EuroBusiness Media (EBM): Publicis Groupe, the world’s third largest advertising and communications group, reports results for the first-half of 2011. Maurice Lévy welcome. You are the CEO of Publicis Groupe, what are your comments on Publicis Groupe’s first-half results?
ML: We have a very good - I would say even excellent - growth. Organic growth was up by 7.6%, well above our own forecasts for the second quarter, bringing the whole half at the level of 7.1%. So we are very pleased with this. The net profit is up by 8%, so this is also something which is pleasing us a lot. And we have our margin which is down by 100 basis points at the level of 13.5%. Part of this is due to currency exchange rate and part of this is due to investment or the fact that we resumed recruitment and pay rises. So we believe that our margin will catch up progressively and we plan to close the year with improved margins. So we are quite confident on that aspect.
EBM: What are the main trends that you are observing in the various geographical zones?
ML: We have been quite surprised - and I must say nicely surprised - by the strength of our operations in Europe. We had, for the second quarter, a growth in Europe of slightly above 11% and we have some markets which are close to 20%. So this is quite impressive and unexpected. It’s due partially to Digital, it’s due partially to the fact that we have some of our operations that have been excellent in new business. The second thing that I would like to notice is the fact that in the US we are still at a very good level – above 5% - so this is very good. But we see a kind a slowdown in the growth. We expect a good third-quarter, but we still see that the US are not taking off as we were expecting them to. Latin America is doing quite well, with differences and, unfortunately, we have one operation in Brazil who lost some accounts due to the departure of the CEO. This has been solved and it’s behind us. And we have China which is up by double digit growth. So we are quite pleased with the way things are moving in the right direction. Some markets, by the way, in Eastern Europe or in Russia are doing quite well. So we are cautiously optimistic due to the overall situation; but when you look at the organic growth, we feel good.
EBM: Is the growth in the first-half mainly due to a few countries that are doing extremely well, or is the performance distributed across many different countries?
ML: I think it’s interesting to see that in the second quarter we have a number of countries which are doing much better than 10%. And I thought I should give the list of those countries, because they are quite interesting. We have been hurt in the Gulf because of the crisis. Emirates, they are up by more than 10%. Argentina, France, Germany, Greater China, Malaysia, Mexico, Philippines, Russia, Singapore, Thailand - these are countries which are delivering more than 10% growth. So I thought it was quite interesting to see the number of countries that are delivering very good, solid double-digit growth.
EBM: Given the current global environment, with an increase in commodities prices, geopolitical uncertainty in some parts of the world, a sovereign debt crisis in Europe and possibly a similar debt crisis in the United States, should we be concerned about your clients’ outlook or that they may respond by reducing their ad spend?
ML: I would like to give two answers to that, if you don’t mind. One has to do with the forecast which has been issued recently by ZenithOptimedia, and it’s much broader than just our clients. In their survey, what they have done is to question a lot of advertisers all around the world, and they came, at the end of the day, with a downgrade of 10 bps, moving from 4.2% to 4.1%. And that I think is a good answer. The second is what we have in plan for the coming months, and for the time being we don’t see any major issue. I’m not saying that there are not clouds above us, and I’m not saying that there is no debt crisis, that there are not some specific issues in some markets, that there is lower purchasing power in some countries. I’m just saying that, when you look at the various aspects and how things are going today, there is a compensation between countries and, all in all, we don’t see a major shift in one direction or another.
EBM: Looking specifically at two sectors, consumer goods and automotive, are FMCG clients able to pass on commodity price increases to their own customers or will they seek to preserve margins by cutting their ad spend? And how confident are you in the automobile sector ad spend this year?
ML: FMCG companies can pass a certain level of price rise of their raw materials. How much? Probably not the full impact of their costs, and we can expect some margin erosion for them. The problem is, would this impact their marketing expenditure? I don’t think so, because I believe that, if they are doing some heavy cuts on their marketing expenditure, they will be hit twice. First, by the fact that their cost will increase, the cost of sales will increase, the cost of the product will increase. And second, by the fact that they will lose market share. So if they want to sustain their growth, to sustain their sales, while at the same time increasing their price, they will need to spend more. Regarding the automotive industry, the situation varies from one market to another and currently we see that there are some markets where demand is not there and, obviously, supply is either to be cut or has to be monitored differently. While in some other markets demand is such that supply is not enough. So there is an imbalance in the various markets of the world and my understanding from what I’m seeing and the first results which have been published recently show that most of the manufacturers have been able to not only monitor the situation quite cleverly, but at the same time to deliver some good margin. So I’m quite confident on that aspect.
EBM: What will be the drivers for margin improvement in the second-half of this year? What is your target?
ML: We want to improve our margin. The first thing which will happen is, naturally, the fact that we have spent a lot in recruitment, in pay rises, in some investments that we have made, and during the end of last year (which had a full impact in the first-half), and also during the first-half of this year. So all this is something which will be regulated over time. And we have also recruited ahead of some new business that we plan to have. So we feel quite comfortable that the issues that we have had during the first-half on our personnel costs is something which is just in transition, to be solved, and we have no big worry about that. The second aspect is, obviously, the fact that our mix of operations is moving toward more value-added products. And we believe that this is something which will, over time, help us raise again our margin target. So I feel quite confident that we will have a slight improvement of our margin in 2011 and that, down the road, the idea that Publicis can still find some upside in the margin is an idea that I can support.
EBM: Today, at the half-year mark, can you provide us with an updated guidance regarding your organic growth targets this year? Do you still believe that you will be able to beat a market which was recently forecast to grow by 6% this year?
ML: To update guidance, I have to give guidance. And the only guidance that I have given is that we will do better than the market. So if you want an updated guidance, yes, I will do better than the market and Publicis Groupe again will deliver better numbers than the average of the market. That is clear. If we look now at the situation and how things will play, what we can see is the following. First-half: 7.1%. I don’t know what the market has done, but probably in the region of 4.8 or 5%. Second-half: we have tough comps, because we had the best growth of the industry for the third and fourth-quarter, very strong growth, so it will be very tough. I feel quite confident that we will achieve a very good growth in the third-quarter and that we will have a number which will be probably higher than 6% on average between first-half and third-quarter. For the end of the year, as you know, many advertisers make late decisions at the end of the year, so it’s a little bit early to decide. But I feel confident that, if you look at the full-year, I reaffirm that we will deliver better growth than the market.
EBM: Do you intend to continue to make digital acquisitions in the US or is your portfolio now in line with your ambitions? And speaking of acquisitions more generally, what is your total M&A budget this year and how much do you still intend to spend in the second-half?
ML: The problem with M&A is that you have opportunities that you don’t plan. For example, we didn’t plan to acquire Rosetta. And Rosetta is a very large acquisition, $575 million, and this is something that was not in our plans, as we didn’t plan to make any acquisition of any magnitude in the US. The problem is, when you have such opportunities, with such quality operations, that you can get at what I still consider as being a reasonable price, such as Rosetta or Big Fuel, we should not hesitate. And we have not hesitated. So we believe that our acquisitions for 2011 – our acquisition budget for 2011 – will be between €700-800 million and €1 billion. That is where it will be, if we have opportunities in the second-half. For the time being, the only thing that we are looking at quite seriously is operations in China and in some other emerging markets. We believe we are done with the US. We hope that we will have the ability to make one or two acquisitions in digital in Europe, and we expect to do a few acquisitions in the emerging markets with fast growing operations. So that is our plan, so it’s not impossible that we don’t reach the level of €800 million. But if there is a great opportunity which would be a game changing operation for one of our operations, we will certainly look at it.
EBM: Your recent acquisitions in China are allowing you to close the gap with competitors in that market. Are you still on track to reach your target of doubling your size in China in the next three years? What types of acquisition targets are you looking at in China and are the prices right?
ML: In China we are looking for some acquisitions, but we are not in a big hurry. We made some very nice acquisitions and we are looking for some specific operations with a very specific profile. So what we are looking for is not easy to find. That’s the reason why you don’t see much more in China, and maybe you will see one or two operations from now to the end of the year, and maybe two or three next year. But it will not be a flurry of acquisitions with huge budgets. What’s interesting is that, in China, we are resuming double-digit organic growth, which is what has to be our goal. And our goal is not to have all this incremental revenue coming from acquisitions, but a large share of this incremental revenue which will help us to double the size coming from organic growth. That is our objective, that is what we are trying to do. We are taking some steps, we are taking some decisions in order to get there, and I believe we will.
EBM: Your shareholders’ agreement with Dentsu will expire next year. What can you start to tell us about that, in particular with regards to your strategy for the use of your cash, whether it be to buy back the Dentsu 10% stake in Publicis or whether it be to use your cash to make more acquisitions?
ML: We don’t plan to have any large acquisitions, so the people who are thinking that we will make an acquisition of €2-3 billion are speculating wrongly. We are not and we have not that kind of plan. With the money we have and the possibilities we have, we believe that we can do both. We can, on one hand, make a limited acquisition, which is our plan, on some specific segment - fast growing market, digital - that’s clear, and that’s our strategy, and we want to achieve our strategy which is delivering. If our strategy was not delivering, we should raise some questions! It is delivering. On the second hand, we have the money – if Dentsu decides one day to sell the shares – to buy them back and to cancel the shares. And that is clear, and our commitment is clear.
EBM: And finally, what is your update today on your own succession plans?
ML: We are working with the Board on that succession plan and things are quite clear, as I said already. And as it has been decided at the stakeholder meeting, I will enroll again myself for another period. I don’t know exactly how long it will take, but I said to the Board that, as long as they will need me, I will be there. At the same time, my duty is to prepare the future and I’m doing so.
EBM: Maurice Lévy, CEO of Publicis Groupe, thank you.
ML: Merci !