Enero Group Limited (EGG.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Enero Group Limited FY '22 Half Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Brent Scrimshaw, CEO. Please go ahead.

Well, good morning, everyone, and thank you for joining CFO, Carla Webb-Sear, and myself, for the Enero Group FY '22 Half Year Results Conference Call. I'd like to begin by acknowledging the traditional custodians of the land on which we work, the Gadigal people of the Eora Nation, and pay our respects to their elders, past, present and emerging. The agenda for today's call is outlined on Slide 2. Firstly, I'll provide an overview of Enero's business performance and the progress we've made in H1 executing our strategy to drive continued and sustainable growth for the group. I'll then provide a trading update after which Carla will take you through the group financials. And at the end of our prepared remarks, we look forward to taking your questions as always. On Slide 3, Enero Group continues to deliver a consistent and impressive growth story, pleasingly building on FY '21's strong performance and benefiting from the implementation of our new operating framework and significant progress in both expanding our existing and winning new clients around the world. Firstly, beginning with our strategy. During the first half, we continued to progress against the 4 key priorities that underpin our strategic framework. We accelerated our reputation for industry-leading innovation and for creating a progressive home for world-class talent, with the addition of a number of key hires in the U.S.A. at OBMedia and in Australia at Hotwire, Orchard and BMF. Our NPS scores continue to consistently grow despite the challenge of a highly competitive hiring environment around the world. This is reflected in our commitment to our team and our high-performance culture. We're also proud of the creativity of our teams continue to be reflected by the numerous global award wins. And in December to highlight one, BMF was now not only the most effective creative agency in Australia, we're #3 in the world by one of the most prestigious global organizations, the World Advertising Research Center. So we're seeing the benefits of our FY '21 acquisition of McDonald Butler by Hotwire UK with its fully integrated client proposition, starting to deliver significant progress in both joint wins and cross-selling opportunities into its existing technology client base in the first half of '22. Our priority is to improve productivity and profitability through the implementation of technology and streamlined business process is also reflected in our first half financial results. Enero delivered operating EBITDA growth of 23%. That's 29% adjusted for JobKeeper. We're particularly pleased to deliver on our commitment of maintaining industry-leading margins, with group operating EBITDA margin now at 32.1% in the first half of '22 compared with 30% in the prior year. And our goal to create an innovation engine to drive new business growth is supported by our ongoing assessment of technology and data opportunities in today's marketplace. We have a full pipeline of M&A activities, and this important priority is supported by our flexible balance sheet with net cash of $47 million adjusted for contingent consideration. Now moving to Slide 5. And you'll see net revenue increased 15.1% and operating EBITDA was up 23.3% and, as I mentioned, 29% adjusted to JobKeeper in the first half of FY '21. Net profit growth of 3% was impacted by a higher tax rate as we expected and increased noncontrolling interest due to strong growth at 51% owned by OBMedia. Of course, Carla is going to run through the detail of that later in this morning's presentation. Dividends of $0.06 per share, fully franked, represented a payout ratio consistent with the second half of FY '21. Moving to Slide 6, and you'll see Enero's 5-year track record of sustainable growth, highlights the group's strong trajectory of revenue and EBITDA growth, taking into account our 51% economic interest in OBMedia. On this basis, revenue increased 11% and margins increased to 25.2%, up from 24.9% in the first half of FY '21. This ongoing strong performance reflects the higher margins of OBMedia, together with efficiency in our operating cost base and leverage of our corporate center of excellence headquartered here in Sydney. On Slide 7, our first half result builds on the strong momentum of FY '21, as I've already mentioned. On an economic interest basis, adjusted for JobKeeper, revenue increased 11% year-on-year and 15% half-on-half with operating EBITDA increasing 20% year-on-year and 41% half-on-half. On Slide 8, Enero's global operating model has been established to guide our ambitious growth aspirations for the future. Our 2 pillars of brand transformation and creative technology and data, each have been established with a clearly articulated portfolio role and a bespoke investment model to deliver value to clients and, therefore, to our businesses. The operating performance of each pillar is reflected in the additional segment information included for the first time today in our financial statements, which Carla is also going to take you through later this morning. Our focus remains on the high-growth verticals of technology, health care and consumer where we utilize the deep expertise of our global portfolio of specialist agency brands to accelerate client business performance. And our global centers of excellence based in Sydney drive efficiency and functional best practice to support our operating model. So on Slide 9, and today, I'd like to provide some deeper insights into our holistic approach to the technology vertical across both of our operating segments, brand transformation and creative technology and data. Hotwire works with the biggest names in the tech world, as I think you all know, to help solve increasingly complex client problems. And as you can see, we've got great momentum in client wins during the first half, including some well-known global brands such as Peloton, [ Headspace ] and Sage. These companies choose Hotwire because of our track record of tech industry experience, innovation, global reach and our ability to help them scale quickly across markets. So for more than 20 years now, Hotwire has been the leading edge of technology transformation. And for example, the move from software to SaaS and the mega expansion of cloud-based technologies. So today, we're looking to the future to help our clients navigate complex issues like the metaverse, NFT, cyber threats and corporate reputational issues like diversity, equity and inclusion, ESG, and the future of work. Hotwire is deliberately agile in their approach to understanding new technology. In fact, we understand it before it becomes mainstream because every day, we're engaged with tech CEOs, CMOs, influencers media, analysts, emerging VC-backed businesses and product developers in high-growth companies around the world. They share with us emerging innovations and, most importantly, they partner with Hotwire to help decide which ones will break through and how. The Hotwire team is based in Silicon Valley with offices and teams and tech innovation centers around the world led by Heather Kernahan, our Global Chief Executive Officer. And Hotwire operates 1 team to quickly share those insights with our themselves and advise our client partners. So this process has really helped us understand that things like the metaverse would become more important as brands experiment with the ways to connect with their audiences. Technologies such as VR, AR, social communities and hardware are ones our clients have developed over an extended period. And as this occurs, Hotwire's deep industry understanding means that we're well placed to develop progressive new narratives and, most importantly, deliver those narratives to the right audiences. So turning now to OBMedia, our 51%-owned programmatic marketing platform, which helps businesses access online advertising markets. OBMedia pleasingly continues to deliver rapidly growing numbers of high-intent consumers to brands with 113 million consumers delivered to advertiser websites in the first half alone, a year-on-year increase of 80%. OB's business is underpinned by its proprietary advertising technology, which uses AI and automation to enhance advertising efficiency in monetizing web traffic. We're investing in technology solutions such as Snowflake and, as importantly, in our people and capability, particularly in data science, to enhance the effectiveness of OBMedia's technology platform. OB's data warehouse supports automated customer acquisition, real-time reporting and review attribution. And OB is well placed in the changing environment for online privacy as its first-party data means it does not rely on third-party cookies. Now moving to Slide 10. And today, I also wanted to provide a deep dive into how we continue to think about M&A at Enero and, most importantly, the disciplined and considered approach we're taking. So firstly, with regard to our existing businesses where our approach reflects the segment investment model I referred to earlier. Our global acceleration brands are those where we see the opportunity for investment to truly deliver global scale and, importantly, differentiated capability. Our enhanced and grow brands have the opportunity to deliver local market leadership. Now we also look for opportunities to expand our portfolio through the investment in potential stand-alone data and market businesses or selective investment in disruptive innovation or new offerings. So an example of this, on Slide 11, in action, today is really to take you through a deeper dive into our FY '21 acquisition of McDonald Butler and its capability enhancement of the U.K. Hotwire team's offering. First of all, just to set the context for the opportunity. I'll focus on what our clients expect us to deliver. They want a partner who going to strengthen their reputation for a brand strategy and the delivery of a distinctive market position and narrative. They also need a partner who can develop relationships with media, influencers, analysts and target accounts. But importantly, and increasingly, they expect a partner that can also connect them to new revenue opportunities. And that's a key area of growth and focus and the strategic rationale behind our acquisition of McDonald Butler. In Hotwire's category of communications, the operating model ranges from traditional PR agencies which focus only on media relations as a narrative distribution channel to performance marketing agencies that focus on demand generation campaigns to drive revenue. So we identified a clear gap in the market for our tech clients looking to connect the narrative from their PR efforts all the way through to demand-based campaigns from their marketing performance agencies. And for clients, this process today is inefficient, often leading to disconnected branding and underperformance from both their PR and marketing campaign. So Hotwire's acquisition of MBA links reputation all the way through to relationship and to revenue, adding new capability to deliver a pipeline of sales. It marries Hotwire's progressive technology-led communications capabilities with McDonald Butler's digital performance marketing credentials and track record. So this differentiation is really capability that's already starting to pay off with new joint client wins, including Sage and Splashtop, and cross-sell at existing clients, including Honeywell and IBM. So we plan to expand Hotwire's unique market position into other geographies around the world, positioning the business as a long-term consulting partner of choice. Moving to Slide 12 where you will see Enero's revenue diversification across a range of industries and sectors reflected here. Our strongest growing categories have been digital media, information technology and services. And whilst technology remains our highest exposure, we've retained significant share in health care, consistent with our strategy, and sector expertise. On Slide 13, our strong client relationships continue to drive repeatable revenue, with a clear majority of our clients having a relationship within the Enero Group for 4 years or longer. And so we've seen an uplift in clients with the group for less than 2 years, which is reflective of our great performance in business wins. Our commercial arrangements with clients are a balance of both retainer and project work, which vary depending on specific client needs. Moving to Slide 14. Despite the ongoing backdrop of COVID conditions around our global network and the impact of Omnicron's lockdown, we delivered pleasing results across all 3 geographic regions. Currency impacts during the period were minimal. The U.S. delivered strong revenue and EBITDA growth. Revenue in Australia was solid with the EBITDA decline reflective of the JobKeeper subsidy received in the first half of FY '21. In the U.K. and Europe, the revenue and EBITDA declines reflected the divestment of freight PR in March 2021, partially offset by the contribution of MBA from April 2021. On Slide 15, the pie chart illustrates Enero's geographic presence and highlights the group's exposure to fast-growing international markets, now representing 56% of the group's net revenue and 71% of the group's operating EBITDA on an economic interest basis, up from 55% and 65%, respectively, in the prior period. The U.S. business continued to benefit from the global acceleration in technology adoption and industry transformation with a 37.5% increase in net revenue and a 47.4% growth in operating EBITDA on a reported basis. Performance on a constant currency basis was even stronger with revenue and operating EBITDA up 39.1% and 49.1%, respectively. Now on an economic interest basis, which adjusts for Enero's 51% ownership of OB. Revenue increased 32.6% and operating EBITDA grew by 42.6%. OBMedia continues to benefit from a structural shift in consumer behavior to digital channels with operating EBITDA margins increasing from 47%. Hotwire continues to benefit from its high-quality technology client base with [indiscernible] and looking at the Australian business, which delivered net revenue growth of 8.2% and operating EBITDA reduced by 6.4%, reflecting the benefits of the JobKeeper subsidy received in the first half of FY '21. Adjusting for JobKeeper, operating EBITDA increased 9.8% and margins also increased to 20.3%. The BMF benefited from its exposure to the consumer and government sectors, while Orchard delivered organic growth from its health care client base. Pleasingly, momentum with new clients continued in Australia, notably, Orchard's win of the Tourism Tasmania digital transformation account late last year, which is expected to be a significant contributor to the Australian geographic segment in the second half. On Slide 18, the U.K. and Europe reported a 6.8% decline in revenue and 7.5% lower EBITDA, reflecting the impact of the sale of Frank PR in March 2021 and the challenging environment with COVID uncertainty remaining in the U.K. and key Continental European markets. On a continuing business basis, revenue increased 12.5% and operating EBITDA also increased by 22.5%. McDonald Butler was acquired in April 2021 and is now fully integrated into Hotwire UK, with cost efficiencies from the merger underpinning an increase in operating EBITDA margins from 20.7% to 22.5%. So turning now just to provide a trading update on Slide 20. Enero continues its track record of sustainable revenue and EBITDA growth. In the second half of FY '22 has kicked off with strong growth in the U.S. and a solid performance thus far in Australia and the U.K. and Europe. We remain focused on maintaining Enero's high margins across our strong and diversified portfolio. The pipeline of M&A opportunities remains a priority for us in FY '22 to continue the growth and transformation of Enero's portfolio. There remains ongoing uncertainty around cover conditions globally with industry-wide challenges around hiring, which may lead to wage cost pressure. And with travel opening up globally, discretionary travel costs are expected to increase from the second half of FY '22. So that concludes my prepared remarks. And with that, I'll hand over to Carla who's going to run us through the group financials. Thanks, Carla.

Thanks, Brent, and thanks, everyone, for joining the call today. I'll begin with the profit and loss summary on Slide 22. Enero Group reported net revenue of $93.2 million, which reflects year-on-year growth of 15%. Staff cost of $54.4 million increased 11.7% year-on-year, representing a ratio of 58% of revenue which improved from 60% in the first half of FY '21. These costs include the full-time employees, freelancers and contractors. Operating expenses reduced 1.4% due to continued strong numbers. The operating cost ratio to revenue, including right-of-use asset charge reduced to 10% from 12% in the prior year. Total expenses when including the right of use depreciation increased 9% in the first half. As Brent mentioned earlier, operating EBITDA of $29 million increased 23% year-on-year. Right-of-use depreciation of $2 million reduced year-on-year due to the disposal of Frank in the U.K. Depreciation and amortization was slightly higher due to the amortization of customer relationships following the MBA acquisition. Looking forward to the second half, we expect these items to remain at similar levels to the first half. Net finance costs of $0.5 million reduced year-on-year due to lower present value interest charges relating to contingent consideration payments for the Orchard acquisition. In the second half, we expect these costs to remain at levels similar to the first half, subject to any additional M&A activity. Tax expense of $6.7 million represented a tax rate of 24%, in line with guidance provided in August. This reflected the utilization of carryforward Australian tax losses in the second half of '21. Looking forward to the second half of FY '22, we expect tax rates to remain in line with the first half. Noncontrolling interest of $7.4 million increased from $5 million in FY '21. This item reflects minority interest associated with OBMedia, which is 51% owned, and Frank which was divested during the year. Turning to Slide 23. As Brent mentioned earlier, we are providing segment results for our 2 pillars of brand transformation and creative technology and data for the first time. Brand transformation revenue increased 8.8% and operating EBITDA by 8.5%, underpinned by organic growth at BMF and Hotwire, the contribution of the MBA acquisition from April '21, partially offset by the divestment of Frank PR in March '21. Creative technology and data revenue increased 24.9% and operating EBITDA by 35.3%, driven by organic growth at OBMedia and Orchard. Corporate costs increased to $4.7 million due to investment in additional capability at our head office centers of excellence and stock-based compensation. Slide 24 provides a reconciliation of our statutory 4D results to continuing businesses. During the half, there were no significant items or disposals. Slide 25 provides the same reconciliation to statutory 4D to continuing businesses for the first half of FY '21, with the disposal reflecting Frank PR sales. The balance sheet on Slide 26 highlights the strong financial position of the with cash of $56.5 million increasing from $50.7 million. Current and noncurrent contingent consideration payable reduced to $1.8 million and $7.7 million, respectively, due to payments of the $11 million undertaken during the half. With the fully franked interim dividend of $0.06 per share is a payout ratio of 38% and is payable on the 16th of March. The franking credit balance at December is $10.1 million. Enero's balance sheet retains flexibility to pursue further acquisitions to enhance the geographical presence and expand its range of services. Details of contingent consideration are outlined on Slide 27. In the first half, there were no new contingent consideration amounts recognized with payments of $11 million undertaken from previous acquisitions. The final contingent consideration in relation to Orchard marketing was paid in September 2021. The contingent consideration balance of $9.5 million is an estimated liability based on performance subsequent to the reporting date and cast on the total purchase price with minimum thresholds. Actual future payments may therefore differ from the estimated liabilities. The maturity profile of the contingent consideration is over the FY '23 to FY '25 period. Adjusting for contingent consideration, net cash of $47 million at December, an increase from $30.6 million at June 2021. Enero's cash flow slide -- on Slide 28 highlights the strong cash conversion of our model. Cash conversion of EBITDA was 98% in the first half, reducing as expected from 137% in the previous period due to unwinding of working capital. Gross cash flow of $31.3 million reduced from $36.2 million in the prior year, reflecting the working capital unwind. Operating cash flow of $25.3 million with after-tax payments of $6 million, which increased from $2.6 million. This increase was predominantly in the U.S. and Australian operations, which commenced paying tax in the second half of FY '21. CapEx of $0.4 million was slightly lower year-on-year due to timing, and we expect by year-end, it will be broadly consistent with FY '21. For the FY '22 first half, free cash flow was $22 million, demonstrating the cash-generative nature of Enero's model. Thank you for your attention, and I hand back to the operator for Q&A.

[Operator Instructions] Your first question comes from Andrew Johnston of MST Acces.

Two questions, perhaps first up, a question for you, Carla, around the cost. You flagged the risks of wage cost pressure in the second half and also the issue there will be higher operating costs with travel, et cetera. How tough do you think it's going to be to maintain margins for the second half? The margin improvement is pretty impressive for the first half, but just wanting to sort of explore that a little more given the pressures that you expect in the second.

Thanks, Andrew. I mean we've consistently guided and talked to our margins being in the high 20s across the portfolio. And we remain laser-focused on looking at that even in the context of a bit of wage inflation, which you can see coming through in that first half result, we feel comfortable with that guide remaining for FY '20.

Okay. And Brent, a question for you just around the strategic initiatives in the business. And one of the key things that you've implemented is treating the agencies as a group rather than a solid portfolio of businesses. Can you talk about how that's progressing in terms of cross-selling between the businesses, leveraging the capability across the businesses?

Yes, sure. I think, as you know, it's been a focus of ours for quite a while. So we're always focused on surrounding client opportunities with a progressive suite of services, whether that's from an individual agency brand or specific capabilities across brands and across geographies. So I think we're pleased with the way that that's progressing, particularly here in Australia. And I think colocation really helps us and enables us to share a more integrated view. We are definitely progressing that in the United States to some degree as well. But today, I think there's still more work for us to do in that space. I mean a great example for us is either the ALDI business here in Australia or now with Tourism Tasmania, working with both BMF and also with Orchard in their most recent wins. So there's high levels of collaboration, particularly between BMF, Orchard, TLE and TDE in those cases as well.

I suppose as part of that, just the impact of COVID and people not being able to work out of offices and having to work from home, now that that's easing up, what are you seeing in your business in terms of, first of all, how COVID affected your ability to work for teams to work together? And then as we come out of COVID is that going to have an impact? Or maybe your teams as well, I mean, given your numbers, it looks like the teams have actually been very effective in spite of COVID. But just in terms of COVID, how do you think that's going to affect the business?

Yes. I think first of all, just to recognize the great work the teams have done around the world in difficult circumstances. But the fact is we've also been working this way for just over 2 years now, consistently delivered strong results, top and bottom line. So the teams, particularly Hotwire in Europe and the U.S. and here in Australia, had already been practicing what they call thoughtful working, which was the ability to work remotely but specifically identify times for collaboration and creativity. So in essence, even pre-COVID, a lot of our teams around the world were quite well practiced in the balance of both work life from a personal point of view and collaboration from a professional perspective. I think as we move beyond COVID into, let's call it, a more flexible working environment, we feel great about the opportunity that, that brings because we are ultimately, at our heart, a creatively led business, group of businesses, a collaboratively led group of businesses. And we thrive on communication. I mean, that's our core business. So for us, we feel great about the ability, as soon as we're able to, bring people back together, retain flexibility to provide work-life balance but also use that energy that creativity and collaboration to continue to power the business forward.

Your next question comes from Ron Shamgar from TAMIM.

I just wanted to ask regarding the M&A strategy. You mentioned that you have a very full pipeline for FY '22. I guess there's sort of only 4 months left in the financial year. Can you give us an idea of sort of the kind of size of acquisitions you're looking to target? And what sort of multiples would you be paying?

Yes. I think the best way to cover our M&A strategy really is as an opportunity for us to continue to further accelerate our growth through those inorganic opportunities that we see in the marketplace. But most importantly, they need to be consistent with our strategy and consistent with our key areas of focus. So that's the criteria within which we look at external inorganic opportunities. It's really around how we enhance our existing portfolio or whether they meet the needs of both our innovation aspiration or our specific new offerings. So we don't really evaluate by size and scale, more so relevant to strategy and the benefit that any inorganic opportunities can bring. So we're consistently engaged in conversations around the world for businesses that meet any of those criteria. I think we've previously shared our geographic focus of prioritization being predominantly U.S.-based but not exclusively, and we continue to assess those opportunities against that strategic framework that I outlined this morning on an ongoing basis.

Okay. But you're going to acquire like profitable businesses that would be earnings accretive?

Most definitely, our preference is for acquisitions or investments that are accretive for shareholders, yes.

Okay. And then just last one, is there any intention to acquire the remaining 49% in OBMedia?

No, there's no intention of that at this stage.

Okay. Is there any reason why not?

We have a great partnership with the OBMedia founders and leaders of the business. They're critical to the business as we are to bring in capabilities, support and investment to the OB business. So we feel today that we have a great balance of both strategic alignment, expertise within that business and a focus on investing to drive future growth in that business together, and we think that's the right model for us to continue to deliver the results that OB is delivering in the marketplace today.

[Operator Instructions] Your next question comes from [ Hayden Yu ] from Evanston Partners.

Just a quick one for me following up on Ron's question around the M&A strategy. The cut in dividend to $0.06 from $0.105, is it deliberate to ensure, I guess, greater ability to do M&A? And is it fair to assume that this M&A, the opportunities are quite at needs basis, as you mentioned, the pipeline in FY '22, Brent?

Yes. I think it's a consistent payout with the last half of FY '21. So what our goal has been, as we communicated at the full year, has been to retain flexibility on our balance sheet to enable us to be nimble and to act as needed with required to M&A opportunities as we consider them to be integrated into our portfolio based on a strategic fit. I think it's fair to say also, and again, as we've consistently communicated, we're definitely focused on quality businesses. We definitely want to be considered in our approach, and we definitely want to make sure that any consideration, from an M&A standpoint, fits our strategy. So we're not driven by time. We're definitely driven by strategic fit, quality of business and how we believe we can leverage that business across our portfolio in due course.

Okay. Great. And just in terms of balance sheet capacity, I know you mentioned you don't really look at the actual price, but in terms of capacity that you can deploy for future M&A, net cash of $47 million. Could you give us a sense of that?

Well, I think it's better to say like we've highlighted. We have a little bit of timing that happens in cutoff over a half year or full year reporting period. So there's a little bit of movement in that number just based on timing and payments. But on the whole, we still retain a significant cash balance as we're going to look through to the full year. And yes, that does allow us flexibility with that level of balance sheet.

[Operator Instructions] Your next question comes from [ Patrick Laborday ], a private investor.

I'm sorry, we're not hearing any question on our end.

Can you hear me now? Yes. Okay. So my question is related to OBMedia. So again, you had an incredible growth. I think I calculated around 52% for OBMedia during the first half, which is really significant when we look at the problem of Facebook, for example. So -- but when we look at the absolute figures, it's still very low, I think it's around $25 million just for the first half. Can you talk about the potential revenue for OBMedia in the medium term?

Sorry, I couldn't quite hear the question because, unfortunately, something happened outside our window here. Could you just repeat the question for us, please?

Yes. The question is simply what's the potential in terms of revenue for OBMedia in the medium term?

Well, we feel very confident in OBMedia's potential, certainly both from revenue and profitability in the medium term. As we've communicated, we'll continue to look for investment opportunities, and we highlighted an investment in Snowflake technology over the last 6 months that we think has really helped to contribute to the growth of OBMedia, two is operating efficiency but also its margin. So yes, we feel that there's a strong connection between OB and Enero. We're very aligned in terms of its future growth potential in the medium to long term.

There are no further questions at this time. I'll now hand back to Mr. Scrimshaw for closing remarks.

Okay. Well, we'd just like to thank everyone for joining us here today. We're very pleased with the results that we've been able to share with you and look forward to your continued support. Thank you, everybody.

That does conclude our conference for today. Thank you for participating. You may now disconnect.