-based proposition that they're bringing to the clients.

And candidly, one of the questions is, is this thing hunting? And the answer is, yes, it is. We had a number of client wins, particularly on the media side, where Kinesso working together with the Mediabrands as well as Acxiom have made a difference in terms of the success of the pitch. Plus, the strength they have when they sit at the table with existing clients, I mean, this is the kind of stuff that clients are looking for. And we have them sitting at the table in all of our top-to-top and open architecture positioning.

With respect to cookies, I know everyone's writing about it. We've been worried about the cookies and the regulatory environment with respect to Google now for years. And we're building ways to work around it. We're highly confident that we working with Acxiom and Kinesso and all the other tools and resources that we have that we will have a solution in place to address that issue. And we're working closely with Google and the other providers to make sure that, in fact, happens. But that was one of the purposes of us buying Acxiom as well. So I think we're really well positioned to the changes in the environment that's coming.

And in fact, more than ever, clients need the expertise that we bring to the table, which is why we're so excited about not just Acxiom and Kinesso, but all of the offerings we have at IPG. When you put together on a team, in terms of an open architecture, the creative capability, the activation capability, the experiential, the PR, the media capabilities and the secret sauce that comes out of Kinesso in terms of value propositions, it's a very compelling offering. And I think you see the results in our organic growth.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [17]

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Yes. That's great. Could I slip in a quick follow-up, which is also an action about the cost side? Just maybe give us a quick review of what cost lines it impacts. And sort of what is the cost to run and maintain and invest in Acxiom?

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [18]

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Well, this one, I'll let Ellen have at it.

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Ellen Tobi Johnson, The Interpublic Group of Companies, Inc. - Executive VP & CFO [19]

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Listen, Acxiom is a great business from both the top line and the bottom line that we're very pleased at. Their business mix is a little bit more heavy-weighted in office in general than SG&A, but all that's taken into account in the numbers you see in the forecast. But it's just a great business, both top and bottom line.

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [20]

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Yes. Incidentally, one of the other differences of Acxiom, Acxiom has a different incentive plan. And it's a little different than we traditionally have in our business. So that's also reflected in some of the numbers in terms of whether the O&G is up or whether the incentive comp is a little different because they do have different incentive plans and cost profiles.

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Operator [21]

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And our next question comes from Michael Nathanson from MoffettNathanson.

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Michael Brian Nathanson, MoffettNathanson LLC - Founding Partner & Senior Research Analyst [22]

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I have 2, one in Acxiom and expecting one for Ellen. So Michael, one of the concerns, I think you heard early on with Acxiom was, with that 2/3 of the business managing people's first-party data that the non-IPG clients would tend to leave just because they'd be concerned about being in the same, let's say, marking vertical as a competitor, who may be an IPG client. So are you seeing any type of client pushback from the Acxiom clients that are non-IPG clients? And that's one.

And then for Ellen, you talk a bit about what that working capital swing implies, the big benefit you had. Are deal terms improving a bit? Does that imply a huge media spend in the fourth quarter? So anything kind of underlying the huge improvement in working capital for the quarter?

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [23]

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Let me address the -- we see 0 conflict. I believe that was part of our due diligence. When we did our due diligence on Acxiom, it's a legitimate question. But if you look at financial services, for example, which is one of the significant part of the Acxiom business, we don't see any potential conflict where clients are worried about that. And in fact, sometimes, it adds to their expertise, right? If you have -- if you pretty much own a sector and you had, in the financial service sector, where Acxiom manages first-party data for probably most of the top financial service companies, that's an expertise that is hard to come by. They're trusted. And in the due diligence, we tested -- not only did we test existing client relationships, they were onboarding a new client. And we tested to see how the new clients' reaction to this. So the question of conflict with the Acxiom first-party data is totally an opportunity for us and not a conflict. And working capital, I'll let Ellen. This is Ellen's first call. So I'll let Ellen answer the working capital.

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Ellen Tobi Johnson, The Interpublic Group of Companies, Inc. - Executive VP & CFO [24]

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So working capital is something that we manage very closely, but it's volatile. So if you remember back in the 2018, we had a bigger use of working capital. And in 2019, it was a benefit. And the days that you get the collections and disbursements around year-end can vary from time to time and cross that volatility, but nothing has really changed in the underlying. Either way, we manage working capital for the things that we're seeing in terms.

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [25]

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Let me just make another point. I know all the questions are on Acxiom, and it should be, because Acxiom is providing a significant advantage to us in the competitive marketplace. But we have the rest of our business, okay? And the rest of our business is doing pretty well. I mean we have leading creative agencies in the world. We have -- each of our global networks, for example, have different go-to-market strategies. When we put together our open architecture, we have the luxury of picking and choosing the best people in the business that have expertise in a client sector. And we can put them together on a seamless basis in open architecture. And if you look at McCann, you look at FCB, you look at MullenLowe and you look at our independents, the Hill Hollidays, the Martin agencies, these are world-class creative and -- agencies that bring to the table, the secret sauce that puts all of this together. And yes, Acxiom is great, and it's -- when you look at it as a percentage of our overall business, we don't want to lose sight of our PR business and all the other businesses that we have within our portfolio.

And candidly, the strength of our results this year has been -- it's not just the Acxiom, it's all of our businesses that had those kind of capabilities. And when you look at our go-to-market strategy using open architecture, I mean, it's compelling when you put them all together in a room. And the ability for us to replace one versus the other, I mean, this is real-time. If one of the agencies is not performing well, these clients in the open architecture engagements say we're having a problem with XYZ in this country, and we have the ability to pull in expertise under the open architecture model that is best-in-class. And we see it a lot in the health care side of the business. We have expertise between FCB Health and McCann Health that are world-class. And they can focus on specific diseases and Med Ed and all these capabilities. And we have the luxury of being able to bring all these resources together on an open architecture basis. And that's what's driving our results. So I don't want everyone to lose sight of that part of it. Do I have time for one more question?

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Jerome J. Leshne, The Interpublic Group of Companies, Inc. - SVP of IR [26]

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Yes.

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Operator [27]

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Our final question comes from Jason Bazinet from Citi.

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Jason B Bazinet, Citigroup Inc, Research Division - MD and U.S. Cable & Satellite Analyst [28]

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I hate to do this, but can I just go back and ask on the working capital side? I know you guys had a big inflow in the fourth quarter. But sometimes, you look back on the outflows for Q1, and it can be as low as $200 million. Sometimes, it's $800 million. And as we all try and figure out sort of the cadence of your debt reduction and the pivot towards buybacks, is there any color that you can provide in terms of expectations on working capital drag for the year?

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [29]

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Yes. I think this is normal. I mean if you look back on a year-to-year basis, last year, we were negative, and we were strong in the first quarter. So it's a timing. And it's all generated from our media business in particular. When we look at our cash flows, we look at it on a full year basis. When we look to paying down debt, it's based on our expected cash flow on a full year basis and where we're going to end up at year-end. And I think it's reasonable to assume that we will continue to pay debt of significant amounts, so that by year-end, we'll be in a strong position to take a hard look at getting back into the buyback side of the business and maintaining a strong investment-grade rating and getting all of our ratings to where they should be in terms of solid investment grade. So we look at it on a full year basis. There are anomalies on quarter-to-quarter, and a lot of it has to do with the media side of the business, which is very robust for us. So that's a positive, and that's how we manage it.

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Jason B Bazinet, Citigroup Inc, Research Division - MD and U.S. Cable & Satellite Analyst [30]

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All right. All right. Well, I look forward to the buybacks when they come.

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Michael Isor Roth, The Interpublic Group of Companies, Inc. - Chairman & CEO [31]

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Okay.

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Jerome J. Leshne, The Interpublic Group of Companies, Inc. - SVP of IR [32]

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Yes, I know. Okay. Well, thank you very much. And again, we appreciate all the support, and we look forward to our first quarter call. Thank you.

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Operator [33]

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