Publicis Groupe S.A. (OTCQX:PUBGY) Q1 2023 Earnings Conference Call April 20, 2023 3:30 AM ET

Company Participants

Arthur Sadoun – Chairman & CEO

Michel-Alain Proch – CFO

Conference Call Participants

Lina Ghayor – BNP Paribas

Julien Roch – Barclays

Christophe Cherblanc – Societe Generale

Conor O’Shea – Kepler Cheuvreux

Adrien de Saint Hilaire – Bank of America

Arthur Sadoun

Thank you Sherri. Bonjour, and welcome to the Publicis Groupe First Quarter 2023 Revenue Call. I am Arthur Sadoun and I’m here in Paris with our CFO, Michel-Alain Proch. As usual, we’ll take your questions together after this presentation. Alessandra Girolami is also here and will be available to take all of your question offline after the session.

I will start this call by sharing our Q1 highlights. Then Michel will provide more details on our numbers, and I will conclude with the outlook for the rest of the year.

But before we start, please take the time to read the disclaimer, which is an important legal matter.

Okay. In an increasingly uncertain global macroeconomic context, the strengths of our offering with our revenue mix, our go-to-market and our platform organization gives us full confidence to deliver the 2023 guidance we set in February. I would like to start by actually giving you a broader context about what we have delivered. After two years of double-digit growth, we posted a strong start to 2021. Our Q1 net revenue was up plus 10% on a reported basis. Organic growth was ahead of expectations at plus 7.1%. It is important to note that this performance came on the top of a very solid plus 10.5% organic growth in Q1 last year.

If we start to deep dive deeper into our Q1 highlights, in a market that will continue to change dramatically we were able to capture once again the shift in client investment towards first party data management, digital media and commerce with, as you will, see a direct positive impact on our creative and media operation. First, this was clearly visible is a double digit performance of our activities in data and tech that together represent one-third of our revenue, and were again this quarter accretive to our growth.

Epsilon was up plus 10% organically, on the top of plus 7% in Q1 2022 with solid growth across all divisions. Publicis Sapient continue to gain market share with net revenue up plus 11% organically after a plus 19% in Q1 2022. The relevance of our offer with real time data and tech growth was also visible in the rest of our business, with very solid performance of media and creative this quarter.

Media grew high single-digit organically fueled by new business gain, and after a double digit increase in 2022. Creative sustained its solid momentum with mid-single digit growth this quarter, thanks mainly to scope extensions, notably in production.

Let’s turn now to our regions. The U.S., our largest geography continued to post a strong performance this quarter with a plus 5.8% organic growth on the top of the previous 8% last year. Epsilon and Publicis Sapient stood out by contributing again significantly to the country growth. Europe confirmed the very strong dynamic of the previous quarters. The origin posted plus 12.3% organic growth on the top of the plus 14.9% last year. This performance was largely driven by the UK, our largest country in Europe. Organic growth was plus 24%, led again by outstanding members at Publicis Sapient, but also the contribution of global 2022 media wins that we actually added in London.

France was up low-single digit, despite a high comparable base last year, fueled by several new business wins, notably in big accounts in media. Germany is actually accelerating to double-digit this quarter. In Asia, organic growth was up plus 0.8% this quarter due to a very high comparable base of 14% in Q1 last year, and a decline in revenue in Thailand, due to delays in phasing of large business transformation projects. Actually, more importantly, China posted very solid numbers, with plus 3.7% organic growth despite the difficult health situation in January and a high comparable base of plus 10.6% in Q1 2022.

Let’s be clear, we’re confident that Asia will accelerate growth as early as Q2, thanks to sustained new business momentum, the current improvement of the health situation in China and easier comparable in Thailand [ph].

Beyond the short term numbers, it is important to put our performance in perspective to truly appreciate the strength of our revenue. Since the [indiscernible] situation, the group has changed dimension by growing its Q1 net revenue by plus 45% on a reported basis, of which plus 18% organically. Our long term investments in Epsilon and Publicis Sapient have boosted organic growth at plus 24% and plus 28% respectively, compared to Q1 2019. And our model has leveraged its strengths in all of our region with the U.S. up plus 20% organically versus ’19, Europe up plus 15% and Asia up plus 20%.

Last but not least, our unique go-to-market continued to drive new business gains, and also external recognitions. Our new business momentum that took us top industry rankings for the first time in five years has been further confirmed in the past weeks by several reports. And after a record 2022 commercially, we are off to a very solid start to the year across all of our capabilities.

Of note, we won Adobe International Media, Worldwide Media, as well Sonepar business transformation and expanded our win with Mondelez International. We also scored a number of local creative wins of which Dunkin U.S., KB Home, Premier League and King in the UK.

When it comes to external recognition, not only did we score high in the industry for creative and media, but we also received acknowledgement by leading industry analyst firms for our data and tech expertise that not only set us apart from competition, but also place us way ahead on some of the most renowned tech service companies. This was not always the case with Epsilon that was named a leader once again in Loyalty Technology Solution.

I will now leave the floor to Michel, who will give you further detail on the numbers. And I will come back to talk to you about the prospects for the year.

Michel-Alain Proch

Thank you, Arthur. Good morning to all of you. It’s a pleasure to be with you today. I will begin with the evolution of our net revenue for the first quarter of the year. The Groupe posted a net revenue of EUR3079 million in Q1 which represent an organic growth of 7.1%. This comes on top of 10.5% last year and is ahead of our expectation as Arthur just explained.

Reported growth was at 10%. We recorded a EUR14 million positive impact from acquisition and disposal. On the one hand, this includes EUR31 million net revenue from our acquisition, the most significant contributions being Profitero, Tremend, Yieldify and Retargetly acquired in the last 12 months. On the other hand, it takes into account the impact of the disposal for EUR17 million mainly the exit of our operation in Russia that we will annualize from April 1.

This quarter foreign exchange rates contributed a positive EUR61 million, which is equivalent to circa 2% of net revenue. This was driven by a positive EUR78 million related to the evolution of the USD to euro FX rates while the GBP had a negative impact of EUR13 million.

Let’s move on to the next slide, which gives the dynamics of our Q1 organic growth by geography. North America posted another very solid quarter with 5.7% organic growth. The impact of the USD to Euro was a positive 450 bps on growth this quarter. Together with the impact of acquisitions this led to a 10.9% reported growth overall in the region.

With 12.3% organic growth Europe accelerated, largely driven by the very strong performance of Publicis Sapient in the UK. Asia Pac posted a slight organic growth of 2.8%, including the solid performance in China, despite the health situation in January. Middle East and Africa and Latin America both posted solid organic growth at 16.6% and 7.8% respectively. I will detail the performance of each region in the following slides.

So I begin with North America, in this slide. As I have just said our operation in the region posted a 5.7% organic growth in Q1, mainly driven by the U.S. at 5.8% while Canada was at 3.2%. Let’s now focus on the U.S. where our operation grew 5.8% organically with solid momentum for all our activities in the country. This is all the more remarkable that it comes on top of 8% organic growth in the same period last year. With 20% organic growth since 2019 our performance in the U.S. confirms the strength of our offerings in this geography, where our model is the most advanced.

Media grew at mid-single digit rate this quarter on top of double digit last year. This was supported by both positive underlying trends with existing clients and new business won in 2022, particularly in food and beverage, retail and healthcare sectors. Creative came in stronger than anticipated and posted mid-single digit growth this quarter. This was achieved thanks to fewer budget cuts than expected, solid production and scope extensions with existing clients notably in automotive, food and beverage, and retail.

Publicis Sapient posted 8% organic growth in Q1. This performance was particularly solid, considering this considering the 16% growth in Q1 last year and confirmed the ongoing demand for digital business transformation. Epsilon posted a double digit organic growth in Q1 thereby remaining very accretive to the country’s number. All of its division posted very solid performance in the quarter. And it’s worth noting that [indiscernible] at our retail media activity continue to grow at a very high pace.

Let’s turn to the performance of Europe in the following slide. As I mentioned earlier, Europe recorded an organic growth of 12.3% including our Outdoor Media activities and the Drugstore, and 12.8% excluding those activities. The UK, which is 9% of Groupe net revenue in Q1 recorded organic growth of 23.9%. Like in Q4 Publicis Sapient, which represents one-third of revenue in the country was the largest driver of the UK’s outstanding performance.

Publicis Sapient’s activity continued to benefit from ongoing large projects, particularly in the financial and retail sector. Media activities grew double-digit driven by global new business wins signed in 2022, notably in the automotive and non-food consumer sectors. Creative activities were up high single digit this quarter.

France, which represents 5% of Groupe net revenue in Q1 posted organic growth of 2.9%. Including our Outdoor Media activities and the Drugstore organic growth reached 2% this quarter. Media was very solid, particularly in the automotive food and non-food consumer sector and Publicis Sapient was softer on the back of a very high comparison basis. Germany representing 3% of Groupe net revenue posted the double digit organic growth. Media grew by your strong double digit mostly on the back of global clients. Publicis Sapient also posted a strong performance supported by the win of local clients, and Creative was broadly flat.

Let’s finish by a few words on Central and Eastern Europe. The performance in the region was very strong at 11% organic with Turkey, Czech Republic and Hungary largely driving growth.

Turning now to the next slide where we detail our performance in the Rest of the World. In Asia Pac which represents 8% of Groupe net revenue in Q1 we deliver 0.8% organic growth. Overall in the region, Media grew double-digit while creative remained stable. The activity at Publicis Sapient declined in the region due to the delayed phasing of a large project in Thailand. Without this impact the region would be close to 4% organic growth.

Let me break this down for the main countries. China posted a solid performance at 3.7% organic growth this quarter, despite the health situation in January. And that’s not a big thanks to new business wins in food and beverage. Australia, Malaysia and Vietnam were also growth contributors. In Middle East and Africa, we posted a 16.6% organic growth in Q1, benefiting from strong Creative and Publicis Sapient in the Middle East and a very solid media activity in Africa. Latin America posted a 7.8% organic, with most countries recording positive growth this quarter, especially in Argentina, Mexico, Colombia, largely driven by Media.

On the next slide, you will find the group performance by client industry for the quarter. This is based on an analysis of our main clients representing 92% of our net revenue. It also excludes Outdoor Media activities and the Drugstore. This quarter all of our clients’ industry were positive but one with six of them growing double digit. Among those I would like to highlight the following ones. Food and beverage grew 19% continuing to perform very well, on the back of last year new business ramp up. Healthcare was up 13% quarter on top of 12% last year, with Media in the U.S. and Publicis Sapient being the main contributors.

We saw a similar dynamic in retail which grew 16% in the quarter. Leisure and travel was up 14% continuing to benefit from the momentum in tourism and hospitality. On the contrary, TMT posted a 7% decline in the quarter. This performance was notably due to some phasing in media combined with a particularly high base last year.

Finally, it’s worth noting the solid performance in the financial sector on top of double digit organic in Q1 2022 as well as non-food consumer and automotive which grew in line with full year 2022.

Moving to the next slide, net debt. The group closing net debt at the end of March was EUR442 million, representing a negative net debt valuation of circa EUR1.1 billion over the quarter, showing the usual seasonality of working capital at this period of the year. This is compared to a net debt valuation of circa EUR640 [ph] million in Q1 2022. This stronger valuation of circa EUR400 million is largely explained by several reasons. First, the EUR220 million share repurchases fully executed in the quarter in order to cover employee long term incentive plans.

Second, EUR110 million cash tax payments made in January 2023 related to 2022 and reflecting the new application of U.S. tax cuts and jobs acts on the capitalization of R&D expenses, as I explained in February in our fully year earnings call. And finally, about EUR100 million additional outflow in working capital versus Q1 2022 due to some phasing effects, and it will normalize during the year.

So 12 months average net debt was EUR563 million at the end of Q1 2023. This is EUR714 million below end of Q1 2022 and EUR122 million below end of 2022 level. We are fully on track to meet our average net debt objective for the full year at circa EUR300 million.

This concludes my financial presentation. And I now give the floor back to you Arthur.

Arthur Sadoun

Thank you Michel-Alain. As you saw, we had a strong start to the year that again proves the ability of our unique model to actually gain market share. It is clear that the current macroeconomic environment is increasingly challenging, with the recent tension in the banking system, adding to the ongoing war in Ukraine, high inflation and interest rates.

But as demonstrated by Publicis our revenue mix, our go-to-market and our platform organization gives us greater resilience to business cycle. This is why we are able to confirm all of our guidance KPIs for 2023 despite this challenging context. Actually, when it comes to organic growth, our strong Q1 and our expectation for a solid Q2 between 3% to 5%, increased our confidence to reach the top half of the 3% to 5% range for the full year. This means 2023 organic growth is now expected between 4% to 5%.

Let’s now go through the drivers of the differentiation that make us confidence for the rest of the year. It starts with our revenue mix. As we said in the past, thanks to our decade long investment, we now have one-third of our revenue in real time data and technologies. This is a reason why we have grown faster than the industry and the global economy, particularly since the pandemic. Concretely, in 2022 we outperformed the industry average organic growth by 300 basis points on a three year basis led by Epsilon and Publicis Sapient, which again will be accretive in 2023.

But we are not it’s stepping down. We keep on adding value and scale them to our future facing expertise to actually strengthen our competitive advantage. This is the case in identity marketing, where we constantly enrich Epsilon capabilities and its 300 million profiles globally. More recently with the acquisition of Yieldify to increase brand online personalization, but also Retargetly that extends our footprint in LATAM.

In digital media, we are building solutions based on our real identity to increase our client business outcomes through fast-growing new channels by connecting Epsilon to our scaling media for connected TVs, and to site [indiscernible] and retail media. Next year when it comes to business transformation, and we will continue to further our scale and our global footprint in everything we do. This is what we have done when we have gone through the acquisition of Practia, making sure that we add not only capabilities in LATAM, but also a new global delivery center to our global map.

It is very important to note that we can today count on one-third of our tenants working in data and technology. This would place us at the heart of a client’s structural needs as you have seen, but it is also a huge asset to leading areas like AI, visualize of ChatGPT everyone has been talking about the future of AI. In our case, it is already a reality that is accelerating the value and the speed of everything we do. AI is at the core of the business operating system and at the service of our clients.

When we launched Marcel in 2017 with the support of Satya Nadella and Microsoft, it was on the promise that AI will help us identify the best suited talent for any given base, proposed tailor-made learning and development programs for everyone, and make sure industry knowledge was better shared and use. Today, the vast majority of our people are connected to Marcel and are already using AI regularly. It is now a huge competitive advantage, not only in recruitment, but also of course, in retention.

To fully divest the value of AI to the benefit of our clients, we have equipped our team with AI-driven tools. This is of course true at Publicis Sapient, where we were first to acquire new AI capabilities to deliver enhanced customer experience, with faster project development and at Epsilon that use AI model now to update, to enrich and activate real time our third party data. But that capabilities further extend to media, where AI is playing a key role to optimize buying and buying, but also power, our retail media and advanced TV offering, for our creative business where AI optimize production process and boost dynamic creativity.

In fact, we enter in partnership with open AI before its recent popularity, to deliver innovative, personalized and send solution to our clients. I mean, there is no doubt that AI will radically change the shape of workforce entities quickly. So we must make sure that all of our people are capable of harvesting the machine capabilities at the service of our clients. We are committed to empower all of our people integrating AI in their daily work.

Secondly, what drives our confidence for this year is our go-to-market. Not only do we have differentiating assets that perform well on a standalone basis, but they also contribute materially to the performance of our Creative and Media. What sets us apart from competition is actually our ability to connect our different expertise. By integrating real time data and technology into creative production any year, we are positioning ourselves as a true marketing transformation partner for clients. The strength of our model has been visible in our new business track record in the last five years.

The momentum continued in Q1 and will contribute to our growth. Of note our recent win of Walgreens Media show the indisputable scalability of our model run on real IDs that not only bring efficiencies in terms of investment, but also competitive advantage for clients. In 2023, our focus will be on delivering the best services to our existing and recently won clients while winning market share with the right value.

And lastly, our platform organization provides us with agility, which is increasingly required to navigate a more complex world. With our consumer data, our global delivery centers and our soft services we have the ability to maximize resources allocation locally, manage recruitment policies and benefit from scaling and pool the organization. Not only does our platform create efficiencies to mitigate wage inflation and plus year-after-year the best financial KPIs but it also enable us to invest in our growth and in our people.

One, to our Groupe, we are confirming our 2023 expectations set in February despite the rising macroeconomic uncertainties. When it comes to revenue, our better than expected Q1 and a very solid anticipated Q2 make us confident to now deliver between 4% to 5% organic growth this year.

And this will come while maintaining industry high financial ratio with an operating margin rate of 17.5% to 18% and free cash flow of circa EUR1.6 billion. Thanks to the combination of our revenue mix our go-to-market and our platform organization, that definitely set us apart from competition, we will continue to deliver on our commitments and accompany our clients in their transformation.

I would like to thank our talent for their continued excellence and of course, thank our client for their trust. And now with Michel-Alain we are ready to take all of your questions.

Question-and-Answer Session

Operator

Excuse me, this is the conference operator. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Lina Ghayor of BNP Paribas Exane.

Lina Ghayor

Hi, good morning, Arthur and Michel. I hope you can hear me well. And congrats on the results. I have two questions. The first one is on Sapient [ph]. The performance is impressive, particularly in the context of its past comparatives. However, could you just explain a little bit more what happened by geography and client vertical? Particularly the U.S. grew 8%, which is strong, but half of the rest. So and your data and the asset dynamics, and your thoughts around the growth outlook will be appreciated?

The second question is on trends. You now expect organic growth for the year to be between 4% and 5%, with 3% to 5% for Q2. So back of the envelope, it implies 3%-ish for — excuse my calculation is correct, which still has given the macro environment. So my question is, what do you see in your client behavior at the moment? And what have you baked in on the macro side in your guidance?

And the last question is on activities like technologies and AI, so you mentioned some elements in the presentation. But where do you see generative AI impacting your business on the economics. So typically, for example, pricing, but also on the customers. And I will be also interested to hear what is the client appetite, either on the training side or media buying side, any concrete example would be highly appreciated. And that’s it. Thank you.

Arthur Sadoun

Wow, that’s great, Lina. Thank you. So if I’m well, we have a question on Sapient, mainly on the U.S. and client vertical. We have a question on the rest of the year. And then a question on ChatGPT. I’m going to start, if it’s fine for you, Michel. If you want to add anything, please do so.

Maybe I start by your second question, at the trends for the year and how we anticipate the rest of the year. What can I tell you on that? First of all, as we said, for Q2, we expect a very solid quarter between 3% to 5%. And again, it’s very important to consider that we’re going through a higher comparable in Q2 than in Q1 on the three-year basis.

When we go to H2, we are of course, taking three factor into consideration. The first is, as everyone has mentioned, increasingly, macroeconomic challenges that are rising for sure. Second, which is important for us so higher comparable base seems upon the niche, with H2 last year that was growing 400 basis points faster than H1. So big gap, and you have seen the acceleration we had last year. And also Q4, which is always an adjustment quarter, even more in such a volatile year. So that’s the assumption we’re making.

But despite those three factors, it’s very important to note that we have not changed our assumptions for H2, thanks to the strength of our revenue. All that I explained about our revenue mix that will continue to be accretive, the new business that we win, but also our platform organization when it comes to launching. And so what we have done to actually move from 4% to 5% is simply reflecting on the full year after an expected Q1 that came at 7.1%.

When I move on to — I’m going to move into Sapient, why not now. Let’s do Sapient in the U.S. I mean, I should start by the beginning, overall, adding Sapient again, that where did it go in Q1 after the track record they were having on the three-year basis is something that is good news for us. And it happens higher than expected, for a single reason is that we were expecting that some business transformation project could have been delayed. They have not been delayed so far.

I think, again, is the economic challenges that our clients are facing. We don’t think they’re going to cut their investment on transformation. We can expect that some will postpone some decision and we are prepared for that. We were in Q1, we are in Q2. And this is a very important element. Now when it comes to the U.S., I mean, I will start by reminding you that Sapient had an outstanding performance in the U.S. in 2022, 17.5%. For those who were there with us a couple of years ago, this is incredibly strong and building on already a very good momentum.

And despite this very high comparable, we are delivering 8% in Q1, which means that we have delivered plus 36% organic growth since the start of the pandemic. So they are good by itself inorganic. I mean, we are absolutely convinced that Sapient will be accretive to our growth again this year, despite, as I said, some slower decision processes, smaller projects, you might have heard that, by the way from other system integrators.

I think that in the U.S., everyone will agree that on smaller account, there might be some delays. But we are absolutely certain that Publicis Sapient not only will continue to be very solid in the U.S. And this for the third year continued consequently, but will also accelerate, as well, particularly in the UK. I think the UK, case, if I can spend a minute on that is very interesting.

You would remember that in ’20 and 2021, and maybe the beginning of ’22, the performance was pretty poor. And we told you the reason why the performance is poor is because of few clients that are very loyal and very happy with us have decided to stop and postpone their investment. We had to take the heat at the time. And now that they have started to invest again, we are taking the benefit of it, as you can see in our results in the UK.

Al, you’re asking all the questions. What can I tell you about generative AI? I mean, clearly, I’m not going to come back on everything I said about why AI is already at the core of Publicis operating, and by the way, why AI is already at the service of our clients. It is, if I may, native at Sapient. It is absolutely core is where we refresh our data and it’s here now.

It’s having a massive impact on how we can maximize our client investment in media. And even more importantly, how we can boost our retail media offer. And it has to play also in creative, in production and ideation. And this is where at the moment generative AI is having the biggest impact. And of course, I guess the question you get behind that is can generative AI hit our creative business in the future? I mean, I’ve been working at creative agencies for the last 25 years now.

So if there is an area that I know pretty well, it definitely is one. And I have seen the ideation process when we create that and the production process change radically several times over the last two decades. And it’s very interesting to see that every time creative agency has always been able to adapt to new technology and continue to deliver great value for their clients. So to be clear, I think that generative AI for the creative business is going to be an opportunity. I am definitely not worried about our ability to adapt and leverage the potential of AI. But I also want to be clear that the fact that it will take time before it can become a reality across the board.

This is not something that will change overnight, but what is certain is that what we might lose in terms of our view through a faster process, because maybe there was a lesser job which will be fine, will be largely compensated by the necessity to multiply the number of creative assets due to personalization at scale.

And by the way, you see [ph] not enough production number today. As you have seen creative is strong in Q1. It’s partly due to the fact that we have to produce more assets. So if I want to make a long story short on this one, it’s possible that tomorrow we get paid less for a single ad but we will have to deliver way more volume as personalization increase. So that he will see generative AI. As long as we are capable of mastering it more as an opportunity demonstrate. So I have been long but I think it was three important questions.

Lina Ghayor

Thank you.

Operator

The next question sir is from Julien Roch of Barclays.

Julien Roch

Bonjour Arthur and Bonjour Michel. Two easy questions for Michel. And on the first one is indication for working capital in 2023. To the split between media and creative in the two third you’re talking about? And a more difficult question for Arthur, following up on the theme of artificial intelligence. I just said — I just heard what you said, in terms of less revenue per ad, but more ad for net-net the same, but historically, you run your business on a cost plus basis. So let’s say you win a content creative budget where a client will spend 100.

Historically, you say we are making 18 margin. So we’re going to spend 82, on what the client wants. Thanks to AI, it will cost you far less to deliver the same value add illustratively, let’s say 40. So if the clients were still spending 100, you’d make a massive margin of 60, rather than 18. So I think the client will say, well, I’m going to pay you less 60, 70. So you make a higher margin, and I pay less and everybody’s happy. So why in that specific case, why don’t you think that AI will lead to lower revenue, but higher operating profit?

Arthur Sadoun

Okay, so first, I’m definitely not saying that AI will lead to lower revenue. What I’m saying is that we might get paid less for a single ad one day. We are far from that, but it will add to the volume of ads that we have to produce because of personalization at scale. But actually, I need to answer your question a bit differently, Julien because this is a critical question the one you’re asking.

And this is where we still have a lot of work to do, to change the perception of what we do for our clients. And why what we do, not only make us unique, but we believe creates, the opportunity to be the only one that can truly outperform the market, is we have shifted from a communication partner to a transformation partner, where we make our money and our margin, because this is valued services, is in our ability to accompany our clients in the transformation you just talked.

And so the reason why we see AI as an opportunity is that, you know what, maybe one day on what we are doing in the past we will get paid less on creative, but it will be more compensated by our ability to bring what is needed for generative AI creative work, which is first party data, which we are the only one that can deliver with Epsilon, the only one among the holding company, the necessary technology and technological ecosystem to produce it, which is what we do, of course, with Publicis Sapient. That work with — as a system integrator with all the platform like capability [ph], and our ability to add a client build your own model for this to work.

So don’t get me wrong. I am not saying that generative AI will keep our creative revenue at the moment. What I’m telling you is that because we are not on the same positioning that our competition, because thanks to the vision of noise 10 years ago, with Sapiens, we have started to invest in technology and data differently from our competitors and integrate it at the heart of our creative and media business. You should ask yourself the question why we are going crazy, but also why we are winning so much on media is because of this integration, the ability we have today to take generative AI and see it as an opportunity for our client to further accelerate the transformation represent more source of revenue as a transformation partner, then as a former communication partner.

Now, I think I get enough time for Michel-Alain to take the two other questions.

Michel-Alain Proch

Thank you, Arthur. So on the working cap, yeah. So on the first quarter, as I was commenting the valuation of net debt pact of the EUR400 million stronger version of net debt we had in Q1 2023. That’s just Q1 2022 is coming from about EUR100 million of out flowing in working capital, which is really phasing effect. Nothing to worry about. We will normalize during the year. And to give you a data point, like last year I’m targeting to be roughly at zero in working capital for the year.

On your second question which was the split between media and creative, I think you are referring to one of the first slide of Arthur, when we say to sell. So yeah, it’s one sell down roughly. The split of the company hasn’t changed compared to 2022. So one cell then tech, and one cell of Creative, and production will sit in there. And one cell media and as Arthur was mentioning in the beginning of the call, a strong performance of media high single digit and actually a better performance than expected in creative with…

Arthur Sadoun

By the way, it’s important to note that when we say data and technology, we are talking about engineering and actually AI capabilities which we have with one-third of our revenue. We should not underestimate how much we have digitalized and bring technology into our media business, for example, and starting to do very well in production and ideation. We have the discussion on AI.

Julien Roch

Okay, very, very clear. Thank you very much.

Arthur Sadoun

Thank you.

Operator

The next question is from Christophe Cherblanc of Societe Generale.

Christophe Cherblanc

Yes, good morning. Thanks for taking my question. First one was on head count. Can you give us the headcount at the end of Q1? And what are your plans for Q2 at that stage? I think Arthur you mentioned some consultants were slowing down a bit. So do you plan to soft land the Sapient workforce? That’s the first one.

The second one was on offshoring? What — whom do you see to increase the share of offshoring in your setup? I mean, if we speak again, in five year will the mix be 30-70 that is 25-75 today. And Arthur you mentioned the fact that was a balance between the cost advantage and the flexibility and the ability to key to tap talent. If you had to pick a number, would you say to balance between the cost issue and the flexibility issue?

And the last one is still on offshoring. On Practia, I guess that’s for Michel now, can you give us some numbers, orders of magnitude of margin revenues? And more importantly, maybe how many Practia do you see on the market because that kind of asset for us is very up to see from the outside? Thank you.

Arthur Sadoun

I’m going to let Michel-Alain answer the three and then maybe I’ll make some comment on that.

Michel-Alain Proch

Sure. Okay, hi. So on the head count at the end of the quarter, we are a bit more than 98,000 people. We have added during the first quarter, a net hiring of 700 people. This is just for you to remember what we’ve decided is stabilize the accounts in Q4 of 2022. You remember that we were hiring for the first three quarter of 2022 between 2,500 and 3,000 people and we are still catching up on our revenue trajectory. We stabilized in Q4.

In Q1 we have 700 more on net hiring that we have concentrated mostly on Epsilon. As you have seen, it then is delivering double digit goals, on our global delivery centers. That’s the second the second place, I will make the link with your second question about offshoring. And finally, in Europe, because in Europe we are delivering, as you see 20% growth. So we have very granular monitoring of the accounts on a monthly basis operation by operation.

On the second part, which is the offshoring, in terms of in terms of global numbers, you remember them we have about 25% of our account, which are based in global delivery center. This is obviously different practice by practice. As I have already mentioned Sapient s already too high number which is about 70% of its accounts. Epsilon is just below with a bit more than 60% of head count. Media is around 30% and production is about 20%. And it’s not so significant for creative.

So as you can see, first I think we are leading the industry, in terms of offshoring leverage, first point. And the second point is that we still have way to go in some practice on the basis of the numbers that I just explained. I finish up on Practia, if it’s okay with you. So on Practia, you understand the move we are making. It’s a move, which is very comparable to the one we’ve made then with Tremend in Romania.

Going back a bit in time, Sapient was relying on one very large global delivery center in India. We have doubled it with the acquisition of Tremend in Romania last year. And here we are creating a third global delivery center for Sapiens in order to better serve our client base in North America having this global delivery center on the same time zone. So Arthur you want to add a little bit.

No, no. Okay, all right. So maybe that’s the first reason global delivery center. And the second reason is obviously entering a new market, which is one of the fastest markets for delivery, which is Latin America.

Arthur Sadoun

Now, maybe to build a few points and to come back to the operating stuff. It’s very interesting to see what we’re doing with Practia or what we have done with Tremend, because it come back about your point on offshoring, and what we’re expecting from offshoring. The reason why we are putting a new center in Latin America is for time zone reason more than anything else.

Why and come back to the question you were asking me between expertise and cost there, is that you need to understand that the platform that we have put in place that was initiated 20 years ago, maybe with the shared services. That was complemented with a global delivery center, and the company mandate to get a seamless access is making a huge difference in terms of managing our cost base and you see again the kind of financial ratio [ph] we are having. But also to make sure that we get immediate and direct access to data and technology to our clients.

And so the reason why it’s so important to be in Latin America is that we want to make sure that we can serve the needs, real time of the West Coast of the U.S., and [indiscernible] build them again now with all three centers where we can work 24/7 without any bumps in the communication.

And going back on the question you raise about why are we doing this. I mean, it’s three reason. And believe me they are in this order. First is expertise. I mean, when you look at the high end service, we are bringing with Publicis Sapient with Epsilon, or even with our media now, but mainly with Publicis Sapient, we have access to high-end high-skilled, high-trained engineer. And this is making a big difference. And to be clear, I have been — my first trip as a CEO, six years ago now, I’m getting older, was to go to India. I started by India, because I wanted to understand exactly what we were doing there and how we were working directly with our clients.

And I found their very high skilled engineer. And that the second time I found them at scale, because if you look at how we have been developing our workflow there, it makes a huge difference. And then because yes, if you allocate resources better by definition, it is less expensive. But you need great talent at scale and those global delivery center allow us to do that, in India, in Eastern Europe, and now in Argentina.

And I went there actually to make those guys and make sure that the feeling was the same. We have always high regard [ph] and we consider that a great thing to do. I will finish with a point that again, come back on where we have to do a better job to explain our differentiation. Building global design center in India is extremely hard. Because you have to start small, when scale matters. You have to start new, when young engineer will look for established brands where they can grow faster.

And so we have been incredibly lucky again, when we decided to buy Publicis Sapient. And I know that at one point it was a bit controversial, but now it’s proving his full power. What we have bought there is not only a great company with great brand and great talent, but also an organization that is organization of the future. And so we started immediately, but I think it was 10,000 or 12,000 engineer based in India on the global delivery model that we’ve been able to scale. But it’s very important to say that the first mover advantage and the fact that we’re already there, in our opinion, give us a 5 to 10 year advance to anyone who wants to be there.

Christophe Cherblanc

Okay, thank you.

Operator

The next question is from Conor O’Shea of Kepler Cheuvreux.

Conor O’Shea

Yes, sir. Thank you. Good morning, everybody. Congratulations on the numbers as well. From my side, I have just three quick questions. If I could, first on Epsilon, can you give us a little bit of detail behind which activities within Epsilon are fastest growing? And if there’s a big gap between the growth and the various activities within Epsilon?

Second question in terms of just the digital advertising market in general particularly in the U.S., are you seeing any signs of that bottoming out and in particular, with regard to your CJ affiliate activity, and now within the media business, is that — are revenues declining for that unit from your perspective as well?

And then the third question, just in terms of the UK business, obviously, an excellent performance again. There was an announcement in the last week or so that the Head of UK business Publicis, Annette King is leaving to Accenture. So just wondering if that has any potential destabilizing impact on the business in the coming quarters. Thank you.

Arthur Sadoun

Great, thank you Conor. So what we’re going to do is, maybe you can give the number on it, and I’ll make a comment and then I’ll take the two around. Okay.

Michel-Alain Proch

Yes, sure. So, hi, Conor. As I was saying on the call, the third channel Epsilon has been growing this quarter, tech, auto, digital media and data. We say with an organic growth for Epsilon at 10%. And we see a good distribution of the performance among these four division. That is not an outlier. So it’s pretty much within the average number of 10% for Epsilon.

Arthur Sadoun

I mean, we are very pleased to see Epsilon performance. I start by that. We have been talking about Sapient so far. But for those who were there are four years ago now, when we made the acquisition, and at the moment, while the market gave us a credit to have paid a good price, that was anticipating growth between 0% to 3%, continuing to deliver double digit growth is remarkable. If I want to be honest, I think it is 80% thanks to the work of the team that is outstanding today.

And the integration of this team within Publicis Groupe to really bring together identity marketing, and upscaling media, and creating new products for retail media winning the biggest Groupe at 80% to their credit, but I have to admit that there is a good 20% that is due to [indiscernible]. Five years ago, no one was anticipating that the shift from third party cookies to third party data will be so fast and will be in every client mine so fast. And this, of course, represent a massive trend itself, particularly to first party data management, in order to make sure it can be digital ecosystem and truly transform your business. That is giving us a fantastic day win also.

On media and digital media, look, first of all, we had an outstanding year last year, on media in general, we are having a good quarter, as you have seen. What really defines the trends is what happened at the upfront in the U.S. in a couple of weeks. So I think it’s too early to draw any conclusion. What I can tell you is so far, as we said, we have seen some localized charts in more traditional advertising, but nothing material. And more importantly, no real movement into that.

I propose that we wait for the approach. And maybe we can take back this discussion after when we talk in July. It’s too early. When it comes to the UK first of all, again, one of the good surprises of Q1 is Europe. As you have seen on the kind of four-year stack, closer from the 15% when the U.S. is at 20%. But they’re coming back, which is a great news.

I will tell you U.S. is more on the kind of three year stack of our competitors in Europe. So it’s keeping up and progressing. But when you look at the number on, it’s particularly you do the UK, as you commented, but for tourism, and we want to be very transparent on that and we have been transparent even with the price. The first one is Sapiens coming back very strongly, because some projects that have been stopped are starting again, and the team there is doing an outstanding job on the top of that winning new business, in other industries, and the side effects of the global crisis [ph].

We have one in the U.S. that that’s now starting to deploy in the rest of the world and mainly Europe. And we took the strategic decision to make UK, the base for our business when it comes to Europe, in Media. And this, of course, is having an impact on the organic growth. And when it comes to Annette King, I will first start by thanking here for her services. We’re very happy to have her with us. And I would say it is the life of the agencies.

We have taken strong decision in September, when we decided to put in place a new Director of Publicis, and then a new organization for Europe, where I have asked [indiscernible], that was truly outperforming the market in Asia to come and take Europe. We decided to make an external recruitment with Annette [ph] from one of our competitor that is definitely someone that is already having a big impact. And you have to understand that this condition people decide to move on. I can’t blame them for that. I can just thank them for the time they have spent with us.

Conor O’Shea

Great, thank you.

Operator

The final question gentleman is from Adrien de Saint Hilaire of Bank of America.

Adrien de Saint Hilaire

Yeah. Thank you very much for squeezing me in. I’ve got a few questions, if you don’t mind. So all of your peers are now talking of logins being flat at worst or up at best. I know at Publicis you run a slightly different model. But I’m just curious, given the slightly better organic sales growth, if you see any scope, let’s say, for outperformance there, perhaps some extra work done around real estate optimization.

And then I have two more questions around Sapient. Perhaps Arthur, you can talk about the pipeline of projects that you see. Do you see a lot of RFPs at the moment around digital transformation compared to previous years? And then maybe more specifically, I was interested with this contract with Sonepar. Not a company I’m very familiar with. But I noticed that they were ready to spend a EUR1 billion around digital transformation over five years. How does that contract specifically split between Sapient and the two other partners which have been selected? Thank you very much.

Michel-Alain Proch

So I begin with margin. Okay, all right. So as far as margin is concerned, we’re very confident into our operating margin guidance Adrien with 17% to 18%, for 2023. And we are delivering as the industry highest ratio while supporting growth. I just want to add one point here, which is if you take the midpoint of this guidance, it’s actually 50 bps above the average of the last three years. And we are doing all this while maintaining a high bonus pool at about EUR500 million, which is the same level of 2022.

And again, if we go back a bit in time, remember that this bonus pool was a EUR200 million in 2019. So we in average, we doing 50 bids better than the last three years. All this while absorbing Eur300 million more bonuses. I am not going to go into detail of our cost assumption. I just want to tell you, I gave you past assumptions for the year for fixed DC [ph] and for G&A. They haven’t changed. Fixed DC will evolve broadly in line with the new. G&A will increase slightly as we are progressively seeing return to more face to face meetings with clients.

So long and short, can we do more than 18, if we decide? Yeah, I mean, we can. I mean, are we doing to do more? No, because we want to place a guidance which is sustainable for our business, to support goals, and allowing us to invest into talent and technology. Arthur?

Arthur Sadoun

Yeah, I mean, as I’m already in my seventh year now, things are moving very fast. I remember the time where everyone was telling us you should sacrifice margin to get growth. And we say it’s not about sacrificing margin because we’re not here to buy market share. We are here to build a model for the future. That lies on growth pillar that are sustainable on the long term. And what we are achieving here, at least what we achieved last year, and what we aim to achieve this year again, is outperforming on growth, outperforming on margin and rewarding our people better than anyone else because we know that talent matters.

And honestly, if you ask me what we are the most part of today, looking at the Q4 season as we are going first, is not only we raised our salaries, not only we gave two weeks of additional salaries to everyone that doesn’t have variable remuneration, but we actually increased our bonus pool that was already extremely high in 2021 by 20%, while again, delivering the best margin, while our competitors were actually declining their bonus pool. That’s very important for us. And this has been perceived not only by our people, but by our clients.

On Sapient, look, we are extremely at ease with the Sonepar partnership. It is a great company. It has been done by Publicis Sapient in France and Leeds [ph] and our team with of course a support again, this is fantastic. I’m sorry, I can’t give you more detail. I shouldn’t say when it’s a fantastic partnership. And I don’t want to get into too much detail as we are again, not giving any specifics on our clients.

But maybe a bit more of corrals on reception pipeline as you asked, I mean, those guys are doing an outstanding job, when it comes to securing develop things with our existing clients, when it comes to winning new clients, double digit growth, again in this context is surely strong. I will not compare to other system integrators and the leader of the market in particular, but we’re at least at the same level, which I think is a good sign of our competitiveness. And although they are more selective in the kind of bids taking on new clients, they are showing the superiority of their offer.

And what we see at the moment, again is a strong pipeline. But again as the system integrators competitors, told you already in the call, we have to be cautious, because we consider it will be normal for some of our clients to sometimes delay a bit some investment, just because they are going through a couple of cluster of uncertainty.

So we have on one side pretty excited about the pipeline we are seeing and on the other pretty cautious when it comes to the ability of some of our clients that again, we haven’t seen in Q1, though, outperforming definitely better than expected in Q1, but we need to stay cautious.

I think that was the last question. So maybe I’ll take one second more to draw up what we discussed today. I hope that what you want to take out of this call is that despite the increasingly challenging microeconomics contexts that you know. This is why we did not come back on that so much. We definitely see confidence in delivering a very solid Q2 and organic growth for the full year that is now between 4% to 5%.

We believe we’re going to do all of these while reaching once again, the highest financial KPIs of the markets Michel just came back on that. We need to do a better job at explaining what we do. And I want to just wrap up with the three reason why we believe that actually we are the only one that can truly outperform the industry this year.

The first is the uniqueness of our revenue mix. When you have 30% of your revenue in data and technology that will be accretive of our growth. We know that our clients are going to continue to transform, again some project could be delayed. But this is a massive strength not only in terms of pushing our roles, but also pushing our business and helping us to really be at the cutting edge. So this is something that no one else has in this business. It has been built over time it has not always been easy, but we actually made the right acquisition at the right time with the right integration.

The second, and as you have seen, we are being more cautious and not spending too much time in any particular window. But the tail wind that are coming forward to continue to the new business starts will help us again this year. It did in Europe in Q1, and it will continue over the year. And last but not least, but I guess it’s something we will discuss more in Q2, our platform organization is definitely giving us the agility to deliver on our financial objective, while continuing to invest in our people, and in technology.

I mean, I have a few question with the price, and with you and in the last meetings about where are we in terms of transformation, and what are the next steps. Hopefully, you are feeling now that the translation is really behind us. And we can only focus on one thing, which is the execution of our own map with a team, despite all the uncertainties, and with real success at the moment.

So you can be sure that what we’re going to do in the coming months is to be closer to our client than ever. Because as we discussed, every challenge, they are facing some things that we need to face with them and can represent an opportunity to be an even better partner in their transformation. We’re going to take particular care of our people. We just talked about returning to the office and what we are doing there, but a lot is being done. And we will continue constantly to innovate. We talked a bit about AI.

Well, I thank you very much. Wish you a great day. And any further question, Alessandra is here for you. Merci.

Michel-Alain Proch

Merci. Bye-bye.

Publicis Groupe S.A. (OTCQX:PUBGY) Q1 2023 Earnings Conference Call April 20, 2023 3:30 AM ET

Company Participants

Arthur Sadoun – Chairman & CEO

Michel-Alain Proch – CFO

Conference Call Participants

Lina Ghayor – BNP Paribas

Julien Roch – Barclays

Christophe Cherblanc – Societe Generale

Conor O’Shea – Kepler Cheuvreux

Adrien de Saint Hilaire – Bank of America

Arthur Sadoun

Thank you Sherri. Bonjour, and welcome to the Publicis Groupe First Quarter 2023 Revenue Call. I am Arthur Sadoun and I’m here in Paris with our CFO, Michel-Alain Proch. As usual, we’ll take your questions together after this presentation. Alessandra Girolami is also here and will be available to take all of your question offline after the session.

I will start this call by sharing our Q1 highlights. Then Michel will provide more details on our numbers, and I will conclude with the outlook for the rest of the year.

But before we start, please take the time to read the disclaimer, which is an important legal matter.

Okay. In an increasingly uncertain global macroeconomic context, the strengths of our offering with our revenue mix, our go-to-market and our platform organization gives us full confidence to deliver the 2023 guidance we set in February. I would like to start by actually giving you a broader context about what we have delivered. After two years of double-digit growth, we posted a strong start to 2021. Our Q1 net revenue was up plus 10% on a reported basis. Organic growth was ahead of expectations at plus 7.1%. It is important to note that this performance came on the top of a very solid plus 10.5% organic growth in Q1 last year.

If we start to deep dive deeper into our Q1 highlights, in a market that will continue to change dramatically we were able to capture once again the shift in client investment towards first party data management, digital media and commerce with, as you will, see a direct positive impact on our creative and media operation. First, this was clearly visible is a double digit performance of our activities in data and tech that together represent one-third of our revenue, and were again this quarter accretive to our growth.

Epsilon was up plus 10% organically, on the top of plus 7% in Q1 2022 with solid growth across all divisions. Publicis Sapient continue to gain market share with net revenue up plus 11% organically after a plus 19% in Q1 2022. The relevance of our offer with real time data and tech growth was also visible in the rest of our business, with very solid performance of media and creative this quarter.

Media grew high single-digit organically fueled by new business gain, and after a double digit increase in 2022. Creative sustained its solid momentum with mid-single digit growth this quarter, thanks mainly to scope extensions, notably in production.

Let’s turn now to our regions. The U.S., our largest geography continued to post a strong performance this quarter with a plus 5.8% organic growth on the top of the previous 8% last year. Epsilon and Publicis Sapient stood out by contributing again significantly to the country growth. Europe confirmed the very strong dynamic of the previous quarters. The origin posted plus 12.3% organic growth on the top of the plus 14.9% last year. This performance was largely driven by the UK, our largest country in Europe. Organic growth was plus 24%, led again by outstanding members at Publicis Sapient, but also the contribution of global 2022 media wins that we actually added in London.

France was up low-single digit, despite a high comparable base last year, fueled by several new business wins, notably in big accounts in media. Germany is actually accelerating to double-digit this quarter. In Asia, organic growth was up plus 0.8% this quarter due to a very high comparable base of 14% in Q1 last year, and a decline in revenue in Thailand, due to delays in phasing of large business transformation projects. Actually, more importantly, China posted very solid numbers, with plus 3.7% organic growth despite the difficult health situation in January and a high comparable base of plus 10.6% in Q1 2022.

Let’s be clear, we’re confident that Asia will accelerate growth as early as Q2, thanks to sustained new business momentum, the current improvement of the health situation in China and easier comparable in Thailand [ph].

Beyond the short term numbers, it is important to put our performance in perspective to truly appreciate the strength of our revenue. Since the [indiscernible] situation, the group has changed dimension by growing its Q1 net revenue by plus 45% on a reported basis, of which plus 18% organically. Our long term investments in Epsilon and Publicis Sapient have boosted organic growth at plus 24% and plus 28% respectively, compared to Q1 2019. And our model has leveraged its strengths in all of our region with the U.S. up plus 20% organically versus ’19, Europe up plus 15% and Asia up plus 20%.

Last but not least, our unique go-to-market continued to drive new business gains, and also external recognitions. Our new business momentum that took us top industry rankings for the first time in five years has been further confirmed in the past weeks by several reports. And after a record 2022 commercially, we are off to a very solid start to the year across all of our capabilities.

Of note, we won Adobe International Media, Worldwide Media, as well Sonepar business transformation and expanded our win with Mondelez International. We also scored a number of local creative wins of which Dunkin U.S., KB Home, Premier League and King in the UK.

When it comes to external recognition, not only did we score high in the industry for creative and media, but we also received acknowledgement by leading industry analyst firms for our data and tech expertise that not only set us apart from competition, but also place us way ahead on some of the most renowned tech service companies. This was not always the case with Epsilon that was named a leader once again in Loyalty Technology Solution.

I will now leave the floor to Michel, who will give you further detail on the numbers. And I will come back to talk to you about the prospects for the year.

Michel-Alain Proch

Thank you, Arthur. Good morning to all of you. It’s a pleasure to be with you today. I will begin with the evolution of our net revenue for the first quarter of the year. The Groupe posted a net revenue of EUR3079 million in Q1 which represent an organic growth of 7.1%. This comes on top of 10.5% last year and is ahead of our expectation as Arthur just explained.

Reported growth was at 10%. We recorded a EUR14 million positive impact from acquisition and disposal. On the one hand, this includes EUR31 million net revenue from our acquisition, the most significant contributions being Profitero, Tremend, Yieldify and Retargetly acquired in the last 12 months. On the other hand, it takes into account the impact of the disposal for EUR17 million mainly the exit of our operation in Russia that we will annualize from April 1.

This quarter foreign exchange rates contributed a positive EUR61 million, which is equivalent to circa 2% of net revenue. This was driven by a positive EUR78 million related to the evolution of the USD to euro FX rates while the GBP had a negative impact of EUR13 million.

Let’s move on to the next slide, which gives the dynamics of our Q1 organic growth by geography. North America posted another very solid quarter with 5.7% organic growth. The impact of the USD to Euro was a positive 450 bps on growth this quarter. Together with the impact of acquisitions this led to a 10.9% reported growth overall in the region.

With 12.3% organic growth Europe accelerated, largely driven by the very strong performance of Publicis Sapient in the UK. Asia Pac posted a slight organic growth of 2.8%, including the solid performance in China, despite the health situation in January. Middle East and Africa and Latin America both posted solid organic growth at 16.6% and 7.8% respectively. I will detail the performance of each region in the following slides.

So I begin with North America, in this slide. As I have just said our operation in the region posted a 5.7% organic growth in Q1, mainly driven by the U.S. at 5.8% while Canada was at 3.2%. Let’s now focus on the U.S. where our operation grew 5.8% organically with solid momentum for all our activities in the country. This is all the more remarkable that it comes on top of 8% organic growth in the same period last year. With 20% organic growth since 2019 our performance in the U.S. confirms the strength of our offerings in this geography, where our model is the most advanced.

Media grew at mid-single digit rate this quarter on top of double digit last year. This was supported by both positive underlying trends with existing clients and new business won in 2022, particularly in food and beverage, retail and healthcare sectors. Creative came in stronger than anticipated and posted mid-single digit growth this quarter. This was achieved thanks to fewer budget cuts than expected, solid production and scope extensions with existing clients notably in automotive, food and beverage, and retail.

Publicis Sapient posted 8% organic growth in Q1. This performance was particularly solid, considering this considering the 16% growth in Q1 last year and confirmed the ongoing demand for digital business transformation. Epsilon posted a double digit organic growth in Q1 thereby remaining very accretive to the country’s number. All of its division posted very solid performance in the quarter. And it’s worth noting that [indiscernible] at our retail media activity continue to grow at a very high pace.

Let’s turn to the performance of Europe in the following slide. As I mentioned earlier, Europe recorded an organic growth of 12.3% including our Outdoor Media activities and the Drugstore, and 12.8% excluding those activities. The UK, which is 9% of Groupe net revenue in Q1 recorded organic growth of 23.9%. Like in Q4 Publicis Sapient, which represents one-third of revenue in the country was the largest driver of the UK’s outstanding performance.

Publicis Sapient’s activity continued to benefit from ongoing large projects, particularly in the financial and retail sector. Media activities grew double-digit driven by global new business wins signed in 2022, notably in the automotive and non-food consumer sectors. Creative activities were up high single digit this quarter.

France, which represents 5% of Groupe net revenue in Q1 posted organic growth of 2.9%. Including our Outdoor Media activities and the Drugstore organic growth reached 2% this quarter. Media was very solid, particularly in the automotive food and non-food consumer sector and Publicis Sapient was softer on the back of a very high comparison basis. Germany representing 3% of Groupe net revenue posted the double digit organic growth. Media grew by your strong double digit mostly on the back of global clients. Publicis Sapient also posted a strong performance supported by the win of local clients, and Creative was broadly flat.

Let’s finish by a few words on Central and Eastern Europe. The performance in the region was very strong at 11% organic with Turkey, Czech Republic and Hungary largely driving growth.

Turning now to the next slide where we detail our performance in the Rest of the World. In Asia Pac which represents 8% of Groupe net revenue in Q1 we deliver 0.8% organic growth. Overall in the region, Media grew double-digit while creative remained stable. The activity at Publicis Sapient declined in the region due to the delayed phasing of a large project in Thailand. Without this impact the region would be close to 4% organic growth.

Let me break this down for the main countries. China posted a solid performance at 3.7% organic growth this quarter, despite the health situation in January. And that’s not a big thanks to new business wins in food and beverage. Australia, Malaysia and Vietnam were also growth contributors. In Middle East and Africa, we posted a 16.6% organic growth in Q1, benefiting from strong Creative and Publicis Sapient in the Middle East and a very solid media activity in Africa. Latin America posted a 7.8% organic, with most countries recording positive growth this quarter, especially in Argentina, Mexico, Colombia, largely driven by Media.

On the next slide, you will find the group performance by client industry for the quarter. This is based on an analysis of our main clients representing 92% of our net revenue. It also excludes Outdoor Media activities and the Drugstore. This quarter all of our clients’ industry were positive but one with six of them growing double digit. Among those I would like to highlight the following ones. Food and beverage grew 19% continuing to perform very well, on the back of last year new business ramp up. Healthcare was up 13% quarter on top of 12% last year, with Media in the U.S. and Publicis Sapient being the main contributors.

We saw a similar dynamic in retail which grew 16% in the quarter. Leisure and travel was up 14% continuing to benefit from the momentum in tourism and hospitality. On the contrary, TMT posted a 7% decline in the quarter. This performance was notably due to some phasing in media combined with a particularly high base last year.

Finally, it’s worth noting the solid performance in the financial sector on top of double digit organic in Q1 2022 as well as non-food consumer and automotive which grew in line with full year 2022.

Moving to the next slide, net debt. The group closing net debt at the end of March was EUR442 million, representing a negative net debt valuation of circa EUR1.1 billion over the quarter, showing the usual seasonality of working capital at this period of the year. This is compared to a net debt valuation of circa EUR640 [ph] million in Q1 2022. This stronger valuation of circa EUR400 million is largely explained by several reasons. First, the EUR220 million share repurchases fully executed in the quarter in order to cover employee long term incentive plans.

Second, EUR110 million cash tax payments made in January 2023 related to 2022 and reflecting the new application of U.S. tax cuts and jobs acts on the capitalization of R&D expenses, as I explained in February in our fully year earnings call. And finally, about EUR100 million additional outflow in working capital versus Q1 2022 due to some phasing effects, and it will normalize during the year.

So 12 months average net debt was EUR563 million at the end of Q1 2023. This is EUR714 million below end of Q1 2022 and EUR122 million below end of 2022 level. We are fully on track to meet our average net debt objective for the full year at circa EUR300 million.

This concludes my financial presentation. And I now give the floor back to you Arthur.

Arthur Sadoun

Thank you Michel-Alain. As you saw, we had a strong start to the year that again proves the ability of our unique model to actually gain market share. It is clear that the current macroeconomic environment is increasingly challenging, with the recent tension in the banking system, adding to the ongoing war in Ukraine, high inflation and interest rates.

But as demonstrated by Publicis our revenue mix, our go-to-market and our platform organization gives us greater resilience to business cycle. This is why we are able to confirm all of our guidance KPIs for 2023 despite this challenging context. Actually, when it comes to organic growth, our strong Q1 and our expectation for a solid Q2 between 3% to 5%, increased our confidence to reach the top half of the 3% to 5% range for the full year. This means 2023 organic growth is now expected between 4% to 5%.

Let’s now go through the drivers of the differentiation that make us confidence for the rest of the year. It starts with our revenue mix. As we said in the past, thanks to our decade long investment, we now have one-third of our revenue in real time data and technologies. This is a reason why we have grown faster than the industry and the global economy, particularly since the pandemic. Concretely, in 2022 we outperformed the industry average organic growth by 300 basis points on a three year basis led by Epsilon and Publicis Sapient, which again will be accretive in 2023.

But we are not it’s stepping down. We keep on adding value and scale them to our future facing expertise to actually strengthen our competitive advantage. This is the case in identity marketing, where we constantly enrich Epsilon capabilities and its 300 million profiles globally. More recently with the acquisition of Yieldify to increase brand online personalization, but also Retargetly that extends our footprint in LATAM.

In digital media, we are building solutions based on our real identity to increase our client business outcomes through fast-growing new channels by connecting Epsilon to our scaling media for connected TVs, and to site [indiscernible] and retail media. Next year when it comes to business transformation, and we will continue to further our scale and our global footprint in everything we do. This is what we have done when we have gone through the acquisition of Practia, making sure that we add not only capabilities in LATAM, but also a new global delivery center to our global map.

It is very important to note that we can today count on one-third of our tenants working in data and technology. This would place us at the heart of a client’s structural needs as you have seen, but it is also a huge asset to leading areas like AI, visualize of ChatGPT everyone has been talking about the future of AI. In our case, it is already a reality that is accelerating the value and the speed of everything we do. AI is at the core of the business operating system and at the service of our clients.

When we launched Marcel in 2017 with the support of Satya Nadella and Microsoft, it was on the promise that AI will help us identify the best suited talent for any given base, proposed tailor-made learning and development programs for everyone, and make sure industry knowledge was better shared and use. Today, the vast majority of our people are connected to Marcel and are already using AI regularly. It is now a huge competitive advantage, not only in recruitment, but also of course, in retention.

To fully divest the value of AI to the benefit of our clients, we have equipped our team with AI-driven tools. This is of course true at Publicis Sapient, where we were first to acquire new AI capabilities to deliver enhanced customer experience, with faster project development and at Epsilon that use AI model now to update, to enrich and activate real time our third party data. But that capabilities further extend to media, where AI is playing a key role to optimize buying and buying, but also power, our retail media and advanced TV offering, for our creative business where AI optimize production process and boost dynamic creativity.

In fact, we enter in partnership with open AI before its recent popularity, to deliver innovative, personalized and send solution to our clients. I mean, there is no doubt that AI will radically change the shape of workforce entities quickly. So we must make sure that all of our people are capable of harvesting the machine capabilities at the service of our clients. We are committed to empower all of our people integrating AI in their daily work.

Secondly, what drives our confidence for this year is our go-to-market. Not only do we have differentiating assets that perform well on a standalone basis, but they also contribute materially to the performance of our Creative and Media. What sets us apart from competition is actually our ability to connect our different expertise. By integrating real time data and technology into creative production any year, we are positioning ourselves as a true marketing transformation partner for clients. The strength of our model has been visible in our new business track record in the last five years.

The momentum continued in Q1 and will contribute to our growth. Of note our recent win of Walgreens Media show the indisputable scalability of our model run on real IDs that not only bring efficiencies in terms of investment, but also competitive advantage for clients. In 2023, our focus will be on delivering the best services to our existing and recently won clients while winning market share with the right value.

And lastly, our platform organization provides us with agility, which is increasingly required to navigate a more complex world. With our consumer data, our global delivery centers and our soft services we have the ability to maximize resources allocation locally, manage recruitment policies and benefit from scaling and pool the organization. Not only does our platform create efficiencies to mitigate wage inflation and plus year-after-year the best financial KPIs but it also enable us to invest in our growth and in our people.

One, to our Groupe, we are confirming our 2023 expectations set in February despite the rising macroeconomic uncertainties. When it comes to revenue, our better than expected Q1 and a very solid anticipated Q2 make us confident to now deliver between 4% to 5% organic growth this year.

And this will come while maintaining industry high financial ratio with an operating margin rate of 17.5% to 18% and free cash flow of circa EUR1.6 billion. Thanks to the combination of our revenue mix our go-to-market and our platform organization, that definitely set us apart from competition, we will continue to deliver on our commitments and accompany our clients in their transformation.

I would like to thank our talent for their continued excellence and of course, thank our client for their trust. And now with Michel-Alain we are ready to take all of your questions.

Question-and-Answer Session

Operator

Excuse me, this is the conference operator. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Lina Ghayor of BNP Paribas Exane.

Lina Ghayor

Hi, good morning, Arthur and Michel. I hope you can hear me well. And congrats on the results. I have two questions. The first one is on Sapient [ph]. The performance is impressive, particularly in the context of its past comparatives. However, could you just explain a little bit more what happened by geography and client vertical? Particularly the U.S. grew 8%, which is strong, but half of the rest. So and your data and the asset dynamics, and your thoughts around the growth outlook will be appreciated?

The second question is on trends. You now expect organic growth for the year to be between 4% and 5%, with 3% to 5% for Q2. So back of the envelope, it implies 3%-ish for — excuse my calculation is correct, which still has given the macro environment. So my question is, what do you see in your client behavior at the moment? And what have you baked in on the macro side in your guidance?

And the last question is on activities like technologies and AI, so you mentioned some elements in the presentation. But where do you see generative AI impacting your business on the economics. So typically, for example, pricing, but also on the customers. And I will be also interested to hear what is the client appetite, either on the training side or media buying side, any concrete example would be highly appreciated. And that’s it. Thank you.

Arthur Sadoun

Wow, that’s great, Lina. Thank you. So if I’m well, we have a question on Sapient, mainly on the U.S. and client vertical. We have a question on the rest of the year. And then a question on ChatGPT. I’m going to start, if it’s fine for you, Michel. If you want to add anything, please do so.

Maybe I start by your second question, at the trends for the year and how we anticipate the rest of the year. What can I tell you on that? First of all, as we said, for Q2, we expect a very solid quarter between 3% to 5%. And again, it’s very important to consider that we’re going through a higher comparable in Q2 than in Q1 on the three-year basis.

When we go to H2, we are of course, taking three factor into consideration. The first is, as everyone has mentioned, increasingly, macroeconomic challenges that are rising for sure. Second, which is important for us so higher comparable base seems upon the niche, with H2 last year that was growing 400 basis points faster than H1. So big gap, and you have seen the acceleration we had last year. And also Q4, which is always an adjustment quarter, even more in such a volatile year. So that’s the assumption we’re making.

But despite those three factors, it’s very important to note that we have not changed our assumptions for H2, thanks to the strength of our revenue. All that I explained about our revenue mix that will continue to be accretive, the new business that we win, but also our platform organization when it comes to launching. And so what we have done to actually move from 4% to 5% is simply reflecting on the full year after an expected Q1 that came at 7.1%.

When I move on to — I’m going to move into Sapient, why not now. Let’s do Sapient in the U.S. I mean, I should start by the beginning, overall, adding Sapient again, that where did it go in Q1 after the track record they were having on the three-year basis is something that is good news for us. And it happens higher than expected, for a single reason is that we were expecting that some business transformation project could have been delayed. They have not been delayed so far.

I think, again, is the economic challenges that our clients are facing. We don’t think they’re going to cut their investment on transformation. We can expect that some will postpone some decision and we are prepared for that. We were in Q1, we are in Q2. And this is a very important element. Now when it comes to the U.S., I mean, I will start by reminding you that Sapient had an outstanding performance in the U.S. in 2022, 17.5%. For those who were there with us a couple of years ago, this is incredibly strong and building on already a very good momentum.

And despite this very high comparable, we are delivering 8% in Q1, which means that we have delivered plus 36% organic growth since the start of the pandemic. So they are good by itself inorganic. I mean, we are absolutely convinced that Sapient will be accretive to our growth again this year, despite, as I said, some slower decision processes, smaller projects, you might have heard that, by the way from other system integrators.

I think that in the U.S., everyone will agree that on smaller account, there might be some delays. But we are absolutely certain that Publicis Sapient not only will continue to be very solid in the U.S. And this for the third year continued consequently, but will also accelerate, as well, particularly in the UK. I think the UK, case, if I can spend a minute on that is very interesting.

You would remember that in ’20 and 2021, and maybe the beginning of ’22, the performance was pretty poor. And we told you the reason why the performance is poor is because of few clients that are very loyal and very happy with us have decided to stop and postpone their investment. We had to take the heat at the time. And now that they have started to invest again, we are taking the benefit of it, as you can see in our results in the UK.

Al, you’re asking all the questions. What can I tell you about generative AI? I mean, clearly, I’m not going to come back on everything I said about why AI is already at the core of Publicis operating, and by the way, why AI is already at the service of our clients. It is, if I may, native at Sapient. It is absolutely core is where we refresh our data and it’s here now.

It’s having a massive impact on how we can maximize our client investment in media. And even more importantly, how we can boost our retail media offer. And it has to play also in creative, in production and ideation. And this is where at the moment generative AI is having the biggest impact. And of course, I guess the question you get behind that is can generative AI hit our creative business in the future? I mean, I’ve been working at creative agencies for the last 25 years now.

So if there is an area that I know pretty well, it definitely is one. And I have seen the ideation process when we create that and the production process change radically several times over the last two decades. And it’s very interesting to see that every time creative agency has always been able to adapt to new technology and continue to deliver great value for their clients. So to be clear, I think that generative AI for the creative business is going to be an opportunity. I am definitely not worried about our ability to adapt and leverage the potential of AI. But I also want to be clear that the fact that it will take time before it can become a reality across the board.

This is not something that will change overnight, but what is certain is that what we might lose in terms of our view through a faster process, because maybe there was a lesser job which will be fine, will be largely compensated by the necessity to multiply the number of creative assets due to personalization at scale.

And by the way, you see [ph] not enough production number today. As you have seen creative is strong in Q1. It’s partly due to the fact that we have to produce more assets. So if I want to make a long story short on this one, it’s possible that tomorrow we get paid less for a single ad but we will have to deliver way more volume as personalization increase. So that he will see generative AI. As long as we are capable of mastering it more as an opportunity demonstrate. So I have been long but I think it was three important questions.

Lina Ghayor

Thank you.

Operator

The next question sir is from Julien Roch of Barclays.

Julien Roch

Bonjour Arthur and Bonjour Michel. Two easy questions for Michel. And on the first one is indication for working capital in 2023. To the split between media and creative in the two third you’re talking about? And a more difficult question for Arthur, following up on the theme of artificial intelligence. I just said — I just heard what you said, in terms of less revenue per ad, but more ad for net-net the same, but historically, you run your business on a cost plus basis. So let’s say you win a content creative budget where a client will spend 100.

Historically, you say we are making 18 margin. So we’re going to spend 82, on what the client wants. Thanks to AI, it will cost you far less to deliver the same value add illustratively, let’s say 40. So if the clients were still spending 100, you’d make a massive margin of 60, rather than 18. So I think the client will say, well, I’m going to pay you less 60, 70. So you make a higher margin, and I pay less and everybody’s happy. So why in that specific case, why don’t you think that AI will lead to lower revenue, but higher operating profit?

Arthur Sadoun

Okay, so first, I’m definitely not saying that AI will lead to lower revenue. What I’m saying is that we might get paid less for a single ad one day. We are far from that, but it will add to the volume of ads that we have to produce because of personalization at scale. But actually, I need to answer your question a bit differently, Julien because this is a critical question the one you’re asking.

And this is where we still have a lot of work to do, to change the perception of what we do for our clients. And why what we do, not only make us unique, but we believe creates, the opportunity to be the only one that can truly outperform the market, is we have shifted from a communication partner to a transformation partner, where we make our money and our margin, because this is valued services, is in our ability to accompany our clients in the transformation you just talked.

And so the reason why we see AI as an opportunity is that, you know what, maybe one day on what we are doing in the past we will get paid less on creative, but it will be more compensated by our ability to bring what is needed for generative AI creative work, which is first party data, which we are the only one that can deliver with Epsilon, the only one among the holding company, the necessary technology and technological ecosystem to produce it, which is what we do, of course, with Publicis Sapient. That work with — as a system integrator with all the platform like capability [ph], and our ability to add a client build your own model for this to work.

So don’t get me wrong. I am not saying that generative AI will keep our creative revenue at the moment. What I’m telling you is that because we are not on the same positioning that our competition, because thanks to the vision of noise 10 years ago, with Sapiens, we have started to invest in technology and data differently from our competitors and integrate it at the heart of our creative and media business. You should ask yourself the question why we are going crazy, but also why we are winning so much on media is because of this integration, the ability we have today to take generative AI and see it as an opportunity for our client to further accelerate the transformation represent more source of revenue as a transformation partner, then as a former communication partner.

Now, I think I get enough time for Michel-Alain to take the two other questions.

Michel-Alain Proch

Thank you, Arthur. So on the working cap, yeah. So on the first quarter, as I was commenting the valuation of net debt pact of the EUR400 million stronger version of net debt we had in Q1 2023. That’s just Q1 2022 is coming from about EUR100 million of out flowing in working capital, which is really phasing effect. Nothing to worry about. We will normalize during the year. And to give you a data point, like last year I’m targeting to be roughly at zero in working capital for the year.

On your second question which was the split between media and creative, I think you are referring to one of the first slide of Arthur, when we say to sell. So yeah, it’s one sell down roughly. The split of the company hasn’t changed compared to 2022. So one cell then tech, and one cell of Creative, and production will sit in there. And one cell media and as Arthur was mentioning in the beginning of the call, a strong performance of media high single digit and actually a better performance than expected in creative with…

Arthur Sadoun

By the way, it’s important to note that when we say data and technology, we are talking about engineering and actually AI capabilities which we have with one-third of our revenue. We should not underestimate how much we have digitalized and bring technology into our media business, for example, and starting to do very well in production and ideation. We have the discussion on AI.

Julien Roch

Okay, very, very clear. Thank you very much.

Arthur Sadoun

Thank you.

Operator

The next question is from Christophe Cherblanc of Societe Generale.

Christophe Cherblanc

Yes, good morning. Thanks for taking my question. First one was on head count. Can you give us the headcount at the end of Q1? And what are your plans for Q2 at that stage? I think Arthur you mentioned some consultants were slowing down a bit. So do you plan to soft land the Sapient workforce? That’s the first one.

The second one was on offshoring? What — whom do you see to increase the share of offshoring in your setup? I mean, if we speak again, in five year will the mix be 30-70 that is 25-75 today. And Arthur you mentioned the fact that was a balance between the cost advantage and the flexibility and the ability to key to tap talent. If you had to pick a number, would you say to balance between the cost issue and the flexibility issue?

And the last one is still on offshoring. On Practia, I guess that’s for Michel now, can you give us some numbers, orders of magnitude of margin revenues? And more importantly, maybe how many Practia do you see on the market because that kind of asset for us is very up to see from the outside? Thank you.

Arthur Sadoun

I’m going to let Michel-Alain answer the three and then maybe I’ll make some comment on that.

Michel-Alain Proch

Sure. Okay, hi. So on the head count at the end of the quarter, we are a bit more than 98,000 people. We have added during the first quarter, a net hiring of 700 people. This is just for you to remember what we’ve decided is stabilize the accounts in Q4 of 2022. You remember that we were hiring for the first three quarter of 2022 between 2,500 and 3,000 people and we are still catching up on our revenue trajectory. We stabilized in Q4.

In Q1 we have 700 more on net hiring that we have concentrated mostly on Epsilon. As you have seen, it then is delivering double digit goals, on our global delivery centers. That’s the second the second place, I will make the link with your second question about offshoring. And finally, in Europe, because in Europe we are delivering, as you see 20% growth. So we have very granular monitoring of the accounts on a monthly basis operation by operation.

On the second part, which is the offshoring, in terms of in terms of global numbers, you remember them we have about 25% of our account, which are based in global delivery center. This is obviously different practice by practice. As I have already mentioned Sapient s already too high number which is about 70% of its accounts. Epsilon is just below with a bit more than 60% of head count. Media is around 30% and production is about 20%. And it’s not so significant for creative.

So as you can see, first I think we are leading the industry, in terms of offshoring leverage, first point. And the second point is that we still have way to go in some practice on the basis of the numbers that I just explained. I finish up on Practia, if it’s okay with you. So on Practia, you understand the move we are making. It’s a move, which is very comparable to the one we’ve made then with Tremend in Romania.

Going back a bit in time, Sapient was relying on one very large global delivery center in India. We have doubled it with the acquisition of Tremend in Romania last year. And here we are creating a third global delivery center for Sapiens in order to better serve our client base in North America having this global delivery center on the same time zone. So Arthur you want to add a little bit.

No, no. Okay, all right. So maybe that’s the first reason global delivery center. And the second reason is obviously entering a new market, which is one of the fastest markets for delivery, which is Latin America.

Arthur Sadoun

Now, maybe to build a few points and to come back to the operating stuff. It’s very interesting to see what we’re doing with Practia or what we have done with Tremend, because it come back about your point on offshoring, and what we’re expecting from offshoring. The reason why we are putting a new center in Latin America is for time zone reason more than anything else.

Why and come back to the question you were asking me between expertise and cost there, is that you need to understand that the platform that we have put in place that was initiated 20 years ago, maybe with the shared services. That was complemented with a global delivery center, and the company mandate to get a seamless access is making a huge difference in terms of managing our cost base and you see again the kind of financial ratio [ph] we are having. But also to make sure that we get immediate and direct access to data and technology to our clients.

And so the reason why it’s so important to be in Latin America is that we want to make sure that we can serve the needs, real time of the West Coast of the U.S., and [indiscernible] build them again now with all three centers where we can work 24/7 without any bumps in the communication.

And going back on the question you raise about why are we doing this. I mean, it’s three reason. And believe me they are in this order. First is expertise. I mean, when you look at the high end service, we are bringing with Publicis Sapient with Epsilon, or even with our media now, but mainly with Publicis Sapient, we have access to high-end high-skilled, high-trained engineer. And this is making a big difference. And to be clear, I have been — my first trip as a CEO, six years ago now, I’m getting older, was to go to India. I started by India, because I wanted to understand exactly what we were doing there and how we were working directly with our clients.

And I found their very high skilled engineer. And that the second time I found them at scale, because if you look at how we have been developing our workflow there, it makes a huge difference. And then because yes, if you allocate resources better by definition, it is less expensive. But you need great talent at scale and those global delivery center allow us to do that, in India, in Eastern Europe, and now in Argentina.

And I went there actually to make those guys and make sure that the feeling was the same. We have always high regard [ph] and we consider that a great thing to do. I will finish with a point that again, come back on where we have to do a better job to explain our differentiation. Building global design center in India is extremely hard. Because you have to start small, when scale matters. You have to start new, when young engineer will look for established brands where they can grow faster.

And so we have been incredibly lucky again, when we decided to buy Publicis Sapient. And I know that at one point it was a bit controversial, but now it’s proving his full power. What we have bought there is not only a great company with great brand and great talent, but also an organization that is organization of the future. And so we started immediately, but I think it was 10,000 or 12,000 engineer based in India on the global delivery model that we’ve been able to scale. But it’s very important to say that the first mover advantage and the fact that we’re already there, in our opinion, give us a 5 to 10 year advance to anyone who wants to be there.

Christophe Cherblanc

Okay, thank you.

Operator

The next question is from Conor O’Shea of Kepler Cheuvreux.

Conor O’Shea

Yes, sir. Thank you. Good morning, everybody. Congratulations on the numbers as well. From my side, I have just three quick questions. If I could, first on Epsilon, can you give us a little bit of detail behind which activities within Epsilon are fastest growing? And if there’s a big gap between the growth and the various activities within Epsilon?

Second question in terms of just the digital advertising market in general particularly in the U.S., are you seeing any signs of that bottoming out and in particular, with regard to your CJ affiliate activity, and now within the media business, is that — are revenues declining for that unit from your perspective as well?

And then the third question, just in terms of the UK business, obviously, an excellent performance again. There was an announcement in the last week or so that the Head of UK business Publicis, Annette King is leaving to Accenture. So just wondering if that has any potential destabilizing impact on the business in the coming quarters. Thank you.

Arthur Sadoun

Great, thank you Conor. So what we’re going to do is, maybe you can give the number on it, and I’ll make a comment and then I’ll take the two around. Okay.

Michel-Alain Proch

Yes, sure. So, hi, Conor. As I was saying on the call, the third channel Epsilon has been growing this quarter, tech, auto, digital media and data. We say with an organic growth for Epsilon at 10%. And we see a good distribution of the performance among these four division. That is not an outlier. So it’s pretty much within the average number of 10% for Epsilon.

Arthur Sadoun

I mean, we are very pleased to see Epsilon performance. I start by that. We have been talking about Sapient so far. But for those who were there are four years ago now, when we made the acquisition, and at the moment, while the market gave us a credit to have paid a good price, that was anticipating growth between 0% to 3%, continuing to deliver double digit growth is remarkable. If I want to be honest, I think it is 80% thanks to the work of the team that is outstanding today.

And the integration of this team within Publicis Groupe to really bring together identity marketing, and upscaling media, and creating new products for retail media winning the biggest Groupe at 80% to their credit, but I have to admit that there is a good 20% that is due to [indiscernible]. Five years ago, no one was anticipating that the shift from third party cookies to third party data will be so fast and will be in every client mine so fast. And this, of course, represent a massive trend itself, particularly to first party data management, in order to make sure it can be digital ecosystem and truly transform your business. That is giving us a fantastic day win also.

On media and digital media, look, first of all, we had an outstanding year last year, on media in general, we are having a good quarter, as you have seen. What really defines the trends is what happened at the upfront in the U.S. in a couple of weeks. So I think it’s too early to draw any conclusion. What I can tell you is so far, as we said, we have seen some localized charts in more traditional advertising, but nothing material. And more importantly, no real movement into that.

I propose that we wait for the approach. And maybe we can take back this discussion after when we talk in July. It’s too early. When it comes to the UK first of all, again, one of the good surprises of Q1 is Europe. As you have seen on the kind of four-year stack, closer from the 15% when the U.S. is at 20%. But they’re coming back, which is a great news.

I will tell you U.S. is more on the kind of three year stack of our competitors in Europe. So it’s keeping up and progressing. But when you look at the number on, it’s particularly you do the UK, as you commented, but for tourism, and we want to be very transparent on that and we have been transparent even with the price. The first one is Sapiens coming back very strongly, because some projects that have been stopped are starting again, and the team there is doing an outstanding job on the top of that winning new business, in other industries, and the side effects of the global crisis [ph].

We have one in the U.S. that that’s now starting to deploy in the rest of the world and mainly Europe. And we took the strategic decision to make UK, the base for our business when it comes to Europe, in Media. And this, of course, is having an impact on the organic growth. And when it comes to Annette King, I will first start by thanking here for her services. We’re very happy to have her with us. And I would say it is the life of the agencies.

We have taken strong decision in September, when we decided to put in place a new Director of Publicis, and then a new organization for Europe, where I have asked [indiscernible], that was truly outperforming the market in Asia to come and take Europe. We decided to make an external recruitment with Annette [ph] from one of our competitor that is definitely someone that is already having a big impact. And you have to understand that this condition people decide to move on. I can’t blame them for that. I can just thank them for the time they have spent with us.

Conor O’Shea

Great, thank you.

Operator

The final question gentleman is from Adrien de Saint Hilaire of Bank of America.

Adrien de Saint Hilaire

Yeah. Thank you very much for squeezing me in. I’ve got a few questions, if you don’t mind. So all of your peers are now talking of logins being flat at worst or up at best. I know at Publicis you run a slightly different model. But I’m just curious, given the slightly better organic sales growth, if you see any scope, let’s say, for outperformance there, perhaps some extra work done around real estate optimization.

And then I have two more questions around Sapient. Perhaps Arthur, you can talk about the pipeline of projects that you see. Do you see a lot of RFPs at the moment around digital transformation compared to previous years? And then maybe more specifically, I was interested with this contract with Sonepar. Not a company I’m very familiar with. But I noticed that they were ready to spend a EUR1 billion around digital transformation over five years. How does that contract specifically split between Sapient and the two other partners which have been selected? Thank you very much.

Michel-Alain Proch

So I begin with margin. Okay, all right. So as far as margin is concerned, we’re very confident into our operating margin guidance Adrien with 17% to 18%, for 2023. And we are delivering as the industry highest ratio while supporting growth. I just want to add one point here, which is if you take the midpoint of this guidance, it’s actually 50 bps above the average of the last three years. And we are doing all this while maintaining a high bonus pool at about EUR500 million, which is the same level of 2022.

And again, if we go back a bit in time, remember that this bonus pool was a EUR200 million in 2019. So we in average, we doing 50 bids better than the last three years. All this while absorbing Eur300 million more bonuses. I am not going to go into detail of our cost assumption. I just want to tell you, I gave you past assumptions for the year for fixed DC [ph] and for G&A. They haven’t changed. Fixed DC will evolve broadly in line with the new. G&A will increase slightly as we are progressively seeing return to more face to face meetings with clients.

So long and short, can we do more than 18, if we decide? Yeah, I mean, we can. I mean, are we doing to do more? No, because we want to place a guidance which is sustainable for our business, to support goals, and allowing us to invest into talent and technology. Arthur?

Arthur Sadoun

Yeah, I mean, as I’m already in my seventh year now, things are moving very fast. I remember the time where everyone was telling us you should sacrifice margin to get growth. And we say it’s not about sacrificing margin because we’re not here to buy market share. We are here to build a model for the future. That lies on growth pillar that are sustainable on the long term. And what we are achieving here, at least what we achieved last year, and what we aim to achieve this year again, is outperforming on growth, outperforming on margin and rewarding our people better than anyone else because we know that talent matters.

And honestly, if you ask me what we are the most part of today, looking at the Q4 season as we are going first, is not only we raised our salaries, not only we gave two weeks of additional salaries to everyone that doesn’t have variable remuneration, but we actually increased our bonus pool that was already extremely high in 2021 by 20%, while again, delivering the best margin, while our competitors were actually declining their bonus pool. That’s very important for us. And this has been perceived not only by our people, but by our clients.

On Sapient, look, we are extremely at ease with the Sonepar partnership. It is a great company. It has been done by Publicis Sapient in France and Leeds [ph] and our team with of course a support again, this is fantastic. I’m sorry, I can’t give you more detail. I shouldn’t say when it’s a fantastic partnership. And I don’t want to get into too much detail as we are again, not giving any specifics on our clients.

But maybe a bit more of corrals on reception pipeline as you asked, I mean, those guys are doing an outstanding job, when it comes to securing develop things with our existing clients, when it comes to winning new clients, double digit growth, again in this context is surely strong. I will not compare to other system integrators and the leader of the market in particular, but we’re at least at the same level, which I think is a good sign of our competitiveness. And although they are more selective in the kind of bids taking on new clients, they are showing the superiority of their offer.

And what we see at the moment, again is a strong pipeline. But again as the system integrators competitors, told you already in the call, we have to be cautious, because we consider it will be normal for some of our clients to sometimes delay a bit some investment, just because they are going through a couple of cluster of uncertainty.

So we have on one side pretty excited about the pipeline we are seeing and on the other pretty cautious when it comes to the ability of some of our clients that again, we haven’t seen in Q1, though, outperforming definitely better than expected in Q1, but we need to stay cautious.

I think that was the last question. So maybe I’ll take one second more to draw up what we discussed today. I hope that what you want to take out of this call is that despite the increasingly challenging microeconomics contexts that you know. This is why we did not come back on that so much. We definitely see confidence in delivering a very solid Q2 and organic growth for the full year that is now between 4% to 5%.

We believe we’re going to do all of these while reaching once again, the highest financial KPIs of the markets Michel just came back on that. We need to do a better job at explaining what we do. And I want to just wrap up with the three reason why we believe that actually we are the only one that can truly outperform the industry this year.

The first is the uniqueness of our revenue mix. When you have 30% of your revenue in data and technology that will be accretive of our growth. We know that our clients are going to continue to transform, again some project could be delayed. But this is a massive strength not only in terms of pushing our roles, but also pushing our business and helping us to really be at the cutting edge. So this is something that no one else has in this business. It has been built over time it has not always been easy, but we actually made the right acquisition at the right time with the right integration.

The second, and as you have seen, we are being more cautious and not spending too much time in any particular window. But the tail wind that are coming forward to continue to the new business starts will help us again this year. It did in Europe in Q1, and it will continue over the year. And last but not least, but I guess it’s something we will discuss more in Q2, our platform organization is definitely giving us the agility to deliver on our financial objective, while continuing to invest in our people, and in technology.

I mean, I have a few question with the price, and with you and in the last meetings about where are we in terms of transformation, and what are the next steps. Hopefully, you are feeling now that the translation is really behind us. And we can only focus on one thing, which is the execution of our own map with a team, despite all the uncertainties, and with real success at the moment.

So you can be sure that what we’re going to do in the coming months is to be closer to our client than ever. Because as we discussed, every challenge, they are facing some things that we need to face with them and can represent an opportunity to be an even better partner in their transformation. We’re going to take particular care of our people. We just talked about returning to the office and what we are doing there, but a lot is being done. And we will continue constantly to innovate. We talked a bit about AI.

Well, I thank you very much. Wish you a great day. And any further question, Alessandra is here for you. Merci.

Michel-Alain Proch

Merci. Bye-bye.