EuroBusinessMedia (EBM): Publicis Groupe, the world’s third largest communications group, reports revenue for the third quarter of 2010. Maurice Lévy, welcome. You are the CEO of Publicis Groupe, what are your comments on the group’s performance in the third quarter?
Maurice Lévy (ML): The organic growth is at 9.2%. With such a number, I think that the best thing I can do is a big smile. Yes, I’m happy, as Droopy would say. I think that we have been very lucky with the strategies that we have developed. We have a very strong organic growth on digital. Emerging markets, which we now call fast-growing markets, have responded extremely well, and all the regions are up.
EBM: What is your update on the main trends that you observe in the different geographical zones or by industry sector?
ML: If we look at the client portfolio of Publicis, we have a very good representation of all the sectors of the economy and all the sectors are up. Regarding the geographical zones, we have a very important surprise in the third quarter. We had until now very good numbers, as far as the US is concerned, and we have a staggering 12% up for the US in the third quarter. This has been fuelled by our Publicis Healthcare operation as well as our Digital operation. Again, it is a demonstration that our strategy is working extremely well. If we look now industry-wise – what are the trends for the industry – we see that Europe is slowing down a little bit, that the US is strengthening a little bit, and that the fast-growing markets are picking up more dramatically with a number which is quite surprising, where we expect Brazil to be more than 20% up. I don’t know if the number is right, but even if it is only 15%, it’s quite interesting.
EBM: Coming back to the US, how would you describe the real underlying situation in the US where your own figures, which benefit from your buoyant Healthcare and Digital business in the US, as you mentioned, may blur our accurate reading of the true state of the US market?
ML: It’s difficult to say exactly what’s going on because there are various levels. You have the atmosphere, which is not very good, where people think that there will be issues, that unemployment is still very high, that they are expecting growth to resume but it’s not yet there, and even if there is growth, it’s not a good enough growth to generate new jobs. So there is this general concern. There is also what we see with {The Economist} and also the newspapers and editorials about the gloomy economy. Besides this, in the advertising field, you have some very fascinating numbers in TV, how all the advertising market has returned to growth. And if we look very precisely at how our business is done in the US, we have very good numbers with all our operations. So either we are particularly good, which is probably true, but I guess that we are not good to the point that we are making that huge of a difference. We have also a good strategy which is paying now quite well because the growth in Digital is such that it is fuelling all the activities. So, if you look in pure economic terms, you have this consumer behaviour which is a little bit in a mood of “OK, I will wait and see, I’m not very keen to spend”; there is a public opinion at large which is thinking that the administration is not solving the problems; and you have a tone of voice in the newspapers that is not very good. At the same time, we have some numbers which are excellent. That is what I can say based on pure facts.
EBM: What is your outlook for 2011 and what are your top priorities?
ML: Our top priority remains, for the time being, digital and fast-growing markets. We wish to build a base which will generate in the next two to three years - so let’s look at the horizon of 2012-2013 – 60% of our revenues coming from digital and emerging, or fast-growing, markets. So we are quite aggressive on that front and our priorities are clearly there, unless tomorrow there is something happening which would be such an opportunity that we should have to look at it. But our strategy is clear and we don’t see why we should deviate from this strategy. The second aspect is the outlook. We see 2011 as a consolidating year, so with a growth which will be in the region of that of this year – the market is expecting for this year 4.8%. We have a lot of forecasts which are putting 2011 roughly at the same level, 4.6%-4.7%. Yes, but coming from a different base because 2009 was relatively easy. So it is in the year 2011 that we will reach the level of 2008. We will also have something which is interesting in that the forecast that we see already for 2012 is quite positive, as we see a number which is in the region of 5.4%-5.5%, so a nice take-off for 2012.
EBM: You recently made an acquisition in Brazil which some analysts say was overpaid when compared to the multiples that you are used to paying for acquisitions. Would you please provide us with some details about the rationale for this acquisition and your own justification for the price paid?
ML: For the price, I’m very much interested in how people can make any assumption and consider that it is overpaid or underpaid, as we have not published any numbers. And I will not comment because we have an agreement with the vendors that we are not going to disclose the price. So I will let speculation go on the street and, you know, when it is in the streets of Brazil, things are going up quite easily... Brazil is a fantastic country. We have known that for many, many years and we have known for many, many years that one day Brazil would become one of the largest economies in the world. We have been waiting for this for many years. All the progress of Brazil was eaten by inflation and by bad cycles of the economy. It looks like today Brazil is on solid ground and Brazil has a lot of what the world needs: great population, well educated; great basic resources, incredible basic resources; solid economy, entrepreneurs; a political system which is stabilised. So there is no reason why Brazil will not grow faster. And what we see for the time being, and all the evidence that we have and the facts that we have in hand, are comforting the idea that Brazil will be a great possibility for growth, not only for us but for a lot of industries. We are lagging behind in Brazil – we were the number 3 or 4 group. With the acquisition of AG2, which is a fantastic digital agency, and now the acquisition of a minority interest of 49% in Talent Group, which will move to a majority interest in the next few months, we are acquiring one of the very best and one of the largest agencies in Brazil. This will put us immediately into the second position. And this is something which is absolutely great. We are very confident and we believe also that Brazil should be a generator of talent for the group. We believe that there is a lot of good talent which could play a role much bigger than just in Brazil.
EBM: What is your update today on your ongoing exploratory mission to find potential acquisitions in China? Are there any targets available?
ML: We have made a full review of China and we are close to making a final call on the strategy that we will be deciding on for China – in the next few weeks – and we will probably share some of the aspects of that strategy publicly. We have already a few targets, so we have immediately explored the possibilities, and we are already entering into negotiations with some of these targets. We are quite confident that we will get some of them. China is a huge market. We had a very good third quarter with nice growth, because in mainland China we had a growth of something like 25%, which is not bad, it’s a good number, I’d wish to see it in many more countries. We have acquired a small operation which is strengthening our position in Beijing, and we are now thinking about some other acquisitions. We feel that we are in a good position in this country.
EBM: And what are your plans to expand your business in India?
ML: In India, we already have acquired a PR agency 20:20 Media which is making MS&L Group the largest PR operation in this country. So that’s very good. We are looking to strengthen our advertising agencies and the other operations that we have in the country. So we still have a long way to go before becoming one of the major players in this country. It has been dominated by a few advertisers and, unfortunately, we came quite late. So before we can have a strong impact we need to further strengthen our position.
EBM: Will your top line growth this year trickle down entirely to the bottom line? Or should we assume that margins will not grow in step with your top line, as you will be catching-up employee compensation and bonuses after an 18-month freeze?
ML: It is a very good question and a very complicated situation. In fact, in 2009, we delivered a very good margin, 15%. And unfortunately, that year, despite this very good margin, our people – our talent – have not been compensated as they should have. For two reasons: the first one is that we had a hiring and a salary freeze; and the second is that we have not reached the target that we had for triggering the level of bonus. So everything that we did went directly to the margin and the bottom line, and very little to our employees. This was unfair to the point that I have personally decided to abandon my personal bonus. And I think that we should be very cautious about this: first, because there is a scarcity of talent, and we should be very, very cautious about talent; and second, because we need to best serve our clients, and there is no way to best serve our clients without a good investment in talent. So yes, we will need to build a stronger base of bonus, and second, we will need to invest in our people. This will not prevent us from improving a little bit our margin, despite the fact that we have a 70 bp impact due to the Razorfish acquisition. So we are doing a lot currently and if we want to continue with our key objective, which is to outperform in a sustainable way, we need to have a very strong talent pool, highly-motivated and well-compensated. This is our objective. And I guess that the margin will ramp up progressively. I believe that one day we will surprise very much the financial community and investors by delivering a margin that no one has ever delivered in this industry.
EBM: When will the margins of Razorfish come back in line with the group’s margins, and more generally, when will the margins of all of your Digital activities be in line with the group level?
ML: This will take time, for a lot of reasons. First of all, we need to bring Razorfish to the level of the Digital operation. And I guess that this will happen in 2011-2012. There has been already a great improvement and Bob Lord and his team are making a lot of effort. They have resumed growth and they are improving cost management. So I feel very confident in Razorfish and I think it was a great acquisition. I guess that we will need first to invest in technology, to invest in people, before reaping the fruits. And that’s the reason why I believe it will take 2-3 years. This will help all of our margins go up and reach this level which has been so far not yet touched.
EBM: By when could we expect you to beat your all time record high of 16.7% margin?
ML: This is a good segway to my previous comment. I hate to give dates and to give some milestones but, if I look at the current situation, I think that this year we will have a small improvement, next year another small improvement, we will have a better improvement in 2012, because, as I said, we have to reconstruct the base... Pretty soon!
EBM: What is the best use for your strong cash position in the coming three years: external growth, higher dividends, share buybacks? And are you still as adamant about not acquiring any market studies companies?
ML: On market research, let’s deal with this issue first. As I said, it can be a good business. It’s a business we don’t know well. There is growth but the margins are relatively low. I am not sure that we will know very well how to manage that business. We are exploring. We are looking at it. We are, obviously, trying to understand it. And for the time being, we are not in the acquisitive mode for that kind of business. We have a strategy that is clear, and that is limited, for the time being, to Digital and fast-growing markets. Regarding cash, we need to strengthen our Digital position in a lot of countries. It is clear that there is not much to acquire, but there are a few and if we found some good ones, as AG2 in Brazil, we would be very happy to acquire. We’ll probably have numerous small acquisitions. We’ll also have acquisitions in emerging markets. I think that this is generating good growth. We will see if there is something of a certain magnitude to acquire. If not, obviously, we will have to see what the best use of cash is. Is it through better dividends? Is it through extra dividends? Is it through share buybacks? I don’t know. I think that we will have to look at what’s best, knowing that the first thing we will have to do is to make sure that we give Publicis Groupe all the strong bases and all the strong pillars for sustainable growth. And everything I have in hands today gives me really great confidence that we will be delivering on that front.
EBM: Maurice Lévy, CEO of Publicis Groupe, thank you very much.
ML: Thank you.
