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

Thank you for standing by, and welcome to the Enero Group Limited FY '24 Full Year Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Brent Scrimshaw, Enero Group CEO. Please go ahead.

Well, good morning, and thank you for joining CFO Carla Webb-Sear and myself for the Enero Group Full Year 2024 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 is outlined on Slide 2. I'll first provide an overview of Enero's FY '24 business performance highlights, drivers and metrics. Carla is then going to take you through the group financials, and I'll then also provide some insight into the continued evolution of our strategy and, importantly, our progress against it, along with an outlook commentary. We then, of course, as always, look forward to taking your questions at the conclusion of this morning's presentation. So starting with the business performance and turning to Slide 4. Consistent with half year, we've provided a like-for-like comparison of prior year, which adjusts for the proactive rebase of OBMedia's business in Q4 of FY '23. Pleasingly, our Australian-based agencies, BMF and Orchard, continued to perform strongly during the year despite interest rate and cost of living pressure impacting local consumer sentiment. The continuation of ongoing uncertainty in the international technology sector and the global adtech market continued to impact Hotwire and OBMedia through the balance of the year. Despite these challenges, Enero Group delivered $189.7 million in net revenue, a decrease of 6% on a like-for-like basis, with EBITDA declining 10% to $37.4 million. Net profit after tax grew 7% on a like-for-like basis to $10.3 million, driven by lower interest expense and stronger earnings in our wholly owned businesses despite lower profits in non-wholly owned OBMedia. Earnings per share of $0.113 grew 8% on a like-for-like basis. And the group delivered $21.7 million in free cash flow, with 88% cash conversion. This continued strong cash flow allows us to continue our share back in the second half and repay the majority of our outstanding loan balance. The Board declared a final dividend of $0.02 per share fully franked, representing a payout ratio of 51% for the second half. Slide 5 focuses on Enero's financial highlights on an economic interest basis, reflecting our 51% ownership of OBMedia. Whilst revenue decreased by 6%, EBITDA declined 7%, both on a like-for-like basis, with a continued focus on cost management during the year delivering consistent EBITDA margins. Cash conversion was at 97%, with strong cash flows in our wholly owned businesses. On Slide 6, we show the performance of the Technology, Healthcare and Consumer Practice, which reflects our strategy of deep specialism and expertise in these growth industries of scale that we've prioritized. Revenue of $143.5 million declined 4% on a continuing business basis, excluding the impact of divested government affairs business CPR, with contrasting performance of agencies within the segment. EBITDA of $22.8 million declined 6% on a continuing business base, with margins broadly consistent from FY '23 at 16%. And now reflecting more detail at the subsector level, the Hotwire Group, with its deep offering in the technology industry, experienced ongoing impact directly related to softer tech market conditions globally. It should be noted that additional cost initiatives were undertaken in Q4 in response to margin compression. Now as mentioned earlier, our Australian-based agencies, BMF and Orchard, operating in the health care and consumer sectors, continued their growth trajectory delivering strong revenue growth, with EBITDA margins improvement despite the inflationary environment in Australia. All of our agencies continue to make progress on relentlessly refining their products and service, particularly for clients, whilst maximizing synergies across the group and leveraging multiple client touch points. Within the Hotwire Group, this strategy has continued to deliver, with 65% of its revenue now earned from clients with relationships with more than one brand or country. And for our Australian-based businesses, our synergy focus has now delivered 60% of total revenue from clients such as the Australian government and Hyundai that utilize services across both BMF and Orchard. Slide 7 demonstrates the diversification of our revenue in the Technology, Healthcare and Consumer Practice across both industries and geographies and the multiple touch points we have with many of our major clients. Revenue continues to reflect our strategic focus on key verticals and remains well diversified by industry with the largest category of technology. Now in technology, we're largely operating in the B2B segment through the Hotwire Group and its reputation, relationship and revenue service offering to indeed capture client investment in cloud, cybersecurity and the rapidly growing semiconductor industry. Our agency business model has a healthy mix of retainers and projects, with 49% of our revenue in the half derived from fixed retainers. And lastly, as mentioned, our strategy of maximizing synergies within the group portfolio has delivered tangible results, with 66% of revenue earned from clients who have one relationship with more than -- sorry, who have relationships with more than one THC brand or country. On Slide 8, we've continued our track record to expand our roster of blue-chip clients of scale in our key verticals across the agency portfolio. And this includes Palo Alto, Lilly, Life Healthcare, Stan, Alinta Energy and most recently, the Endeavour Group here in Australia. At this point, I'd particularly like to call out BMF's win with the Endeavour Group. After an extensive process, BMF was appointed as the lead creative agency across its portfolio of brands, including household names like Dan Murphy's, BWS and Pinnacle Wines. Most importantly, though, our continued focus on winning bigger underpinned by the expansion of new service offerings means that we now have 34 clients globally with annual revenue greater than $1 million, which is up from 27 clients this time last year. On Slide 9, we show the performance of OBMedia. OBMedia revenue decreased 8% on a like-for-like basis to $46.2 million, with notable market-wide weakness seen in Q3 and some positive recovery in Q4. EBITDA declined 17% on a like-for-like basis to $23.5 million, with a margin of 51%, and cost management initiatives were taken in Q4 in response to adtech market headwinds. OBMedia also continued to invest in its data science capabilities to create AI tools that drive content creation and automated campaign activation. Last Wednesday, August 7, we provided an update on the OBMedia sale process to the ASX. Despite receiving multiple nonbinding indicative offers and selecting a preferred bidder, in late FY '24, at the end of lengthy negotiations, we're unfortunately not able to finalize terms. However, in order to continue a competitive sale process and, of course, to maximize shareholder value, we're now actively engaged in a nonexclusive due diligence process with multiple bidders and anticipate engaging in contractual negotiations with a preferred bidder at the conclusion of the due diligence phase in Q2 FY '25. So with that, I'll now hand it over to Carla, who's going to run us through the group financials.

Thanks, Brent, and thank you, everyone, for joining our results call today. I'll begin with a statutory profit and loss summary on Slide 11. It's worth noting that OBMedia, for which Enero Group holds a 51% interest, are consolidated at 100% on this slide. Enero Group delivered net revenue of $189.7 million, a decrease of 21% with FY '24, reflecting the rebased OBMedia business. Staff costs of $133.4 million represent a staff ratio of 70%, reflecting a combination of a flat 70% ratio in the THC Practice and an increase in the ratio at OBMedia from 22% in FY '23 to 39%. The operating cost ratio was 10% compared to 9% in FY '23, with the ratio impacted by OBMedia with the group maintaining cost discipline throughout the year and containing discretionary spend, which offset some of the inflationary pressures. EBITDA of $37.4 million decreased 53% year-on-year. Depreciation and amortization was broadly flat. Reduction in net finance costs reflect lower present value interest unwind relating to contingent consideration payables and lower level of debt due to debt repayments of $6.3 million made in the second half of FY '24. We expect this to further decline in FY '25. Our effective tax rate of 26% is slightly higher than the prior year of 24% due to higher effective tax rate in the U.S. relating to state taxes and a change in profit mix between different countries resulting in a higher tax rate. Noncontrolling interest of $8.4 million decreased from $25 million in the prior year, reflecting the minority interest associated with OBMedia. Enero recognized a statutory loss of $44.2 million due to significant items of $54.5 million, which I'll discuss next. Turning to Slide 12. We've outlined the details of significant items. The impairment losses of $70.8 million are noncash and relate to ROI DNA and GetIT intangibles. The continued challenging macroeconomic environment in the technology sector has impacted near-term performance of ROI DNA and GetIT and resulted in an impairment in this reporting period. The recent performance and the uncertainty around timing of improved market conditions has resulted in lower earnings expectations over the earn-out period and a reduction in contingent consideration payable has been reflected in the $22.4 million fair value adjustment in FY '24. The combined fair value adjustment across both years is $57.1 million, the large majority relating to ROI DNA and GetIT. Restructuring costs have predominantly been in OBMedia and Hotwire Group in FY '24 and in the Hotwire Group and Orchard in FY '23. The disposal of CPR resulted in the loss on sale of business of $2.2 million. Tax expense on this slide relates to prior year U.S. tax adjustments of $1.3 million, partially offset by $1 million in tax credits relating to the lines above. Turning to Slide 13. We've shown our expense by segment by half over the past 2 years to show the sustained manner in which we manage our costs during this challenging period. Enero undertook material cost reductions in the second half of FY '23 and FY '24. The impact of this is a 14% reduction in costs on a constant currency basis when comparing H2 FY '24 to H1 FY '23. The disposal of CPR had 1% impact on this figure for both the group and the THC Practice. The Technology, Healthcare and Consumer Practice delivered a 14% cost reduction in H2 compared to FY '23 H1, with material cost reduction initiatives predominantly in Hotwire Group. We anticipate this will improve margins in FY '25 and build towards the margins being delivered by the consumer and health care agencies. All practice agencies continue to make investment in strategically important areas and build capabilities to innovate, which Brent will discuss in a little more detail later. OBMedia delivered a 9% cost reduction in H2 against FY '23 H1, with staff savings offset by investment in tech, machine learning and data capabilities and cost inflation, particularly in technology costs. Additional cost management initiatives were undertaken in Q4, which was -- which will deliver a full year of savings in FY '25. We continue to focus on carefully managing corporate costs, now representing 5.4% of the group's net revenue on an economic interest basis, an improvement from 5.9% in FY '23. H2 FY '24 saw a $1.5 million reduction in corporate costs to $4.5 million. If our portfolio was to change materially, we'll take necessary steps to continue to adjust corporate costs accordingly. Turning to Enero's cash flow on Slide 14. Cash conversion was 88% of EBITDA for the year. And on an economic basis, cash conversion was 97%, reflecting the stronger cash flows of the wholly owned businesses during the year. Operating cash flow of $27 million benefited from reduced interest and tax payments. Net interest payments has reduced to $1.2 million from $1.5 million, relating to lower levels of debt with net loan repayments of $5.4 million during the year. Tax payments made in all jurisdictions totaling $4.8 million, with the decrease coming predominantly from the U.S., Australia and the U.K., with Australia receiving a tax refund in H2. After cash-funded CapEx and lease payments, free cash flow was $21.7 million. Net investment in businesses of $3.8 million relates to installments of payments for contingent consideration of MBA and ROI DNA. Share buyback repurchases represented $2.6 million in FY '24 and $3.2 million over the 12-month program. Turning to Slide 15. Enero's strong balance sheet underpins our ability to deliver growth and manage headwinds. Our cash position of $46.7 million reflects our strong operating cash flow, with a net cash position of $38.2 million, increasing from $13 million at June 2023. As noted, our loan balance is now $3 million, with $47 million of undrawn facilities. The contingent consideration balance relates to ROI DNA and GetIT acquired in July 2022 and MBA acquired in April 2021. This balance of $5.5 million has a maturity profile over FY '25 to FY '26. We remain very comfortable that our balance sheet retains flexibility to pursue Enero's growth ambitions. Slide 16 emphasizes that we are continuing to optimize our capital position. Enero is maintaining its financial flexibility with adequate net cash position of $38.2 million at balance day and zero leverage. Reflecting the company's financial performance in FY '24 and strong balance sheet, the Board declared a fully franked final dividend of $0.02 per share payable in October, representing a 51% dividend payout ratio. The overall dividend payout ratio for the year was 44%. I also want to note that as the majority of our operations are now outside of Australia, our franking credit balance at 30 June 2024 of just under $1 million decreased from $5.2 million at 30 June 2023. Enero completed its on-market share buyback on the 30th of April. The program bought back a total of 2 million shares with a maximum opportunity captured given the limited trading volumes in the share. I'll now hand back to Brent to provide an update on the company's growth strategy and our outlook for FY '25.

Okay. Thanks, Carla. And turning now to Slide 18, with an updated overview of Enero's operating strategy. We operate in a competitive and evolving global marketplace, with a specific focus in our battleground industries of technology, health care and consumer, combined together with our strategic pillars and strong fundamentals needed to ensure ongoing success. Enero will always continue to advance the business transformation and creative needs of clients globally, and we believe this continues to represent significant incremental market opportunity particularly in a more robust technology sector. Underpinning our operating strategy is the creativity, leadership, deep category expertise and resilience of all of our amazing people, bonded together through a culture of innovation and continuous improvement. On Slide 19, FY '24 represents continued progress in our transformational journey. We focused our efforts on delivering on 4 key strategic priorities: strengthening our core agency business; completing the optimization of our portfolio; scaling our tech and AI capabilities; and refining our health care practice for the future. Today, given the strong performance of our Australian agencies, I'm going to provide a high-level overview of the technology sector, with some additional insight on the global tech marketplace opportunity and our response through AI thought leadership and tech capability development. On Slide 20, whilst the tech sector remains challenging on a global basis, client organizational restructuring and churn has begun to stabilize. And valuations of a small sample of some Hotwire clients shown here has begun to improve in 2024. This combination of valuation growth, along with significant venture capital available for deployment, means we continue to remain optimistic in the long-term growth of the technology sector. So on Slide 21, and given that market opportunity, it's really critical for us that we focus on controlling what we can control and continue to position Hotwire Global to take advantage of momentum in tech when it rebounds. We continue to develop new technology and consulting solutions that help clients navigate the shifts underway in their business through digital transformation and artificial intelligence. Hotwire has recently launched their [ Fast to AI ] plan with client-first AI solutions that provide compelling insights for clients on brand sentiment and influential media optimization outcomes, together with the continued rollout of their data and analytics IQ suite with 7 new solutions in market now over the past 18 months. Slide 22 highlights the strong foundations now in place that position the Enero Group for future success and, most importantly, to capitalize on the return of a more robust global technology market. We've continued the strong growth trajectory of our Australian agency businesses. We have a track record of cost discipline combined with investment in innovation for the future growth whilst navigating challenging macroeconomics. The opportunity to continue to reduce complexity and simplify the group portfolio remains near term, and this will enable our focus on a unified global agency strategy. We also have capital flexibility to pursue growth opportunities whilst delivering shareholder returns. So given these strong fundamentals, we remain confident that Enero is better positioned than ever to create a globally scaled and differentiated marketing services business. Turning now to Slide 23, where I can now provide you with an outlook for FY '25. Trading for July remained broadly consistent with the end of FY '24 H2. Technology, Healthcare and Consumer Practice continues to operate in a challenging technology industry internationally. The segment is benefiting from cost initiatives taken in FY '24 Q4. OBMedia revenue is broadly in line with FY '24 Q4. The OBMedia sale process remains ongoing, and Enero anticipates engaging in contractual negotiations with a preferred bidder at the conclusion of the due diligence phase in Q2 FY '25. Enero also remains focused on proactively managing its cost base. So with that, I'd like to thank you for your attention this morning. And of course, Carla and I will be pleased to answer any questions you have. So I'll now hand it back to the operator for Q&A.

[Operator Instructions] Your first question comes from Olivier Coulon with E&P Financial.

Is it possible to quantify the bounce back that you saw in the fourth quarter in OBMedia versus the third quarter? Because obviously, it's encouraging, but without kind of understanding how deep the third quarter decline was, it's hard to kind of gauge what that means.

I think what we would say is, obviously, we don't disclose trading quarter-by-quarter. But we did refer in our prepared remarks today around ongoing market softness and rates in a more volatile market, I guess, you could put it down to. And also, there's some mix between United States and international revenues that obviously reflects more challenging conditions in certain parts of the world. And so, therefore, looking to make sure we optimize the business on an ongoing basis.

I mean I would just add to Q4 like we referenced to slight margin improvements, but it's off the back of only a few months of trading. So again, like Brent mentioned, we're not giving quarter-by-quarter but slight.

Okay. And then just on the technology part, you mentioned that the business overall is trading in line with kind of the back end of the second half. You've provided a bit of color around OBMedia and saying that it's bounced back from a very weak third quarter. But in terms of, I suppose, the cadence to use that word, of the revenue in the second half in the agencies business, can you provide a bit more color on that?

Well, I think, again, because we're really only referencing one month of data. It really just remains very broadly consistent with what you can see in that half. There's nothing substantial that we can call out, other than what we have mentioned is that you should anticipate and we have started to see for one month of activity a slight improvement in margins that's happening in that technology sector as a result of the back end of our half having those costs out, the technology being Hotwire Group, I should say. But again, nothing pronounced enough to call out at this point because it's only one month of trading.

Yes. I mean, as mentioned, the technology industry, we clearly have long-term confidence in a rebound at some point. We've taken some cost action in Q4, particularly in the Hotwire Group. But it's broadly in line to Carla's point with what we've seen in the second half of the year.

Yes. In terms of the revenue cadence, you mean?

Yes.

Yes. I mean it's one month of data. So I appreciate...

No, I understand. Yes. And I'm not concerned necessarily about the long-term future of the business. I mean it looks like you're winning clients, et cetera. It's just the question is how deep the first half nadir is effectively of the earnings, right? Is there any potential to quantify also the cost out that you executed in the second half in corporate and in the creative agencies?

I mean what I would just reference you to is we've obviously given the cost-out data -- so you can see the cost profile, sorry, which sits within our cost slide. Just trying to remember the reference. So this is Slide 13. What I'd probably steer towards is that absolute cost base for that agency group. We're entering into FY '25 broadly around the same profile because within that practice, we've got a bit of cost inflation that comes with staff costs for the growing agencies in consumer and health, which have had that momentum throughout the second half, and that will be slightly offset then with that growth with the savings that are starting to pull through for technology. But I think the best steer at this point we can give you, it's broadly consistent with the second half. When you look at the entire practice, obviously, a few moving pieces in there, but we don't disclose and break down by brand. So it's best that we referenced that in the context of the segment.

Yes. Sorry, in terms of the [ 15.5% ] second half run rate.

Yes. You're looking at absolute total expense bucket. And I'd say that's how we're entering into FY '25.

But I think what we also did is try to provide some longer-term dynamic as it relates to our focus on cost management. And you can see that on that slide from '23 H1 down to '24 H2. So you get a sense of a continued focus from a management perspective to make sure that we continue to maintain cost relative to revenue.

Yes. Okay. No, I appreciate that. Sorry, I might just have a last one, if possible. Just around the OBMedia sales processes. Is there any extra color that you can provide us on the preferred tender at the time not getting to an agreement.

The short answer is no. But what I would say in terms of extra color is our focus is 100% on driving positive shareholder outcomes. And it's clear that we have a priced asset that's in demand and that is reflected in a competitive process that we are in right now. But we believe that, that is a great sign in terms of demand for that asset. And whilst I think there may well be some focus on speed, we definitely want to make sure we prioritize shareholder returns versus completing any transaction with regards to a time frame. So the good news there is we have multiple parties with significant interest. And of course, I'm sure you can appreciate we're in a process. So we can't really disclose any more than that.

[Operator Instructions] Your next question comes from Conor O'Prey with Canaccord Genuity.

So I might take you to Slide 8 on the deck, which is the one about the client wins, and kind of thinking about the fact that very crudely you've got, let's say, $7 million of incremental revenue from clients. 34 minus 27, in terms of million, $7 million. Not all of that comes through in FY '24. Agency revenues down, I think, $9 million. So what is the difference in the bridge between the sort of the uplift you're getting from new clients and the actual result? Is that other clients exiting, spending less, pricing pressures? How would you sort of characterize what else is going on inside the agency business from that perspective?

Well, I think, first of all, just to clarify, this slide, the blue-chip clients and brands you see on this slide, FY '24 new client wins, not all of these clients are $1 million clients, just to make sure that, that's clear for everybody. These are continued wins in '24 that demonstrate momentum in each of the agency practices. And we thought from a metric perspective, we've had a very clear focus on winning bigger. And so the notion of leveraging our cost base against clients of scale is delivering specific results as it relates to that strategy. So I just want to clarify that first.

And then also, Conor, I guess, because you can see that absolute change, we are highlighting our strategy around larger clients. But you can expect that as a result of the movement, we've also been dropping out some smaller clients. So you've got that dynamic. And then ultimately, some of these clients are recognizing revenue over time. So we're signing up to clients that have multiyear perspective, so there's a revenue recognition over that period. But this slide was really to highlight, if you looked at a point in time, 30 June, and had a look at the size and scale of our clients that those are the ones that sit over $1 million. But we, as you point out, have also had smaller clients dropping off and creating a bit of that long-tail drag.

Which, to some degree, is a deliberate strategy in terms of making sure profitability around smaller clients and analyzing that around how we think about winning bigger and the impact not only creatively or operationally, but also from a profitability standpoint.

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