IPG
#Thank you, <UNK>, 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 <UNK> 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
, 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 <UNK> 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 <UNK>
The only thing I'd add, <UNK>, 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
I don't mind
That's okay
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
