The Mission Group plc (M7K.F) Earnings Call Transcript & Summary

Good afternoon, and welcome to The Mission Group plc Interim Results Investor Presentation. [Operator Instructions]. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to CEO, John Carey. Good afternoon to you.

Good afternoon, and welcome, everybody, to this, and I really appreciate people giving up their afternoon time to actually listen in to us. As we said, my name is John Carey, and I've been in the role 3 weeks. So be a bit gentle with me on the questions, please, but I would certainly do my best to answer them in the best way I can. Having said I've been in the role 3 weeks, I have known this group for a long time. I was a client at one stage, I was a partner, et cetera, as well. So it's really good to be reacquainted and it's a privilege to be in this role. What I thought I would do just for a few moments today is just give you a little bit of background in terms of what I hope, I bring to the party and how I would like to see the business run and then maybe a few moments on just initial observations and opportunities. I would say, overall, what I feel is this is an exciting business to be joining. Whilst it's a tough time, it's also a huge opportune time for us as a company, and I think certainly in terms of the challenges of our clients and the industry, an opportune time for us to make a real difference. People ask what product, what's important to me, I think, is really the question here. I think any business like this and all the businesses I've run, there has to be a drive towards being a customer-centric business. And what I mean by that is that we need to be a business that understands the issues facing our clients and work with them and work away from them as well in coming up with solutions to that. There is no point in us being ignorant of what's going on in the marketplace. We have many, many challenges. Our clients have even more challenges. And therefore, to have the voice of our customers, our clients in the room is really critical as we not just develop our strategy for the future, but also develop our business today. We are a people business. Our clients, our customers, our own staff. It is based on relationships. It's based on clients. And so therefore, I think it's important that we make sure we always retain and attract the best people in the industry and grow from that, still on the previous slide. The other thing is we need to prioritize, and I'll talk to that in a moment, but we need clarity and prioritization. We have a lot of initiatives. We have a lot of very creative people, and that's fantastic. What we have to do is make sure, though, we deliver for our clients, we deliver for our people. And the only way we can do that is by really focusing on the key important parts of our business. We can't focus on every initiative. We need to make sure we pick, we choose and we choose well. And I think in today's market, it would be fair to say -- and I think if anything, we learned from COVID, it is the last comment, which is staying standing still, having a status quo is not an option for any business. Our clients face dynamic situations, dynamic opportunities, dynamic issues, and we need to make sure that we continue to evolve to address that. So when I look at our business and Mission in particular, I think the first thing I think is resilience. This is a business that has been through tough times. We all know that, but it has stayed the course. It is robust. It is resilient. It enjoys extremely strong client relationships. We are not a business that jumps in and out of clients very quickly. When we get clients, we keep them, and that's important because maintaining and growing clients is often a lot easier than growing and finding new ones. It's obviously important that we grow our business and we find new clients, but the most important piece is to make sure that we look after the clients we have today. And we have a huge knowledgeable and experienced leadership team. And one of the reasons, frankly, I'm able to come into this business without the depth of experience in advertising, but having that depth of experience in business is that we have those skill sets and we have got those anchors in terms of creativity, in terms of advertising, in terms of digital across our business. And I see my job as trying to help and support that and to identify clear objectives going forward but to make sure that we keep that and keep those experienced people and those experienced leadership teams. I talked in terms of the next slide of the future and what my focus is. I think we are underperforming our potential. If you look at the different aspects and areas of our group, the sum of the parts today is higher than the group, and we need to make sure that we actually reverse that and really ensure that the sum of the parts of our group are understood, that they're valued and that we actually can grow them and that the Mission organization really adds value across that. I think we are under ambitious in our plan. I think we have huge potential, as I said, huge number of initiatives. We need to rationalize those, prioritize them, but make sure we go after the big opportunities and actually grow and access them. And my final point to you would be the role of Mission within this is to add value across the group to drive synergies, to reduce costs, but to also access the knowledge and experience that we have in all corners of our organization to maximize the business opportunities in our business and most particularly for all of our clients. To do that, we will drive more rigor and clarity regarding our strategy, and you will hear a lot more from me about the future of our strategy in Q1. We will share with you and talk about the different areas of our business in more detail. And most importantly, you'll hear from the heads of those areas about their plans and their ambition and their ability to deliver for the future. And we will, within that, talk not just about the U.K. business, but an international business that has -- that I would describe as somewhat of a sleeping giant, if we can access and deliver that. Yes, the headwinds are there in the short-term. Of that, there's no doubt. The resilience that we've shown will be tested and will continue to be tested as it is for every business and every industry. But I have every confidence our people will come through that. But when they come through that, we need to make sure we have a real clear vision of our growth opportunity so that you grow in confidence with us as a business and you will see the benefits of that and your confidence you will see the benefits of that. So Giles, let me hand over to you to talk about the operational update for 2025, and then we can come back and answer any questions.

Yes, that sounds good. So let's just take a step back for a second and reflect on where we were when we last had this conversation in April. When Mark Lund, Interim CEO and I were here. And Mark talked then about the need from the get-go in quarter 1 to structure the business more simply, improve accountability, improve profitability. We talked about investing in systems as a way of making the business more effective and sort of begin to take costs out in that way and targeting the value-added niches and so on this, but really see us raise margin. Taking the first point, just to catch you up on the work that's being done there, give or take -- we started the year with 19 agency brands and a full provision of central sort of middle room services. The output of where we've ended up is to have 5 rooms, which you may well be familiar with representing those market segments in which we operate. But within that, a defined number of brands. So Solaris leading on health, Bray Leino on business and corporate with speed very much as a PR angle there. Krow, our Consumer Lifestyle business and store operating in Scotland; ThinkBDW, our Property Specialist business and Mongoose alongside [ Spark, ] very much driving our sports and entertainment sector. All of that underpinned still by a shared finance, HR and IT base. But that is now the structure within we operate. And that structure in itself what's happened? So clearly, we've simplified by merging those agency assets together, we left 1 or 2 brands in each segment. We've deconstructed the advantage provisions, which primarily for production, mainly digital, data insights, behavioral insights, performance marketing and brought them under the direct control now of the agencies, which enables them to firstshandly improve effectiveness and demonstrate sharing across the group. What we've also done is take a real look into the center and what do we really need in mission if we've got so much more now happening at an agency level. And that's meant that we've reduced our central marketing costs. We've looked at leases around the place and a number of other things and taking costs out of the center. The result of all that unexpectedly is a more effective group organization, which obviously was the plan going in, and there'll be more of that as we go through, I'm sure, over the months and years to come. By taking that more simplified structure, we can -- we start on the top, not at the bottom. And it means we have fewer senior managers in the business and fewer sites. We have much greater accountability, greater ownership and improved group collaboration. And we're seeing more investment in the key agency brands and less emission and none in the smaller brands. Obviously, there's been a cost to that reorganization, which is reflected in the accounts. The majority of that cost is a human cost, unfortunately, in terms of restructuring and redundancy, but the payback on that from a financial point of view is within 12 months or so. The other key strand we've been working hard on over the course of the first half of the year is in regard to systems. And the progress update there is that we remain very much on track. We remain on track to deliver the 2 key objectives. First of all, sort of by the second half of the year to have in place central accounting, production HR systems that talk to one another, talk to the business powered by AI. And we very much require that to drive the future incremental improvements that John has been talking about. Further on from there, we really have seen massive gains and take-up in terms of more and more work being performed through AI and content generation. And we're seeing that through a number of key clients in a number of areas. We're not trying to build our own large language models and so on and so forth. We are using the tools in the marketplace to effectively deliver against the requirements our clients have new and existing. Looking at the results themselves over the -- for the first half year. First off, so what have we done fundamentally, delivered that quarter 1 restructure is on systems and AI integration piece well underway. You'll see significant margin improvement, and you'll see profit in line with expectation for the first half year, even though revenue is down, which is obviously in line with the marketplace. Debt leverage is in a reasonable place. And just to remind everybody that we have a new 3-year bank facility that's been in place from around March. To take the basic P&L, the key headline numbers and sort of talk you through it, the green shading is the continuing operations, so excludes the disposal of April 6, primarily that happened at the end of last year. And there, you can see that on a pretty much like-for-like basis, operating income, which we call revenue down by GBP 1.6 million, which is 4%, that's give or take in line with the market. Our operating profit, 15% up, reflecting all the work that's gone into the restructuring that we just talked about and obviously, therefore, the margin improving. Because our interest servicing costs are down as a result of the disposal and the improvement in the cash -- in the net debt position, our profit before tax is, give or take, doubled where it was this time last year on a like-for-like basis. And even on the right-hand side of the page, if you were to include the April 6 acquisition, our headline profit before tax is pretty much where it was this time last year even excluding that component of the group. Just to take the sort of segmental highlights. So what's happening in each component of the group. In the first half, as you will likely know, if you follow the group, we are heavily geared towards the second half year for better or for worse. But the performance in the first half has seen some areas be quite resilient, in particular, business, B2B sector and Property sector, both enjoy good starts to the year. And of course, in the center where you've seen the cost savings coming through. Less straightforward in the Consumer market sector that is incredibly competitive at the moment, and you'll know that if you read around our sort of peer group, is a tough marketplace, and we've seen that in our own performance with the revenue being down about 10% in that segment in the first half year. But the restructuring that we've done against that has seen that the operating profit has been well mitigated as a result of that. So we're not far off in terms of operating profit performance to where we were last year. Sports and Entertainment, very much a growth part of our business. However, the first half year reflected that it's a business that can be quite lumpy in terms of the deals that we do there. And the fact that we're a little bit down first half this year versus first half of last year is more a reflection of the fact that those deals hoping to close more of those in the second half than we did last year. I don't think I need to say too much on the more full detailed P&L having run through that. One thing I maybe pull out, obviously, the revenues decreased by 4%. As we say, the market is -- that's not unusual. Operating expenses down 6%, but headcount down 3% and that kind of demonstrates, if you like, that we've been [indiscernible] how we've approached the cost reduction in the business. Reduced borrowing charges further down the page, impacting that improved headline profit before tax, which is double where it was last year. There are adjustments in, as I've already talked about, mainly reflecting the restructure that we've done and the payback on that should be relatively quick. In terms of cash flow, again, there's kind of not a lot to see there, the working capital position relatively flat, which is good for this year certainly compared to last year. The way that the cash flow works in our business is that we're quite front-loaded in terms of the nonoperating cash flow pieces. So acquisitions, in particular, earn-out payments on acquisitions and of course, our restructuring costs. And we're going to be back loaded in terms of trading profit. So the trading profit will flow through in the second half of the year and will not be bogged down by further nonoperating outflows. And that in itself then reflects in the balance sheet, where you can see total net debt is well down where it was this time last year, GBP 8 million less net debt including acquisition obligations that we had this time last year. It is higher than it was at the end of December by a couple of million, and that does reflect the restructure costs essentially and some of the other timings on cash, which obviously don't repeat in the second half of the year. The little chart on the right-hand side demonstrates where we are in terms of debt-leverage ratios compared to our covenant test. So you can see for yourself that the headroom we have there is okay. Worth just reflecting as well that our staff turnover is significantly down versus where it was when we came to market at end of last year, 16% compared to 23.5%. The last industry census through the IPA that we can see that is around 24%. It'd be interesting to see where that census comes the next time we can access that data. I suspect that generally, the market is start turnover across the group has reduced somewhat. So as I say, we are very much second half year business. So this is an important slide. How is it looking for the rest of the year? There is no doubt it's tough. We feel, as we sit here at the moment, we've got a strong pipeline, particularly in the Sports and Entertainment business, a pipeline which feels really healthy. It is, however, as you understand, a marketplace and sector and everything where we always at risk that sign-offs can be pushed back. That is not within our control. So it's not so much whether we feel some of these opportunities will land. It's more where these opportunities land by the notional cutoff point of the 31st of December 2025. So as we've already said in the press to date, we're currently on track to meet where we hope we would be, but it's tough. I think that's an important point to that. I'm going to hand back to John to sum up. I can see some questions coming through. I look forward to looking at those in a second, just in terms of a couple of next steps.

Yes. I think this business has to kind of start to look beyond just quarter-by-quarter. I think we do, as Giles has alluded to, I've spoken about, we've already done some simplification. I think there's more simplification to be had there. The prioritization has to come. And we need to get ourself in a position where we have the opportunity to invest to grow. Within that, as I said earlier, we want and we will review and we are reviewing the strategic parts of our business, each part of the business in turn, what the value is, what the value we bring to that is. And we will share that with you in the first half of next year through a Capital Markets Day. But more importantly, you will hear from the actual people running those businesses on what their plans are, what the value drivers are. And I hope that will give you not just a better understanding of what the group is made up of and where it's going, but a much greater confidence as well in terms of our ability and our desire to deliver against what we will describe as an ambitious set 2- to 3-year set of targets. So with that, let's kind of get to the questions. I think Giles has done quite a nice job as I was watching the questions come through, answering some of these as he presented. But in terms of the new agency segments, the question is, how do you see the 4 new agency segments supporting margin improvement over the next 12 to 14 months -- 12 to 24 months, I should say. I think as Giles said, I mean, the simplification reduced the costs. I think the other part of that is prioritization of accounts and really making sure from an agency business that we do put our best people on our best accounts and with the best opportunities. And that's something when you have such a proliferation of agencies and organizations, it's harder to do. So you have people doing a great job, but the opportunity in the account may be smaller when there may be bigger opportunities and higher margin opportunities elsewhere. The second thing you will start to hear from us going forward is not just our client pipeline, but our product pipeline, the offer pipeline as well. I think that's really important because we have got a lot of work going on around digital, around AI, et cetera, that bring new products to market but with much higher margin opportunity for us as well. And that's something you will hear a lot about. In terms of the question of what are our aspirations for margins, I mean, Giles, I'm going to give you...

Yes. I mean we've gone to market before saying, we know where we are at the moment isn't high enough. It doesn't give us enough operational leverage. We would be -- we are targeting 14%, 15% kind of as soon as we can get there. We feel at that level, we start to at least complete the set.

And the new products we bring to market will obviously be -- we require to be strongly north of that, and that's the pipeline, the innovation work we're doing. And by simplifying the set of agencies and utilizing the experience across the group, I think that will help. We go back up on the question. Sorry Giles. What is the current size and visibility of that second half pipeline, I think there's a couple of questions around that. I think it's linked to with set of new high profile new clients wins, how much cross agency opportunity? In terms of our pipeline, our pipeline across all of our businesses is strong. I think Giles makes a great point, though. We know in the market the wind is in our faces at the moment, not behind our backs. And so therefore, whilst I look at the opportunities and the new clients and say that is great. We are very reliant on how much they're going to spend this year versus next year. And so we know in some segments, people are pushing spending both in consumer segments, in particular, people are pushing spending back into next year into quarter 1 next year. We don't have a great visibility on how much that is at the moment. And I don't think anyone does, but it's something that we're very cognizant of. Our pipeline is very strong. Our timing is a critical part of this at the moment. Do you want to say anything? Do you want to highlight?

I'm sorry, running through -- so that's a good question. You said that sum of the parts is worth more than the whole. Are you looking to sell one or more of your agencies? I don't think -- I think the point of the sum of the parts being worth more than the whole is more -- that it's a fact. We -- in April 6, we disposed of the company that contributed 10% to 15% of profits for about 50% of the market cap. And clearly, we're not doing enough to communicate the inherent value of the member agencies of the group. And so when John talks about that, to my mind, it's about lifting the lid on that so we can better do that and then demonstrate how Mission is going to help 2 plus 2 equal 5. And it feels like maybe 2 plus 2 equals 1, which isn't quite where we're trying to get to. So I think that's more what we're saying, look, -- we're a public one, public company, and we have to take off since through if they come. But I think that's more the input...

But it's the challenge we face that we have to either address or deal with. And that's the strategic question we will have going into next year.

Yes, absolutely. It's a good question. Actually, it's quite a good question. I think we've generally answered the rest. I'm just going to double check. The scale of the opportunity for half 2 in Sports and Entertainment next year, I mean that's a hard question to answer. I mean there's some good opportunities there, it's clearly a hot part of the marketplace. And there are great opportunities, and we feel that in our portfolio of style business that where we would hope to see good growth behind over the coming times. There's one question here. There's one about the threats and opportunities from AI. I think -- I mean I can answer it to some degree, but...

Well, yes, I mean I'll jump in and then you can add. I think then the last question is probably a good last question to finish on. [ I stressed ] many times the table on AI and the other side of the table. And I think everybody now either sees AI as the guess of its business or the savior of its business and the reality is it's neither. It's an enabler to do business better. And so therefore, whilst internally, we are using AI as most companies are, to be honest, to actually improve the efficiency of our business. That's a great piece. We have also seen both the threat and the opportunity in the marketplace. And how I would characterize that is, I think some of our clients on the one hand are saying, well, actually, now I don't need any creative, I just need to plug my questions into ChatGPT, and I'm going to get the answer. And of course, that isn't as simple as that, but it's a threat in the short-term as people kind of believe they can do that. On the other hand, we are seeing a lot of clients coming to us, probably smaller clients who have never been able to get into this market to say, with AI, are you able to help us more at a lower cost and higher margin. And that's the opportunity for us. AI is an area that clearly is a disruptor for every business in the market, every business in every industry at the moment. I cannot think of an industry where AI is not a hot topic. Our job and our investment is around how do we help and use AI as an enabler to deliver better results. We are seeing some early wins on that, which I'm really pleased about. But I'm certainly not declaring victory as the race starts. It's something we will continue to talk about. We will continue to look at and invest in, but also with a healthy level of humility rather than skepticism about how much we know and what we can do. I think also we need to recognize with something with AI that it isn't about being the expert. This is about partnerships. This is about flexibility. And I think when you talk about Mission hubs and you talk about the relationships we have in our clients, this is a 2-way relationships. Many of our clients will help us to develop and do this. And I think it's the companies who develop the partnerships and the strength of working together that will succeed most in AI. It's the people who go off and think we're going to own AI that will struggle the most. And we're certainly in the former rather than the latter. So do we want to take [ them ].

So let's take -- I think maybe the last question is -- I think that's a good question about why did you take on the role at The Mission?

Well, I mean, it is not -- I mean why do I take on the role because I see the opportunity of what we can do. I think this is an exciting business. I think it has good people. The people I met before I joined the business gave me hope for our ability to actually grow significantly and drive it forward. I hope that combined with the experience I've had in previous similar roles will be a good combination. You guys will judge that much quicker than I will judge it. But I think I've not come in to be the creative or the advertising head of this business clearly. I think I've come in to be the business head and maybe bring in the mixture of rigor with emotion, but somebody who hasn't been around the industry forever, but who has a healthy respect and knowledge of it. And hopefully, together, we can actually really develop a good result.

Great, John, Giles, if I may just jump back in there, and thank you for addressing all those questions for investors today. And of course, the company can review your questions submitted and we'll publish those responses on the Investment Company platform. But John, before I redirect investors to provide you with their feedback, which is particularly important to the company, could I please ask you for a few closing comments?

You can. I'm in [ danger ] of repeating myself. Firstly, it genuinely is a privilege to take on this role. I hope people would feel that we are an open company. Please feel free to reach out any time to us. You are -- a lot of you are the owners of this company, and you have every right to question and challenge us and hopefully encourage us at the same time. In what is a tough market, we have a resilient company. We now need to take that resilience and drive our ambition, our focus and our growth. We have great people in our business. We will continue to add to that. There is never ever not going to be a home for great people in this organization. And truly, I want us to become a world-class organization in what we do. We don't want to be average, and we want to deliver for our clients. We are a client-facing business. Ultimately, they will be the biggest judge of how successful we are. The closer we get to them, the more opportunity, I believe, not just do we have to grow and to earn more margin, but actually to succeed and be a more robust business going forward. Thank you very much for your time. I appreciate it. I hope this has been helpful. Please, as I say, give us feedback on how and what more you'd like to hear from us, and we will address that going forward. We will be certainly very much dynamic in how we communicate with you.

That's great, John, Giles. Thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of The Mission Group plc, we would like to thank you for attending today's presentation, and good afternoon.