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

Good morning, everyone. I'm your chair, Ann Sherry, and I'd like to welcome you all to the 2023 Annual General Meeting of Enero Group. I've been advised that we have the necessary quorum of shareholders present, and I am pleased to declare the meeting is open. Today's AGM is a hybrid meeting. Here with me today at 100 Harris Street or on the online meeting platform are my fellow directors, CEO, Brent Scrimshaw; Non-Executive Director, Anouk Darling; Non-Executive Director, David Brain; Non-Executive Director, Ian Rowden; and Non-Executive Director, Louise Higgins. Together with the Chief Financial Officer, Carla Webb-Sear; and Company Secretary, Cathy Hoyle, and representatives from our share registry, Automic Group, who will be assisting with the conduct of the meeting. Our external auditors for 2023 KPMG are online and available to answer any shareholder questions on the audit of Enero Group's 2023 financial statements. For those not in attendance here in Pyrmont, today's meeting is also being held online via the Automic Zoom platform. Shareholders can watch and listen to the meeting in real time, submit questions and may also cast votes by accessing the separate online voting portal. We encourage shareholders to take part in the meeting, both in person and online. Thank you to those shareholders who submitted questions prior to the meeting. We will address those questions in our prepared speeches. Shareholders in attendance will be able to ask questions during the course of the meeting and shareholders online may also submit a question via the chat function at the bottom of the Zoom screen. Please include which resolution it relates to, so it can be addressed at the appropriate time. Questions that relate to the general business of the company will be collected and addressed after the close of the formal business of the meeting. Online questions will be read aloud to me by the Company Secretary. The notice of the Annual General Meeting was mailed to all registered members on or about the 22nd of September and is to be taken as read. Voting on all resolutions will be conducted by poll. And for the purposes of the poll, I appoint Jonathan Kim of Automic Group, the company's share registry, who has examined and prepared summaries of the proxy forms received to act as returning officer and to conduct the poll. Each shareholder in attendance here in Pyrmont, who has registered and entitled to vote will have received a yellow voting card. I will ask you to raise the yellow voting card to assist the counting of votes. If you're in attendance online via the Automic Zoom platform, you will see instructions on the screen for how to register and vote during -- using the online portal, which you must do separately to the Zoom meeting. Shareholders in attendance via Zoom that have already submitted a vote by proxy should note that your votes will already be counted towards the poll. You do not need to lodge another vote unless you wish to change your proxy instruction. Shareholders in attendance via Zoom, who have not submitted a vote by proxy and wish to vote on the resolutions being put to the meeting today can do so by following the instructions provided in the notice of meeting. Please note that the online voting portal is now open and will remain open until the poll is declared closed. Your votes must have been submitted prior to the poll being closed for them to count. The agenda for the meeting will be as follows: I'll provide a short welcome address, this will be followed by a business review from our CEO, Brent Scrimshaw. We'll then proceed to the formal matters to be considered at today's AGM and then there will be an opportunity for questions and discussion. Enero Group sits at the convergence of a rapidly evolving global market that does offer large-scale opportunities for future growth. We're a truly global business with over 70% of our revenue now derived outside of Australia. From a statutory perspective, in full year '23, we continued to deliver strong growth, albeit impacted by the challenging operating environment for the entire industry over the last 12 months. Net revenue increased 25% with a 3-year compound annual growth rate of 21% to $241.6 million. EBITDA increased 19% with 3-year compound annual growth rate of 39% to $78.8 million, and net profit after tax before significant items declined 10%. The decline in full year '23 reflects the reduction in earnings contribution of the agency businesses, offset by the growth of 51% owned OB media, along with higher amortization and interest expense associated with acquisitions. The group also delivered $54.4 million in free cash flow, an increase of 30%, reflecting strong cash conversion at 102% of EBITDA. The strong cash flow contributed to rapid debt reduction. And there are also returns financial flexibility through adequate cash reserves with net cash of $13 million at 30 June 2023. This enables us to pursue Enero's long-term growth ambitions and build on our momentum. As a result of Enero's financial performance in full year '23, strong balance sheet and attractive growth opportunities, the Board declared total dividends for full year '23 of $0.11 per share fully franked. This equated to a 42% dividend payout ratio. In line with full year '23 results disclosures, Enero's results on an economic interest basis, where net revenue increased 20% to $197.8 million, EBITDA increased 4.8% to $46.8 million, and net profit after tax before significant items consistent with statutory results. Given a disappointing second half decline in Enero's share price, the Board continues to believe that Enero remains undervalued relative to its financial performance and potential and I want to highlight the group's compelling investment case. First, portfolio approach. Our strategic framework and portfolio approach is delivering diversified revenue and earnings growth while building differentiated capabilities. We now derive over 30% of revenue from clients working with multiple Enero businesses across geographies. Secondly, our global offering. We now have a truly global offering, working with blue-chip clients with large marketing budgets. 37% of the group's revenue is derived from clients in more than one geography, which is a deliberate expansion strategy. Third, our track record of transformation. Notwithstanding current marketplace conservatism, we've transformed the group over the last 3 years, growing net revenue at 21% compound annual growth rate between full year '20 and '23 while growing EBITDA even faster at 39% compound annual growth rate. We've also demonstrated our ability to manage costs in a dynamic marketplace while sharpening our focus on the services that matter to our clients. Four, our significant growth potential. The growth opportunities for the group remain large. Our current addressable market is estimated at USD 50 billion with the potential to grow to USD 1.2 trillion, including digital transformation. Fifthly, delivering shareholder returns. We continue to deliver strong returns to shareholders through our share buyback program, which remains ongoing. Our full year '23 dividend of $0.11 per share fully franked, represents a payout ratio of 42% and return on invested capital of 34% in full year '23. Our capital management strategy is clear and it reflects the Board's ongoing commitment to delivering increased shareholder returns and confidence in the group's value and progress. And sixthly, the OB Media strategic review. We have appointed Citigroup to advise on strategic options for our 51% stake in OB Media. Citi have a deep connection to the global digital advertising marketplace from their New York office and have commenced work. We expect to update shareholders on progress in early 2024. The Board believes that Enero has more robust and diverse capabilities than ever before. Our portfolio of businesses remains well positioned with enormous growth potential in markets of scale. In summary, I'd like to thank my fellow Board members for their ongoing effort and expertise throughout a demanding full year '23. On behalf of the Board, I'd also like to thank the talented and tireless executive leadership team for their continued dedication and commitment to our business as well as our talented employees for their resilience and commitment to our clients throughout full year '23. Finally, to you, our shareholders, thank you for your continued support and belief in our long-term vision and strategy for the group. I'll now hand it over to Brent, who will provide an update on the business.

Thanks, Ann, and good morning, everyone. I'm pleased to provide a business update to all shareholders at today's AGM as we look back on a challenging year in which Enero continued to deliver exceptional and award-winning work for our clients, whilst navigating the many challenges and macroeconomic uncertainty, in many of our key global markets and particularly in the technology sector. . As a business with more than 70% of our revenue outside of Australia, we recognize that FY '23 off the back of 2 prior years dominated by COVID-19 was both a dynamic and at times, a difficult and volatile trading environment with particular impact across the marketing services sector as clients became more conservative and cautious with their marketing investments. With that said, the question I most frequently asked in the past few months is when do you see the current market sentiment changing? And more importantly, when can we expect your clients to resume a more confident growth orientation in both their short- and midterm thinking and business outlook. Like everyone, we continue to look for signs of market recovery and remain focused on positioning each of our portfolio businesses to be leaner, sharper and more agile in order to capitalize on a more robust and growth-oriented client investment when it returns. There's no doubt that the marketing industry has been challenged globally with many common themes within the technology sector. However, large market setting technology businesses are beginning to show some small signs of positivity in the digital advertising market, and clients are also indicating some positivity for the first time in the last 12 months. We do believe we are at the bottom of the cycle right now and look forward to the second half of the fiscal year with some renewed optimism. Despite this, Enero businesses continued to add a number of blue-chip clients to our portfolio, including LEGO, QBE, Tennis Australia, Alinta Energy, A2 milk and OpenText amongst other high-profile brands highlighted on this slide in the last 12 months. Significantly and directly as a result of a deliberate cross-business focus, 31% of revenue now comes from clients who have relationships with more than one Enero Group brand, providing us with more opportunities to engage with our clients and also to drive stickier reoccurring revenue in the long term. Whilst in FY '23, we made a number of business decisions that led to a significant reduction in our global headcount. We also made a number of strategic senior hires to key leadership positions around the globe. As we explained in our year-end results presentation, it's critical we maintain and extend our competitive advantage and are well positioned with the most modern and relevant capability to continue to change the shape of our work and more importantly, anticipate rapidly changing client needs to deliver a differentiated, innovative and market-leading services offering. Enero's ambition and ultimate opportunity is underpinned by our strategic intent. That is to provide deep industry knowledge within long-term growth industries in order to drive competitive differentiation. To continually refine our progressive and modern marketing services to create client stickiness and success and to ensure the deployment and relevance of those services in markets of strategic importance and scale in order to respond with world-class work to briefs of all shapes and sizes. So with that said, just a reminder on the group's corporate strategy, we serve the continually evolving business, transformation and creative needs of our clients globally with a sharp focus on the long-term growth segments of technology, healthcare and consumer. Each of the Enero brands must continue to build deep industry expertise and remain strategically positioned to win within each of the priority segments. In addition, our centers of excellence, supported by an amazing team of over 700 people worldwide are also what makes us truly unique. The implementation of our strategy in practice is best illustrated within the technology sector through the evolution of Hotwire. From a humble PR and communications business based in London, the Hotwire Group has deliberately being transformed into the preeminent global technology and communications consultancy serving clients in 16 markets worldwide and is arguably the go-to tech sector specialist working with some of the world's best and well-known tech brands such as Meta, Citrix and Honeywell. This enables a blueprint for scalable success in other priority verticals over time. I'm also pleased this morning to announce a new multi-market partnership with Palo Alto Networks, the global cybersecurity leader, utilizing the group's end-to-end service capabilities. Combined with our established reputation for innovation, in FY '24, we will continue to embrace new technology such as artificial intelligence in order to enhance and accelerate our competitive offering. We continue to see opportunities across the portfolio within content creation, data and analytics and in the provision of strategic insights powering campaigns and creative development for clients as we test and learn with AI in FY '24. It's also important to manage AI in a responsible way on behalf of our clients across the group through the formation of Enero's AI Council. In terms of outcomes, 2 early-stage repeatable and scalable examples that I'd like to share this morning include work with Hotwire client Indeed to better measure business results and the impact of communications activities, through the development of a reputation impact scorecard, along with ROI DNA client, Hewlett Packard, to deliver meaningful and impactful insights about their top 20 target accounts to better equip their sales force and impact revenue-generating conversations. So that concludes this morning's business review, and I'd now like to turn to our Q1 business update. In Q1 FY '24, agencies are cycling a strong comparative period, and revenue has declined 7% year-on-year, but above levels seen in H2 FY '23. Recent client wins such as Sobi, Alinta Energy, ABB and Palo Alto Networks building momentum in Q2. Q1 FY '24 agency's margin of 16% above prior year despite lower revenue. Benefiting from cost initiatives in FY '23 and are expected to be within the guided range of above 18% in Q2. OB Media continues to build back from revenue rebates and is expected to grow from Q1 FY '24 trading. OB Media EBITDA margin is in line with guidance of 55% to 65% in Q1 FY '24. OB Media strategic review is in progress and expected to be concluded by early 2024. That concludes my presentation this morning, and I'd like to sincerely thank all of our shareholders for their continued support and loyalty to Enero. Thank you.

Thank you, Brent. And I'll now turn to the formal business of the meeting. More than 61 million proxies received by the company for this meeting, that's around 66.5% of the total shares on issue. We'll be displaying the text of each resolution on the screen, and I will repeat the resolution. We'll also display the proxy votes for each of the resolutions we're dealing with today. So to our first item of business. It's the financial statements and reports, which are for consideration and for discussions. This is not a resolution. The annual report contains the financial accounts for the group, the reports of the directors and the independent auditors and other information about the business performance of the company. I'll take the financial reports as read, but I would like to open up the floor to any questions on this item of business, either through the online platform and then for those in attendance in Pyrmont, if you'd like to ask a question, if you wouldn't mind putting your hand up, and we'll get a microphone to you. So can I just check and see if there are any questions on this item.

Thanks, Chair. There are no questions.

Thank you. So we'll move now to resolution 1, which is the adoption of the company's remuneration report, which again is set out in the annual report. The nonbinding resolution is on the screen. At the remuneration report included in the Enero Annual Financial Report for the year ending 30 June 2023 be adopted. The way in which proxy votes have been cast is now shown on the screen. As indicated in the notice of meeting, I intend to vote validly marked undirected proxies in favor of resolution 1. Again, I will now take any questions on this item of business from shareholders through the online platform and anyone who's is attendance here.

Thank you, Chair. No questions.

Shareholders, please now vote on this resolution if you haven't done so already. And I will now hand over to the Chair of the Remuneration and Nomination Committee, Ian Rowden, to conduct resolution 2 as it relates to my re-election.

Thank you, Ann. Shareholders, the ordinary resolution is now on the screen. Resolution 2 is the re-election of Ann Sherry as a director. Ann Sherry, AO was appointed as Chair and Non-executive Director of the company on January 1, 2020, and is a member of the Remuneration and Nomination Committee, and she is a prominent Australian business leader holding many executive and nonexecutive positions at leading businesses. The way in which proxy votes have been cast is now shown on the screen. As indicated in the notice of the meeting, as Chair of this resolution, I intend to vote validly marked undirected proxies in favor of Resolution #2. I will now take questions on this item of business received from shareholders through the online platform and then from those in attendance here in Pyrmont.

Thank you, Chair. No questions.

I think shareholders, please now vote on this resolution if you haven't already done so. Okay. Thank you. I will now hand Chair of the meeting back to Ann Sherry.

Thank you and thanks, Ian, and thank you, shareholders. Resolution 3 is the re-election of Anouk Darling as a Director. Shareholders, the ordinary resolution is now on the screen. Anouk Darling was appointed as a Nonexecutive Director in February 2017 and is a member of the Audit and Risk Committee and the Remuneration and Nomination Committee. Anouk has retail, private equity and M&A experience and is currently CEO of Scape, Australia's largest developer owner and operator of purpose-built student accommodation. The way in which proxy votes have been cast is now shown on the screen. And as indicated in the notice of meeting, I intend to vote validly marked undirected proxies in favor of Resolution 3. I'll now take any questions on this item of business, either through the online platform or from any shareholders present here in Pyrmont.

Thank you, Chair. No questions.

Shareholders, please now vote on this resolution if you have not done so already. Resolution 4 is the change of auditor from KPMG to Ernst & Young. The ordinary resolution is on the screen in front of you all, the way in which proxy votes have been cast is also now shown on the screen. As indicated in the notice of meeting, I intend to vote validly marked undirected proxies in favor of Resolution 4. And I'll take any questions on this item of business from shareholders through the online platform and then from those in attendance.

Thank you, Chair. No questions.

Shareholders, please now vote on this resolution if you have not already done so. Resolution 5 is the approval of the Enero share appreciation rights plan. The ordinary resolution on this is on the screen. The way in which proxy votes have been cast is now shown and as indicated in the notice of meeting, I intend to vote validly marked undirected proxies in favor of the resolution. Again, I will now take any questions on this item of business from shareholders through the online portal or from those here in the room.

Thank you, Chair. There are no questions.

Shareholders, please now vote on this resolution if you have not done so already. Resolution 6, which is the allocation of share appreciation rights to a director under the Enero share appreciation rights plan. The ordinary resolution is now on the screen and the way in which proxy votes have been cast is now shown on the screen. As indicated in the notice of meeting, I will vote validly marked undirected proxies in favor of the resolution and I'm happy to take any questions on this item of business from shareholders online or from those here in the room.

Thank you, Chair. We have no questions.

Please now vote shareholders on this resolution if you have not done so already. Resolution 7 is a resolution to amend Enero constitution. That resolution is now on the screen. The way in which proxy votes have been cast is now shown and as indicated, I intend to do validly marked undirected proxies in favor. And I'm happy to -- and I'm happy to take any questions on this item of business from shareholders through the online platform or from those in attendance.

Thank you, Chair. There are no questions.

Again, shareholders, please now vote on this resolution if you have not already done so. Concludes the items of business for approval. Voting will remain open for 5 minutes after the close of the meeting and then our share registry will now -- will conduct the poll count for each resolution. Results of the meeting will be lodged with the ASX as soon as available. Before we move to questions from our shareholders, I'd just like to take a moment to say thank you to KPMG for their service and their role as our auditors. We greatly value the assistance they've provided over many years. Their commitment to upholding rigorous financial standards and their meticulous attention to detail have been instrumental in ensuring the transparency and integrity of our financial reporting progress. So thank you. For those online, the auditors are here in the room. And now I'm happy to turn to any other questions shareholders may have either that they've submitted prior to the meeting or during the meeting. Is there any questions anyone has?

My name is Peter Taylor. I just wonder whether the fact that Enero seems to be a very complicated sort of business to understand, may have some sort of impact on the share performance there. I know that's beyond the company's control, but it seems to be a difficult company to explain to people.

Look, I'm happy to have a first crack and then I'll hand over to [indiscernible]. I think companies in transition, which we are going from one sort of business to another in an environment where technology and the sort of offerings we make is changing over time. It's true. So it feels like it's more complicated to explain because we're not just one sort of business. We now have multiple offerings over multiple geographies. I honestly though don't think that's the driver of the share price. I think we're timing our stock and sort of sales of shares sometimes impact confidence in the stock rather than the actual performance of the business. But as a Board, we honestly believe that the performance of the business warrants a much better share price than we currently have. And we're doing everything we can to try and get more confidence and drive the share price higher. And that's partly what's behind us having to look at what we do with OB Media in the long term because having a 51% stake in the business, albeit a very successful business, but with more volatility perhaps gives us more optionality, but we'll be talking more about that next year once we've had a good look at it.

Yes. The one thing I would add also is we've worked very hard in the last 18 months around disclosure. And if you look at our disclosures 2, 3, 4 years ago, there's significant improvement, particularly around economic interest, which obviously represents the 51% Ann was talking about around OB Media. So we've really worked hard to try and simplify our disclosure to try to make it easy or easier for people to understand a portfolio in transition, but also with one business that obviously is a large contributor to our results, but that we do own 51%. So hopefully, you're certainly tracked and even today first time we've ever released economic interest results in a trading update for Q1 as an example. So hopefully, that's helpful. But as always, we remain open to answering any other questions you may have as you work through our results.

Thank you for your questions. Yes. Are there any other questions?

I'm a bit like Peter okay, I'm here to get a better understanding of what goes on. And since I've been here, it looks like all these companies are operating on site, or being close. Do they integrate across each other? Or is it a plan to meld them all together? Or what's the process?

Yes. I think one of the things you would have heard called out -- well, first of all, let me say, this is the representation of our Australian operation. And so here in the building today, you do see the colocation of 4 of our 6 businesses. There is a clear strategy around how those businesses integrate together to better serve clients, but also obviously, to continue to drive results. So today, you will have heard in my remarks, I think, 31% of our revenue now is served by multiple Enero brands. So as an example, ALDI Supermarkets, our largest client here in Australia. We do work for that. Obviously, BMS is our lead agency, but it's a very rapidly growing piece of business for us in Orchard and the collaboration between BMS and Orchard, different skill sets, we believe, a, best serves ALDI's business, but also that number of 31% has grown significantly in terms of multiple agency serving clients as a growth strategy for the business. . And then maybe just the last comment is what you see here today represents about 25% of the overall group's revenue. In other words, 75% of our revenue is actually driven from United States, the U.K., Europe and Asia. So this is the one place where we actually have the ability to bring businesses physically together in one environment, but it is clearly a strategy for us as we think about what we refer to now as hubbing in different parts of the world where we're able to bring businesses together to drive that collaboration as a revenue growth strategy and it also works for us across markets. So 27% of our revenue now, we serve clients in multiple markets. In other words, winning clients in one particular market, leveraging that success into other markets as well as with multiple agency partnerships. So that's a key driver and a key strategy for us in terms of revenue growth in the long term.

And I think partly, if I could just add to that, partly what sits behind your question is, is there opportunity to integrate them into -- under 1 brand perhaps. And I think what we -- where that we see that is a good outcome. So with some of our acquisitions, we've rolled them in under Hotwire and Hotwire is the brand because that's the brand in that segment. We might have bought the business in another market that allows Hotwire to expand its footprint because they're in the same sorts of deals. But the brands here really face into different -- and advertising agency is different to Orchard as a digital health agency. So they're quite different offerings, but there are points where they do come together, and that's synergy.

Which is also our client perspective. So some clients are looking for full service across the spectrum from insight, creative development through to execution along the journey, some client demands to Ann's point, are more heavily digitally oriented or technology oriented than others, which may be more broadcast or content creation oriented. But where possible, we're really looking to serve our clients with the best possible work leveraging the expertise of our businesses regardless of where that capability sits in an agency to better serve clients.

Does that answer your question?

Yes [indiscernible] group, but you've got special...

Synergy is a key driver for us in terms of growth. We're looking for businesses that have synergy.

It also allows us when one segment of the market goes soft, that we've got other offerings that actually give us. So in fact, part of the reason we've been able to continue to grow so effectively year-on-year-on-year is because we've always got one piece firing. And that's the -- in a way that's the art of having the sort of offerings we've got.

You take a question from a non-shareholder, but I've got [indiscernible] I've got in the company [indiscernible]. Is that okay? It's Roger Colman. Okay. The query I've got on the potential sale of OB Media. What sort of multiple are you looking for on that sale? Number one, is there any interaction between any leftover earnouts that exist in OB Media and the ultimate EBITDA multiple you sell at? That's the second question. And thirdly, the capital gains jurisdiction in which the OB Media realization might occur.

I think it's probably what multiple are we looking for. We haven't committed to sell, which is why we're doing the review. So what can we get is the question that we're looking to explore. And obviously, we wouldn't sell at any multiple, we'd be looking to get if we're going to do any sort of transaction, it would be at the best price we can get. But on the other issues, capital gains...

Carla, our CFO, will talk to capital gains tax jurisdiction.

The jurisdiction is the U.S.-based. It's a U.S. Yes. It's one that we -- I mean, in terms of the jurisdiction and the tax effect, it's again one of those things that we'll work through as we get to a point of knowing where we're sitting in terms of a sale, but it's a solely U.S.-based business.

I'm sorry, [indiscernible].

There's no earn-outs that sit within that business, no.

[indiscernible] strongly recommend that [indiscernible] the operation. Now they got 8x, 8.6x out of life, well, but it's been a lemon within that organization. I kept some contact with the Spanish guys that sold out. And they strongly recommend you get rid of the business. You're going to get front of the [indiscernible]. You're like a barnacle on the edge of Google, which is what one of these businesses are. And you get thrown off every 3, 4 years by changing their algorithms and other people coming in, there are no barriers to entry. There is no moat and it's a very dangerous business. If you just talk about the [indiscernible] share price since they bought in the [indiscernible].

Thanks for your views on that. I mean, clearly, strategically, we think it's time that we had a good look at it. And that's the work we're doing. And early next year, we'll come back to shareholders on what we decide to do. And obviously, we'll keep you posted. So thanks for your views. Any other questions or comments?

Thank you, Chair. There are no questions.

So we've answered all the submitted questions on those. So can I just say a few words on behalf of the Board. Thank you for your continued support. Thank you for coming today. I'm delighted that we've got people back in person, which is rather nice to see as well as those of you online. Thank you to KPMG, as I said earlier and to the team here. And -- we will continue to do our best to drive the share price up as much as we can do that ourselves and to continue to focus on the performance of the business. So thanks, Brent and the team. I declare the meeting closed.