EuroBusinessMedia (EBM): Publicis Groupe, the world’s third largest communications group, reports annual results for 2010. Maurice Lévy welcome. You are the CEO of Publicis Groupe, what are your comments on the Group’s full-year results?
Maurice Lévy (ML): 2010 was a difficult year with a lot of issues, crises which were not yet stabilised, a lot of issues and it happens that we started the year quite well and we have, quarter after quarter, strengthened our position to the point that the numbers for the full year are not good - excellent - absolutely excellent! I’m very, very pleased with the numbers. First, we had a Q4 with a 12.5% organic growth, a number that we have not seen for more than ten years. Double digit growth: 12.5%. For the full year; 8.3% organic growth; 15.8% margin, much better than we anticipated. Razorfish integration has been absolutely fantastic. Net profit has been up by 13% and we had a lot of satisfaction, including the fact that we are closing the year with a cash position instead of debt. So when you look at any kind of indicator, any KPI; green - all green!
EBM: What are the main trends that you saw in 2010 in terms of geographies or sectors?
ML: If we look at the Publicis Groupe, we did much better in mature markets than in developing markets. In some developing markets we have a growth of 30% which is rather good. But in total, when you look at the combination, the US in the fourth quarter has been up by 14% thanks to Digital. In Europe we had a fourth quarter double digit growth. So when you look at all the numbers, in fact we see maybe three interesting aspects. The first one is that without trumpeting, the western countries have been much better than anticipated. Second, Digital is really taking off big time and as leader of the pack in Digital we are benefiting from this trend. And third, emerging markets have been very good and that is good for us because as we have not performed as well as I would have anticipated or hoped, this is good for the future, because we still have a great potential coming from these countries.
EBM: As you just mentioned, your Digital activities appear to be growing strongly, but what about their margin convergence with the levels of the rest of the group?
ML: Digital represents 28% of the group today and we expect to do more in the future. We have a total margin of 15.8%, so if Digital was not catching up with our margins, I think that we would have seen a deterioration of our margin. Instead of that, we see an improvement. Digital is progressively catching up with the margin of the other activities. Why is that? Simply because we are benefiting from the scale of our operations, so we are having a better margin than what we had when we were a smaller operation. And second, Digital is today a much broader solution than simply Internet, or display or such. For that we have developed tools, we have developed services, products which deliver better margins. So we believe and we hope that we will get a margin level which is in line in the future with all the other services of the group.
EBM: Focusing on the US market for just one second; how sustainable is the US recovery in your view?
ML: I have not my crystal ball and I don’t know all the elements. What I see from the US is maybe three interesting aspects. The first one is the situation of the corporations. They have rebuilt their balance sheets. They have very, very solid balance sheets and a very good cash position. They have dealt with the crisis quite quickly compared to some other western companies and I believe from everything I’m hearing from the corporations, that they are back, not only in investment, but also in marketing investment. So these first elements are very positive, thanks to the fact that they have a very solid balance sheet. The second element is what’s happening with the consumers. Despite the fact that unemployment is still at the all-time high and that we have a very high level of unemployment, we see that the morale of the consumer is much better than what it was. They are still saving, which is good. So the debt level has been reduced a little bit on the consumer; they are less indebted than they were. And second they are cautiously starting to consume. So the consumption from the consumer is much better. The third aspect is obviously the political aspect. For that, I’m not good enough to understand what the situation is all about and what will be the important decisions which may have an impact. My feeling is that with the combination of Democrats and Republicans we will get to a kind of balanced approach which will be much better for business than it was in the last two years.
EBM: You have had a strong and steady free cash flow for a while, thanks to strong cash generation from operations - but how sustainable is this?
ML: As you said, we have a very stable delivery of cash flow. If you look at the last few years, we have an average of €600 million and this year it has been €646 million due to the fact that last year it was a bit less. So we believe that we’ll continue to generate very good cash; we believe that it will grow and this is something for which we have a very high level of confidence.
EBM: What are your prospects for external growth in emerging markets these days, in particular in China, where you recently gave a Board member the responsibility of conducting a strategic review? Are there any targets actually available for purchase and do valuation levels appear prohibitive in emerging markets today?
ML: There are many aspects. China is one country, but India is another and it’s very different. And Brazil is very different. The first thing that I would like to say is that each market has its own specificities. And these specificities can be interesting because of the opportunities. If you look at Brazil, you will probably pay a higher price, but you will have a very good agency with high quality people, talented people, experienced people, because they are used to being in the market economy since almost always. So they understand advertising, they understand marketing, they are skilled, they have been to the right university etc. India, the market is very different. You will not find many agencies of the size of the ones you can find in Brazil and you will hardly find an independent agency of a decent size. So you have to cherry pick according to what you need, small operations, but you will find talented people and you will find also interesting opportunities, but at a very small level. China is a very different country. We have considered that China is today one of our priorities. We have asked Jean-Yves Naouri, our Chief Operating Officer, to focus personally on China. So he’s spending a lot of time on China, looking at the opportunities, looking at what is happening and looking also at all the possible ways to grow our business in China. So we are focusing on China. We have already made a few acquisitions and we are in negotiation with a few potential targets and despite the fact that the multiples are slightly higher than in other markets, the fact that we can integrate and we can also improve the quality of the people, we can grow much faster. So we have to look at the multiples based on the synergies. And there are two kinds of synergies; cost synergies but also growth synergies and they are enormous because when we have the right assets we can convince our clients, which are on an international basis, to trust us and to give us more business, etc. So all this is a plan which is rolling in a nice way, we are speeding up the process and we have some other targets in what we call the “Next Eleven” and Russia.
EBM: After your sizeable acquisitions of Digitas and Razorfish, is the wave of digital consolidation now over in your industry, with no more big players left to acquire? Are we now to expect only smaller digital acquisitions, or do you foresee the emergence of future large-scale digital players who might in turn become transformational acquisition opportunities for you?
ML: There are many possibilities in that field. The most obvious for us is to strengthen our position in the top twenty countries. We are already in a very strong position in the US. And if you look at the nineteen other countries, the kind of acquisition that we can make is relatively small or modest. We look at all this acquisition as a priority and if there is an opportunity to make an acquisition of a bigger size somewhere we will look at it. But the very large operations, a little bit “à la” Digitas, is something which we will hardly find. We don’t believe that we need that. We are already under a huge transformation. It is not yet noticed by everyone, but I guess that our numbers will help some people open their eyes and to look at us a little bit differently. What we have done in Digital is much more than acquisitions, it’s much more than just signing some cheques and acquiring some entities. We have transformed our Group. We have built Vivaki which is a unique operation in our market. The combination of the media operation plus Razorfish and Digitas is such that in the US 40% of our revenues are derived from Digital, 40%, four zero!, and we still have room to grow. Let’s imagine for a second that we can transplant this in other countries. So you can imagine what the growth of our Group can be. We do not have that ambition, we have the ambition of deriving 35% of our revenue in the next 3 years from Digital and 30% from emerging market. Two-third of our business will come from fast growing segment and Digital will have a specific place on our roster of assets.
EBM: Coming back to your strong cash position, what will be the best use of your strong cash position going forward, if there are precisely not that many large-scale acquisition opportunities left out there? Is a regular increase of the dividend payout over the next couple of years foreseeable? Or what about a return of cash to shareholders through share buybacks?
ML: We are very pleased with our cash position. We have been indebted in order to acquire. We have acquired the right assets and we have been cautious in the way we are acquiring assets. This is something of which all our investors, all the analysts should be sure. We have a very cold head and when we look at acquisitions, even if we have a passion, or even if we feel the need, we know how to stay reasonable. That is something that has to be understood by all our investors and all the analysts. Regarding now the use of the cash there are many options, and we are looking at all options. Obviously we have to be cautious due to the fact that times are uncertain. We don’t know what will happen to interest rates. We don’t know what will happen to the credit crunch, or even if there will be another one after Solvency 2 and Basel 3. We have to be cautious and see how the market will stabilize. The other aspect that we may have also in 2012 an opportunity to make a share buyback of a certain magnitude. We have to keep the money ready for that if that option is on the table. Obviously if we have none of this we will have to think about either a large special dividend or a share buyback program. We have time to look at all the options. One thing that you may be sure of is that we will remain always cautious when it comes to spending the money.
EBM: Looking ahead to 2011, is the positive growth momentum of the fourth-quarter sustained into the beginning of this year and, if so, in which sectors mainly?
ML: 2011, 2012, 2013 should be years where Publicis Groupe will outperform the market and post very good growth. Obviously things will depend from a sector turnover but, all in all, that is what we should be doing simply because of the exposure that we have in the segment of high growth, both Digital and emerging market - which we call fast growing market in our definition. The second thing I would like to point out is the fact that 2011 will be compared to a strong base. It’s not the same game as 2010 where we were comparing to a year of crisis which was 2009. So we do expect to have very good growth but we don’t expect to post double digits growth as we did in the last quarter. So we will outperform the market clearly, and we will have a situation which I believe will be very well appreciated by both analysts and investors, shareholders.
Regarding the sectors, some may be a little bit more weak in 2011 than they were in 2010, for example automotive. But at the same time we see in automotive new products and from the second half of 2011, and the full year 2012 there will be a whole new range of products that will be advertised: electric cars, hybrid, etc. And there will be a big fight for market share. So I believe that in those markets we will be well equipped to win the party. This is something which will work very well.
All the financial sector is recovering and now it has to recover its the image, its reputation, its relationship with the client, with the environment, with the city, and all this requires that it will invest. And I believe that due to our exposure in this segment we will do well.
Regarding the sector of FMCG we are very well exposed. We have great clients. We are delivering great work. We are winning market share, so I have no worry about that. IT, Telecoms, it’s ups and downs as always. We will see great years and less great years, but 2011 should be a good year. When you look at all the various aspect there is a lot of reason to remain confident. I won’t say “cautiously confident”, I believe confident. The only cloud that we have, it’s not the computing cloud, the cloud that we have today is simply the sovereign debt. The sovereign debt is very high in a lot of markets, in a lot of countries. There is some risk associated with that. I am confident that in the Eurozone Governments will be very strong. Communication made by President Sarkozy, or Chancellor Merkel is leaving very little room for doubt. They have made strong comments on how they plan to defend the Euro and to defend the Eurozone. So I believe that the risk exists as always, but it is limited.
EBM: Lastly, what is your guidance and outlook for organic growth and margin improvement for 2011 -- a year when rising compensation, continuing Razorfish integration, and ERP costs could potentially still put a drag on margin improvement?
ML: Let’s start with growth, which I believe it is a good way to start. Top line is from where everything is derived. On growth we believe that we will outperform the market and we have all reason to be confident for that. The market today is at 4.5, 4.6, 4.7, according to the forecasts which are issued by the various forecasters. And I think that we will do better than that.
Regarding the cost, clearly we have imposed a very strong freeze on salaries and on recruitment. In 2010 we started recruiting only in the second half and it is impacting progressively each month, so we don’t have the impact of the full year, we will have that normally in 2011. We will have also less freelance costs or temps costs because we are having fixed salaries. This will probably put a small burden on our cost. Regarding Razorfish I think that most of the problem is behind us and the dilutive effect will be minimal next year. So having a small improvement on our margin is not something that is out of reach.
EBM: Maurice Lévy, CEO of Publicis Groupe, thank you very much.
ML: Merci.
