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

Beautiful sunny day. It feels somewhat slightly representative of the macroeconomic environment right now. But it could be something [indiscernible]. And we have quite a bit to get through today. We've got a run-through of last year, which interestingly, in some ways, sort of feels such distant history to us. I think we sort of normally at this point, would use last year as a good predictor of the year that we're in. But unfortunately, partly because of the loss of the large 49 contract and partly because somebody put it to me recently, there is this large orange man that is changing the world. Partly because of that, it does create an environment where we just feel the right thing for us to do is being incredibly prudent. It doesn't mean that we're not doing anything. And hopefully, what you'll take away from today is actually that we're doing an awful lot across the business to put it in the right place for when normal business resumes, if you want to call it that, if such a thing is going to exist. And Peter will walk through the results. And we're going to canter through those at a very high level. If people want to delve into a lot of the detail on that, there's a whole bunch of data in the appendix, which we can go through glorious technicolor if required. We're going to spend quite a bit of time though on sort of what is next for Next 15. What are we up to? How are we focusing? What are we investing in? How are we investing in those things? What you should expect from us? Obviously, some commentary on capital allocation and how we see the world, although I think how we see the world is driven much more by macro than anything else right now, just simply because of the way that our customers are seeing the world. At this point, I'll hand over to Peter.

Yes. Thanks, Tim. Yes. So just a few comments from me on the results. Revenue was down 1.4%. That was 4% down organically. 1.5% of that was because we lost obviously the Mach49 contract in January, so it would have been 2.5% down without that. We had a negative impact on currency. Last year, it was just over 125. Previous year, I think it was near 123. And we did have some acquisitions in the year, 2 for MHP, 1 content business, 1 tech business and the Transform, our government agency did quite a big acquisition of a company called Cadence, which got them into more sort of strategic consultancy in the government. So overall, a reasonable year, but obviously, we'd like to have done better. Overall, our operating profit was down 11% with the margin down to 18.9%. Again, we had good growth from some of our B2C agencies. SMG had a fantastic year. They continue to be our sort of [indiscernible] (00:03:06). And the 3M, that's private, that's M Booth Health and MHP all did pretty well, and BrandVue had a good year. So overall, some good performance from B2C. B2B tech continues to be slightly more challenging for us. And one of the reasons the margin was down is because the tech tends to have more operational gearing, sort of more use of tech and data, less use of people and obviously, more B2C agencies are more sort of people dependent. So the mix of revenue, I think, wasn't helping in terms of the margin. Tax rate was 27.4%, that's going to come down quite a bit next year because just the mix of where the revenue is coming from, we had a much higher tax rate from the big contracts. So tax next year should be down to 25.5%. And EPS fell to 9.3% because of the profit, and we've decided to maintain the dividend because good cover and good cash. Working capital, I think people who were here 6 months ago, I beat myself quite hard on working capital. We had a much better second half performance, GBP 31.9 million down to GBP 7 million working capital outflow was a much better performance, and it's a real focus going forward given the markets. Earn-out commitments, that dropped a lot, partly because we paid a big chunk to Mach49 in the year, but also we reduced the estimate for Mach49 from, I think it was $105 million at the interims down to $91.5 million, and that's payable over -- and sorry, that's dollars, that's payable over the next 3 years. So kind of a nice sort of spread of that payment. Net debt reduced GBP 38.4 million from GBP 74.8 million. We typically have a better working capital performance in the second half. And particularly in January, we have a very strong cash performance. So that was sort of pleasing. A lot of restructuring costs, over 500 roles were reduced last year. Sam Theobald, our HR Director, probably hopefully won't have another year, it was a pretty brutal year in that regard. GBP 16 million of that related to Mach49 obviously the loss of the contract. Of the remaining -- sorry, the remaining GBP 29 million, GBP 9 million related to last year, and we sort of -- that was the cost saving last year, and so the remaining GBP 20 million this year. We are reinvesting a fair bit of that back into AI, and Tim is going to talk about our investments later. And also SMG, the jewel in the crown, they are beginning to see some really encouraging signs in the U.S. They won the first big client, WHSmith U.S. and they've got quite a few consultancies on the horizon. So we really want to help them grow into the U.S. and also into Europe as well. So we are not seeing all of that GBP 20 million cost savings from redundancies dropping through the bottom line. So AI investment and investment in SMG as well. So back to Tim.

You just talked a lot about the sort of the hard financial data. This is sort of a look inside the beast, if you like. We do still work for an awful lot of really big important companies and play a very important role for those companies. And we carry on working for them. I think there is probably a sense of something changing underneath the covers, if you like. And the reality is really not much has changed. This stat of 70% of our top 100 customers has been with us for 5 years or more. And in fact, many have been there for much longer than 5 years. That stat has remained constant. I went back and looked at it Jenny Rollins over there, he did a lot of good work on, spent quite a bit of time trying to figure this one out. And I went back and looked at the data that we reported previously, and it matches almost exactly. So really, what you're seeing is a remarkable level of consistency at our larger client level. And technology clients will now account for 1/3 of our revenues in this year. The loss of the big contract skews back towards tech again. Staff retention remains amazing. Having over 10.5 years, I'd probably skew that number. But having average tenure being over 10.5 years, that's quite a remarkable stat in our industry. There's typically an awful lot of turnover at that level. Operating margins, I know that there are a lot of people who would kill for a sort of roughly 19% operating margin in our sector. It is a difficult thing to do. It requires you to be incredibly close to the customer. It requires your leadership team to be very good about how they staff their businesses. It requires them to really focus on things like traffic management, making sure the right people are in the right place at the right time. That is hard to do and do it again and again and again, and our businesses do an amazing job of that. We've talked about the fact that we are investing in AI and data. We've talked about that ad nauseam for the last few years. We're now moving into the next phase of that investment. We've done the phase where we've armed everybody with tools, and we're really kicking them to use them, making sure that they use them every day. We're now into the phase where we're starting to deploy products with customers. A good example of that is the Delve product, and I can talk a little bit more about that later. The other thing that we're doing is changing the Board. You would have seen that we recently brought on Mark Astaire, we're today announcing that Sam Ran is joining the Board. We do have 3 directors that are stepping down. This is us effectively looking at the Board structure and saying, how do we have a Board that is appropriate for the business going forward. Some of it is we're recognizing that were at slightly different scale. Some of it is us recognizing that we need some slightly different skill sets, a more commercial Board effectively. And I think Sam and Mark very much, I keep calling him Fred, by the way, [ not able to see him ]. Sam and Mark are definitely good additions from that perspective. In terms of review of strategy, I actually wrote it a strategic review, and I got -- told I wasn't allowed to use that expression. We talked a while ago about the fact that we were really trying to focus on how do we make the business simpler. How do we make it easier for you to understand. How do we make it easier for us to run the business. How do we make it better for our customers and better inevitably for our employees in that process. And we have done a tremendous amount of work on that in the last year. A lot of it is stuff that you won't see. A lot of it is us working away in the background of the business and trying to simplify a lot of the back-end processes that enable us to deliver the kinds of margins that we deliver. And a lot of it is also us trying to make sure that our people get better information so that they can run the businesses more efficiently. But there are also efforts Jonathan Peachey or JP is affectionately known, will talk you through what we call Project Goose, which is a fairly big initiative to bring a group of our businesses together. But we are approaching simplification not as -- there's only one way to do it, that you smash businesses together or whatever. We're approaching it as how do we deliver a better product to the customer to make our business better for them. How do we do this in a way that still keeps the integrity of our model, which is still a very decentralized model compared to a lot of other people. And how do you do it in a way where we keep our best people. We do not want our best people to disappear because if they disappear, the customers will follow. We are looking at the operational structure of the company. It has evolved over the years in all sorts of different ways. Some of it is because of how we've acquired different businesses, and they've brought with them infrastructure that in some cases, we've just sort of bolted together. Some parts of our infrastructure, we've had to do quite a lot of work in the last 12 months to really clean that up, and we are going to do a lot more in the next year to continue that process. I have used this expression and have got a lot of amusement out of it. We won't peanut butter our investment. In other words, we won't spread it thinly. It's a case of saying we recognize that we know that businesses do well when they do a few things really well. And from our perspective, that's crucial to how the company will succeed in the long term. And so what you'll see in the next section is where we want to really focus our efforts. But you can basically put it into 2 categories, AI and new capabilities. The new capabilities really means either focuses on new geographies or focuses on new service lines that we think are going to be crucial for the future. We will do a small number of strategic acquisitions. We are not out of the buying game. We are very much in the buying game. You will see us do that, but it will be very selective and very focused my peanut butter comment. I think another piece of work that we are just starting is a real deep look at our incentive scheme. One of the things that I think has become very obvious to us in the last 12 months is the decentralized model works brilliantly for those businesses and for the customers attached to those businesses. What it doesn't do a brilliant job is driving those customers to work together or those businesses to work together on behalf of those customers. So sometimes, we miss out on revenue and sometimes we don't do the best job we could possibly do for a customer because incentives don't drive the right behavior. And so we will have to try and fix that. And that will require us to really kind of scrape back a lot of the way that we look at incentives and realign incentives so the customers are not sort of finding it weird, well, you have that capability. Why aren't you even talking to me about it and that kind of thing. And in terms of priorities, it looks like a lot here. I think what you should look at is the middle column, which is product service evolution. That's us trying to tell you where we think our business is going in each of these areas. The first one, B2B rev gen, that's really Project Goose and JP will walk you through that. But that's us recognizing that the way that technology is now sold has become very, very different from the way it used to be sold, and we need to really move to create a completely new solution for that market. Retail Media, that's really us just saying the thing that we need to focus most on is really the U.S. expansion. To some degree, the EMEA expansion is a function of us also driving U.S. expansion. There are a number of European retailers that really want to do well in America. And our work is therefore in service really of the U.S. If we can build a successful U.S. retail media business, we will have a very valuable and very big company on our hands. Data is an area that is really being transformed because of AI. You've heard us talk before about things like synthetic personas and synthetic data. And that is really changing the way that companies get data in order to help them drive better decisions. That's really why they use the data is they want to make more -- better decisions more frequently. And they don't want to use data after the event to prove that they did something right. They want to use it before so that they know they're making the right decision. AI creates a completely new way of tackling that problem, but it also turns the business into a subscription business rather than a services business. And you'll see a lot more coming out of us in the next 12 months on that. The Comms collective, as I've described it, this is a new way of us thinking about the businesses that we have in the Comms space. At the moment, they are run very independently. We do have a marker collective, but it is very separated from our M Booth business, our MHP business and so on. We're starting to look at how do we bring those businesses together in such a way not that we lose their brand names, not that we run them as just one big agency in the way that WPP has approached the creation of BCW. It's really us saying we want to keep the front doors to those businesses, but we want to share a lot of the capabilities that we have in a much more meaningful way than we currently do. We also know that, that's an area where there are a couple of areas that if we could expand our capabilities, notably corporate comms and influencer, we can do extremely well. Corporate comms is just a very good door into the C-suite of the company, keeps you in constant dialogue that's never a bad thing and Influencer is just a category of marketing services that has grown out of nothing 5 or 6 years ago into being of similar magnitude to the comms industry alone at this stage. And so it makes enormous sense for us to do that. It's a space that is growing and doing extremely well in the B2C world. It is growing rapidly, but from a very, very, very small base in the B2B world. And we think in B2B, we have a huge opportunity if we get that right. That is an area that we are likely to do a mixture of organic and acquisition because it's a market that we cannot wait forever to get into. We already have a good capability in North America through M Booth and have proven how that model really works. It's very profitable. It's growing. It's grown to a very decent size within our M Booth business, but we could be multiples of its current size and still do extremely well. On consulting, that is probably going to get less focus from us this next year. It is an area where we are building AI accelerators for a lot of our clients. A lot of them are trying to figure out how do we use AI to innovate or to change our business. And they, in many cases, don't have the capability to do it themselves. So they're coming to us to say, help us figure that out. Let us create little labs that we can play in, that we can sandbox ideas, run them outside of our IT environment because that's a really scary thing for them to do to run it in their own IT environment because they're very fearful that somebody will use it as a way to hack into their system. And so by doing it externally through us, they're very protected in that respect. And it's actually proving to be a pretty good place for us to operate. And I've already talked through back office, so I won't linger that. I'm going to hand over at this point to JP, and he can talk about the Goose.

So we wanted to give you a bit of a case study of how we're thinking both about simplification, but also evolving the services that the group offer. So we've got 4 U.K. B2B marketing agencies in the Group. First 3 there together, Velocity and Agent3 are all focused on enterprise tech, the software that large companies tend to buy for their own use. And historically, those have shared a lot of services. They've overlapped in terms of their client base, and they tended to compete with each other. The fourth public tech is more focused on deep tech. But the thing that has united them is that they've had quite a challenging trading environment over the last couple of years. And we sat down with the Chief Executive of those businesses last summer to dig into that a little bit and find out why and more importantly, what we could do about that. And a number of things emerged from that. The first was that in a more profit-focused environment, the clients of those businesses were much more focused on the return on investment, how much were they getting in terms of sales from their marketing spend. And that was forcing them to be more choosy about who they work with and which tactics they picked. And the second was that actually the way that B2B marketing is -- functions is breaking down a bit the old ways of doing it don't work. We dug a bit more into that. And that's because the traditional way of marketing stuff is what's called the funnel, which involves putting out a lot of activity at the top of the funnel. You might send out 10,000 e-mails to potential customers for your CRM system and hope that some of those might be in the market and interested right now. And you would hope that they might fill in a form and ask for a demo or ask for a white paper. Most of those people don't. We're all familiar with marketing that we compete. And through a process of sort of refinement and engaging with those people, you hope that a small number of people would engage, take a demo and maybe ultimately buy from you. But it doesn't work like that anymore for a couple of reasons. Firstly, if you are thinking of buying a piece of software for your company, then you will look on the web, you'll research that decision, you'll go and look at what Gartner is saying about that thing. You'll probably ask ChatGPT these days when hit things, you'll talk to some colleagues. And you will do a lot of your own research before you ever turn up to the CRM company that you might have decided to talk to. And actually, a lot of the research now shows that 80% of those buying decisions have been made before anyone actually talks to the potential vendor. And that creates a space called the dark tunnel. That's an area that if you're a Salesforce or Workday, you don't control what's going on in that 80% because it's going on without you ever interacting with your potential customers. And because you don't control it, you're not sure what of your marketing activity is having an influence in that space. The other problem is that unlike personal buying decisions, when you're buying software in an organization, it's not just 1 person or 2 people or 3 people making that decision. There are now up to 15 people involved in the decision. So it might be the CFO, the CTO, well you might have your DPO, your Head of Legal involved as well. And to sell a piece of software, you've got to get all of those people pointing in the right direction at the same time. Super time. So what's the answer? Well, a technical journey mapping has been around for a few years. And what that involves is working through who are the people in an organization that are likely to be part of that decision, working out what matters to them. So it might be getting the job done for the person who first thought of it, but it might be, is this going to comply with my regulatory requirements for that DPO. And then when you work that out and what are the things that accelerate and hold back those people, you can then work out what are the marketing interventions that are going to work for them. So it might be for the CFO, it might be a peer-to-peer event where they can discuss with like-minded people how they solve the same problem. For the DPO, it might be a white paper about regulatory compliance and how their needs are solved. So that -- and that's a technique that we have been using that journey mapping technique is a technique we've been using in our businesses, but it's very manual and time intensive. So it's expensive for clients. It just -- it generates much better results. So back to the 4 chief execs of those businesses. The decisions we quickly came to last summer -- that they came to was that, firstly, journey mapping has to be way forward. The funnel no longer works and is increasingly a bad approximation for how things go. So journey mapping is the way forward. But to make that work, we need to automate, and we need to provide apply AI and a lot of data to that process to make it work. And also that scale matters. So if we want this business to be a key player, particularly in the U.S. market, that there is no point competing with each other, competing for funding, for investment, competing for clients, but doing it as one makes more sense. So what have we been doing about that? Since last October when Project Goose, as Tim was calling it, came to life, we've done 2 things. We have merged those businesses. So as of today, they are operationally merged. Clients are still trading with those different brands names. But under the body, it's a single organization under the leadership of Clive Armitage, who was formerly Chief Exec of Agent3. And that's already led to significant increases in profitability for the combined business, and they started winning new work that they couldn't have won on their own because they have a broader range of services to offer. And that's fantastic, but it is not our goal to build a better classic agency. The other thing that we've been doing is we've been working on a platform called JourneyLab, which takes the journey mapping technique and it applies AI and automation and some of the technology that we've been working on the Next 15 AI labs like synthetic personas that Tim was talking about. And bringing that together into a platform that makes journey mapping at affordable and achievable for our clients. And that is -- we've already -- we've been testing that with clients over the last few months. We've got prototypes of parts of the process already out in the market. And what comes next after this is that by the end of the summer we will have a first version that we can use end-to-end internally. We will relaunch that business under a new brand, and those existing brands will get retired later this year. So what did it for our customers? Well, our customers are going to get better return on investment because we can use this new technique to achieve that, and we've proven we can do that. But also we can show them which bits of their marketing are actually working. They don't see that. What do we get out of it? We get a competitive advantage in -- particularly in the U.S. market where the dominant players are funnel fillers effectively. They're tied very much into the old way of doing things. But it also moves us away from sort of project time-based approaches much more into a subscription-based model because JourneyLab is an always-on process that's always learning from the data that it's generating to improve and optimize marketing performance. And that means that we can benefit from subscription revenues and stickier relationships because it will be always optimizing for our clients once we're in. And that takes us more towards -- gives us a path towards a higher-margin product in the future. So there's a lot more to come about Project Goose, especially when we launch it formally in September. But as you can probably tell, we're very excited about how that both simplifies and evolves the Next 15 story.

I got the demo of one of the key bits of the product about a week ago. And the bit that I got really excited about was at the moment, when -- if people look at all of the content that they're producing for a client, they might look at it and say, well, this bit of content would work for the CTO and this bit of content would work for the CEO and this would work for the CFO and so on. And you sort of go, okay, we can tick all these boxes. What you can't see is that actually through the buying process, do we might have content at the beginning of the process. We don't start to run out of content at the end. And the example that they used to me was they show -- they basically put in Cisco as a customer and said, right, okay, Cisco is selling this product to this organization. Let's look at that journey as a buying journey and let's look at the content that currently exists from Cisco that would meet that customer through that journey. And what you see is Cisco does an amazing job at the beginning of the journey and then just hopes basically. Like at the end of the journey, they're like on either. There is like nothing there. So the person who's trying to make the buying decision at the end of it has literally like they're looking for stuff and there's nothing to find. So they just wanted to push over the line and say, yes, I should buy this product. But it's kind of like -- I'm sorry, you're going to go right to the stuff I sent you at the beginning, which is like, yes, but that was really general and that just really told me like broadly why I should be doing this. It's not the specific answers to the questions that I have at this stage in the journey. So it's a much more sophisticated way of looking at the buying journey and the problem. And what it does is it not only can reflect that for Cisco and say, right, we're weak here. What it can also say is Cisco, you're competing with Huawei or whoever it is you're competing with, let's look at how they do in this buying journey and see where you're weak versus them. That, again, is just something that all at the moment, all they can do is look at very basic data and compare and contrast and look like -- we look like we're good, but they have no idea where they're weak versus those other people. And that is -- I think that's a pretty exciting place to be. I don't get that much. Capital allocation. I think the thing that you'll probably notice if you're an eagle eye on here is the net debt level. We're targeting that below 1.5x and that is a peak. It's not a constant. It's not a case of us saying that we want to be heavily leveraged. I think it's just a recognition of we are going to be a very slightly smaller group this year, still a GBP 500 million revenue business. It's not tiny. But we do recognize that we do still want to do some things, and we don't want to be brutal about the balance sheet in the process. But you can bet your bottom dollar that we will manage our cash flow incredibly tightly this year and make sure that we hopefully do not linger anywhere close to that. All the other things are very much unchanged. We basically want to be a business that prioritizes investment for internal capabilities and where we have cash that we don't need, we will give it back to shareholders. And there are lots of things that we are looking at. There is nothing within the organization that we're saying that's just sacrosanct. We just leave it as it is. So people have said, would you sell some parts of the business? Would you consider taking the whole company private, all sorts of things. There is nothing that we are not looking at. I'm not trying to say we're going to take the company private, by the way, just to be completely clear. But it's -- we are going to do what is right for the business and for the shareholders in that process. And we know that there are parts of our business that over time will become less core, and it will make sense for us to say maybe those parts of the business should move on to a better owner. For a long time, we have been like a private equity company. We buy things, we turn them into better businesses. What we don't do is sell them. And I think that's the one question that has sort of been raised in our minds is, is that something that we should do? Is there a point where something is reaching its peak value with us and would be better owned by somebody else? I'm not indicating anything by that. I'm just simply saying that is a new question that we're asking ourselves as we move forward. Outlook, as you'd expect, this got crafted and recrafted and recrafted. I think more time went into 100 words or whatever this is on this than did into the rest of the document. Essentially, what I'm trying to say here is our business is fundamentally in a good place. We think long term, we have a great group of businesses with a really good outlook. There's nothing that really scares us from that perspective. We have a really great customer base. We have a really good group of employees. We are modernizing the product in all of the right ways. So from that perspective, I feel fantastic. I just have a headache, which is the American government and what it's doing. And that is creating pause for a lot of people, and it feels stupid of us to say everything is fine, the sun is out. It's all fabulous. It feels like the smart thing to do right now is to say, let's just be cautious because anybody who can tell me what Apple's results are going to be, what NVIDIA's results are going to be, what even Procter & Gamble and so on, I think is -- well, they're either a genius or a fool. And so therefore, it feels to us like we should just be prudent. It feels a lot like going into COVID, if I'm completely honest. When we stepped into COVID, we felt like we have no idea what's going to come here. We don't know what our customers are going to do. We do not know how they're going to react to change and so on. And a lot of them are put it mildly freaking out. They -- you saw the Nintendo Switch piece. They basically are having a real headache because they don't know how much that product is actually going to cost. Is it going to be $400, at one level, it could be as high as $1,250. So how do you launch a product not knowing what it's going to cost. Not knowing how many people, therefore, might be able to buy it, therefore, not knowing how many to manufacture. It has all sorts of ramifications, right? So until that world starts to become more normal, and it will, at some point in the next few months, it just has to. The market will break otherwise. When it does, we can go back to being a place where we can give you more comfort in guidance. At this point, it just feels like we pulled our numbers back because we are -- like we know our currency at the moment. He seems to want to destroy the U.S. dollar. I certainly don't know if it's deliberate, but he's doing a very good job of it if it's not. And that is a headwind for us. And then there is this other macro headwind, which we just have to deal with. Doesn't mean that I have fears about the long term of the business. No. I think the business has got, as I said, good products, good people, good end markets and good customers. It's just going to be bouncy for the next few months, while we deal with this rather unusual self-inflicted situation.