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Interpublic Group of: Chairman Of The Board And Chief Executive Officer Frank Mergenthaler

The following excerpt is from the company's SEC filing.

Executive Vice President and Chief Financial Officer

Jerry Leshne

Senior Vice President, Investor Relations


Alexia S. Quadrani

J.P. Morgan

John Janedis


David Bank

RBC Capital Markets

Peter Stabler

Wells Fargo Securities

Benjamin Swinburne

Morgan Stanley

Daniel Salmon

BMO Capital Markets

Tim Nollen


Exhibit 99.1




Good morning, and welcome to the Interpublic Group third quarter 2015 earnings conference call. . . . 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, This morning we are joined by Michael Roth and Frank Mergenthaler. We will begin with prepared remarks, to be followed by Q&A. We plan to conclude before market open at 9:30 Eastern.

During this call, we will refer to forward-looking statements about our company. These are subject to the uncertainties and the cautionary statement that are included in our earnings release and the slide presentation, and further detailed in our 10-Q and other filings with the SEC. We will also refer to certain non-GAAP measures. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance.

At this point, it is my pleasure to turn things over to Michael Roth.

Chairman of the Board and Chief Executive Officer

Thank you, Jerry, and thank you for joining us this morning as we review our results for the third quarter and nine months of 2015. I’ll start out by covering highlights of our performance. Frank will then provide additional detail, and I’ll conclude with an update on our agencies and the tone of our business, to be followed by Q&A.

We are pleased to report another quarter of strong organic revenue and profit growth. Organic revenue growth in our third quarter was 7.1%, on top of a very strong comp from a year ago. Net acquisitions had a positive impact of 10 basis points, while FX was a negative 5.9%. However, FX had very little impact on our operating margin. Total revenue growth was 1.3%.

We continued to see positive contributions to our top-line performance from a broad range of our creative, media and marketing services offerings. Across the group, our digital capabilities were again significant drivers of growth. We also continued to drive strong growth in our largest regional markets, with the U.S., AsiaPac and U.K. all showing very good advances. Organic growth in LatAm was also very strong in the quarter.

From the standpoint of client sectors, we saw growth across all client verticals. The best performance came in tech & telecom, financial services, food & beverage and healthcare.

Our operating profit in the quarter was $192 million, an increase of 12% from a year ago. Q3 operating margin expanded 100 basis points to 10.3%. We had leverage on both our salaries & related and office & general expenses.

It is worth noting that, below operating profit, “other expenses” in the quarter includes charges totaling $38 million to dispose of certain smaller business units which were underperforming and which we deemed as non-strategic, all of which were outside the U.S. Most of the expense was noncash. Frank will have more color in his comments. The after-tax expense was $0.09 per diluted share in the quarter and $0.08 for the nine months.

Excluding the charge for dispositions, diluted EPS for the quarter was $0.27, an increase of 29% compared to the prior-year period.

Looking at the first nine months, organic revenue growth was 6.5%, on top of 5.9% a year ago. We posted a 17% increase to operating profit and a 34% increase in adjusted diluted EPS. This represents industry-leading organic revenue growth and profit growth. That’s an accomplishment which all our people across the company can be proud of.

Turning back to a bit more detail on the quarter, U.S. organic growth was 7.1%, on top of 7.9% a year ago, which is an outstanding result. We had growth at most of our agencies, notably McCann, Mediabrands, FCB, Deutsch, R/GA, Weber Shandwick and Golin.

International growth was 7.1%, once again driven by our full range of services. By region, we were led by 14.4% growth in LatAm, where we saw increases in most national markets. AsiaPac increased 7.2% organically, and was highlighted by our continuing strong trends in India and China.

In the U.K., organic growth was 5.2%, on top of last year’s 12% growth. We were led by the growth of R/GA and our marketing services specialists at CMG. In Continental Europe, Q3 organic growth was essentially flat, and we continue to stay focused on improving our talent and capabilities in this region.

For the first nine months, 6.5% organic growth reflected growth in every region of the world, and contributions across all major disciplines. Nine months’ operating margin growth was 100 basis points, with leverage on our base payroll, benefits & tax and on office & general expenses.

As we’ve said previously, supporting our best-in-class offerings, as well as cost discipline and margin enhancement, continue to be our top priorities, and we are successfully executing against those objectives.

With respect to share repurchase, during Q3 we used $70 million to repurchase 3.6 million shares. Through nine months, we have utilized approximately $172 million for share repurchases, and we have $271 million remaining on our authorization as of September 30.

Since instituting our return-of-capital programs in 2011, we have returned $2.3 billion to shareholders in dividends and share repurchases, as well as reduced our dilutive share count by 26%.

In sum, our performance in the quarter and year-to-date continues to demonstrate industry leadership and the strong position of our offerings. Heading into our important fourth quarter, economic conditions in some areas of the world will present macro headwinds and uncertainties. While those have been incorporated into our outlook, the overall tone of business nonetheless remains solid, and we continue to effectively manage expenses.

Previously, we increased our full-year 2015 organic growth target to 4%-5%. Our strong performance through nine months has us on track to exceed 5%. We also remain well-positioned to achieve 100 basis points of margin expansion this year, the high end of our targeted range.

With that overview, I’ll turn it to Frank for additional detail on our results, and I’ll join you after his remarks for an update on our operating units, to be followed by Q&A.

Thank you, Michael. Good morning. As a reminder, I will be referring to the slide presentation that accompanies our webcast.

slide 2

, you’ll see a summary of our results:

Organic growth was 7.1% in the third quarter, evenly balanced between the U.S. and international. In our first nine months, organic revenue growth was 6.5%.

Q3 operating profit was $192 million, an increase of 12%. For the first nine months, operating profit grew 17%.

Q3 margin of 10.3% improved 100 basis points, and our margin for the nine months also improved 100 basis points.

We had a below-the-line charge of $38 million for the disposition of selected non-U.S. business units. Most of the charge is the balance sheet write-off of currency translation adjustments built up over the years, with the balance representing the net assets of the disposed businesses. This pertains to a handful of businesses for which revenue was small, with the noncash translation adjustments magnified by large FX changes over the years. The impact of this charge to reported diluted EPS was $0.09 for the quarter.

Excluding the charge, diluted EPS was $0.27, which compares to Q3 2014 at $0.21, a 29% increase.

Q3 fully diluted shares decreased 3% from last year due to our share repurchase program.

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. I’ve already covered the disposition-related charges in “other expenses.”

Slide 4

has more detail on our revenue growth:

Revenue was $1.87 billion in the quarter, an increase of 1.3%.

Compared to Q3 2014, the impact of the change in currency exchange rates was negative 5.9%, with the Dollar significantly stronger in all regions of the world.

Acquisitions added 10 basis points to revenue.

The resulting organic revenue increase was 7.1%.

As you can see on the bottom half of this slide:

At our Integrated Agency Networks the organic increase was 8.0%. This was led by our global integrated offerings at McCann and FCB, by Mediabrands, Deutsch and by R/GA. IAN’s growth was 7.5% over the first nine months.

At our CMG segment, Q3 organic growth was 3.7%. We continued to have very strong growth at our PR agencies, notably Weber Shandwick and Golin, which grew at double-digit rates. Organic growth was 2.5% at CMG for the first nine months, but was a mid-single-digit increase excluding the impact of lower pass-through revenues.

Moving on to

slide 5

, revenue by region:

In the U.S., Q3 organic growth was outstanding at 7.1%, with contributions coming from a very broad cross-section of agencies, disciplines and client sectors. For the nine months, organic growth was 7.0%.

In the U.K., Q3 organic growth was 5.2%, on top of 12.2% last year. We had notably strong performance at R/GA, McCann, Octagon and Weber Shandwick. For the nine months, organic growth was 6.5%.

Continental Europe was essentially flat organically in Q3. Our largest markets on the Continent were mixed, with Spain up organically, Italy and France flat and Germany down.

In AsiaPac, our largest international region, Q3 organic growth was 7.2%, propelled by strong growth in China and India. Growth for the nine months was 8.4%, a performance that speaks to the strength of our positioning across our global integrated agencies, our media business, our digital specialists and our public relations offerings.

In LatAm, our organic increase was 14.4% in the quarter. We continued to see very strong performance in most national markets, such as Mexico, Argentina and Colombia, which is consistent with the first half of the year. We also had an improved quarter in Brazil, although business conditions generally remain challenging there. In the quarter, we had leading contributions to growth in the region by McCann, Mediabrands, R/GA and Huge.

Our “Other Markets” group, which is made up of Canada, and the Middle East and Africa, grew 13.5% organically in the quarter, due chiefly to strong performance in the Middle East, as well as growth in Canada.

slide 6

, we chart the longer view of our organic revenue change on a trailing-12-month basis. The most recent data point is 6.0%.

slide 7

, our operating expenses:

In the third quarter, total operating expenses increased 20 basis points from a year ago, compared with our reported revenue growth of 1.3%. As a result, margin expanded 100 basis points.

Underneath that performance, our ratio of salaries & related expenses to revenue in the quarter was 64.4% this year, an improvement of 50 basis points from a year ago.

We had 50 basis points of leverage on our base payroll, benefits & tax expense, as well as 20 basis points on temporary labor.

Our accrual for incentives increased by 40 basis points as a percent of revenue, driven by our strong operating performance.

Total headcount at quarter end was approximately 48,700, an increase of 3.2% year-on-year. The increase chiefly reflects organic hiring in support of growth in areas such as digital, creative, healthcare and PR, as well as regionally in the U.S., U.K. and AsiaPac.

Turning to office & general expenses, on the lower half of the slide:

O&G expense was 25.3% of Q3 revenue, compared with 25.8% a year ago, an improvement of 50 basis points.

Our improvement was driven by leverage on expenses for occupancy; travel, office supplies & telecom; and “all other” O&G expense.

slide 8

, we show our operating margin history on a trailing-12-month basis. The most recent data point is 11.1%.

Turning to the current portion of our balance sheet on

slide 9

, we ended the third quarter with $881 million in cash and short-term marketable securities. The comparison to December 31 reflects that our cash level is seasonal and tends to peak at year-end.

slide 10

we turn to our third-quarter cash flow:

Cash provided by operations was $281 million, compared with $176 million a year ago. Working capital was a source of $154 million this year, compared with a use of $11 million in Q3 2014.

Investing activities used $41 million in the quarter, primarily for cap-ex.

Financing activities used $151 million, mainly in capital returned to shareholders, $70 million for share repurchases and $48 million for common stock dividends.

Our net increase in cash and cash equivalents for the quarter was $26 million.

slide 11

, we show debt deleveraging from a peak of $2.35 billion in 2007 to $1.75 billion at the most recent quarter end.

In summary, on

slide 12

, the quarter and the year to-date represent very solid performance and progress toward meeting our financial objectives for the full year. We’re seeing growth in areas where we have focused our investment in both people and acquisitions. Our operators are focused on the appropriate cost disciplines and margin expansion. And our balance sheet is an important area that we can continue to deploy for value going forward.

With that said, let me turn it back to Michael.

Mr. Roth

Thank you, Frank.

It’s worth repeating that we’re pleased to continue reporting strong results. In terms of organic revenue growth and margin progress, Q3 continues to make us a leader in our peer group. Contributions came from across the portfolio, in terms of agencies, geography and client categories, all fueled by the outstanding creativity, insights and digital capabilities that we have throughout Interpublic.

Our success is a reflection of the strength of our offerings and our client-centric focus. Ultimately, it is driven by the caliber of our people. Across the group, we continue to see evidence that Interpublic and our agencies are consistently a first choice for the industry’s best talent. For some time, talent has been a top strategic priority for us, one that has fueled our return to levels of organic growth that are fully competitive or better. We’re proud that our culture has become a differentiator for us, as has our longstanding commitment to diversity and inclusion, where we have a strong and established track record as the leader in our space.

On our call last quarter, we drilled down and provided greater focus on the role digital expertise is playing in all of our work we do for our clients, from advertising through media and marketing services.

We pointed out that, unlike others in our space, IPG’s digital capabilities have been largely grown organically and are embedded within every one of our disciplines. This commitment to incubating new skills, developing new products and services and investing in new technology has allowed us to stay highly relevant in today’s digital world. It gives us confidence that our offerings are forward-facing, competitive and increasingly vital to clients as they seek to navigate the complexity of the media and marketing landscape.

Operationally, it’s clear that we continue to be disciplined in terms of cost management. We remain focused on converting at the appropriate levels to deliver 100 basis points of margin improvement for the year. We also remain committed to robust capital return programs that have been driving further value creation for our shareholders.

As we look to the fourth quarter, the tone of the business is solid. Clients are being measured in their approach, but the year-end period will be key to delivering for all marketers, and they are relying on partners that have the tools, insights and capabilities to connect with consumers across channels and drive desired business outcomes.

We remain cautious on Europe, although our plans did not factor in growth in that region. The Brazilian and Chinese economies have been challenged, although our operations in those regions continued to deliver results.

The new business pipeline is solid. Year-to-date, we continue to be net-new-business positive and, in fact, near the top of the new-business league tables.

The significant number of media pitches continue, and it bears noting that we have been performing well to-date, with a number of headline wins, notably UM’s wins of the Coca-Cola media review, J&J’s U.S. media buying and planning accounts, as well as CVS and McCormick, which was won in collaboration with R/GA.

Those are a reflection of the cutting-edge offerings we have within Mediabrands, in terms of strategic media thinkers, outstanding digital and data platforms and the scale and expertise to deliver buying efficiency to some of the world’s largest and most demanding clients.

An additional point that is worth repeating when it comes to emerging media is that we do not take ownership of digital media for resale to clients, so our strong organic growth does not reflect the growth of digital media arbitrage revenue that you are seeing among some of our peers, who take principal positions and resell owned inventory to clients at a margin. We continue to believe that our role as an agnostic consultant is key and allows us to provide clients with the recommendations and services that are best for


We also remain committed to the highest standard of transparency, an area in which we’ve been a leader for some time. This continues to gain in importance as the world of digital media is beset by challenges surrounding viewability and other issues that make it imperative that we...