Next 15 Group plc (NFG) Earnings Call Transcript & Summary

Good morning, all. Thank you all for coming along. Agenda is fairly straightforward. I'm going to give you the numbers that you've already read. Pete is going to go through the numbers that you've already read. I'll then come and talk a little bit about the color behind that, and hopefully give you a better sense of how the business is doing behind those numbers and what you can expect going forward. So the numbers that you've already read are on the left. I think the number that probably stands out the most to me is the margin performance. It is quite difficult running a business through the kind of cycle that we've just been through. And the fact that we've actually improved the margin, I think, should give you quite a good amount of confidence in the way that the organization is run. It's one of those where, as you can see on this slide, our tax spend dropped 17%, which means some parts of our business must have gone backwards, and trying to run a business with a solid margin when revenues are not moving in a good direction is actually very, very difficult. It's quite easy to expand the margin as you're growing because you typically can't hire people quickly enough. So your margin actually benefits. When the opposite is happening, it's actually very hard to do because it's usually harder to get the cost out of the business at the same pace as the revenue might be dropping out. The good news on the revenue side is obviously the non-tech was up 11%. That's a good counterbalance. And of course, a fairly obvious question is when do we think tech is going to reverse from that position? I think the good news is for us is that we think that in the first half of this year, tech is going to be pretty stable. I think we expect it to improve in the second half. Assuming that does come through, then actually, you should see some pretty good organic growth in the second half of the year. Obviously, we're not betting the farm on that and the way that the notes have been written is assuming a relatively steady state for tech. But assuming a relatively good performance outside of tech, which actually, there are a whole bunch of very good reasons why we would expect that partly the Mach49 contract, partly the work that's going on with SMG and the win of Asda, partly the impact of some of the acquisitions that were made last year and how those roll into things. So there are good underlying reasons why we expect the non-tech side of the business to carry on doing okay, actually quite well. And if we expect the tech part to level out, then actually overall, that should be good. If tech does show a good recovery in the second half, then hopefully, we'll be coming to you with good news. In terms of the numbers on the left, I think the real story again was we've seen quite a shift in our revenue base. And the one good thing about tech is they pay very quickly. They pay on 30 days, very typically whereas non-tech is notorious for paying very slowly. 120 days is for them being extraordinarily generous. But the fact that we've managed our cash so well, the fact that our balance sheet is therefore also in a good shape, says the underside of the business is doing an incredible job. And there's a bunch of next 15 people in the room who do that job and a huge thank you to you for that. In other words, I think the mechanics of the organization are actually really, really strong. That gives you a platform upon which you should actually be able to add more businesses, you should be able to add more revenue and get really good leverage out of that. This decentralized model is definitely something that we are benefiting from. There is a point on here about brand to demand. This is a sign that we're seeing emerging within our client base. They are reorganizing around this, where effectively, that's saying it's kind of weird that the brand side of the organization is run quite independently from the sales engagement side of the organization. And they're saying, "Right, let's merge this. Google has undertaken this. Dell, IBM, a whole bunch of them when the tech organizations have said we need to tie these two things together more directly." We think that's good news for us. And certainly, so far, what it seems to be showing up is good news for us. But we do think it's going to ripple through inevitably once a few tech companies do it, they all tend to do it. And once tech companies do it in volume, then non-tech companies tend to do it in volume. That just seems to be the way our world works. So I do suspect that you'll see that as a trend, and it will put pressure on organizations like ours to be much more joined up in the way that we deliver solutions in that respect. So it will mean that areas of our business that are working on branding will have to connect much more strongly with those that are working in areas like ABM or demand, lead generation, that kind of thing. The last point on here is to do with strong client retention, and there's a little bit of data later on to sort of talk about that. The dividend increase of 5% is sort of literally rolling forward the increase that we did at the interims. We do have a share buyback program in place. And Peter will give you a bit more detail about how we're thinking about that later on. But hopefully, it gives you some confidence about how we're feeling about the business in the year ahead. At that point, I guess I hand over to Peter.

Thank you, Tim. Revenue is up 2.5%, good increase in margin, which obviously led to a big increase in the operating profit. Tax rate increased to 26.3%. That is mostly down to tax rates increasing around the world, particularly in the U.K., which I think we're all aware of an overall increase in diluted EPS. And that's taking account of all the dilution for all the sort of growth shares and other incentive plans by 1.5%. And as Tim said, we increased the dividend by 5%. We still got very strong cover. So again, I think we will be having probably modest increases in dividend going forward. But again, I'll talk about capital allocation and how that all fits in together. On the revenue side, we had reasonable organic growth, considering the market conditions. Acquisitions, we did 5 bolt-ons last year where the bolt-ons is the right term. I think we see the strategic acquisitions for the businesses we really want to back going forward. And for each of them it does bring new customers and new capabilities to the business that have impacted and we had modest FX headwind. So this year, we were roughly 125, previously about 123. And we are pretty geared to the U.S. dollar exchange rates. On the segments, so Insights had a reasonable year. I think what we saw there was quite a big investment in Clink. Clink is our data science business where they affected [indiscernible] 1 customer view for some sort of big retailers and then the e-mail marketing campaigns in the back of that. So we had quite a big investments in some new product launches for them. So the expectation is that margin will improve this year as that sort of investment in sales and marketing pays off. Savanta continues to grow both organically and by acquisition. They did quite a reasonable size acquisition for them in Canada, which is the first acquisition in Canada, and that was in sort of shopper, media, marketing. So again, we're hoping that SMG and Savanta will develop a good relationship through that process. Engage was our weakest segment. Again, quite a mixed performance, M Booth and M Booth Health [indiscernible] Dale Bornstein, M Booth Health presented at the Capital Markets Day. They continue to do extremely well. In fact, they've had a fantastic start to this year. MHP, I've got to say because quite a few of them in the room today, doing very well, very good margin, very well-run business. I think, again, the more focused on sort of tech customers the tougher time. And so I think on overall mix performance, but I think the biggest thing, as Tim mentioned earlier, was the margin. It is tough to run a business where you're not quite sure where the revenue is. And all the business is anticipated quite some tougher times and therefore, manage their cost base accordingly. On delivery, that was very much led by SMG, who had a phenomenal year, and this year is going to be incredible for them. Morrisons was one, I think, about 2 years ago and the way that contract works is you get a monthly retainer and then at the end of the financial year with October, you get an over-target performance and they had a phenomenal performance from Morrisons. So that led to a very nice sort of kickout in October. This year, we're spreading the sort of profits more evenly over the year. So it will be slightly more sort of evenly based for the first half, second half. And then the One Asda, which we announced, I think, in January. That's more of a sort of cost plus model, where there's going to be some kickup for revenue outperformance, but maybe not as much as Morrisons. And they've also got a crazy pipeline. So I think SMG will continue to do extremely well for us. Activate was slightly slow, particularly in H2, and we're expecting, as Tim mentioned earlier, probably a better second half performance than the first half. But overall, we still feel very pleased with that segment. Business transformation, obviously dominated by Mach49, the growth after the big contract, and Transform had a very good performance led by the Department of Education, which they won in the first half. And interestingly, they -- DFE spent a lot of money with the first half. And then as often happens to government, they realize they probably overspent so they fall back a little bit in the second half. But overall, we think Transform is doing well. Blueshirt Group is probably our most unpredictable business because they're very dependent on tech IPOs, and that was obviously very quiet last year, but they were involved in the [ Brexit ] float, and we're hoping that that's going to sort of kick a better performance in the second half. And the final business there is Palladium, which is very much around due diligence for PE and again, with all the kind of go private, they're getting a bit busier. The final number, which I was very pleased with was the head office cost, which was quite elevated last year, partly because of the engine transaction, and we inherited slightly crazy head office costs with Engine. So we worked very hard to reduce that down to a sensible level. We took GBP 6.5 million out of their cost base and that margin number is the head office cost as a percentage of total revenue, and you can see how that's sort of reduced from 4.7% last year to 3.4% this year. On cash flow, I think as Tim mentioned earlier, we've done a much better job on working capital. I think last year was quite tough because during COVID, everybody paid on time. It's almost the sort of the world change in terms of people started sort of respecting their suppliers and paying on time. And last year was much more challenging. I think this sort of concept of tech paying 30 days, FMCG paying 120 days has definitely had an impact. And again, I think the GBP 10.7 million outflow was partly a result of that, but we worked incredibly hard, particularly in January to kind of get us back into a better place. Cash tax was under our accounting tax because we have some offsets in the U.S. where you can use goodwill amortization to actually reduce your cash tax rate. So I can see that continuing to be maybe 3% or 4% below the accounting tax rate and all the other numbers were pretty much as expectation. Again, quite a big change here where we made the first big Mach49 earn-out payment, which that GBP 45 million was mostly Mach49. Every year, we have to do a very full analysis in terms of what we think the earn-out payment is going to be for all of our acquisitions. And as we sort of announced in the statement, we looked at Mach49. And 12 months ago, the big contract is going very well. The rest of the business was doing incredibly well as well. And we assume that, that would continue probably in a sort of overly aggressive way. So we assume that the total earn-out payment is going to be $300 million. Based on how they performed this year, which was still very strong, but maybe not as strong as we expected and the expectations for the next sort of couple of years. We've actually reduced the total earn-out payment estimate from GBP 300 million down to GBP 250 million. Now there's still got a lot of adjustment in there. The calculation is very dependent on revenue growth, profitability, et cetera. But when we had a sort of full review of all the numbers, we reduced that down. So that 2 factors: one, the first earn-out payment plus the reduction in the expected total payment is behind that reduction from 244 down to 177. So on adjustments, the biggest number there or the most unusual is on restructuring. I think Tim has mentioned just how proactive the businesses are in terms of rightsizing the cost base to reflect demand which our companies see. So in total, we took out roughly 200 roles with an annual saving of GBP 15 million, which I think was very much behind the fact that we kept the margins where they were. Deal cost is very much the cost of the bolt-ons. We had quite a few new incentive plans, mostly for the Engine brands, where effectively, they share in the sort of increasing value they create over the next sort of 5 years. So that's a one-off cost, which we put into that. It's based on very much the performance of each of the businesses and the reduction in terms of acquisition accounting rated costs from 89 to 24 was very much reflecting that reduction in the Mach49 earn-out. Capital allocation. We haven't changed our priorities. So this is really restating them. The first priority is to invest in existing capabilities and very much around sort of data and AI, and Tim will talk a little bit about. We're still very keen to do larger strategic acquisitions. I think we recognize that is tougher given where our share price is and very voracious appetite from PE to compete in these areas. So I think the focus for the immediate future is going to be continuing to do bolt-ons. We really did one for MHP this year. There's quite a few in the hopper. And we have an aspiration to spend a fair bit of our cash on bolt-ons. But if we recognize that we can't do that and the share price continues to be a little bit soggy then we will continue with a bolt-on. And we announced in January that we were going to spend GBP 10 million or up to GBP 10 million up to the end of April, probably because the share price being a bit stronger than we thought it was going to be. We've only spent GBP 2.1 million of that GBP 10 million. And what we announced today is we're going to roll on that buyback program to the end of July. And we actually spend up to another GBP 7.9 million if the share price is where it is, and we haven't got an alternative use of our capital.

Now you're back to me, I'm afraid. I mentioned earlier about one of the features of our organization is how good we are at keeping customers. We have this sort of habit of winning customers as relatively small customers and turn them into relatively big customers, this sort of slide shows you how many customers are now over $1 million. The logos at the bottom are not all of them. There's only some of the customers that have been with us for more than 5 years, that could have produced an equally long list of others as well, and equally good list of others. I think that is one of the things that keeps our business in really good health. It's this ability to essentially not lose customers. And I think that's one of the difficult parts of running a business like ours is a tremendous amount of work goes into winning a customer. And so if you have what we describe as a leaky bucket problem, then that means you're running twice as fast to stand still, and we don't want to run a business that way. So we put as much emphasis within the organization, if not more, on the customers that you already have than we do on the customers that you want to win. I think a lot of sort of agency-type businesses glorify the account win. We try and glorify the account kept and the account grown. And I think that actually serves us extraordinarily well. There are a few wins here on the left as the, I think has been talked about quite a lot to do with SMG. Workday is a client where we're sort of actually spanning across the whole brand to demand area that I mentioned earlier. Sega, we're rebuilding their dot-com. Our sort of ability to sort of just get our teeth into these customers, if I look at Workday, it's already grown really quite substantially since we first took it on as a customer, and we haven't had them very long. We are seen as a relatively complicated business by a lot of people. They sort of look at us and say, "Well, you're a little bit different from everybody else and couldn't you simplify this?" And I think our argument is we give customers what they really need and we only integrate where they really need us to integrate. And by doing that, the customer gets a really good outcome, and they stick around. They don't get things that they don't need. They're not paying for parts of the organization that are unnecessary. They're really only paying for the parts that are actually helping their businesses, and that works. So I think we'll carry on being annoying and being complicated. In terms of acquisitions, Peter has already mentioned, we've done quite a few in the last year. Explorer, Williams, Rush, Whitespace, onefourzero, those actually spread pretty much across all of the segments in which we do business, Studio La Plage is actually an Engage acquisition for MHP. All of them have a very strong data and digital aspect to them. There's nothing in here where you're saying, okay, you're looking at some traditional acquisition and that's it. I was mentioning before we came in that we need to start referring to these things as bolt-ons because it makes them sound like they're just things we don't really care about. And actually, they may be small, but they're actually extraordinarily valuable to the organizations that they join. And they joined for a very good reason. They help us get into a new vertical market, they add a new product or a new service, they change that organization in a way that would take quite a lot of time otherwise. So we see them as crucial. The good news is though that it's not a particularly expensive way to grow. You can see the multiple range that we paid up on the right-hand side there. That is still a very lucrative way for us to grow the business, and you will see us continue to do that. We have a lot in process at the moment. We never guarantee that we do everything. We're very ruthless on due diligence but there are plenty of businesses out there that we can bring into next 15. That's not a shortage of opportunity and there's no real meaningful pressure on pricing. So from our perspective, you should expect to see us continue to sort of grow the business in that way as well. It says at the bottom what those businesses added, clearly, they're not unimportant to us. I'm now going to talk about AI, my favorite topic. So I think everybody is loading this at the moment. This quote from Jamie Dimon at the bottom. I don't know how many of you read his shareholder letter but I think he devoted pretty much the whole thing to AI in one way or another. He is essentially saying this is probably as important as any other major shift that the modern world has undertaken. It's like the industrial revolution but even bigger. It's like the boom that we saw from tech when it really started to impact businesses. We do think of it as being that impactful and we are embracing it as an organization in literally every way we can think of. We're training everybody. We're giving them the tools, we're making sure that it's embedded into their work. We have this concept of if you're not using it, you're not going to go anywhere within the organization because, quite frankly, it is going to be an embedded part of the way that we do things. We've already developed 3 products that we're actually selling, that have AI built into them and pretty much every new product that we are bringing to customers at the moment has some level of AI built into it or utilizes AI in some clever way to make that product better. We're seeing great improvements in efficiency. And again, I think that's partly why our margins can stay in a good shape. And the Next 15 labs, which is our central function where we are investing on building products on behalf of the businesses in addition to the products that they're building is proving a really, really good resource and JP, our COO, is driving that and I have to give him a lot of kudos for the work that's already been done there. In terms of -- one of the outputs for this is what we're calling Maistro. This is a way to effectively supercharge our people. Jamie Dimon talking about every role being augmented. This is really kind of giving everybody a sort of a super hero cape and saying, right, you now have AI. It will make you better at doing your job, it will enable the people and your team to get there much more quickly. So what you're doing is pulling things internally and externally that will help you with that. So we're taking practitioner expertise, going to our best people and saying, how would you do this? How can we learn about the process that you follow to get to that outcome? Why do you ask those questions of a customer when you're interrogating them on something? We're then taking all of the methodologies that we already use to do the work practices, embedding those into the system, then we're looking at case studies where work has been done, where we know that was a really good job. That really helped the customer move the needle in whatever way was asked. And then lastly, we're taking a whole bunch of external data on how are other people doing things extremely well so that we can then effectively create a learning system that effectively means an event like today, for example, somebody at MHP could use this to create the plan for that at the push of a button. It won't be perfect but it will be 80% of the way there, which will get people to an outcome far more quickly and produce best-in-class work, again, much more quickly. There are other things that we're doing in the labs. Another thing that is my personal favorite at the moment is synthetic personas. This is where using data that's coming out of -- at the moment, our BrandVue product, which sits within Savanta. BrandVue is a brand tracking tool. So what it does is, on a daily basis, it goes out and asks people tons of questions about very different brands in different vertical markets, finds out what their perception of those brands is? Are they moving up or down. If you have that data over a long period of time, you can actually break it down into very distinct personalities that are interacting with those brands. You can put them into different categories, if you like. And by doing that, if you model the data in the right way, you can actually start to have conversations with virtual versions of those people and actually have some really quite compelling conversations. One example that we showed to one of our customers was the idea in the retail banking area, for example, for being able to say, right. You can have a conversation with them where you're literally saying, so how much would it take you to switch? You're with Barclays right now, you want to move to our bank? If we -- how much money will we have to give you to make it worth your while to make that switch? It was Peter that asked the question in a demo just because we were curious to see what the number would be, and it came out at GBP 200. That is a pretty important number for them to be able to calculate. That would have been a very difficult thing to do. You could have got there through focus groups but you risk with focus groups that people get tired, they get bored, they start answering questions just to shut you up and get out of the meeting. With this technology, people never get tired. We can test content with them. We can literally put 1,000 different versions of the content in front of them and they'll tell us, which is the one that they're going to react best to, if you like. It's a much more intuitive way of being able to interact and learn about what works, why it works, why something doesn't work and so on. So I think you're going to see from us quite significant progress in both of those areas. And I think -- if you think about it in terms of how can we use AI to create better data to inform the decisions that our customers wanted to make or the programs that they need to run in order to achieve their business goals. Then synthetic personas is a really good way to do that. When you think about how we can essentially make our skill base much stronger, much better as an organization, more efficient, then Maistro is the tool that we'll be using to do that. We're not alone. I think this is going to be a race. I think it's not one of these where it's necessarily amount of money because the good thing with the AI tool set is they're not crazy expensive. And we're not focused on trying to build tools, which would be a very expensive thing to do. We're focused on how we leverage those tools, how we combine those tools in interesting ways to create products that basically solve the problems that we think our customers face. I'm going to talk here about megatrends. I mentioned Brand to Demand earlier. Another thing that we're seeing is the connected customer experience. There's been a lot of siloed work in areas like e-commerce or CX and to a lesser degree, in connected commerce. We are seeing that those areas will start to merge. We're also seeing that underneath all of that, B2B, which has been a relative laggard compared to the consumer end of the spectrum is going to accelerate its investment quite significantly. Some businesses in that space have already done that, but there's a tremendous number that have not even with COVID. We see that social commerce, though, is going to continue to dominate in the consumer area. It just seems like there is a never-ending amount of growth coming from that particular part of the business. AI, I've already bored you with that, I think probably with that, but it is going to be the biggest shift that our business is going to have to go through in the next 4 or 5 years. We are throwing everything that we can think of at it. We are not holding a meeting with our businesses without discussing it with them, making sure that we're confident of the plan that they have. We're confident of their usage. As I mentioned earlier, usage is the biggest way that you change behaviors and they change patterns within organizations. If your people are not using this technology every day, then you can't expect anything to change. If they're not using Copilot or GPT or DALL-E or any of the tools, then good luck to you because you can throw products at them but usage is king. There will be this new arms race on data as well. I think informing the models is crucial. That's where we are seeing that our Savanta business could be extremely useful to us, especially in areas like brand tracking, where you can repurpose that data to create some very, very interesting applications. ESG, I think quite a lot of people have sort of said ESG, we don't care about that anymore. Our customers do, is extremely important to us that we pursue this. And it's also incredibly important to our people. They want to work for organizations with a sense of purpose. I believe that it's equitable. I believe that it is trying to make its mark from an environmental perspective, governance, there are some important shifts taking place in that respect, and we have to make sure that we are moving with the tide in that area. This gives you a sense of some of the things. The fact that Peter, myself, JP now are measured on eNPS as a part of our bonus and that kind of thing shows that we're taking these kinds of things seriously. And actually, so are the executives that lead the individual businesses in our organization, we haven't just kept it for ourselves. That takes me to outlook. I was conscious while Peter was doing his part that I probably sounded a bit downbeat and I don't want to. I think what you should take away from this is our business is actually in remarkably good health. The machine is running really very efficiently and doing very well. We have some incredible businesses within the portfolio that are going to deliver some very good growth in this year. We have some businesses that have had a more challenging time because of the changes in tech. But even those I think we'll have a better year this year. It would only take a relatively modest improvement in tax spend for our business to show quite a marked uplift. In other words, that is still a meaningful percentage of our revenue. It's 30% of our revenue. Even a small improvement in that space, it has a profound impact on the growth from a revenue perspective and most definitely from a margin perspective. So I want you to take away that actually we are quite nicely confident about how this year will shape out. I think the consensus, if I'm not wrong, is something like 5% organic growth for this year. That feels very deliverable as we sit here today. I think we could do better than that if tech recovers in the second half and hopefully it does. But it's not a business that is sitting there going, "I have no idea how we're going to hit that target." It feels very, very doable as we sit here today. I think I'm going to end on that now.