Publicis Groupe SA
PAR:PUB
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
74.76
108.1
|
| Price Target |
|
We'll email you a reminder when the closing price reaches EUR.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Publicis Groupe SA
You don't have any saved screeners yet
Good day, and welcome to the Publicis Groupe Third Quarter 2019 Revenue Presentation. Today's conference is being recorded. And at this time, I would like to turn the conference over to Arthur Sadoun, Chairman and CEO of Publicis Groupe. Please go ahead, sir.
Thank you, Nadia. [Foreign Language] and welcome to Publicis Groupe Q3 2019 Revenue Call. I am Arthur Sadoun, and I'm here in Paris with our CFO, Jean-Michel Etienne. The 2 other members of the Directoire are also here. Anne-Gabrielle Heilbronner is with us in Paris, and Steve King is on the phone. Thank you for making yourself available at such a short notice. We decided to bring forward our publication as soon as we got the final figures for Q3 and our new forecast for the end of the year. Our quarterly numbers and, more importantly, our forecasts throughout the year are not delivered of our expectation, leading us to reset organic growth objectives. In light of the trends we have experienced in Q3, we have dug deep to understand how the challenges we are facing could continue to impact our short-term organic growth and margin. This allows us to give you today a detailed explanation of our performance. But before getting into the presentation, please have a look at the disclaimer as it is an important legal matter. Okay. Our organic growth ended up at minus 2.7% in Q3, below our expectations. This is due to well-identified industry challenges amplified by the cost of the transition we are in. First, we are continuing to suffer from cuts from a handful of clients on traditional advertising mainly in the U.S., with a stronger impact than anticipated in July. This attrition continues to reflect both our client portfolio and our activity mix. Second, the performance of our media operation were softer than expected in the context of very high comparable basis. In Q3 2018, organic growth was close to double digits, fueled by various U.S. wins that annualized out this quarter. In Q3 2019, SCA and GSK continued to ramp up as anticipated but did not fully compensate the impact of the losses incurred in since Q3 last year. Third, as you might remember, we have announced at the beginning of the year that we are shifting Publicis Sapient in the U.S. from digital marketing services to business transformation through industry verticals. We are mirroring the strategy that is already delivering strong growth for Publicis Sapient internationally. This shift has had a negative impact on our short-term growth as we are moving from project-based digital assignments to long-term business transformation programs. For now, the digital business transformation growth in the U.S. has not been strong enough to compensate the decline in one-off projects and project-based revenues, leading to a negative Q3 and also an expected negative Q4. Jean-Michel will now go through the detail of our revenue performance in Q3. I will then come back with an update on our guidance for this year and next year.
Thank you, Arthur. So good afternoon, everybody, and good evening for some of you. I will go through a few slides detailing the first 9 months of 2019 net revenue and net debt. It will be short as we do not publish a full P&L analysis or balance sheet and cash flows. I will start with net revenue on Page 6. Regarding Q3 2019, net revenue are EUR 2.577 billion, up 17.3% versus last year as reported. Currencies had a 3% positive impact. At constant currency, growth is plus 14%. Acquisition have 7 -- plus 17% positive impact with the consolidation of Epsilon. All in all, organic growth is at minus 2.7% in Q3. For the first 9 months of 2019, net revenue is EUR 6.929 billion, up 7% versus last year as reported. Currencies are 3.5% positive impact. At constant currency, growth is plus 3.3%. Acquisitions have an impact of plus 4.9%. Therefore, organic growth for net revenue in the first 9 months of 2019 is minus 1.4%. On Page 7, regarding Q3 net revenue by geography, Europe is down 3.3% in the context of high comparable as last year organic growth was plus 4.2%. North America is down 3.6%, with U.S. down minus 4.9% for the reasons already explained by Arthur with higher-than-expected attrition in the U.S. traditional advertising, the softer performance in media operations and the short-term negative impact of the repositioning of Publicis Sapient to full digital business transformation in the U.S. Asia Pacific is up 2.5%, confirming the group H1 trend. Latin America is down 7.2%. Middle East and Africa are up 9% -- plus 9%. Overall, Q3 organic growth for the whole group is at minus 2.7%. On Page 8, regarding the first 9 months and net revenue by geography, Europe is flat. North America is down 3.3%. Asia Pacific is up 2.2%. Latin America is down 7.5%, and Middle East and Africa are up 15.5%. Overall, organic growth for the first 9 months of the whole group is at minus 1.4%. On Page 9, as usual, we try to give you some color on organic growth rates for the main countries for the first 9 months of 2019. I will only mention a few of them. Above 10% -- above plus 10%, we have mostly India at plus 16.7% and United Arab Emirates at plus 23.9%. Between plus 5% and plus 10%, Canada is at plus 9% and Italy at plus 6.1%. Between 0% and plus 5%, China is at plus 0.4%, France and the U.K. both at plus 1.8%. Several countries reported negative organic growth for the first 9 months of 2019, among which Brazil at minus 14.4%, the U.S. at minus 4% and Germany at minus 8.2%. Now moving on to the net financial debt on Page 10. And to start, I'll just remind you that all the numbers are under IFRS 16, including for the 2018 comparatives. Q3 2019 average net debt is EUR 1.724 billion, up EUR 314 million year-on-year, reflecting the acquisition of Epsilon closed on the 1st of July 2019. Net debt position at the end of Q3 2019 is at EUR 5.043 billion, up versus last year, explained by the Epsilon acquisition, of course, and the seasonality of our working capital. And to quickly finish my presentation on Page 11, as you can see, our liquidity stands after the Epsilon acquisition at EUR 3.9 billion, which is at the similar level as a year ago when we did not have Epsilon. And now Arthur will continue with the outlook and priorities. As I said, it was short. And I will be available for your question, of course, at the end of the presentation.
[Foreign Language], Jean-Michel. Based on our Q3 numbers and what we anticipate to deliver in Q4, we have decided to reset our forecast for 2019 and 2020. We expect 2019 organic growth to be around minus 2.5%. For 2020, it is too early to give precise guidance, but we think organic growth is likely to be between minus 2% and plus 1%. So why such low numbers? There are 2 key reasons: one linked to increasing market challenges, the other related to the decisions we have taken to transform our business. When it comes to industry challenges, namely attrition in housing and the rise of the platforms, our overexposure to the upper end of advertising and our media leadership position in the U.S. means we are particularly affected by these negative trends. The second reason is due to our strategic commitment to disrupt our creative and media business with data and technologies. This is a key condition to build the future. And we have to accept the cost of this transition on short-term organic growth. We are definitely in the last part of our transition. And as always in these situations, things get worse before they get better. But let me be clear: while we will need a few more quarters to deliver sustainable growth, we will maintain solid financial ratios. Of course, we are not immune to revenue decrease. But with the levers we have in our hands, we are confident of posting a 30 basis point increase in our 2019 operating margin reaching 17.3% and being able to sustain a normalized margin at around 17% going forward. It is worth spending time on those levers. We have 2 structural reasons that explain our margin performance. Many years ago, we made the strategic choice to position the group on the upper end of the funnel in communications and also on media activities in the U.S. While this is penalizing us on organic growth, as you know, it is helping our margins. We also implemented shared services very early to support our non-client-facing activities creating real efficiencies. In addition and more recently, we did not wait to address industry challenges and take the necessary steps to make our margin sustainable in the context of low organic growth. First, we are adjusting our costs to the level of activity, especially in creative. Second, we have a clear tailwind from our innovative offers as our game changer drives superior value for our clients. We are also continuing to streamline our structure. The benefits are already visible, and this will continue to pay off with a positive impact of the country model and also the simplification of our super functions. And last, our cost reduction plan is continuing to deliver with the benefit of real estate consolidation. This is why we have all the means to maintain our margins at a very solid level in the year to come. We can also confirm a 5% headline EPS growth for 2019. Let's finish with our cash generation profile. We are planning CapEx of around EUR 250 million in 2019 rising to EUR 300 million per annum from 2020, taking into account the full consolidation of Epsilon. This level together with a normalized margin around 17% confirms our ability to maintain a high level of cash flow. This enables us to confirm a full deleveraging in 4 years. Having reset our guidance, let me share with you why we are confident in the future. First, the model we are building, connecting data, creativity and technology will not only reinforce our position in growth segments, but it will also prove to be more resilient. State-of-the-art technology on data and digital transformation offerings are what clients need the most and can update in-house or from the platforms. Today, the core of the activity in this area, namely our game changer, are growing by 21% year-to-date. Second, all of our clients are being disrupted by technology and need digital business transformation. Shifting Publicis Sapient U.S. toward this expertise will allow us to capture this high-growth performance that we are seeing in Sapient on our international operation. Although this is having a short-term impact on our organic growth, it is already positioning us as the leader in digital business transformation as it is mentioned, for example, in the Forrester latest reports. We are already seeing some encouraging sign of this transition with clients such as Marriott, Goldman Sachs or Lowe's who are trusting us in their transformation journey. Third, as communication systems become more complex and more personalized, combining Epsilon with all of our operations through the Power of One create a unique offering. We now have one unified team for Epsilon under one leadership, including all the Publicis Groupe data and tech capabilities. We have a unique data platform, Epsilon People Cloud. We are starting to expand Epsilon internationally, beginning with France this week. We have already included Epsilon in our proposal to some clients, and the results are encouraging. Over the summer, Epsilon played a critical role in winning key pitches like Mondelez or Novartis, positioning Publicis Groupe as a leader in new business rankings. Epsilon brings unique bespoke solution to our clients with precise marketing and personalized communication at scale through unmatched deterministic data, a wealth of contextual and behavioral data combined with transactional data, all powered by AI, delivering extremely powerful products. Epsilon core data and tech expertise delivered a slightly positive performance in Q3, and we are putting everything in place to continue to grow the business in the coming months. Finally, our organization will be fully operational in the 1st of January. It will be radically simple with only 2 type of P&L: at the client level and at the country level. We have designed this model to drive greater cross-fertilization of local assets and capabilities while continuing to reduce our cost base. This will reinforce the focus not only on our top clients but will also add [ capture ] opportunities with mid- to small-sized accounts. To conclude, we have all the asset needed to implement our strategies. Success rely in execution, which is our primary focus. With the full support of the Supervisory Board, we are committed to make those tough changes in order to shift the revenue profile of the group, continue to deliver solid financials and implement our go-to-market with all of our clients. Thank you very much for your attention. We will now take all of your question with the Directoire.
[Operator Instructions] We'll first go with Mr. Tim Nollen from Macquarie.
A lot of questions. Let me see if I can boil down to maybe just a couple. I guess first off, could you try to comment, please, on any sector or client impact on the growth rate? Is it quite concentrated? Or is it more broad in terms of the pressures that you're seeing and the declines? And relatedly, I'm a bit surprised on Sapient if you're talking about 21% organic growth. And you've been talking about transitions for Sapient for some time here. Why is this not currently leading or helping offset whatever the declines are elsewhere? Why are you not getting better growth from Sapient?
Okay. I'll take those 2 then, I guess. I'll start with the sector impact. Again, what we are still experiencing on attrition on our traditional business is significant. We are calculating EUR 200 million over the year. It's coming from traditional advertiser, many in FMCG and retail. You have to know that FMCG and retail on traditional advertising is 37% of our revenue when it comes to the advertising part. So there is a big hit here for a very simple reason: it's that when our clients start to cut this spend, they start with brand advertising and not activation. And this is where, obviously, we are strong. As I said, it has a positive impact on margin. It has a negative impact on our organic growth. On Sapient, it's pretty simple. And this is something that we discuss more at length at the beginning of the year is what is important to understand is that Sapient is 2/3 in the U.S. and 1/3 international. Sapient International is performing extremely well for a very simple reason: it's that they are pure business transformation through industry practice that we can plug directly with our clients. And it's actually embracing our vision, which is not only to bring marketing transformation but business transformation. And this is doing very well, but it's one side of our revenue. In the U.S., the situation is a bit different. We have some business transformation that is working pretty well, but we have also a lot of digital marketing services that today needs to be integrated closer from creative or media agencies. Their positioning was not clear enough. Our sales was not growing enough. And we have decided to go to where the growth is, which is business transformation. And this is why, by the way, we are talking about the cost on our organic growth of transitioning because it means that, first, we have to shift what we are doing with some project-based digital marketing assignments to long-term digital business transformation assignments. So you lose on the short term, you win on the long term. We had, honestly, to stop some long-time marketing services clients that was not core for us and where we needed the people to shift again. And by the way, we need also to bring the kind of people that can do that. And today, to give you a number, we have like 1,000 open positions for new projects that are entering. So you're right that we have been transforming Sapient for a while. We did that very well under the leadership of Nigel Vaz internationally. Now he has taken the global CEO role. We are seeing, as I've said, some very encouraging signs with some clients. But it's clear it is a transition that is penalizing our short-term organic growth but, we think, for the better. And one of the reason why we are giving a big bracket for the moment in 2020 is how fast can we ramp up with those business transformation projects to really solidify our position overall with Sapient in the U.S.
Okay. Does that -- can I follow up? Does that mean shifting -- transforming from the marketing services business, does that mean shutting down operations? Does that mean trying to deploy or retrain people? Does it mean having to hire people for the new business transformation model? I'm not quite sure I understand that.
Yes. So it's -- no, it's a great point. There are several things. There are people on the marketing services side, the digital marketing side that could be shift on business transformation. And this is happening right now. Now we have some outstanding clients within Sapient in the U.S. that are marketing services. And guess what, they are sometimes the same that we have in advertising. So we are actually taking those clients and putting them closer from our creative business. Because to be clear, we are not giving up on our creative business. We have to grow it again, but we know that we will grow it through digital and technology. And if you might have read somewhere in the press that we just hired someone to manage our creative agency in the East Coast called Jem Ripley that was at Sapient but went to Capgemini and just come back to us. This guy that knows about technology, that knows about digital is now sitting on the helm of 40% of our creative agency in the U.S. He also has the digital marketing services capabilities in order to cross-fertilize better. This is pretty new. I didn't think we will go into this kind of detail, but it's pretty encouraging. Because at the end of the day, attrition will slow down, but it will not come back. And the question is how fast can we bring to our creative agency the digital services they need to transform the marketing of our clients. So again, the core of Sapient that will be business transformation will go this way even if it has a cost on short-term organic growth. And on the other side, the marketing services client that has significant enough will be brought to the creative business. And in the meanwhile, you have a kind of long tail that we have decided that it was better to split apart.
We're taking our next question from Lisa Yang from Goldman Sachs.
A couple of questions, please. Firstly, on the margins. Just wondering how you can make your 17.3% margin for the year. I mean clearly, you've missed your revenue targets. So what part of the cost base are going to be addressed? And what specifically are you going to do to your bonus pool? And I guess the same question applies to next year. I mean you mentioned in the press release, even though -- if the environment doesn't get better, your revenue is probably going to be declining by about 2%. So again, like, where in the cost are we going to see the adjustment? The second question is on your guidance for next year. So you're talking about minus 2% to plus 1%. So just wondering why such a wide range. Can you maybe go through the main moving parts? And the third one is on Epsilon. I mean you mentioned the core data business is slightly positive. Could you maybe just give us the organic growth rate for Epsilon as a whole? And when you completed -- when you announced the acquisition, you mentioned that could easily get you a 5% or maybe 10% growth at some point. So where do you think we could get back towards those level of 5% to 10% and how?
Thank you. We're going to start with the margin with Jean-Michel, and then I will take Epsilon and the guidance, if it's fine for you.
Okay. So operating margin rate for 2019, as already explained during the presentation, we have levers explaining why we can confirm our margin rate in 2019 despite the anticipated shortfall in revenues. So first of all, there is the adjustment of cost base to revenue stream, which is a natural work which is done regularly. This is a basic task that we are doing every time. And historically, we have been pretty good, I think, that way. Second point is interesting. Also, it is -- our new innovative offer is driving superior value, implying good margin, something which is good, or margin -- dynamic, which is improving margin year-over-year. I'm thinking about entities like Sapient, for instance. Sapient has improved its margin by more than 300 basis points since the date of acquisition, so this will continue. The simplification also of our structure with the country model that we are implementing is something also extremely important. We have less structure. We are able to operate in a leaner way, which is far better. And also there is something on which we have not insisted enough, which is real estate consolidation plan, which is bringing significant savings, which is sustaining our margin rate for sure for 2019. So -- and in 2019, we benefit from Epsilon contribution on the second half. Epsilon profitability is higher during the second part of the year, and we are consolidating Epsilon only for the H2 part. So this means that we will sustain the margin through that mechanical effect also.
If I can add 2 points on the margin. First, what Jean-Michel said about values revenue is extremely important. And the good news is that it has been published in the press, if you even look at the pitch we are winning, I won't mention that, but one of the big one that we have won said publically that we are not the cheapest. I mean we are bringing value. Why? Because we are bringing an offer that is different. So you like it or you don't, by the way. We win or we lose. But what we can bring to the -- what we could bring with Sapient yesterday and what we can bring today with Epsilon plus Sapient make us unique. Some clients like it, and they pay -- are ready to pay the price for it. Some think that they should go the cheap way. And in this case, we lose. And if you look at the new business, frankly, last year, you will recognize client that were really going for value where we lost and it's having an impact this year and other where we have been able to justify our value. The second point on simplification is very important. Don't get me wrong here. We are not doing the simplification to reduce costs. We are doing the simplification because we have to bring the Power of One together, and we have to make sure that people work together and connect data, dynamic content and technologies. The good news is it's having a positive impact on our margin. The bad news is it could have a negative impact on our organic growth in the short term. Because when you have less structure, you have less P&L, you have less CEOs, you less new businesspeople, you have less of these people getting on the day to day. And this is what we need to bring back within the Power of One. That is one area where we definitely need to progress a lot. It is in cross-fertilization. It is everything that we are putting in place at the moment. This is why we changed our organization, and this will drive the organic growth. On Epsilon, there are actually 3 kinds of activity at Epsilon. The core of Epsilon about building, enriching and activating client first-party data, these activities that represent roughly 80% of the business posted a slightly positive growth in line with H1. And there is a good momentum, by the way. There is a good momentum. But more importantly, they have been able to win good things, hopefully, even more in the coming months, and we feel pretty confident to stay cautious. On the other hand, the advertising business is steeply declining. And it has been merged immediately with one of our creative operation. We are currently reviewing the client portfolio and actually cutting drastically on the costs to make sure that we can adapt the structure to the revenue decline and, more importantly, bring their data expert into this creative brand. When it comes to CJ Affiliate, this is also declining. Although actually, September was better, but it has been merged and put into Publicis Media, and we are reviewing our go-to-market. This is a place where we are still looking at what is the right thing to do. So that's roughly for Epsilon. Now the question you raised about 2020 is important. And if you don't mind, I'm going to take a bit of time because we wanted to do a short call to leave time for questions. When you look at 2020, it is, of course, early days. But we have decided that we will give some indication because, this is what I said at the beginning, when we look at the trends of Q3, we said, okay, we need to go very deep into every other operation. We need to understand exactly what we could expect for this year and next year. And even if it's a broad spectrum, we need to share it very transparently. As I said, organic growth could rise from minus 2% to 1%. It is a broad spread, but we have to take into account 4 moving parts. First, attrition that we believe will continue. For 2020, it could be up to EUR 200 million as in '19. Actually, the question is not whether it will slow down. The question is when it will slow down. We are actually -- and this is what we're doing about the organization -- saying about the organization, we are fighting thanks to cross-fertilization. And how we're going to move from minus 2% to 1%, one of the moving part is this one, is how fast can we cross-fertilize better at the country level. That's one. Second, on media, as you can see in the different reports, the momentum in our new business pipeline is clearly accelerating over the recent months. And the question here is how fast can we transform this into our figures to compensate the loss that we just mentioned. Third, as we discussed, it is taking more time than expected to reposition Publicis Sapient in the U.S. to full digital business transformation. At this stage, the new business pipeline is encouraging but only encouraging. And it's too early to say if Publicis Sapient will be positive in the U.S. in 2020. It will really depend on how fast the first structural project or the next group of projects can ramp up. Honestly, on Sapient, when we come today with Epsilon and Sapient, we always leave with a test project. The question is how can we make that bigger. How can it be significant in a market where, of course, we have a lot of scale. Last but not least, and that's the last moving part, coming back to Epsilon, which as Jean-Michel mentioned, will contribute to organic growth in H2 2020. As I said, there, our strategy is Epsilon 2.0, which is really about the data building, enriching and activating is slightly positive in 2019. They are in several pitches at the moment, and there is a clear upside if we can transform some of the pitches we are in at the moment. But again, a lot of moving part, but we wanted to be as transparent as we can at this stage. And with those 4 areas, we will come back to you with more specific guidance at the end of the year -- actually, in February, when we will present Q4 and annual results.
Can I just confirm then? So on the margin, you don't think you're going to touch the bonus pool this year, next year to get to your margins?
No. I mean if you look at next year, which was a year where we were short on our target on organic growth, we actually increased our bonus pool. We believe that our people are doing an outstanding job, some better than others, by the way, because there are some underperforming agencies that, of course, won't get their bonus. But this is a difficulty we have to manage at the moment. These are the 2 phase of our transformation, actually. On one side, no doubt, transition is adding a cost on our organic growth, and we fully understand that this is the main focus for you. But on the other side, we can see that, first, the new kind of revenue is accelerating with our game changer. We can see that we have very strong financial ratio, which, by the way, Jean-Michel is doing an outstanding job, but the job is done in the countries in the operation to simplify to work in a seamless way to make sure that we have the money to invest because most of what we save, we reinvest it. And the new business track record that we're having at the moment, of course, will show that many people are doing a great job and will deserve to be rewarded.
[Operator Instructions] We'll take our next question from Patrick Wellington from Morgan Stanley.
A couple of simple questions. I think you said in your presentation after that there will be a few more quarters until sustainable growth that suggest to me that you are very much at the minus 2% end of your minus 2% to plus 1% range. Is that the case? The second question is Lisa asked for the Epsilon organic growth. You gave us the organic growth of parts of the business. Do you have a figure for the Epsilon organic growth for the -- all of the business? The third one I've wanted to ask was whether you think that you are investing sufficiently in the business. You've got this EUR 300 million CapEx number, but what I've heard on the call so far is that your margins, which are industry-high margins, are rising as your organic revenue growth is falling. That suggests to me potentially a degree of underinvestment. And then fourthly, just on your optimism about acquisitions. Publicis has spent EUR 11 billion on acquisitions in the last few years, stretching back through Sapient and Digitas and Razorfish and so on, and yet your organic revenue growth as a group despite the promises made for those businesses is no better and arguably somewhat worse than the other agency groups. So why should we believe that things are going to be different with Epsilon?
Well, I'll start with Epsilon. First of all, what is important to understand with the Epsilon acquisition is that it comes to complement an offer that is based today on data, creative, media and technologies. We believe that the future of our business lies in personalization at scale. I'm going to give you just one number that I'm sure you have seen: 8% growth in the media in the U.S. This 8% growth is captured at 150% by the platform. Why are the platform capturing this growth? Because our clients need personalization at scale. And why they need to get personalization at scale is data, technology and AI. And while those platform are taking 150% of the growth, we, as holding companies, are declining. Some are doing way better than us, by the way, and we are not the one that are doing the best by far. But overall, the growth is shifting. And so the question is, are we able to compare this growth in the future? Because I can tell you right now that our clients will need alternative to the walled garden and will need to build their own first-party data, enrich it and activate it thanks to technology or not. We believe that the Epsilon acquisition is complementing our offer and helping us to actually bring to our clients what they need. Hopefully, you see it now in the new business. And hopefully, it will continue. Winning now to make sure that we can compensate what we are losing through the cost of our transition on organic growth and in attrition through this new kind of revenue. But we do believe and we are actually very confident that Epsilon will make the difference not because of Epsilon itself but because it's coming into an organization that can bring together what our client needs and where our clients are spending. You just have to see the trends.
Of course. The fastest growth agents...
We will need to invest...
Sorry. The fastest growth agents here at the moment is Omnicom, which hasn't bought any data assets.
Yes, I know. Again, as you know, I never comment on competition. The question is, again, for me, I'm looking at several thing. I'm looking at 3 things. I'm looking at the organic growth, of course. And this is where we need to provide because organic growth is a lot of cross-fertilization, and this is something that we have to do way better at least in the U.S. I'm looking at the financials because, again, it shows through your margin and through your cash flow the relationship you're having with your clients. Is that a valued relationship or not? It has been 1.5 years since we have started to win a lot of new business, and our margin is still very high while we are decreasing, which shows that, at the end of the day, something should happen there. And then, as I said, I look at new business. And I look at do you have a competitive offer on the global scene when there are some pitch. So don't get me wrong, and this is what I said in my introduction: we know that we won't make the demonstration that our model is the right one until we bring back organic growth, and it is our priority. We are having some headwinds due to market conditions that we have identified, that we are mastering in terms of margin and that we need to bring back in terms of organic growth. We are making tough decision and big investments in what we think in the future. And when I talk about investments, I'm not talking about CapEx. I'm talking about our leadership thing, making sure that we build the model of the future together that is, again, materializing in the different pitches that we have been winning or in our game changer. And this is something that is taking time in order to materialize in organic growth, and this is why it is taking a bit of time. And this is why, by the way, to come back to your first question, we are still giving a large bracket between minus 2% and plus 1%. It was very important for us to explain you the moving parts because we know exactly where are the challenges but also where are the opportunities per activity and per client. And hopefully, we're going to be able to evolve, to refine. If I go fast because I see that there is still a lot of question, and we have like 15 minutes. On Epsilon, I gave you the most important information, which is the core of our business is growing slightly. The rise is steeply declining, but we are fixing that. And I will finish with the investment in the business. Hopefully, we've been clear on CapEx. We're not going to spend more than what I just described. Where we're going to continue to spend is on talent because, at the end of the day, no doubt, we have the tools, we have the model, we have the go-to-market, we have finalized our organization. We need every day to bring more talent. We are in a people business where you encounter a lot of people that find a lot of interest in our journey today, and we need to make sure that we continue to invest there. And I can tell you something is we will never ever think it twice to [ weigh our ] talents for our margin. We will always find the right way to invest in our people, to invest in new people because, at the end of the day, when you look at the assets we have, if we have the right people to assemble it, we're going to make the difference. Thank you.
That's great. I'll assume that Epsilon is still running at about minus 4% then in total.
Oh, no, no, no. [ You only said one? ] No, no, it's way better than Q2. No, no, no. Of course, not.
But somewhere between 0 and minus 4% then?
So it is better than Q2, for sure. And the core Epsilon, what we call the core Epsilon, is -- we call that also Epsilon 2.0, is slightly growing, okay, in Q3, while the agency and CJ Affiliate are declining but not at a minus 4%. So...
No, but I -- so I'm going to spend a minute more on that because, again, it has been, what, 4 or 5 months now, I think, since we announced the acquisition. Honestly, we look at every aspect. For the moment, it has been extremely encouraging. And the reason why we are not disclosing the detail also is that we have been very fast in integrating the decision we are taking to make sure that we take the core of what they are at the center of Publicis, adding people into this. And maybe Steve can tell you a word about that because it's worth spending a minute, is pretty amazing. And then honestly, we are being fast and decisive of the operation that are not working, meaning it could have an impact on short-term organic growth here again because we're cutting long tail, but we're making sure that in H2 2020 when we are integrating the organic growth, it will be starting from the good feet and working well.Steve, do you want to add a word on that?
Sure. Yes. I think we've -- it's interesting when you're talking about traditional and legacy business models, and obviously, as Arthur has said, we're going through a significant transformation, which you've all heard about. And I think it's interesting because the media is very much at the fore of this. And really, for the last 18 months, 2 years through the lens of media, we've been able to put a very strong data solution, firstly, through Publicis People Cloud at the center of our propositions for clients. And we've spoken on previous calls the success we had. We were #1 last year in terms of new business, and they were very much putting media and technology and data all together for clients in what we've called a Power of One solution. And so now that we're -- now that we have the ability to put not just data but really [ powered ] engineering through Epsilon, we feel that, that is going to accelerate the modernity of our media proposition. So I think the combination that we're talking about, I think the best evidence of that is the continued success that we're having in media, where we were very much at the fore of putting data, technology and data in a single proposition for clients.
Thank you, Steve.
We're taking our next question from Richard Eary from UBS.
I just got a couple of questions, and I apologize for background noise because I'm traveling. Just based on the new guidance, you've got minus 2.5% growth organic from 0, and it was obviously better than 0.8% at the first quarter results, which then got revised down. So there's been a EUR 225 million circa downgrade on organic guidance from one quarter to another for the full year. You said attrition is EUR 200 million for '19. I presume that you're still sticking with your game-changer number, which is like EUR 240 million. That and we've obviously got contributions from GSK and SCA coming in. So there's like a minus EUR 200 million change from somewhere else, which as far as I can read in the press release, and correct me if I'm wrong, is more due to Sapient. So I don't know whether you can expand on where that EUR 200 million has come. Is that just Sapient that's actually not delivered on projects and that that's the issue because it's project-based rather than recurring revenue? So that's the first question. The other thing is that of that EUR 200 million, is it Sapient? Can you just tell us how much that is relative to Sapient's revenue base? Because I'm still a bit confused in terms of -- and I'm sure a lot of other people are confused. So that's the first question. The second thing just go back to the margin side. If we're taking EUR 220 million out in terms of the downgrade of revenue, again, can we be specific in terms of where that cost is coming out from to actually hold the margins because I'm still not clear? I mean you talked through generically about the model, but it's still not clear to me exactly where that cost is coming out from. If you can answer those 2 questions first, that would be helpful.
Jean-Michel, I give it to you.
The second question regarding margin first. Okay. As I said before, okay, we have the drop in revenue. We have an adjustment on the cost base, which is done systematically because we can't -- when you don't have the revenue, you adjust your cost base. This is a business where we can do that, obviously, and we are held by turnover, which is churn rate, which is extremely high in this industry. As you know, it is more than 20%. As you see, we are held by the churn rate. This means that you don't have the revenue, you leave the people going and you would put a little bit less. This is just that, something which works extremely well. And historically, if you follow us since a few years, you will have seen that we are doing that systematically, which is helping us to sustain -- to keep our margin rate. The second reason is a reason which is extremely important. The wins that we have, thanks to our new offer, wins which are creating high added value is through an offer which is rather innovative through our model. And this means that the margin is better than in the traditional world. And the last point is something on which we have not insisted enough is the real estate consolidation. Some of our competitors are doing the same also, but we started before, and we got the benefit of this consolidation earlier than them. In fact, there is 3 phases, 3 phases. Last year, we have the first phase of this real estate consolidation, which brought, as you saw, EUR 30 million of improvement in the operating income, directly improving the margin rate. We have a second phase this year, which is bringing something similar, an amount rather similar. And we will have another phase in 2020 which will be also similar in terms of margin improvement. So these 3 elements combined are the explanation of what's happened in the margin rate in the context where we have revenue which are down.
Just to come back on your first question about the EUR 200 million and maybe more broadly about Q4 because, again, this is what is making our guidance for the end of the year. Yes, we are actually anticipating a challenging Q4 for 2 reasons, one that hopefully will answer your question but also another one. The first question -- the first reason is that we have identified structural factors that has happened in Q3 and will happen in Q4. And to come back to your EUR 200 million question, it is a mix of attrition in traditional advertising; the impact of the losses we had on media last year; the cost of the transition of Publicis Sapient, as we said; and some to be found that has not materialized. Now -- and this is -- sorry, but it's very important. We are talking about Q4 and Q4 being an adjustment quarter generally marked by volatility as advertisers are adjusting their [ account ]. Sometimes, they are reducing, sometimes they are increasing, but they are doing what is necessary to get that full year number. So we believe that not only we have the structural factors that means that we should [ disclosures ], but there is also the fact that it is an adjustment quarter to quarter. And this is particularly true this year as we are in a very uncertain economic context. So the risk of potential budget cut is, we think, much higher than last year. Again, I don't think we should extrapolate what we are projecting in Q4 to a trend because it is specific to this quarter, but we think that we have to be very cautious.
Just -- and to be clear, of the EUR 200 million, how much is Sapient of the actual downgrade today? And does that follow on to another asset write-down that we've already had?
I mean, again, it's between 1/3 and 1/2, but it is too early to say. I mean we are trying to be as transparent as we can. We are giving you all the reasons why we see the shortfall and now what we can expect for next year for the movement of growth -- those moving parts can change before the end of the year. But overall, we see where we think we will land.
Okay. Can I just ask a follow-up then on Epsilon, which I think a couple of other people have asked in different ways? Is that if we look at the actual declines in the agency and the CJ Affiliate business, obviously, the agency business has suffered some high-profile losses. And the CJA business should hopefully benefit from bolting into your offering. How do we think about that growth as we go into 2020? Have we still got headwinds? Have we still got significant losses that we've got to cycle through? So the agency and the CJA businesses are still basically a drag on Epsilon growth in 2020 and, therefore, there's a risk to a write-down in terms of the asset value that you acquired it for.
I mean, again, I think it's too early to give a precise number, but you have 2 very different assets here. On the agency, we are doing all the necessary thing, and we have a clear plan on how we integrate it into our creative -- into one of our creative brands. We are putting the cost in relation with the account we are keeping. We are bringing data talent into the brand. And we feel that we have a clear road map. And so when we're going to start to count the growth in H2, we feel reasonably confident. On CJA, honestly, it's too early. We will need a bit of time. What I can tell you that we will come back with more detail. Maybe Steve can tell you well, but this is something that, again, we are folding Publicis Media. There are some potential, but we need to make sure that we make the best out of these assets. And don't get me wrong: we are focusing on the 80% of the business that honestly is going from good surprise to good surprise, but we are taking very seriously the creative and the CJ Affiliate business too.
There are currently no questions at the time.
Okay. So maybe I will just conclude. Again, I would like to thank you for joining us on such a short notice. For some of you, it's already pretty late. We are definitely at the outpart of our transformation now. This is why we gave you today an update and detailed you on where our challenge is, and it was very important for us to take as many questions as possible. For us, the 3 takeaways of this call are the following: First, we are clear on how to address our organic growth challenge. And I guess it's a discussion that we'll have with many of you if we meet you in the coming weeks. Second, we have solid financials to get through this transitional phase. And the question you raised about how can you maintain your margin in a low-growth environment or negative-growth environment is, of course, the right question. We are making the demonstration this year. We will do it last year. And by the way, while we had this organic growth underperforming issue for a while, we have always been first on our financial ratios, and we have always delivered on it. So we feel very confident that in this time of transition, we will deliver our financial and we will continue to stick with what we have planned. And last, but not least, we are confident on our model. And I know that new business should make the demonstration that we can bring organic growth, but at the moment, new business is demonstrating that we are extremely competitive and that what we bring is what our client needs in this road of transformation. It is not enough. We have to do all the right, but we think that this is very important. Now we need to execute and deliver. We are 100% focused on execution. I would like to thank you very much. [Foreign Language]
This concludes today's call. Thank you all for your participation. You may now disconnect.