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

Thank you for standing by and welcome to the Enero Group Limited FY '23 Half Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Brent Scrimshaw, Enero Group CEO, please go ahead.

And good morning, everyone. Thanks for joining myself and CFO Carla Webb-Sear for the Enero Group half year FY '23 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. I'll first provide an overview of Enero's business highlights, key drivers and metrics. And then Carla will take you through the Group financials. I'll then come back and provide some deeper insight on how the execution of our strategy will deliver on our growth ambitions. And then of course, as always, we look forward to taking your questions at the conclusion of today's presentation. So regarding business performance, and turning to Slide 4, for those of you following along. The strong financial performance we've delivered in the first half of FY '23 is driven by the execution of our Group operating strategy. The strategic investments we've made in OBMedia over the past few years are delivering accelerated returns; now, diversified revenue mix and geographic portfolio are key pillars of that strategy. And despite the increasingly challenging macroeconomic environment globally, all our businesses contribute -- continue to contribute to the Group's profitability in the first half. Towards the end of the first half, we continue to refine our existing capabilities to deliver long-term growth, which in turn led to a number of cost reduction initiatives. This will deliver benefits in the second half of the financial year. The suite of streamlined capabilities will sharpen our business focus for future customer requirements, whilst providing additional cost flexibility to address continued economic headwinds. Our integration of ROI DNA and GetIT as part of the Hotwire Group is on track and is already delivering results. This, combined with our ongoing focus on cross selling services, has led to 28% of our revenues now being derived from clients with relationships across more than one Enero Group brand. Over the first half revenue grew by 39% to $129.5 million, continuing our track record of sustainable growth over each of the last 5 years. Now within this, our Creative Technology and Data segment was up 57% to $61.8 million and our Brand Transformation segment grew 26% to $67.7 million. Overall EBITDA increased 39% to $44.3 million, while Group EBITDA margin continued to be a highlight for the Group, at 34%. On Slide 5, which shows Enero's financial highlights for the first half, we continue to set the pace for the broader marketing services industry. I've already touched on Group revenue and EBITDA results. Net profit growth of 8% to $14.8 million reflected the accelerated growth in 51% owned OBMedia. Now we have some -- added some additional slides in OB in this morning's presentation, given its impressive performance and contribution to the Group's results. Reflecting the Group's first half financial performance and balance sheet strength Enero's Board of Directors have declared an interim dividend of $0.065 per share, fully franked, representing a payout ratio of 40%. Turning to Slide 6, Enero continues to demonstrate continued resiliency with revenue and EBITDA growth for the half despite the global macroeconomic challenges and general uncertainty in the marketplace, and of course, off the back of COVID-19 over the past few years as well. Enero has delivered an EBITDA CAGR of 30% over the past 3 years, driven by growth in higher margin businesses, and a relentless focus on efficiency across the Group, outpacing an impressive net revenue CAGR of 17%. Noting that this slide is presented on an economic interest basis. Turning to Slide 7, which shows our segment performance, the Group continues to outperform expectations with accelerated growth in the Creative Technology and Data segment. Growth in the Brand Transformation segment was impacted by the challenging macro conditions, particularly in Q2. Creative Technology and Data revenue was up 57% to $61.8 million, which is a 46% increase in constant currency terms. And EBITDA grew 74% to $38.8 million, or a 60% increase in constant currency terms. And this strong result was driven by OBMedia's performance, as it diversifies its traffic sources and search partners and benefits from increasing scale. Brand Transformation achieved 26% growth in revenue to $67.7 million, a 25% increase in constant currency terms and a decline in EBITDA of 21% to $11.5 million, 22% decline in constant currency terms, having been impacted by macroeconomic challenges across all geographies and a reduction in government spending on health versus FY '22. Given the economic environment, we took steps to realign our cost base, in late Q2, in order to deliver improved segment margins in the second half. The refinement of our capabilities also ensures that we're well positioned to address changing customer needs over the long term, while providing the Group flexibility to address short-term economic challenges. Our corporate costs increased 21% to $6 million, reflecting investment that supports the global growth and the complexity of our business. Our corporate costs now, however, represents 4.6% of our revenue, down from 5.3% last year as we remain focused on managing our cost base. On Slide 8, we highlight how our diversified portfolio is providing resilience in a challenging macroeconomic environment. For the first time, our Creative Technology and Data EBITDA was higher than Brand Transformation, showcasing the ongoing growth of OBMedia's high-margin business. The 3-year CAGR delivered by Creative Technology and Data is an impressive 61% on EBITDA and 33% on revenue. Brand Transformation segment delivered EBITDA CAGR of 3% and a revenue CAGR of 11% for the same period. Slide 9 provides some high-level insight to the key market dynamics that are currently impacting an Enero Group around the world. The impact remains mixed across each of our core verticals: technology, health care and growth consumer with each having their own unique challenges and opportunities. In technology, as I'm sure you already know, there's been a global slowdown in the broader industry. Cost reduction initiatives are impacting marketing budgets, and of course, we're not immune to general client conservatism. We're also experiencing some delays in project work as the tech world looks for more positive economic indicators. However, it's important to note that there have been minimal client losses or cancellations. Now on the positive side, we expect that in calendar 2023, digital ad spend will continue to grow. And history suggests a potential increased need for outsourced support following some industry-wide layoffs and redundancies that you've all read about. Health care has been mostly resilient despite macroeconomic conditions because marketing budgets are typically well committed in advance. We've then experienced slow decision-making in the U.S. and Australia, combined with a reduction in corporate level marketing spend. In Enero's consumer segment, the dynamics are also mixed across sub-segments. Strong consumer demand is returning to low-cost grocery. The government sector is returning to a more normalized level of activity and the auto segment remains constrained with demand continuing to outpace supply, while tourism spend has accelerated in a post-COVID world, which we think provides some opportunity. On Slide 10, our revenue mix continues to reflect our strategic focus and is well diversified by industry. The largest category is being technology and digital media. Now if we double click into this technology-based revenue, we're largely operating in the B2B segment, as many of you know, which has grown significantly due to the ROI DNA and GetIT acquisitions. Geographically, we're also well diversified, with nearly 70% of revenue now delivered outside of Australia. We've added the variable retainers category through our agency model due to the ROI DNA acquisition, where there is generally a minimum revenue threshold to serve. And we've also made strong progress in delivering relevant services across our agency brands, as I mentioned earlier, now resulting in 28% of our revenue being derived from clients, who have multiple commercial partnerships with more than one Enero Group brand. We think this provides further opportunity to cross-sell into a greater proportion of accounts over time. Now Slide 11, 12 and 13 provide a deeper dive into OBMedia, which has been the strongest contributor to this half year results. OBMedia sits at the intersection of global e-commerce and digital advertising. And has 2 very large addressable markets, each growing at a rapid rate. Simply put, OBMedia delivers valuable high-intent customers to advertisers. So I thought it would be helpful to provide an outline of the customer journey for OBMedia. So step 1 is all about customer acquisition. Now OBMedia's buying and publishing partners acquire potential customers for advertisers through an omnichannel approach. They do this by placing relevant ads on websites, e-mails or social channels, and our partners leverage OBMedia's creative inventory and data science to help develop and optimize their advertising campaigns. Step 2 is about qualifying those customers. When a customer clicks on an advertisement, OBMedia qualifies their intent through their interaction with OBMedia's landing pages of hosted search results. Investment in artificial intelligence has allowed us to better optimize these landing pages to improve the conversion rate for advertisers. And as we always talk about, OBMedia remains vigilant in supplying quality clicks and investing in technology that reduces fraudulent traffic. Step 3, monetizing those consumers. So traffic is monetized when high-intent customers click through to advertisers' websites. Search advertising is typically the most expensive but the highest conversion advertising you can buy. Non-search advertising can be less expensive, but also less effective. So OBMedia uses its proprietary technology to effectively deliver high-intent search by customers to advertisers up from a lower-cost omnichannel source or sources. So moving to Slide 12, and now we understand the customer journey. Let's look at the OBMedia -- sorry, I should say, the consumer journey. Let's look at the OBMedia business model, which, of course, is powered by smart technology in the key business partnerships. Focusing on the bottom half of the page from the right to the left to talk through the revenue flow. As OBMedia drives traffic to its search partners, we record gross revenue. This is generated as a pre-agreed share of search engine revenue paid by the end advertiser. Traffic acquisition costs are recorded as cost of sales. And OBMedia generates traffic through a large suite of partners, who acquire their audiences in a variety of ways. Some generate organic traffic from their own portfolio of websites. While others purchase traffic from advertising platforms such as Outbrain and Taboola or from social channels such as Facebook and TikTok. OBMedia's ability to continue to expand these traffic sources has fueled strong growth in gross and net revenue. Diversification also enables dynamic optimization of traffic costs to deliver strong net revenue margins. And so now to Slide 13. Acquiring customers is all about our expansion of traffic sources that has included native, social and more recently an investment in our owned websites, which has allowed OBMedia to grow both into volume and traffic and to deliver better performance metrics. In terms of qualifying those customers, the role of AI and automation has also continued to drive the relevance and potency of the OBMedia offering. AI is now involved in every step of the optimization layer. OBMedia's artificial intelligence and continued rapid testing of campaigns from incentives to creatives, ad copy and placement, keyword selection and landing page layout, buyers' return on investment for advertisers and partners. And investments in OBMedia's cybersecurity and platform infrastructure supports our ability to grow and also gives confidence to our partners on the reliability of our platform. And lastly, monetizing those customers. Over the past 3 years, OBMedia has delivered a revenue CAGR of 107% through the continued investment and focus on optimization I've just spoken about. Our search engine partners value the high-quality growth provided by OBMedia to their maturing businesses. And this has been acknowledged by Microsoft, with OBMedia receiving the Bing advertising award for excellence in quality, twice and a recently renewed commitment from Google. Turning to Slide 14, which provides an additional high-level summary of the key achievements of our Creative Technology and Data businesses during the half. Now we've already just spoken about OBMedia in detail on the past few slides, which continued to experience substantial revenue and EBITDA growth for H1. Digital experiential agency Orchard was impacted by some challenging marketplace dynamics, particularly in the U.S.A, delivered a high single-digit EBITDA margin and a single-digit revenue decline. They are impacted by health client delays and timing of client conferences, partially offset by some growth in consumer clients. Now in late Q2, we reviewed our capabilities in the U.S. health business and increased our flexibility in resourcing through an offshore team. New client wins from a strong pitch conversion rates in H1 are expected to deliver benefits in the second half of this financial year. Slide 15 provides a high-level summary of the achievements of our Brand Transformation businesses during the half. Starting with Hotwire, we recorded a single-digit decline in revenue, excluding acquisitions. ROI DNA's revenue was impacted by reduced client media spend in Q2, although still showed double-digit revenue growth versus the prior year. Hotwire achieved a double-digit EBITDA margin despite the macroeconomic environment, and we expect second half margins will benefit from cost-saving initiatives already implemented in late Q2. Pleasingly, Hotwire and GetIT jointly won 2 new cybersecurity clients as an integrated global network as the reputation, relationship and revenue go-to-market offering evolves. Hotwire also recently launched a new suite of data and analytics IQ solutions. And lastly, Hotwire also recently announced a new CEO of its U.K. business, Jeremy Lucas, as well as a number of leadership promotions in the U.S.A. to support its global growth ambition. And now turning to BMF, our creative agency, who maintained its EBITDA margin as it cycles through a decline in government health spending from FY '22 record highs. During the half, we increased our focus on maintaining workforce flexibility and agility. And most importantly, BMF also successfully renewed its ALDI Australia 21-year contract. Both Hotwire and BMF won a series awards during the first half of FY '23. So on Slide 16. And with that, I'll now hand it over to Carla, who is going to walk us through the Group financials.

Thanks, Brent, and thank you, everyone, for joining our results call today. I'll begin with the profit and loss summary on Slide 17. It's worth noting that OBMedia for which Enero Group holds a 51% interest is consolidated in the accounts at 100%. Enero Group reported net revenue of $129.5 million, which reflected year-on-year growth of 39%, driven by recent acquisitions and strong momentum in OBMedia. Staff costs of $74.7 million were up 37% year-on-year. This represents a stable ratio of 58% of revenue despite investment in OBMedia and the acquisition of new businesses. The Group continues to actively manage staff costs and look for opportunities to increase productivity. As Brent said, in late Q2, we implemented a restructuring, the benefits of which we expect to flow in the second half. Operating cost ratio to revenue was 8% compared to 7% in the prior half year with ongoing cost discipline across all businesses. EBITDA of $44.3 million increased 39% year-on-year. Net finance costs grew during the half, reflecting interest costs following the debt drawdown of $36.3 million at 30 June 2022 and subsequent repayment of $10.3 million in late December 2022. Our effective tax rate of 24% was in line with the previous first half. Significant items are related to the restructuring costs in Hotwire Group and Orchard as mentioned earlier by Brent and are one-off in nature. Net profit after tax before significant items to equity owners was $14.8 million, an increase of 8% year-on-year. The weaker Australian dollar had a positive impact of $4.7 million on net revenue and $3.4 million on EBITDA. You will see this in the results; we've introduced with constant currency variances, in the segment slide, which is Slide 7; to address currency movements and provide investors with a better view of the underlying business performance given Enero's global footprint now. The balance sheet on Slide 18 highlights the strong capital position of the Group. Our cash position of $38 million is after the purchase of ROI DNA and GetIT and repayment of debt in December 2022. Intangible assets and contingent consideration increased due to ROI DNA and GetIT acquisitions. With a strong capital position, we retain flexibility to pursue our growth plans as we capture opportunities in high-growth verticals, while navigating the challenging macroeconomic conditions. The company's strong financial position, cash flows and attractive growth opportunities has enabled Directors to declare a fully franked interim dividend at $0.065 per share payable in March 2023, consistent with a payout ratio of 40%. The franking credit balance as at 31 December 2022 was $7.5 million. Turning to contingent consideration on Slide 19. The balance of $62.9 million represents -- or relates to, sorry, ROI DNA and GetIT acquired in July 2022 and MBA acquired in April 2021. Adjusting for contingent consideration, net debt was $51.3 million at 31 December 2022, reflecting the acquisitions made in July 2022. The first contingent consideration payment to MBA of $2.4 million was made during the half with no further payments due for FY '23. The remaining maturity profile over FY '24 to FY '26 is outlined on this slide. Turning to Enero's cash flow on Slide 20. Cash conversion of EBITDA was 36% due to 2 large customer payments in OBMedia and BMF being received just after December close. Adjusting for these payments, cash conversion was 74% for the half as compared to 98% in half 1 FY '22. Operating cash flow of $55 million (sic) [ $5.5 million ] was down from $25.3 million, reflecting the lower cash conversion and higher tax paid. Tax payments were made in all jurisdictions with the increase predominantly relating to the U.S. and Australia. After cash funded CapEx and lease payments, free cash flow was $2.1 million. I'll now hand back to Brent to provide an update on the company's growth strategy.

Yes. Thanks, Carla. Just to clarify, operating cash flow of $5.5 million as opposed to $55 million. So just want to make sure that that's clear. Okay. So now let's turn to Slide 22. Enero will continue to serve the creative and technology needs for clients globally across our priority verticals of technology, health care and growth consumer. Notwithstanding current market conditions, we continue to believe these industries represent significant long-term opportunities for Enero with our unique and differentiated offering in each of those industries. Our brands have built deep industry experience and are well positioned within each of those segments. We'll continue to refine our offering with modern capabilities to lead in a rapidly changing marketplace around the world. On Slide 23, we provide an update on ROI DNA and GetIT integration plans. The Hotwire Group has been co-pitching on opportunities, and pleasingly, Hotwire and GetIT have now jointly won 2 new cybersecurity clients. Commercial integration of the acquisitions is on track with the external go-to-market strategy nearing completion. In Asia, Hotwire will continue its planned expansion of communications capabilities over time, leveraging GetIT's presence and deep relationships in the marketplace. Operational integration is also progressing as detailed on the slide. Slide 24 shows the progress we've made on our 5 key FY '23 strategic priorities. Firstly, a primary focus on our core. We continue to drive initiatives that strengthen and accelerate our existing business as evidenced by our new business wins and successfully extending contracts with a number of long-standing clients, including ALDI, as I mentioned earlier this morning. Secondly, capability enhancement, we continue to develop and invest in new capabilities with an active pipeline of opportunities to ensure an ongoing relevance of our services in a dynamic and changing global marketplace. We continue to focus on the commercialization of our recent investments across our portfolio, and we continue to drive efficiency and have discussed our approach to managing costs for the long-term growth on this call today. Lastly, we strive always to be a magnet for world-class talent. We've accelerated the investment in our people, delivering a 58% increase in worldwide training hours, with a specific focus on diversity, equity and inclusion and mental well-being for our teams. Turning now to Slide 26, where we provide you with a trading update today. Now while still early in calendar 2023, the first 6 weeks of H2 have delivered a continuation of the macroeconomic headwinds experienced in FY '23 H1. The Creative Technology and Data segment has continued to achieve a strong financial performance, albeit with lower growth rates as it cycles year-on-year comparatives, whilst Enero continues to invest in the OBMedia business. The Brand Transformation segment has experienced a soft start to the calendar year as the segment continues to see the impact of slower client decision-making and general conservatism across all geographies and in some cases, constrained client budgets. Enero remains focused on managing near-term margins, and we'll continue to take appropriate steps to address current macroeconomic headwinds whilst positioning the business to capture and meet client demands. So lastly, on Slide 27, and before I hand over to the Q&A, I'll just briefly summarize and highlight our achievements in H1 as we continue our momentum building a long-term growth platform. I just want to highlight, we've delivered another set of strong financial results in FY '23 in the first half with 39% growth in revenue and EBITDA and with an EBITDA margin of 34% as standout. OBMedia continues to deliver substantial growth with further opportunities through traffic diversification, technology investments and its scalable business model, which we've talked about this morning. Enero has strong fundamentals, and we've also discussed that we've taken the opportunity in the current environment to accelerate towards a leaner, differentiated offering in key markets of growth around the world. And lastly, our culture remains a unique competitive advantage for the Group with a flexible talent model, strong leadership, and we believe that this will continue to attract the right talent in a more buoyant talent marketplace. I'd like to thank you all for your attention this morning on the call. And of course, Carla and I would be delighted to answer any questions you may have. So I'll hand it back to the operator for some Q&A.

[Operator Instructions] Thank you. We are showing no questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.