Enero Group Limited (EGG.AX) Earnings Call Transcript

Thank you for standing by, and welcome to the Enero Group Limited FY '22 Full Year Results Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Brent Scrimshaw, Chief Executive Officer. Please go ahead.

Thank you very much, and good morning, everyone, and thank you for joining CFO, Carla Webb-Sear, and myself to the Enero Group FY '22 Results Conference Call. Firstly, I'd like to begin by acknowledging the traditional custodians of the land in which we work, the Gadigal people of the Eora Nation and pay our respects to their elders past, present and emerging. Now the agenda for today's call is outlined on Slide 2. Firstly, I'll provide an overview of Enero's business performance, covering the record financial results we are delivering today. Carla will then take you through the group financials. And I'll return and provide some deeper insight into how Enero is well positioned to continue to grow. We then look forward to taking your questions at the conclusion of our presentation. So moving on and starting with our business performance on Slide 4. The strong financial performance we've delivered in FY '22 is a direct result of the deliberate and focused execution of our operating strategy. Pleasingly, our growth was supported by our well-diversified revenue base around the world and across our portfolio, with all businesses in the group contributing profit. In addition, we also continued to refine our portfolio throughout the year with the acquisition of ROI DNA in the United States and GetIT in Asia Pacific by Hotwire while also divesting The Leading Edge and The Digital Edge businesses, which no longer align with our strategic direction and our ambition as a global creative technology company. In FY '22, revenue grew by 20%, continuing our strong track record of sustainable growth. This included the Brand Transformation segment revenue, up 11% to $106.7 million, while our Creative Technology and Data segment was up 34% to $86.7 million. Overall, we improved our operating EBITDA margin by 380 basis points to 32.2%. So turning now to Slide 5, where our FY '22 results continue to build on our strong trajectory of revenue and EBITDA growth over the past 5 years, taking into account our 51% economic interest in OB Media. Our net revenue CAGR of nearly 13% has included both organic and inorganic growth. And operating EBITDA CAGR of 32% has been delivered over that period, with operating EBITDA margin expansion underpinned by growth from higher-margin businesses and an increasingly efficient operating cost base. Turning to Slide 6, which shows Enero's financial highlights for the year, which is slightly above the guidance we provided on June 8. Net revenue increased 20% to $193.4 million and operating EBITDA was up 36.4% to $62.2 million, noting that the actual growth rate here is 40.1% if you adjust for JobKeeper in FY '21. Net profit growth of 18.8% to $27.1 million was impacted by a higher tax rate and increased noncontrolling interest due to the strong growth in OB Media. And lastly, a final dividend of $0.065 per share fully franked has been declared, representing a payout ratio of 43%. This takes our total dividend for FY '22 to $0.125 per share. Turning to Slide 7, which shows Enero's consistent growth across our business segments over time. Brand Transformation net revenue has grown at a 4-year CAGR of 5.2%, while operating EBITDA has grown by 9.9% per annum. The 4-year revenue CAGR delivered by the Creative Technology and Data segment is an impressive 40% in terms of net revenue, as I mentioned, and 81.6% at the operating EBITDA line. On Slide 8, we've broken down our FY '22 performance now by segment for the first time. And Brand Transformation achieved 11.3% growth in net revenue to $106.7 million and an increase in operating EBITDA of 13.6% to $24.2 million. The strong growth was driven by Hotwire's differentiated reputation to revenue service offering, which is resonating across all geographies and also reflects a strong performance, particularly in the first half for creative agency BMF. In our Creative Technology and Data segment, revenue was up 34% to $86.7 million, and operating EBITDA grew 52.8% to $48.6 million. This was driven by the ongoing high performance of programmatic marketing platform, OB Media, as well as strong growth in Orchard's health care business in Australia and additional key wins in the Consumer division of the business. Whilst corporate cost as a percentage of revenue has continued to decline over time through economies of scale, in FY '22, costs of $10.6 million were up from $7.5 million in the prior corresponding period due to investment in new capability to support our global growth, group system implementations, travel that pleasingly reconnected us to our teams around the world as well as SAR or Share Appreciation Rights program. On Slide 9, we demonstrate the diversification of our revenue streams and the longevity of our client relationships. Our revenue continues to reflect our focus and is well diversified by industry with our largest categories of information technology and digital media. If we double-click into this technology-based revenue, we're largely operating in the B2B marketplace and we're well positioned with a relevant offering to capture opportunity in growth segments, including cloud computing, cybersecurity and digital transformation. In terms of geographic diversification, nearly 60% of our revenue is now delivered offshore. So that's outside of Australia. And our sticky services and strong and deep client relationships continue to drive repeatability in our revenue, with 66% of our clients having been within the Enero Group family now for 4-plus years, and almost half at 6 years or longer, which is a great insight into the relationships we enjoy. Slide 10 provides a high-level summary of the achievements of our Brand Transformation segment during the year. Starting with Hotwire, who have consistently delivered against their vision to be the preeminent global tech communications consultancy operating at the speed of tech. During FY '22, we deepened our reputation, relationship and revenue services. We deepened that offering to the marketplace, and we captured the global digital transformation opportunity as we completed the full integration of the McDonald Butler team out of the U.K. The addition of ROI DNA in the U.S.A. and GetIT's performance marketing capabilities in Singapore, India, Malaysia and Japan provided fully global network for the Hotwire group from July 1 this year as well as a platform for owned office expansion into Asia Pacific for the very first time. On to BMF, which is a globally renowned creative agency, famous as the home of the long idea and their commitment to enduring effective and emotive end-to-end ideas. Creating some of Australia's most high-profile and talked-about campaigns in FY '22, and might I add, celebrating its 25th birthday, BMF delivered its best year in the last 6 years, led by the creation of the First Things First COVID vaccine campaign for the Australian federal government and was also named the third most effective creative agency in the world by WARC 100. That's an amazing achievement for BMF on the global stage. So both Hotwire and BMF experienced double-digit top and bottom line growth, with margin improvement during the year. And they were also the recipients of numerous other prestigious industry awards, demonstrating the success of their work and the resonance of that work around the world during FY '22. So now moving to Creative Technology and Data on Slide 11. OB Media deepened its AI and its automation skills to enhance overall campaign efficiency and its effectiveness in FY '22. OB Media experienced 120% increase in customers delivered to advertiser web destinations and a 30% improvement in traffic conversion, which is a remarkable achievement by the team year-on-year. Throughout FY '22, OB Media also experienced strong growth from the continued enhancement of its media buying capabilities, machine learning and an improvement in its data science capabilities. Additionally, the OB team made some strategic investments in a number of key new hires to fuel the business. Orchard delivered both revenue and EBITDA growth in FY '22 with margins consistent year-on-year. Significant highlights included client wins such as Epson, Tourism Tasmania and amaysim, which is Australia's fourth largest telco, in addition to the continued strong performance from the Australian Healthcare business unit. Orchard was also the most awarded agency at the 2021 PRIME Healthcare Marketing awards, reflecting its innovative thought leadership in the health care marketing space. So that's it for me. I'll take a little break. And with that, on Slide 12, I'll hand over to Carla, who's going to run us through the group financial for FY '22.

Thanks, Brent, and thanks, everyone, for joining the call today. I'll begin with the profit and loss summary on Slide 13. It's worth noting that OB Media, to which Enero holds a 51% interest has been consolidated in the accounts. Enero Group reported net revenue of $193.4 million, which reflected year-on-year growth of 20%, demonstrating ongoing strong momentum. Staff costs of $111.7 million represented a ratio of 58% of revenue, which improved from 61% in FY '21, even after our investment in OB Media. While staff costs rose 13.6% in the current year, a reduction in the staff cost ratio was achieved given the increase in global head count was relatively low as compared to the revenue growth. The operating cost ratio to revenue, including right-of-use asset charge, reduced to 10% from 11% in the prior year. Overall operating costs rose due to travel expenses, increasing as COVID-19-related restrictions have eased and staff in offices around the world sought to reconnect after several years apart. Investments also continued in implementing our group-wide HR and finance systems. Right-of-use asset depreciation of $4 million reduced year-on-year due to the sale of Frank in the prior year. Looking forward to FY '23, we expect this charge to increase slightly to FY '21 levels to account for the small footprint of GetIT offices. ROI DNA will continue to remain a virtual office. Operating EBITDA of $62.2 million increased 36.4% year-on-year. Net finance costs of $1 million reduced year-on-year due to lower present value interest charges relating to contingent consideration payments for Orchard acquisition. In FY '23, we expect these costs to increase to reflect the present value interest charges on contingent consideration for our recent acquisitions and costs associated with our new debt facility. Our effective tax rate for the year was 25%, up from 21% in FY '21 due to Australian tax losses being fully recouped. For FY '23, we expect a similar tax rate of 25%. Noncontrolling interest of $16.8 million increased from $10.1 million in FY '21, reflecting the minority interest associated with OB Media. Net profit after tax before significant items to equity owners and after noncontrolling interests were $27.1 million, up 18.9%. And the final point to note is that the depreciation of the Australian dollar had a positive impact of $1.6 million on net revenue and $0.9 million on operating EBITDA. The balance sheet on Slide 14 highlights the strong financial performance of the group. Our increased cash position of $98.7 million was due to a debt drawn of $36.3 million for June 30, 2022, and consistent strong cash collection at the period end, offset by higher tax payments following utilization of tax losses in Australia. Debt drawn and held in cash at year-end was subsequently dispersed on July 1 through the acquisition of ROI DNA. With strong balance sheet, we retain flexibility to pursue our growth plans as we capture opportunities in high-growth verticals while navigating current macroeconomic conditions. Company's strong financial position has enabled declaration of a fully franked final dividend of $0.065 per share payable in October 2022, consistent with a payout ratio of 43%. The franking credit balance at June 30 was $9.9 million. The details of contingent consideration are outlined on Slide 15. The contingent consideration balance of $10.1 million relates to MBA acquired in April 2021, which has a maturity profile over FY '23 to FY '25 years. The final contingent consideration relating to Orchard Marketing was paid in September 2021. Adjusting for contingent consideration, net cash was $52.3 million at June 30, 2022, an increase of $30 million as at June 30, 2021. Contingent consideration payable for ROI DNA and GetIT acquisitions have not been disclosed in these tables given the acquisitions occurred subsequent to year-end close. Enero cash flow on Slide 16 highlights the strong cash conversion of our model. Cash conversion of EBITDA was 96%, reducing as expected from 121% in FY '21 due to unwinding of working capital. Gross cash flow increased to $63.7 million, up from $60.3 million in the prior year. Operating cash flow of $48.8 million was down from $53.2 million, reflecting higher tax paid. Tax payments were made in all jurisdictions with the increase predominantly relating to the U.S. and Australia, where operations commenced paying tax in the second half of FY '21. After cash funded CapEx and lease payments, free cash flow was $42 million. I now hand back to Brent to cover the company's growth strategy and outlook.

Okay. Thanks for that, Carla. So I'll continue now, just turning everybody to Slide 18 in order to provide a little bit of deeper context for the continued delivery of our strategy around the world. Enero will continue its expansion towards serving the digital transformation and the analytical needs of our clients globally, which we believe represent significant incremental opportunity for the group. With a clear focus on healthy and growing segments, our brands have built deep industry experience and are well positioned within each of those segments, and we'll continue to refine our offering with modern capabilities. So I'm now going to cover each of these themes in slightly more detail. If you turn to Slide 19, as we continue to broaden our offering to include digital transformation and analytics services, it's important to understand the size of the prize. Historically, our addressable market of $488 billion covers the traditional marketing services industry, traditional concepts like advertising, media buying, PR, content and digital marketing. But as we rapidly evolve our capabilities to serve the needs of forward-thinking brands, we also unlock the digital transformation and analytics marketplace over time, which then combined with the marketing services market provides a total addressable market of $1.2 trillion. So lots of room for potential future opportunity. On Slide 20, you can see that our businesses are operating in segments that are forecasted to grow into the future. Programmatic advertising is expected to continue along its CAGR of 23%. Data analytics and marketing automation spend are both forecast to continue to grow at 13% per annum over the next 5 years. Health care marketing after life science budgets grew strongly in 2021, whilst the vast majority of advertisers expect to maintain or increase their spend in 2022. So clearly, our strategy of building deep expertise in growing verticals is paying off, and we continue to remain relentlessly focused here in order to win. On Slide 21, we provided insight into clients' needs for integrated services. But most importantly, not at the expense of deep vertical expertise, which is now reflected in our operating model. Today's CMOs are tomorrow's Chief Revenue Officers or Chief Growth Officers, and they're looking for a single integrated provider that knows their business inside-out. That portfolio approach we have and subject matter experts enable us to deliver integrated and relevant functional capabilities but combined with deep vertical expertise and industry-specific experience. On Slide 22, given the importance of offering deep vertical experience, we continue to invest in modern capabilities to stay ahead of the curve. We acquired ROI DNA and GetIT to accelerate the revenue delivery services for our clients. Connecting revenue delivery capabilities to Hotwire's reputation and relationship skills in B2B tech is a transformational claim for the Hotwire business globally. ROI DNA is a leading B2B digital marketing agency in the U.S., while GetIT is APAC's leading B2B technology marketing agency. Now in addition, we've also acquired an impressive list of technology-led clients such as AWS, Cisco, Elastic, Google Cloud and of course, that complements Hotwire's existing industry penetration. It's important to note that both acquisitions will be accretive to earnings from year 1 and the earn-out is self-funding and dependent on management hitting specific earnings targets over a 3-year period. On Slide 23, B2B tech marketing continues to be a growth business. The historic net revenue of ROI DNA, GetIT and McDonald Butler Associates, which you'll remember was acquired in 2021, has grown at a CAGR of 25%, establishing a strong platform for us to build from. These acquisitions have materially changed Hotwire's business to now primarily be focused on reputation, relationships and revenue. And it's that combined contribution that can be seen on the right side of this slide, which shows a pro forma of Hotwire results combined with the 3 acquisitions, ABM services and their contribution. Lastly, Hotwire's global reach has been substantially expanded. On Slide 24, you can see that the business now employs more than 500 people through 15 owned offices operating in 11 countries, and that's excluding our partner network. So this global geographic presence combines scale and the new capabilities I've just spoken about and enables the Hotwire Group to serve significantly larger global RFPs where they were previously unable to compete. Turning to Slide 25 and our FY '22 key strategic priorities. So in '22, we continue to create a home for world-class talent with onboarding of key roles in OB Media, Orchard and BMF and we're excited to welcome the teams at ROI DNA and GetIT into the future. Our NPS scores have remained consistently strong despite the challenge of a highly competitive global hiring environment. And as we've discussed this morning, our Hotwire and MBA proposition from 2021 has now delivered joint wins and cross-selling in the U.K. and Europe, while ROI DNA and GetIT have added sophisticated performance marketing capabilities in North America and APAC into the future, which should position us well in FY '23. Our relentless focus on improving productivity and profitability through the implementation of technology and simplified and streamlined processes is reflected in the strong financial results we've delivered today. And we're particularly pleased to continue to deliver on our goal to maintain our already industry-leading margins with group earnings growing faster than revenues. And then lastly, our ambition to create an innovation engine within Enero in order to deliver new business opportunity is supported by an ongoing assessment of technology and data opportunities in today's global marketplace, combined with the flexibility to support our strategic plans. So moving to Slide 27 and turning to our key priorities for FY '23, which we've broken down into 5 key areas. Firstly is a primary focus on our core. We'll continue to drive initiatives that strengthen and accelerate our existing businesses as well as, for the first time, develop a clear ESG approach that underpins our business framework. Secondly, it's all about capability enhancement. It's critical for us to continue to develop and invest in new capabilities. We have to stay relevant. And we need to ensure that our relevance is maintained and even exceeded in a dynamic and changing global marketplace. Thirdly, it's critical we integrate and, most importantly, commercialize our recent investments. We'll complete the integration of a clear global go-to-market strategy for Hotwire as part of our recent acquisitions and remain relentlessly focused on driving commercial success. We'll continue to drive efficiency through systems integration and simplify processes that improve our productivity. And, of course, diligent cost management to preserve profitability. And finally, as always, as a people business and a people-led portfolio, we strive to be a magnet for talent. We'll continue to lead a post-COVID workplace model for the future, through both global L&D and further diversity, equity and inclusion initiatives around the world. So turning now to Slide 28 to provide you with a trading update. And whilst it's still very early in FY '23, in fact, the first 5 weeks have seen a continuation of the group's growth trajectory. The Creative Technology segment has continued its strong financial performance. The Brand Transformation segment pipeline remains robust with some near-term impact from macro conditions in the U.S. and the U.K. that may contribute to slower client decision-making. We remain focused on managing our staff cost ratios and continuing to achieve strong margins across our diversified portfolio of businesses and geographies. And Enero is well positioned for organic growth in FY '23, along, of course, with the full year benefit of ROI DNA and GetIT as part of the Hotwire Group. So that concludes our prepared remarks this morning. We thank you for your attention. And I'll now hand it back to the operator for any Q&A.

[Operator Instructions] Your first question comes from Hayden Liu from Evans & Partners.

Congratulations on a great set of results. Maybe if I could just start on the trading update. I mean you called out continued momentum in the first 5 weeks and a robust pipeline. I mean how much visibility do you have on the pipeline? How does the sort of pipeline look now versus, say, a few months ago compared to 6 months back? Are you able to give some color on that?

Yes. Well, obviously, it's only been 5 weeks. So in terms of being able to provide more insight to some degree, clearly, we've done that today. In terms of pipeline, for us, it is a robust pipeline across the business. And the Brand Transformation segment continues to see that visibility. Probably 1 to 2 months out is the normal visibility that we would have on that pipeline. So for us, we remain confident about the robustness of that in the period of the next couple of months.

Great. And maybe on the acquisition pipeline. I mean you just made the 2 pretty significant acquisitions of ROI and GetIT, but still got plenty of balance sheet capacity left with net cash of $50 million. Is M&A still a priority for the group or are you focusing on the integration of those 2 businesses?

Yes. I think there's 2 key priorities that I touched on as part of FY '23. Number 1 was around focusing on the core. So clearly, our ability to continue to invest and identify opportunities within our core businesses is the first list -- first on the list of our priorities. And then secondly, to your point, we've made some significant investments, and we are relentlessly focused in the first 5 weeks and from an ongoing perspective to commercialize those. We've brought, in fact, even in that short period of time, our leaders together in San Francisco and here in Australia. So that's ROI, McDonald Butler folks who are now Hotwire market in U.K. and GetIT together with the Enero team. And we've been able to move rapidly to focus on what our global go-to-market offering looks like. In fact, we've even had 2 global RFPs land on our desks as a result of these acquisitions. And significantly even 2 joint wins between GetIT and Hotwire here in Australia already in that first 5 weeks. So I guess, to answer your question, our focus is on the core. It's around commercializing those investments. Of course, we will continue to maintain close connections to global marketplace to be opportunistic with regards to any investments that we think can enhance the business over time.

Makes sense. I'm not sure if I'm reading too much into it, but just to assume, given you've taken out the debt for the ROI acquisition, that still got a bunch of cash on the balance sheet. Let's assume you're sort of keeping the firepower for further acquisitions. Is that sort of fair to say?

Hayden, I think we're remaining flexible. So we've got -- yes, we have got cash, and you can see the levels we've got at the end of the year. But I think we've consistently talked about having a bit of flexibility. And so in the current macro environment, we just -- we retain that flexibility. It's not to say what -- where that will get spent at this point, but it gives us options.

Yes. Okay. Great. And maybe just on the balance sheet again. Do you see any scenario where Enero will possibly be in a net debt position at all?

No, not at this point, in the mid-term.

Okay. Great. And maybe just lastly on the acquisitions. I mean you highlighted, Brent, the full year benefit expected from the contribution in FY '23. Are you able to quantify the expected contribution? I know ROI has a similar head count to Hotwire in North America. Is it sort of fair to assume a similar profile to the U.S. Agency business? Able to give any color on that?

Well, maybe I'll talk to the strategy. And Carla, maybe able talk to some of the financials around that. But I think, as you know, there's some commercial sensitivity around it. But both today and in other analyst calls at the time of the acquisition, we've disclosed some further historical performance. I think on Slide 23 today and contribution to Hotwire, and you get a sense of the glide slope of the combined performance marketing capabilities over time, which I think I called out as plus 25% CAGR as you combine those 3 businesses together. I think you also have some insight into head count within that business, which normally forms a little bit of a proxy for how you would think about the size and scale of the ROI opportunity, in this case, being the largest of those acquisitions. So from a strategy point of view and from a way to think about those businesses operating together in '23, maybe that's a couple of data points to think through and to connect on. I don't know if Carla, you have anything you want to add there.

Yes. I guess, Hayden, the other part is you've obviously at a point in time, looked through our U.S. geography in terms of your assumptions around OB and Hotwire U.S. I guess one of the important data points in a people-led business is giving you a sense of the head count of that business when acquiring it. Staff ratios that we follow is, again, a bit of a proxy to understanding and looking through at that business in terms of how you would expect those earnings to look in comparison to Hotwire U.S. business, probably the other point I'd make.

Your next question comes from Andrew Johnston from MST Access.

Brent and Carla, congratulations on the results. It's good to see the strategy that I think was put in place when you joined, Brent. Good to see that's really coming through this year. And probably the first year, we've seen that really start to come together with both the divestments of a couple of businesses and the acquisitions on 1st of July. So if I can just focus in on a couple of things. Brent, the traffic conversion metric for OB Media. Can you just comment on that and what that actually means?

Well, it means that the conversion of the traffic that OB Media deliver through their programmatic platform to advertiser destinations has grown.

Okay. So in other words, the difference between what they -- the number of ads they bid on and win and then the number of ads that people click through on. Is that...

Well, it's actually consumers that click through to the end destination. So if you were to measure that at any point in time, there's a dropout rate or conversion rate to all consumers that don't follow the entire process. And so what that, in effect, means is that consumers that are now following through to the entire end point of the process have improved by 30% which means that you've got more high-intent traffic being delivered, which in turn, obviously delivers better results for customers. So that's really how the -- how you should think about that traffic conversion statistic.

Wow, that could well be the most extraordinary number in your results actually. That's a huge -- it's a huge increase in conversion.

And as you know, Andrew, that's been driven by investments that we've made over the last 2 years in terms of both technology, continued focus around optimization of our platform and how it, in real time, provide intelligence for better decision-making. So the more you can optimize the traffic that you're driving through to drive a better result for clients, the better that conversion. Obviously, the better results that you can deliver, which in turn is a self-fulfilling cycle.

Yes, absolutely. No, that's a great result. Carla, can I just focus in on the cash conversion rate of 96%. That's pretty impressive cash conversion number. Can you -- and I can't recall what that was last year, but what's been driving that? And what's your outlook for that going forward?

Well, that's a good question, Andrew. I'm just trying to remember quickly what it was last year.