M&C Saatchi plc (IZH.F) Earnings Call Transcript & Summary

In the room with me or online or even watching on playback. Welcome to our first half results presentation. I'm Zaid Al-Qassab, CEO of M&C Saatchi Group. And although today is focused on the numbers, obviously, I think it's important to be grounded in what it is we do as a business, and we do for clients. So I hope that video gave you a little insight. And you'll be able to see here on this slide some of our recent work, award-winning work for LEGO. I'll show you more of that right at the end and new ad for the Fiat Panda. Pro forma of this morning is that I'll take you through top line results before handing over to Simon Fuller, who's our Group CFO, for more of the detail, and then I'll talk about our strategy before we take questions. After a solid quarter 1, we were not immune to the geopolitical and macroeconomic uncertainty in quarter 2. Particularly the ambiguity on tariffs, which led to client caution and project delays. Excluding Australia, net revenue was almost flat, down just 0.7%, which given the macro environment, we believe was a solid result. Australia, however, was a particularly poor performer with macro headwinds causing client budget reductions plus the flow-through of some prior year client losses, contributing to a 27% net revenue decline in that region, bringing the total company net revenue to a like-for-like reduction of 5.1% in the first half. We took responsive action to correct the margin in Australia, restructuring the local teams, hiring new leadership, closing the loss-making Bohemia Media brand and making significant property savings. In order to protect margins in a changeable environment, we accelerated our transformation program. And the combined effects of that plus the interventions in Australia result in a total annualized saving for 2025 of GBP 12 million. As a result, we're targeting 2025 profit in line with prior year despite that challenging environment. The first half results reflect that picture with revenue flat, excluding Australia and operational resilience in evidence. Despite headwinds, outside Australia, we chose to continue to invest in our strategic plan for growth, which led to a first half operating profit decline of 36% like-for-like. Net cash was healthy despite dividends, put options, bonus payments and M&A all taking place in this period with an operating cash conversion of 137%, well above our 80% target. The fundamentals of the business remained strong, 171 business wins and excellent client retention. Clients who represented 93% of our 2024 spending continue to spend with us in the first half. This puts us in a strong position for a profit recovery in the second half. If anything, the tricky market conditions have proven the robustness of our new model. We've continued investing in higher-margin, faster growth areas and new capabilities. We've started our program of strategic bolt-on M&A in the fastest-growing regions and services with the acquisition of June '23, which is already operating as M&C Saatchi Sport and Entertainment in the Middle East. This is a responsible and future-facing use of cash to deliver shareholder returns. And we've accelerated our transformation program whilst additionally restructuring the business to focus on growth areas and to improve margins in lower profitability businesses and geographies. These interventions and the agility of our business mean that although we're not immune to macro challenges, we're forecasting exiting quarter 4 with profitability improved and margin enhanced without needing to make cuts to the capabilities required for future growth. In summary, we have a resilient portfolio, which continues to improve operationally, delivers excellent client service and has a robust pipeline. And we believe it's therefore right to hold the course on our strategic direction whilst showing agility in how we manage the short-term challenges. I'd now like to hand over to Simon Fuller.

Well, thanks, Zaid, and good morning, everyone. My thanks as well for joining our presentation today, whether here in Golden Square or online. My name is Simon. I'm the group's Chief Financial Officer, and I'm going to take you now through the half year financial review. So Zaid just confirmed that whilst the macro context has been challenging, notably in Q2 and with more severe and specific issues in Australia, we nevertheless target full year profit to be flat compared to the prior year. And that's been achieved or will be achieved through three key self-help drivers. Firstly, we've accelerated and extended the global business model changes that we've already announced Phase 2 of our transformation program, and that increases our annualized savings target from a previously communicated GBP 3 million to now be GBP 5 million. Secondly, we've rapidly completed other structural changes in the group, particularly focused on advertising and consulting in Australia, and that will help to drive a further GBP 7 million of annualized savings. Taken together, this is a combined GBP 12 million of annualized savings and puts us in a strong margin position. Thirdly and finally, we'll continue to carefully manage our largely variable cost base, ensuring strong colleague utilization whilst delivering great work for a wide array of clients, capitalizing on an improving pipeline. So let me take you through the summary financial headlines before further detailing the key drivers of our first half revenue, profit and cash performance. Zaid already said, we had a solid quarter 1, but a weaker quarter 2 contributed to like-for-like net revenue for the half being down 5.1%. Q2's market softening, which has been widely publicized, was driven by macro conditions following the U.S. tariff announcements and their aftermath. And that caused clients to scale back activity in light of considerable uncertainty as well as this translating into at times, a longer pipeline conversion process. Excluding Australia, and I'll expand on this a little more on the following slide, like-for-like net revenue for the rest of the group was broadly stable at minus 0.7%. We have already signaled to the market, which you might remember when we gave our AGM trading update that H1 profit would be tempered by the annualization of prior year strategic investments, and that's to support our medium-term growth aspirations. But the effect of that was magnified in quarter 2 by the market softening, which was an unanticipated [Technical Difficulty] margin by 4 points, both of which we expect to significantly improve [Technical Difficulty] having saying the H1 payout of our 2024 colleague bonuses and full year dividend and smaller outflows relating to the cash settlement of put options and a modest but highly strategic piece of M&A in the Middle East. But within H1 performance, Australia was a significant drag. This was explained by a combination of factors, general macro conditions alongside prior year client losses and spend reductions by consumer-facing businesses. Australia's minus 26.5% like-for-like drove approaching 90% of the group's negative like-for-like performance. And the biggest impacts were seen in advertising and the consulting areas. But strong and positive action has been taken in order to ensure that we address that situation. We appointed a new senior leadership team. There's been a significant agency-wide restructure. There's been a planned change in office location. There's been the closure of an unprofitable full-service media agency called Bohemia. And subsequently, there's also been the local launch of our very successful performance media business, which is largely run out of Asia. These are considered responses and they deliver the right business shape for the future. But we do expect Australia to still be a significant revenue drag in H2 as we look to rebuild momentum, which will take some time. The next slide, which fits with what we were just talking about around regional performance gives the full picture. It sets out the context by our regions, and I'll talk you through some of the highlights. Our two largest regions, U.K. and Americas, both saw small like-for-like declines of 3%, but with somewhat differing drivers. The U.K., first of all, it experienced ongoing growth in issues, driven by key global public sector clients, and we also saw good growth in media. But the challenging macro environment that we've been talking about resulted in a lower level of client spend in advertising and consulting. Consulting was also disrupted in the Americas with project delays and slower pipeline conversion. But this was partly mitigated again by strong media growth alongside a very good performance in U.S. advertising, both organically and in terms of new business. We've continued to signal the U.S. as an opportunity geography for the business. It comprises around 20% of our group revenue. And yet, as you will be perhaps very familiar with, it's around 40% of global spend on marketing services. So there's a real opportunity there in terms of our indexing within our group. APAC at minus 22.7% was over 4/5 driven by the Australia performance I've already outlined, -- but that brings us then to our growth regions of the Middle East, up 46.6% and Europe up 5.7%. For those familiar with the story, you'll know that the Middle East has been a real compounding growth story over many years. And both of those regions seen good progress across advertising, across passions and PR, that's our sports and entertainment offering. We remain very optimistic about the ongoing evolution of those regions as we continue to expand our locally offered range of marketing solutions as well as our client base. As you know, we also look at our business by specialism, which is the next slide, which is really the services that we provide. And 68% of our revenue, that's GBP 69.9 million in H1 is now attributable to non-advertising services, and that's up from 56%, so up by 12 percentage points in the last three years. The largest part of this, as the slide shows, is our higher-margin issues business, which grew mainly organically, up by 6.3% to GBP 28.1 million. And this was despite the drag of U.S. policy uncertainty in Q2. Passions and PR saw growth in some of our smaller regions like Europe and the Middle East, but that was more than offset by declines in the U.K., U.S. and overall PR, all of which were impacted in Q2 by those uncertainties and challenges I've described. Consulting was our weakest specialism across the half, and it is the most influenced by market uncertainty because of the nature of work -- project work largely. Like-for-like revenue was down by 16.8%. That was explained by client delays and pauses. But we do also note that 60% of that total adverse performance was driven by Australia. And then media, our second fastest-growing specialism moved forward by 5.4%, driven by organic growth and also some notable new wins. We continue to progress our strong relationship with [ Grap ], for example, in Asia, and we brought on board a new scale client in the U.S., GoPuff, which we're very pleased to announce. The balancing 32% of our revenue or GBP 33.9 million in H1 was advertising services. And this declined by 9.5%, but actually 2.5%, excluding Australia. And that saw Europe, Middle East and the U.S. in growth, but the U.K. in decline. Well, as I mentioned again earlier in the presentation or my section of the presentation, a combination of H1 weighted investment, mainly the annualization of prior year decisions alongside a sharp macro downturn in Q2 temporarily suppressed the operating profit and margin of the group. Steps -- substantial steps have already been taken across Q2 to address this and improve the run rates into the second half with that increased global transformation program focused on the middle office, for example, areas like production and also restructuring of the most affected businesses, mainly Australia. These programs of work sit alongside a largely variable cost base and reward base that helps us to adapt and adjust to changing macro conditions. The cash flow dynamics of this business continue to be very strong with GBP 12 million generated in H1 from a combination of trading plus a small noncore disposal and that supported the payment of our year-end dividend, a small amount of put option settlements, there's only GBP 3.5 million now outstanding. Again, for those who know the story of our business, that's down very significantly over the last few years. It was something like GBP 20 million about 30 months ago. And we also achieved the bolt-on acquisition of June '23, which is an award-winning sports agency in the Middle East. Operating cash conversion was 137% as well as -- which is well above our long-term target of at least 80%. And that was supported and the slides draws that out by a GBP 6.3 million underlying trading working capital inflow. And we see strong level of performance being maintained in the medium term. These strong cash flows and a disciplined approach to capital allocation underpin our investment case. Whilst macro uncertainties have impacted near-term performance, they don't change the company view of our longer-term strategy. And so our priority focus areas continue to be, as we've laid out on the slide, lower-risk organic expansion and development, selective M&A in proven specialisms and geographies and a focus on growing returns for our shareholders and all stakeholders. And those three objectives are enabled by the structural advantages of our business model, which is cash generative, capital-light and maintains low leverage and comes from a strong balance sheet position. And so in conclusion from my section, strong cost management, including upweight efficiency and structural programs alongside an improving H2 pipeline, we're targeting full year profit to be flat compared to the prior year, notwithstanding the expectation that full year revenue will be down around mid-single digits. This is a clear demonstration of the agility and responsiveness of our increasingly integrated global operating model. The foundations of our business and our remarkable brand remain strong. And they'll only further improve as we broaden and diversify our portfolio, shift to higher-margin non-advertising specialisms, develop our accretive mix and also continue to respond proactively, as you've seen in H1, to a dynamic external environment. But to explain that in a little more detail, I'm going to hand back to Zaid for the strategic update. Thanks very much.

Thanks, Simon. I'd like to give you a reminder of our strategic direction and why M&C Saatchi is uniquely positioned to help clients grow, and then we'll take questions. Our profitable growth plan has two elements: the operational self-help and the strategic growth plan, the latter in yellow on this slide. The operational improvement plan has been underway since late 2023, and it has three aspects. Firstly, the exit of unprofitable, low-margin, high-risk or low potential businesses. Having completed the divestiture of loss-making and noncore units in 2024, this year, we set about moving smaller and low-margin businesses to licenses so that we can focus on the biggest opportunities. We've now agreed for several smaller businesses to be acquired by local management and the licenses to be granted to Pakistan, Mexico and Malaysia, and we expect to close these in quarter 4. Secondly, we are close to completion of the back-office consolidation, which has driven significant transformation savings, as you've seen, alongside the harmonization of processes, improved controls and business visibility, and this enabled us to act fast in quarter 2. Thirdly, in H1, we moved on to our middle office transformation program. This delivers savings while strengthening internal capabilities, such as the centralization of our data stack and the creation of our intelligence insight team. The strategic growth layer of our plan or golden staircase as we nick named it, also comprises three aspects. Firstly, increasing our selling ability through creating unified regional leadership with adjusted incentives backed with new growth capabilities such as the AI-driven cultural Power Index, which is now expanded to cover 4,000 brands across the U.S. [Technical Difficulty] which were not previously M&C Saatchi. Secondly, a deliberate drive towards higher-margin businesses by investing for growth in those areas. For example, our investment in the securitization of data for the issues business. And thirdly, investment in new growth areas, particularly in high-quality leadership with future-facing skills, such as our appointment of Karen Boswell, previously Global Chief Experience Transformation Officer of VML to lead both performance and consulting units so that we can make wider use of our digital data and AI capabilities and develop new customer experience solutions. This has already resulted in AI stack advances and partnership agreements with Adobe and other partners. Meanwhile, our new Australia CEO, Dani Bassil [Technical Difficulty] and Chief Strategy and Innovation Officer, Jackie Stevenson, founded and successfully built a content business, all skills that we need for future growth. This is supplemented by our M&A program, of bolt-on acquisition in high growth-- in high margin areas. And our acquisition of Sports Experts in [Technical Difficulty] was our first in 10 years and they illustrates the direction of travel. We now have evidence of the success of this approach. On this chart, you'll see for each region a combination of existing clients who are growing and new clients won in the first half. As you can see, our approach attracts a very diverse client base, which provides resilience. You'll see, for example, our latest major win announced just this morning, the Department for Education campaign to recruit the new teachers the U.K. needs alongside the recent win of the U.S. Soccer Federation just in time for the World Cup in the U.S.A. next year. This in up across-- revenue approach founded on deeper client understanding and a regional go-to-market model has helped us to deliver a robust revenue pipeline for the second half. From retail to real estate, from beauty to banking and from hotels to hire cars, we serve the biggest brands, and they're increasingly turning to us in a changing world. One particular area of focus for future growth is sports and entertainment, where we serve some of the world's most famous brands already. You can see some of those brand names here on the slide. It's a fast-growing market with higher margins and where we have global capability and credibility. We have existing strengths in sponsorship, talent and influencer work, which typically manifest in social content, a fast expanding part of the market. And we're deliberately broadening our sports offering. We've just announced the launch of talent agency M&C Saatchi Football. We acquired June '23 to complete our regional coverage, and we're building a plan to strengthen our sports rights capabilities. It's being indispensable to clients that makes the M&C Saatchi model special and gives us confidence in future growth. We are a differentiated proposition, offering clients connected and coordinated specialisms, which gives them the expertise they crave without the complexity of multiple agencies. Our issues business is uniquely placed to meet the challenges of geopolitical instability. Our consulting business helps clients to develop their growth strategy and navigate the impact of AI on their marketing. Our performance business puts an ROI on marketing activity to drive effectiveness of the client -- ad passions and PR and advertising -- are experts for academic brands in digital and social channels, which is where marketing budgets are being directed. And our cultural power propositions and tools are perfectly positioned to help clients make sense of the increasingly complex landscape. All of this is underpinned with the most famous brand name in marketing services with a reputation for ideas and creativity, the elements which are required for clients' brands to stand out in a world of increasing automation. And perhaps just as important today is our agility, which differentiates us from the large holding companies. When the CEO of JPMorgan Chase, Jamie Dimon, wanted an Independence Day message at 48 hours notice to bring together a fractured nation, he turned to us, and we delivered it. So thank you for listening. summary of our strategy and the case for investment on the screen here.