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

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

Well, thank you, and good morning, everyone. Thanks for joining Carla Webb-Sear, our CFO and myself for the Enero Group Full Year 2023 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 performance highlights and how we're responding in real time to a dynamic market. Carla will then take you through the group financials, and I'll then outline the continued evolution of our strategy along with the trading update. We then look forward to taking your questions at the conclusion of our presentation this morning. So starting with business performance and turning to Slide 4 in your deck. In FY '23, a number of global macroeconomic challenges impacted the marketing services industry. Now of course, Enero was not immune to this with many well-documented and significant client reorganizations in the technology sector, leading to, in some cases, delayed campaigns or project scope production. Despite these headwinds on an underlying basis, Enero Group delivered $241.6 million in net revenue, an increase of 25% year-on-year, driven by growth in OB Media and a full year contribution of our acquisitions. EBITDA grew 19% to $78.8 million, while net profit after tax, reflecting Enero's 51% of OB Media declined 10%, driven by softer earnings in wholly-owned agencies together with higher amortization and interest expense associated with the acquisitions. The group delivered $54.4 million in free cash flow, an increase of 30%, reflecting strong cash conversion. The strong cash flow allowed us to rapidly reduce our bank debt ahead of plan. The Board also declared a final dividend of $0.045 per share, fully franked, representing a payout ratio of 44% compared to 43% in FY '22. Our full year dividend is $0.11 per share, fully franked, representing a full year payout ratio of 42%, up from 40% in FY '22. Slide 5 focuses on Enero's financial highlights on an economic interest basis, reflecting our 51% ownership of OB Media. On this basis, revenue increased by 20% and EBITDA grew 5%, which is a solid outcome given difficult market conditions. Slide 6 shows accretive EBITDA growth from '22 -- FY '22 to FY '23, highlighting the key drivers of our performance. Now as revenue softened through the year, we executed a number of cost reduction initiatives across the portfolio, which delivered a total of $16 million in savings, and we'll hear more about our cost reduction program later in this morning's presentation. Now despite that significant cost reduction, our organic business, which excludes acquisitions, show EBITDA declined by $3.8 million. Our agencies were impacted by a challenging market, in particular in the U.K. and in the U.S.A. and OB Media delivered another strong year of growth. The net impact of acquisitions and disposals to EBITDA was a positive $3.1 million, while foreign exchange movements delivered a benefit of $2.8 million. Moving to Slide 7, we show Enero's segment performance. Creative Technology and Data continued to perform well with revenue increasing 19% to reach $69.6 million, while EBITDA grew 30% to $36.3 million, driven again by a strong OB Media performance. In addition, we expanded our EBITDA margin to 52.2% compared to 47.9% in FY '22. In Brand Transformation, we experienced a more difficult trading environment and whilst revenue increased 20% to $128 million, EBITDA declined 21% to $22.1 million. EBITDA margins declined to 17.2%. Given the economic environment, we've realigned the cost base in the second half of the financial year to deliver improved margins in Q4 in the mid-20s. Our cost management initiatives enabled a continued focus on the core strategic capabilities that ensure our business remains well positioned to address changing customer needs. We also continue to carefully manage corporate costs now representing 5.9% of the group's net revenue at $11.7 million, down from 6.7% of group net revenue in FY '22. Slide 8 demonstrates the diversification of our revenue across industries and geographies and the longevity of our client relationships. Revenue continues to reflect our strategic focus and is well diversified by industry with the largest categories of technology and digital media. Now in technology, we're largely operating in the B2B segment through the Hotwire Group and its reputation, relationship and revenue service offering to capture client investments in cloud, cybersecurity and more recently, the rapidly growing semiconductor industry. Geographically, we've transformed Enero into a truly global business over the last 3 years with around 70% of revenue now derived from outside Australia. With the addition of ROI DNA, we've added the variable retainers category to our agency analysis with 11% of our revenue now sitting in this category. The group's diversified but synergistic strategy continues to deliver results with 31% of our revenue now from clients who have relationships with more than one Enero Group business. So moving to Slide 9. And over the next few slides, I'll provide further insight into how we've proactively responding -- we are proactively responding to a dynamic and changing global marketplace, both within OB Media and also across the agency businesses. Now it's important to remember that the Enero Group sits at the convergence of a rapidly evolving global market that continues to offer large-scale opportunities for future growth despite the short-term macroeconomic challenges that we're all experiencing right now. On Slide 10, OB Media has grown significantly over the past 4 years, with revenue increasing at a CAGR of 93%, while EBITDA grew even faster at a CAGR of 108%, truly impressive numbers. As we previously discussed, working in partnership with the world's 2 largest search engines, the growth in OB Media has been primarily driven by ongoing investment in its technology stack to enable more effective media buying, its expansion of traffic source is driving volume and its ongoing commitment to traffic quality. Moving to Slide 11, in Q4 of FY '23, OB Media proactively halted the traffic of several publishers in order to preserve its quality metrics with our search engine partners. And after further evaluation, prioritization of our search engine relationships and a continued commitment to quality has resulted in the decision not to reinstate these publishers. Therefore, OB Media's growth in FY '24 will be from a lower base. This chart shows June and July actual revenue on an annualized basis to help in forming the new trading baseline for OB Media. FY '24 growth will be driven by continued expansion of publisher relationships that meet our quality metrics with EBITDA margin expected to normalize in the range of 55% to 65%. I want to reinforce that OB Media is a strong contributor to the group's performance, and we remain optimistic about its growth prospects with opportunities including new product launches, traffic diversification and ongoing technology investments. Turning to Slide 12, which provides a summary of the achievements of our agency businesses in FY '23. ROI DNA's revenue grew by 3% year-on-year despite the impact of reduced client media spend due to the well-documented technology marketplace slowdown. Hotwire has now fully integrated GetIT into the Asia Pacific region and continues to transform its communications consultancy capabilities and its unique market position. Hotwire's tech-focused business delivered a 12% organic revenue decline during FY '23 despite adding a series of new clients, including Sony [indiscernible]. BMF continued to perform strongly in FY '23 as it further diversified, invested and grew its customer experience and its innovation capabilities. BMF continues to be lauded for its creative leadership and effectiveness as the home of a long idea in the Australian creative landscape, winning 3 Australian Agency of the Year awards and globally with 2 coveted Cannes Lions and a number of D&AD Pencil Awards. Pleasingly, BMF delivered a 4% revenue growth year-on-year, excluding one-off federal government work in FY '22. And as previously announced, BMF also further extended its long-running and award-winning partnership with ALDI Australia. Orchard delivered a solid full year performance, highlighted by winning Optimizely's Asia Pacific Rising Star Solutions Partner of the Year and key client wins, including Carslile Homes, Beyond Bank Australia, Epson and Janssen. Orchard's consumer revenue grew 11% year-on-year, reflecting its market-leading digital transformation capabilities. Government relations and corporate advisory firm, CPR, continued to drive transformation, build reputation and grow brand recognition for its high profile of clients with revenue flat year-on-year. On Slide 13, creating world-class work for our clients not only drives our business performance, it also attracts great people, and we continue to add a number of blue-chip brands to our client roster across the agency portfolio in '23, including Lego, QBE, Tennis Australia and a2 Milk. I'm also pleased to announce this morning a new multiyear partnership between Enero agency, BMF and Alinta Energy here in Australia, which represents a significant win to the agency. This is in addition to an existing partnership between Alinta Energy and Enero agency, CPR, adding to our growing synergy of multi-agency client services. On Slide 14, we provide an update looking the significant cost reduction initiatives I mentioned earlier, implementing across the group in '23. The chart on the left-hand side of the slide demonstrates that H1 margins were impacted by ROI DNA's investment in staff ahead of demand as well as a softening in Orchards USA business. It's also important to remember that 12 months ago following 2 years of the COVID-19 pandemic, the worldwide labor market was exceptionally tight with talent extremely difficult to find. We implemented a series of significant cost management initiatives that both protected our unique capabilities, whilst removing costs across the business. On the right-hand side, you can see that structural cost reductions will continue into FY '24 should revenue levels remain constrained by market conditions, while one-off cost savings may return in FY '24 subject to business performance. Now back on the left, our FY '23 H2 performance reflected strict discretionary cost control, and we remain confident that our FY '24 margin for agencies will be within our target range of at least 18%. On Slide 15, we believe that ROI DNA and GetIT continue to position the Hotwire Group for future growth, particularly when the tech marketplace returns to more positive sentiment. In FY '23, however, these acquisitions were impacted by macroeconomic headwinds and the current well-documented challenges in the tech industry. These acquisitions added scale in the United States and expanded our presence into Asia for the very first time. They also have accelerated the transformation of Hotwire's reputation, relationship and revenue services into a truly global strategic proposition for clients as the preeminent global tech communications consultancy. The ROI DNA business model is geared for accelerated growth when tech ad spend returns, and we're beginning to see a future pathway for that given the more recent positive tech market sentiment. Turning to Slide 16. It's also important to remember that the strategic rationale for the acquisition of both ROI DNA and GetIT not only significantly expands the total addressable market for the Hotwire Group, but enables Hotwire to be uniquely positioned to capture share of a large and growing client investment in the digital transformation marketplace. As we evolve our capability to serve the needs of forward-thinking brands through these 2 businesses, we unlock that digital transformation and analytics marketplace, which when combined with the traditional marketing and services marketplace provides a TAM of $1.2 trillion. So we're now well positioned with significant opportunity for future growth. So with that, on Slide 17, 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 statutory profit and loss summary on Slide 18. It's worth noting that OB Media, for which Enero Group holds a 51% interest are consolidated at 100% in this slide and the annual report that Enero published today. Enero Group delivered net revenue of $241.6 million, an increase of 25% year-on-year, driven by acquisitions and strong growth in OB Media. Staff cost of $141.6 million were up 27% due to investment in OB Media and the inclusion of our 2 acquisitions in the consolidated results. This represents a staff ratio of 59%, a slight increase from 58% in FY '22. As previously mentioned by Brent, the cost management initiatives occurred from late Q2 and Q3 and the impact of savings associated with restructuring and freelancer management are expected to drive further benefit when annualized in FY '24. Operating cost ratio was 9% compared to 8% in FY '22 as the group focused on containing discretionary spend during the year, which offset some of the inflationary pressures. EBITDA of $78.8 million increased 19% year-on-year. Depreciation and amortization predominantly increased due to the amortization of new intangible assets recorded as part of the acquisition. Net finance costs in FY '23 reflect a full year of interest expense given debt was drawn down prior to the 1 July acquisitions and also includes the present value interest online related to contingent consideration payables. Our effective tax rate of 24% was slightly lower than the prior year at 25%. Noncontrolling interest of $25 million, increased from $16.8 million in FY '22, reflecting the minority interest associated with OB Media. Net profit after tax before significant items to equity owners was $24.4 million, a decline of 10% year-on-year. The constant currency variance slide is available in the appendix to our presentation and it addresses currency movements and provides investors with a better view of the underlying business performance given Enero's global footprint now. Turning to Slide 19. I just quickly want to run through and highlight the significant items for FY '23 and FY '22. They are fair value adjustments in FY '23 relate to the gains on contingent consideration following the true-up due to lower earnings expectations. Restructuring costs predominantly in Hotwire Group, Orchard and Corporate and gain on sale of businesses in FY '22 relates to TLE/TDE. Turning to Slide 20. Enero's strong balance sheet underpins our ability to deliver growth and manage headwinds while delivering sustainable returns to shareholders. Our cash position of $52.4 million is after the purchase of ROI DNA and GetIT and the repayment of the majority of the debt. Intangible assets and contingent consideration increases relate to the acquisitions and include the fair value adjustments. As Brent mentioned, the company's strong financial position, cash flow and attractive growth opportunities have enabled directors to declare a fully franked final dividend of $0.045 per share payable in October 2023, representing a payout ratio of 44%. I also wanted to note that as the majority of our operations are now outside Australia, our franking credit balance at 30 June 2023 was $5.2 million, decreasing from $9.9 million in June '22. We remain very comfortable that our balance sheet retains flexibility to pursue Enero's growth ambitions. Turning to contingent consideration on Slide 21. The contingent consideration balance at 30 June relates to ROI DNA and GetIT acquired in July '22 and MBA acquired in April '21. This balance of $30.7 million has a maturity profile over FY '24 to FY '26. Other movements and contingent consideration during the year included a fair value gain of $34.6 million recognized in FY '23 due to the lower earnings expectations. And the second consideration payment of $2.7 million to MBA in the first half of FY '23. At 30 June 2023, Enero has a net cash position of $13 million and $41.3 million of undrawn loan facilities. Slide 22 emphasizes that we are delivering on our capital management strategy. Enero is maintaining its financial flexibility with adequate cash reserves of $13 million at balance date and 0 leverage. Reflecting the company's financial performance in FY '23 and strong balance sheet, the directors declared a total dividend for FY '23 of $0.11 per share. This equated to a 42% full year dividend payout ratio. The company's balance sheet, combined with the Board's focus on capital management, enabled Enero to initiate an on-market share buyback during FY '23, having bought around 520,000 shares as of the 18th of August. Enero's clear capital management strategy reflects the group's ongoing commitment to delivering a balance of shareholder return and growth opportunities. Turning to Enero's cash flow on Slide 23. Cash conversion was 102% of EBITDA as compared to 96% in the prior year. The group continues to target a cash conversion of 85%. Operating cash flow of $61.5 million was a strong increase from $48.8 million in FY '22. Net interest payments of $1.5 million relates to the debt drawn of $36.3 million in June 2022. Tax payments made in all jurisdictions totaled $17.7 million, with the increase coming predominantly from the U.S. and Australia. After cash funded CapEx and lease payments, free cash flow was $54.4 million. Net investment in businesses of $34.7 million includes a second installment of contingent consideration payments for MBA. The majority of the Westpac loan has been repaid during the year with USD 5.8 million remaining outstanding at 30 June 2023. I'll now hand back to Brent to provide an update on the company's growth strategy.

Okay. Thanks, Carla. So turning now to Slide 25, just in order to remind everyone of our Enero operating strategy. Enero continued to serve the business transformation and creative needs of our clients globally. This continues to represent significant incremental market opportunity. With a clear focus on long-term growth segments, our brands continue to build deep industry expertise and remain well positioned within each of those segments as we continue to refine our offering. Underpinning our commercial strategy is the creativity, the leadership and the resilience of our amazing people and our strong culture. Combined with our established reputation for innovation, we'll continue to refine our approach to embracing new technology such as AI in order to enhance our competitive offering. So moving to Slide 26, to provide a little bit more color on that. I think it's important to provide this deeper context on the potential opportunities that AI can provide across the portfolio in each of our brands. Now we see a particular opportunity in the areas of content creation, data and analytics and the provision of strategic insight, powering campaign development for clients as we test and learn with AI in FY '24, recognizing, of course, that it's also important to manage AI in a responsible way on behalf of our clients across the group. On Slide 27, and during FY '23, we also began to develop an appropriate and relevant ESG framework for the group around the world that can underpin sustainable long-term growth for our people and for the planet. Our first ESG audit has established a critical baseline that will inform the development of strategic goals and enable us to measure our future progress towards the achievement of them, our starting point focused on the most critical area of our business, which is our people. Now this includes diversity, equity, inclusion and belonging, learning and development, employee health and well-being, community industry impact and environmental stewardship. So I'm looking forward to continuing to update the market on our ESG progress throughout FY '24 and beyond. So turning now to Slide 29, where I can provide you with a trading update. Trading for July remained resilient despite ongoing challenging macroeconomic conditions with current expectations that technology-focused clients will begin to return to more normalized trading in calendar year '24. OB Media is expected to grow from its recent rebased trading shown on Slide 11, with EBITDA margins, as I mentioned, in the target range of 55% to 65%. In July, agencies are cycling a strong comparative period and revenues declined 8% year-on-year due to many client reorganizations, impacting or delaying spend predominantly in the technology vertical. The group's health and consumer agencies, Orchard and BMF have grown 4% year-on-year. Full year benefit of cost initiatives taken in FY '23 and an ongoing focus on profitability, underpin expected increased margins in agencies over the first half compared with the last year. And we're commencing a strategic review of Enero's 51% investment in OB Media to ensure shareholder value is maximized. Moving to Slide 30 and to conclude today's session. Given the disappointing second half decline in our share price, I wanted to take a moment to highlight 5 points that uniquely position Enero Group to deliver ongoing value to shareholders in both the short and the long term. Our strategic framework and portfolio approach is delivering diversified revenue and earnings growth, whilst building differentiated capabilities. As I mentioned, we now derived 31% of revenue from clients working with multiple Enero businesses across geographies. Enero Group now has a truly global offering working with blue-chip clients at significant scale, with 37% of the group's revenue now originating from clients in more than one geography. We've transformed the group over the past 3 years, growing net revenues at 21% CAGR between FY '20 and FY '23, while growing EBITDA even faster at 39% CAGR. We'll also continue to drive efficiency and profitability through our ongoing cost management initiatives you've heard about today. The growth opportunities for the group remains, as we move from a PR comms addressable market estimated at $50 billion with the ROI DNA and GetIT acquisitions, enabling potential to grow within a USD 1.2 trillion TAM, including digital transformation. And lastly, and despite our share price performance, we continued to deliver strong returns to shareholders through our buyback program, as Carla mentioned, that repurchased over 520,000 shares as of today's date, our FY '23 dividend of $0.11 per share fully franked, representing a payout ratio of 42% and a return on invested capital of 34% in FY '23. So I'd like to thank you for your attention this morning. That concludes our prepared remarks. And Carla and I would now be pleased to answer any questions you have. So I'll hand it back to the operator for Q&A.

[Operator Instructions] Your first question comes from Nick Weal from Evans & Partners.

Well done on the results today. I just had a quick one about the new EBITDA margins for OB Media. Just you flagged higher quality, more expensive traffic. Could you just elaborate a bit further on that, whether that's a function of your clients specifically or the industry in general?

I think it's just a focus of us around the quality metrics as we talked about this morning, making sure that we're really working with publishers that really meet the strict criteria around quality for us. And so in essence, that may mean more expensive traffic.

But it is also a reflection of what is happening in the market at this point as well, Nick, as you pointed out in your question.

[Operator Instructions] Your next question comes from Eduardo Riquelme, Private Investor.

I just wanted to clarify the -- just Slide 11, just on OB Media. So just the FY '23 June, FY '24 July annualized. So are you saying basically that revenue is going to be down, what, 36% in FY '24? And then there's obviously some substantial margin compression there as well. So that's likely down on an earnings basis, 50% or so. Is that correct?

What that slide represents is the actual results in revenue for that month over an annualized period. So what you can see is in June versus July, that revenue base is growing. But you are correct in picking up on the fact from the margin perspective that there has been -- as we've steered to in the past, we had talked over the last year about an expectation that OB Media would generally deliver in that 60s range. And while reflecting on FY '23, it was at a higher level. The guidance we've given into FY '24 remains at that level of margin range that we have guided to in the past.

Okay. And maybe just a quick follow-up. Just on the -- just the strategic review. Does that reflect outside interest in OB Media? Or does that reflect the deterioration in the business.

2 comments there. I think number one, we continue to be confident that OB Media and the team that we've built will continue to grow, albeit of a small base, Carla just referenced. And the second thing, more importantly, the Board is always looking to maximize shareholder value and looking for opportunities to do that. So I think that is quite simply the only reflection at this point in time.

Your next question comes from Nick Weal from Evans & Partners.

My question just actually got asked. So I'll jump back in the queue.

Your next question comes from Tim McArthur from Asymmetric Asset Management.

Carla and Brent, just -- Slide 23 on cash flow. Can you just run me through why the target is 85%. What leads to the slippage from EBITDA to gross operating cash flow you have the target of 85%, please?

Look, the target has been something that in the past has been a reflection on where we've looked to -- looked for growth in terms of areas around further CapEx or areas in terms of investment. You're right, Tim, though, that while the tone remains at 85% other than -- and I guess that's a reiteration we put in because at the half, we had a bit of a timing point. But it's fair to say, if you look at the history over the last number of halves. -- more often than not, we have been above that 85% target. So it is on a more conservative side. And as you can see from what we've delivered at the 30 June, it has been a lot stronger than that target.

Sure. Okay. And perhaps just on OB Media, are you giving us any color in terms of growth rates? You're expecting it to grow, but are you expecting it to grow obviously from this rebased level sort of similar to what we've seen over the last few years? Has there been a slowdown in OB Media? Or what you see expecting strong growth from?

So I think, Tim, What we've done is just given you current information around trading, obviously, we don't provide guidance or expectations in terms of growth rates, but we've tried to give everybody the best look through as we can in terms of both the rebate and how OB continues to trade in both June and July.

I mean the one thing to point out is this business is a daily business. So what you can see in the June and July results are also a bit of a reflection of what's happening within the days, and it is off a base that is growing.

Okay, sure. And with the strategic review, is there any other color you can give on that? Are you looking to sell? Is that the primary aim? Or are you looking to spin out the business? Anything on the...

I think there's 2 things. One is to reiterate the confidence we have in OB Media and the team, but I think it's very premature to speculate on a number of potential outcomes to be perfectly honest.

Your next question comes from Matt Maven.

Just on OB Media. Just to understand that chart at annualized growth, and it's about 10% in July over June. So -- but if we -- that's kind of 10% in just a month. So am I reading that right, if they continue growing at the rate, we're talking like 100% growth annually. Is that the right way to read that chart, if that July growth rate continues?

Well, we're not making a comment on to how that goes across the full fiscal year, but it is representing 1 month in isolation, then annualized. And obviously, given where we are in August, it's a point in time with only 2 months operating in this current period. So treat them, like I said, as an actual delivery of that month and then annualized, and like I also just pointed out, keep remembering it's a transactional business. It's a daily business, so therefore, there's a bit of day count as well.

There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.