IPG Will 'Right Size' Its European Business

Interpublic shares were down nearly 5% in Friday morning trading after reporting third-quarter numbers that were below Wall Street’s expectations.

Organic growth was 2.4% and within the company’s target of 2% to 3% for the year, but below the Street’s consensus estimate for the quarter of 3.2%. By comparison, Publicis Groupe reported organic growth for Q3 of 3.5% and Omnicom reported 4.1% growth for the same period.

IPG also acknowledged that it would take an extremely strong fourth quarter to achieve its 2013 goal of a 0.5% improvement in operating profit margins.

Europe was part of the problem and so was the government sequestration and recent shutdown, per company officials. CEO Michael Roth noted that IPG is probably “over-weighted” in the amount of work it does for the public sector (about 3%), which he said was probably a good thing in normal times but not when the government shuts down and fees stop flowing in to agencies.



And the company reported that its considering moves to “right size” its businesses in Europe, which means cutting jobs to off-set revenue declines among other measures. On a call with analysts CFO Frank Mergenthaler said it was pretty sure bet that fourth-quarter severance costs—particularly for Europe—would be higher than normal.

Roth said that most regions in which IPG operates showed growth in the quarter. The UK -- with its tough Olympic comparisons — and continental Europe were exceptions. “As we had seen in the first half our results continued to reflect the region’s challenging economic conditions with revenue decreasing 5.9% in Q3,” Roth said of the European region.

“During the quarter we continued to build on our strong new business record for the year,” Roth said, noting recent media assignments from Hershey’s and Nationwide Financial among others. That bodes particularly well for 2014, he added, which is when the full impact of this year’s wins will kick in. That combined with aggressive expense reduction moves will make the company “well positioned” for next year, he said.

When asked whether he foresaw a potential transformational type transaction in the company’s near-term future (read: POG-like deal) Roth said he didn’t. He said that the company would continue to earmark $150 to $200 million in bolt-on type acquisitions to help agencies improve performance.

Commenting on the results, Deutsche Bank issued a client note that stated they were “disappointing” overall. That said, the firm added that IPG’s fundamentals remain sound. “Shares have been one of the best performers so we expect a breather today, though we would consider any dip a particularly attractive buy opportunity as the overall bull thesis remains intact.”

Reported revenue for Q3 was $1.7 billion -- up 1.8% compared with the same period in 2012. Revenue for the first nine months was $5 billion -- up 2.2%.  

The company also took a one-time $45.2 million charge related to retiring some high-interest debt. Roth highlighted some financial moves that have strengthened the company’s balance sheet. “Only a few years ago, our total debt was $2.3 billion; today that’s down to $1.7 billion,” he said, also noting that IPG’s average cost of debt has been reduced to 4% from 7% in the last four years.

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