S4 Capital H2 2024 Earnings Call Transcript

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Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Good morning, everybody. Thanks for joining us. I'm in China, in Beijing. And Mary, Scott and Jean Benoit are in London. And we have Henry Cowling, who is in San Francisco on the West Coast at an unearthly hour.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

So thanks for getting up early or late or staying up late, Henry. So with that, let's just move to the first slide, if we can, please. Can we run up? We're going to run through the results. Mary will run through the results.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

And then Scott will run through business conditions and business performance. And then Henry will run through our focus on AI, and then we'll come back for a brief summary of the results after Jean Benoit has taken you through what we're doing in terms particularly in pricing and utilization and billability. So with that, Mary, do you want to get into the results, please?

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

Thank you, Martin. Good morning, and thank you for joining us today. I'll start with the financial headlines. Our performance in 2024 was impacted by challenging macroeconomic conditions, continued high interest rates and some underperformance compared to our markets. Net revenue was 755,000,000, down 11% on a like for like basis.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

Operational EBITDA was in line with expectations at 88,000,000. We made significant cost reductions to deliver an operational EBITDA margin of 11.6%, up 120 basis points like for like. EBITDA improved as these cost reductions took effect, and we delivered 58,000,000 in the second half compared to 30 in the first. Adjusted operating profit was 78,000,000, and adjusted earnings per share were 5.2p. We finished the year with net debt of a hundred and 43,000,000, below our target range, reflecting our focus on working capital management and tight cost control.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

Leverage was 1.6 times. The board is proposing a first dividend of 1p per share. Moving now to the income statement. In challenging market conditions, revenue decreased 16% on a reported basis to £848,000,000 and like for like was down 14%. Reported net revenue of $755,000,000 was down 14% or 11% like for like.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

This reflects lower spending from technology clients as well as a reduction from one of our larger relationships in our technology services practice. We reduced operating expenses by 14%, and the number of monks was about 7,150 at year end, down 7% on December 2023. Operational EBITDA of 88,000,000 was down 6% on a reported basis or broadly flat like for like. And operational EBITDA margin of 11.6% improved 90 basis points reported or 120 like for like. We recorded an impairment charge of 280,000,000 after tax, reflecting trading conditions in the second half of twenty twenty four and a revised medium term outlook after completion of our budget and three year planning process.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

I've given you a breakdown of the adjusting items in the table on the left hand side. The impairment charge, which mainly relates to goodwill, is included within amortization and impairment. Acquisition, restructuring and other expenses were 29,000,000. This includes 19,000,000 for restructuring, which has driven significant cost reductions, 5,000,000 of lease impairments from our property rationalization, and 4,000,000 for the implementation of our global finance system. Finally, net finance expense, which mainly relates to our term loan, decreased due to a benefit from foreign exchange compared to a charge in the prior year.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

Looking next at our three different practice areas, content, data and digital media, and technology services. My comments here are all on a like for like basis. Net revenue in our largest practice, content, was down 7% with ongoing caution and lower activity from some of our larger technology clients who are prioritizing investment in AI over operating expenses such as marketing. We continue to focus on reinvigorating growth, and Scott will talk more about this later. Data and digital media net revenue was down 4% with growth in the performance business, but lower net revenues from data and CRM.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

Overall, the practice grew in the final quarter. Net revenue in technology services was down 35%. This was due to lower revenue from one key client as expected, as well as longer sales cycles for new business reflecting the macroeconomic climate. We have hired an experienced sales leader to drive growth in this practice. From a regional perspective, The Americas, which includes technology services, was down 12% and accounts for 78% of the mix.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

EMEA decreased 5% and Asia Pacific declined 13%. Moving to EBITDA by practice on the next slide. Again, my comments are on a like for like basis. In content, operational EBITDA grew 31% to 49,000,000 despite lower net revenues due to our action on costs. Operational EBITDA margin improved two ninety basis points to 10.2%.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

We continue to focus on utilization and billability to further improve efficiency and margin. Data and digital media recorded a significant improvement in profitability despite a slight decline in net revenue as it managed costs in line with activity. Operational EBITDA was up 43% at 46,000,000, and margin increased from 16.2% to 23.9%. Technology services was impacted by anticipated lower revenues. Operational EBITDA of 12,000,000 was down from 43,000,000 in the prior year at a margin of 13.3%.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

Central costs were down 16% year on year, reflecting tight cost control. Moving to the next slide, you can see that we continue to maintain a strong balance sheet with sufficient liquidity and long dated maturities to facilitate growth. Our 100,000,000 revolving credit facility, which remains undrawn, matures in August 2026. And we have recently completed an extension for 80,000,000 of this to February 2028 on the same terms. Our €375,000,000 term loan matures in August 2028.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

We currently have comfortable headroom against the key covenant. Moving to cash flow on the next slide. CapEx of 8,000,000 is mainly investment in IT infrastructure. Interest paid includes the cost of our term loan, while lower tax paid reflects our performance in 2023. Restructuring and other one off expenses include 16,000,000 of restructuring payments, mainly related to people, and around 4,000,000 of spend on our global finance system.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

There was a working capital inflow of 15,000,000 supported by our focus on improving working capital. Free cash flow was 38,000,000, up from 14,000,000 in 2023. The cash spend on combinations was 10,000,000. This takes net debt to a hundred and 43,000,000 below our target range with leverage at 1.6 times. Turning to guidance for 2025.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

Given the combination of market uncertainty and technology clients prioritizing AI related capital expenditure, we expect net revenue and operational EBITDA to be broadly similar to 2024. Comparators for the first quarter are expected to remain difficult in part due to the residual effect of the reduction in revenue from one client in technology services. However, we anticipate an improved performance in the second half, supported by phasing of revenue from new business. Given the uncertain market outlook, we continue to focus on managing our cost base, utilization, and billability, and we'll take further action to support profitability. We anticipate a net finance cash charge of about 27,000,000 and a tax rate of 30 to 32%.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

Our expectations for net debt at year end are in the range of 100 to 140,000,000. We continue to focus on cash management, and our medium term target for leverage moves to 1.5 times at the bottom of our previous range. As usual, we have included information on weighted average share count and adjusting items in the appendix, and we are happy to take any questions on these at your convenience. So in summary, we expect clients to remain cautious in 2025. We are targeting a broadly similar level of performance as 2024, and we continue our disciplined approach to cost management and operational efficiency.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

Medium term prospects remain good. And with that, I will hand over to Scott for the strategy and client update.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Thank you, Mary. Good morning, everyone, and thank you very much for joining the call. I'm going to focus on Sfour's strategy and history, including some of the recent challenges we have seen and the measures we're taking to put the company back on a sustainable growth path. JB is going to take you through our focus on margin improvement. We'll also cover some of the strengths and differentiators we feel put us in a strong competitive position today and take you through some cases to illustrate the work we're doing for our clients.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Wes is with clients today, so Henry will then take you through the section he's prepared on our latest developments in artificial intelligence. Going back, we founded Sfour in 2018 with the ambition to become a disruptive force in the marketing communications industry. We launched with four core strategic pillars. Firstly, we'd focus on digital marketing services as this is a growth area. And at that point, 50% of spend was in digital.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Today, that's over 70%. We would take a data driven approach, offering clients integrated services in content, data, digital media and technology services. We would go to market as faster, more agile and responsive, better, a better understanding of the tech platforms, and cheaper, more effective and efficient for our clients. And more recently, we've added more to that, acknowledging how we work with clients to leverage the benefits of AI to achieve more for them. Finally, we'd have a unified brand to eliminate silos and provide integrated services to clients.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

The company grew via acquisition with MediaMonks and MightyHive being the initial cornerstone deals, giving us a firm foundation in our service offering, a burgeoning global presence and a strong client base, particularly in the technology sector. We expanded via M and A with a series of mergers to broaden the service offering, client portfolio, geographical coverage and talent base. We also experienced rapid organic growth with new business wins such as BMW and Mondelez and the expansion of our existing relationships. Digital marketing and the technology sector boomed in the post COVID recovery, fueling our progress and top line growth, which continued to be strong in 2021 and 2022. By the end of twenty twenty one, starting with nothing in 2018, we'd announced 27 acquisitions and had grown to nearly 6,000 employees.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

We then move into 2022, which was a watershed moment for the company. Whilst clients and revenue growth continued, which we were pleased with, we encountered two challenges. First, we needed to catch up on implementing internal processes, systems, policies and controls. And second, our staff numbers and costs had grown disproportionately faster than revenue and negatively impacted our margin that year. Early in 2022, we experienced an audit issue around deferred revenue, which delayed the publication of our FY 2021 numbers, impacting our share price and denting investor confidence.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

And whilst the audit issue was disappointing and ultimately not material, we had anticipated the need to tighten up internal controls and processes the year before. And Mary joined as group CFO at the start of 2022. We rapidly addressed the issues, building out a group finance team appropriate for the size and ambitions of the group, adding expertise and PLC experience and putting in place robust processes and documentation for revenue recognition under IRFS 15. Colin Day also joined as Chair of the Audit and Risk Committee in August 2022, bringing a wealth of experience. In the last three years, we've had no other issues of this kind, and all results have been released on time and unqualified.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Our auditors PwC have recognized the continued evolution of our finance function alongside legal and governance improvements. Now in 2025, thanks to the work of Mary and her colleagues, we have group functions appropriate for a FTSE two fifty company and a solid track record on reporting. We have strong internal controls and a well established internal audit function. We have a well functioning integrated finance team, which is focused on further improving forecasting and business support automation, including the implementation of a global ERP and cash management and working capital. In recent years, we've had some challenges which have impacted our growth and margins.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

We entered 2023 anticipating further growth and had hired aggressively in 2022, impacting our margin to service existing clients and prepare for another strong year. Unexpectedly, the tech companies pulled back aggressively in 2023 with significant redundancies and cost cutting addressing their over expansion post COVID. Mark Zuckerberg referred to this as Meta's year of efficiency and others followed suit. Sales and marketing expenditures were reduced across the board, having historically posted strong double digit growth. For example, Meta spend was down 21% in 2023 and their margin increased from 25% in 'twenty two to 35% in 'twenty three with their share price surging almost 200%.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

This approach to cost discipline continued in 2024, driven by their strategy to significantly invest in CapEx, primarily hardware and software related to AI. In 2024, the hyperscalers Google, Meta, Amazon and Microsoft increased CapEx investment 56% to almost $250,000,000,000 This meant further pressure on operating and marketing budgets in 2024 with Google and Meta both down and Amazon flat. This affected our competitors too. But given we have almost 50% of our revenues in technology, it's had an outsized impact on our ability to grow. The content relationship with Mondelez ended in 2023.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

And in 2024, First American, a client in our Tech Services division, has seen very significant pressure on their business given higher interest rates and as a result decided to ramp down and in house the work streams they had with us. High interest rates and general economic uncertainty led to client caution, which impacted our project based business, especially our ability to win new remits locally. We paused our M and A strategy in 2022 after 30 plus transactions in five years and the scale of which had posed some challenges for us from an integration perspective and a need to focus internally. With declining revenues, despite cuts and cost controls, our staff cost ratios are in the high 70s versus an industry average of around 65%. The challenges we've had with our revenue trajectory have made it difficult to align costs with revenue.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Whilst 2024 continued to be a challenging year from a growth perspective, we spent the year addressing these issues to rebuild our foundations for growth. Firstly, the pace of tech client spend cuts has slowed. The cuts I mentioned earlier have stabilized with the declines in sales and marketing expenditures moderating towards the end of 2024. And whilst they do not provide forward guidance on sales and marketing expenditure, analysts project it will return to moderate growth in 2025 as they start to invest in differentiation for their AI products in a highly competitive market and illustrate some ROI on their CapEx investments. That said, the hyperscalers continue to invest very heavily in CapEx this year.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Secondly, we continue to innovate our product. Launching our AI platform, MonksFlow, at CES in January 2024, over the course of the year, we brought onboard partners, won awards and implemented it with existing clients such as Google, BMW, SD Johnson and Amazon. And we developed a specific AI focused sales pipeline. We've had many updates on our AI approach, and Henry will do another one later. Thirdly, on client wins, the WAAPA client losses are mostly out of our comparables.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

And we have had a stronger pipeline and new business performance recently, especially with the win of GM, which will scale into a top three client over the course of 2025 and a significant expansion of our Amazon remit, an existing client. Fourthly, from an integration perspective, the mergers are now all fully integrated and we go to market as a single brand, Monks. We have centralized key functions such as finance, legal, HR and IT. And the company operates on the same platforms such as Slack, Salesforce, Workday and Google Workspace. Our migration to a single ERP is well underway and will be completed in early twenty twenty six.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

And we've simplified the business around marketing and technology services. We have a clearly articulated organizational structure based around geographical leadership and capability expertise. Finally, people. In 2024, we made several senior hires across country, regional management, capabilities, growth and client leadership, all of whom are now driving new business wins. Also, JB joined us in 2024 as S4 Chief Operating Officer to focus on the optimization of pricing, utilization, billability and improving our margins, getting staff cost ratios in line.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

And I'll now hand over to him for an update on progress.

Jean-Benoit Berty
Jean-Benoit Berty
COO at S4 Capital

Thank you, Scott. Good morning, good afternoon, everyone. As part of our continued push for further simplification and standardization, we launched in the second half of twenty twenty four an operational excellence program centered around three pillars with a specific objective for each. One, growth. Having greater predictability of our revenue forecast, resulting in more effective recruitment, resourcing and investment.

Jean-Benoit Berty
Jean-Benoit Berty
COO at S4 Capital

Two, productivity, getting more efficient use of our talent pool and technology such as AI to deliver higher net revenue per head. Three, profitability, achieving smarter pricing, live project performance tracking and tighter cost control to deliver higher EBITDA. We are specifically addressing five key operational areas impacting primarily productivity and profitability. One, we are adjusting our non billable versus billable headcount ratio two, making our billable people more billable across the board three, driving down our delivery cost to become more competitive and improving the mix of offshore versus near and offshore, which is yet fully maximized fourth, reducing our overruns across too many accounts because we are either over servicing them or not charging for everything we do. And five, addressing too many accounts that are below the profitability threshold, especially the long tail.

Jean-Benoit Berty
Jean-Benoit Berty
COO at S4 Capital

As a result, we are working on improving two key metrics: one, our personal cost as a percentage of net revenue ratio and two, our net revenue per head. We stabilized both metrics in 2024, and we look to continue improving on those two and others in 2025. We are on the right path.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Thank you, JB. We have a strong talent base with a great mix of both entrepreneurial leadership from our various mergers, balanced with strong industry hires from technology, marketing and consulting backgrounds. We've simplified our structure around a marketing and technology services practice with a client centric approach to return us to growth. We have a very compelling client list with some of the world's leading and most innovative companies. Nine of them are what we call WAPAs, that's revenues of $20,000,000 plus, which is a differentiator for a company of our scale.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Most of our direct competitors have a much more fragmented client list with smaller relationships and a longer tail. As you can see, we continue to be skewed towards the tech industry. But recent wins such as GM, which should scale to a top three client across this year, are changing that profile. These are strong relationships that help us attract and retain talent to work on them. The continued softness we're seeing in technology client spend and the first American decline in our tech services practice have had a negative effect on the average revenue size of our top twenty, ten and fifty clients segments.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

But this is primarily driven by reductions in spend rather than lost clients. As we enter 2025 and build our three year plan, we are stabilizing the business and focused on reinvigorating our growth plans. We have a very clear go to market strategy, which leverages our service capabilities and is underpinned by our expertise in both data and technology. We address four challenges for clients. The first one being brand relevance.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Clients are saying it's a cluttered work, cluttered world, so how do I keep my brand relevant and current and build its brand power in the market? For this, our go to market is real time brands model, where we bring the best of our social, experience and brand capability to bear. The principle here is that with our creativity, social area brands approach combined with the power of data, we can be constantly adapting brand messaging to leverage and contribute to culture. Or put more simply, we see creativity as inspiring through an ongoing and live conversation with people, not something that's finished and shipped as a campaign in traditional formats. We work in real time at the same speed as consumers to help our clients' brands be more relevant and strong.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

The second challenge is around complexity. Clients are saying it's all just too complex, and I feel like we're falling behind due to distraction. When my agency model is unwieldy and fragmented, it increases cost, reduces speed and quality and distracts my team. For this, our go to market is orchestration partner model, where Monks are the trusted partner to significantly reduce the complexity and cost of the agency ecosystem with an open source model that allows you to plug in ideas from us or from elsewhere. But with our AI super powered workflow suite, MonksFlow, we make sure the right message gets to the right audience in the right channel faster and cheaper.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

This is the go to market for which GM appointed us in June. This was a disruptive moment in the industry with the replacement of a traditional holding company model with the monks and some creative hotshots. There will be more of this to come in the industry. The third challenge is around media efficiency. Clients are saying I need to best manage marketing costs and the number one line item in that is media.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

I'm concerned that I'm wasting spend and that my agency is not recommending what's best for me, but what's best for them. This will continue to be a big focus for our clients in 2025, not only because of economic pressure, but because of increased demands for transparency from the media market. Our solution for this is Glassbox Media, where we fully transparent media operations with AI tools that help clients directly observe and manage their investments due to our deep relationships with the platforms like Google, Meta, Amazon and others. In a black box world, we are taking a glass box approach. The final challenge is around legacy operating and marketing models.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Clients are saying, I need work in a faster, better, cheaper way, but we are beholden to legacy ways of working and technology debt with outdated systems and processes. We help clients address this through digital business transformation. Our technology services and consulting practices enable transformation in clients via data optimization and management, tech stack integration, digital consumer experiences, cloud migration, AI and automation and other aspects of harnessing technology innovation. All of this is powered by our AI solution, MonksFlow. Our growth strategy is based around growing, keeping and getting clients.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Each of our major clients has a playbook developed with the growth team to identify and pursue organic opportunities, be they geographical or capability expansion. Sales strategies led by product leaders have been developed for each of the go to markets that I just discussed. We have engaged and are working with pitch consultants to help clarify our positioning and access larger RFP processes. At a recent Ad Forum event, we were rated second out of 18 agencies participating and received strong feedback on our capabilities. Monks have always had strong partnerships with tech companies, given they are also major client relationships for us.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

We go to market alongside the likes of Google, Amazon, NVIDIA and Adobe to provide services alongside their products and technologies. Finally, we are driving a conscious effort to increase our pipeline, pitch larger opportunities and diversify our client portfolio. We have a healthy pipeline and are pitching major opportunities in auto, telecom, pharma and FMCG. Google is our largest client with over GBP 100,000,000 annually. We have a team of over seven fifty monks in 30 markets working with almost 70 different Google teams and programs.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

We create content and B2B marketing for Google advertising, helping them convert advertisers. We help YouTube drive viewership via social media campaigns. We produce performance advertising for brands like Pixel and Chromebook to help them sell more hardware. We even help them design and bring to life their presence at CES. We're also one of two agencies working for Google on their media planning and buying and innovation.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

They are the ninth largest advertiser in the world, spending almost $9,000,000,000 a year. Google are also an extremely valuable partner for us. We provide services around their key products such as Google Marketing Platform, Google Cloud and Gemini. Our new business performance has improved as the pipeline gets healthier and the best recent example of this is General Motors. Last July, we were awarded the role of foundational agency across all four of their brands, where we will be responsible for producing all their marketing content, bringing them simplicity, consistency, scale and efficiencies via the use of technology and AI with MonksFlow.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

When announcing the appointment, the client made it clear that our technical capabilities were at the heart of our offer and differentiated us. The account is ramping up brand by brand and will reach full scale later this year. It will be a top three client for us, and we've also picked up assignments in Australia and China. I'll now hand over to Henry, our Chief Innovation Officer, to update us on artificial intelligence.

Henry Cowling
Henry Cowling
Chief Innovation Officer at Monks

Thank you, Scott. Hello. I'm Henry. I am going to I think I'm just gonna start by showing you some of our latest work, then I'm gonna tell you how it was made, why we did it, and what we think it means for our business and for the industry at large. If we could play the video, please.

For too long, greatness has been defined by the grind,

the relentless pursuit. Pain is power. Struggle is strength. Play has no place in sport.

But at Puma, we've always done things differently,

championing the fearless few who show up exactly as they are, unapologetically authentic, joyful pioneers, those who know that greatness is measured by the courage to play your own way.

Your story makes you strong. Your journey is yours to define.

Move the world like only you can because greatness is in your nature.

Henry Cowling
Henry Cowling
Chief Innovation Officer at Monks

Alright. So the question we often get, obviously, is where did you use AI? And the answer is, of course, everywhere. Every shot in this film was made working with or using directly AI agents, not just the visuals, but the actual creative idea for the film, the script, and obviously every subsequent step in the production process. It's a system combining dozens of AI agents, each grounded in different datasets, and they work sometimes collaboratively or sometimes adversarially against one another to get the best results.

Henry Cowling
Henry Cowling
Chief Innovation Officer at Monks

We call this kind of system intelligence as infrastructure. And we believe this system or systems like this are gonna become the backbone of every major marketing organization as enterprise learns to adopt and unlock the value of AI. So we built this to showcase our technology partnership with NVIDIA, and we have some important announcements about that, which I'll come to shortly. The system leverages NVIDIA NIMS, Cosmos and Omniverse, some of their key solutions. So to describe it, in short, creative agents wrote concepts for the film, copywriter agents developed the script and then visual agents actually created the storyboards.

Henry Cowling
Henry Cowling
Chief Innovation Officer at Monks

Art director agents built out the cinematic style,

Henry Cowling
Henry Cowling
Chief Innovation Officer at Monks

which you

Henry Cowling
Henry Cowling
Chief Innovation Officer at Monks

can see here. The product photography, on the next slide, thank you, uses digital twins and the motion is a result of agents working in Cosmos and Runway, another leading AI film solution. But we didn't do all of this just to create one film. Because of Monks Flow, the proprietary AI platform that we launched a year ago, what we've made here is the ability for a brand to create tens, hundreds, thousands of pieces of content, all grounded in different datasets tailored to different audiences and channels driving business growth. And these are not just lower funnel assets that we're talking about here.

Henry Cowling
Henry Cowling
Chief Innovation Officer at Monks

We are moving clients from agencies to agents across the funnel all the way up to the big idea, and we're gonna have more announcements about this at CANLION later this year. So real talk, this kind of innovation is causing some blowback in our industry. What we're seeing here is just a selection of the slew of negative comments that our Puma work has received from the more traditional agencies in our sector. Frankly, they hate it. I think they hate it because it's here to radically change their way of working.

Henry Cowling
Henry Cowling
Chief Innovation Officer at Monks

I think we can debate the ethics of AI all you want, but the economics are irrefutable. And we believe that every client in the world will have to either buy or build systems like the one I've just described, and they will need disruptive and innovative partners like Monks to be successful doing this. So to meet this demand, we've launched our NVIDIA Foundry and AgenTek AI advisory group in partnership with NVIDIA. We launched this last week. Design this is designed to bring this kind of innovation to every major marketing organization.

Henry Cowling
Henry Cowling
Chief Innovation Officer at Monks

So eighteen months ago in this forum, we said AI is gonna change the economics of advertising, and we committed to being fast and first in this new game. I believe that our innovations, like the one I've just shared with you, are living up to that promise. AI drove our biggest wins in 2024 and continues to be a growth service line for us. Thank you. And now I'll hand over to Sir Martin for the summary.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Thanks, Henry. And thanks to JB and to Scott and to Mary for the various sections of the presentation. So let me just turn to the summary and outlook. Firstly, the full year results were in line maybe ahead of expectations. Certainly, the trading guidance update guidance that we gave with improved margin and significant improvement in liquidity and net debt.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Secondly, net revenue was about $755,000,000 It was down almost 14% reported and 11% like for like. And that reflected lower spending on marketing services or marketing from technology clients as they switched OpEx to CapEx to invest in AI capacity, as well as a reduction in the activity of one large technology services plant, we have, and First America. And we saw continued caution against a challenging global macroeconomic backdrop and high interest rates as well as some underperformance when compared to our our addressable markets. Thirdly, costs continue to be tightly controlled, and the number of monks at the year end was about 7,200, down about 7% from the 700 at December of last year. Our operational EBITDA of almost 88,000,000, imputed a margin of around 11.6.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

And as a result of all this, mainly to show confidence in the future, the board is proposing a net dividend of 1p per share as a signal of confidence in the future and a reward to shareholders over the last couple of years, which have been which have not been easy and been difficult. Having said that, net debt liquidity has improved quite considerably. At the year end, we're about $143,000,000 leverage ratio debt to EBITDA of 1.6 times. That's at the bottom end of our guidance range of 1.5 to two times and it reflects a very strong focus on working capital and ongoing cost control. But obviously, as you heard from JB and others, there's more to go for, not only in terms of cost control, but working capital too.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

We generated about 38,000,000 of cash flow in the year. And that, but at the same time, of about 10,000,000 of acquisition payments, which were in January of last year. So acquisition payments are now completely finished. 2025 net revenue and operational EBITDA is expected to be broadly similar in 2025 to 2024 with difficult comparatives in the first quarter and expected improvement in performance in the second half aided by the phasing of new business. General Motors, for example, will kick in fully at the end of Q1 this year into Q2.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

The net debt target range for 2025 is now 100,000,000 to 140,000,000, and that compares with 150,000,000 to 190,000,000 last year. And as you know, we hit net debt of 143,000,000 at the end of the year. We've rebranded, as Scott said, to Monks and are now streamlined into two practices from three. Content and data and digital media have been consolidated into marketing services. And the second practice now is technology services.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

That's digital transformation, not just in the marketing function, but the enterprise function too. We continue to capitalize as Henry has laid out in our prominent AI position, and that's driving new business wins such as General Motors and expansion of relationships such as Amazon as we saw last year. And finally, we remain confident in our talent, in our business model, in our strategy and our scaled relationships, which we think position us well for above industry average growth in the longer term with an emphasis, as you've heard, on improving productivity through optimizing pricing, utilization and billability. So with that as background, I think that the points to make really that last year, we saw an improvement, a significant improvement in the profitability of the content practice, a significant improvement in the profitability of data and digital media. I think the second major point was liquidity improved quite strongly.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

And we began to show a little bit of what we could do in terms of cash conversion. There's obviously more to go for in that. And then finally, I guess, the third point is that it's signifying confidence, not just in those results, but in the future, our board decided to pay our an inaugural dividend of 1P net per share. So with that as background, can we turn the presentation over for questions, operator, to the audience, please?

Operator

Thank you, sir. And our first question is from Julien Roch from Barclays. Please go ahead.

Julien Roch
Julien Roch
Managing Director at Barclays

Yes, good morning, everybody. Thank you for the very detailed presentation. You mentioned at one point your three year planning process. So you gave us guidance for this year around last year. But at one point, you were giving the three year growth rate.

Julien Roch
Julien Roch
Managing Director at Barclays

So can we have some color on your planning in the next two years? Where can you go back in terms of organic in a normal macro environment? Are we talking 5%, ten %, fifteen %? That's my first question.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Why don't we Okay. One by one, Julian. I mean, we won't give more detail. Three year plans tend to be I tend to look at the world, I guess, on a fiftyfifty basis. Budgets tend to be, I think, a little bit more conservative, with provisioning with central provisioning that put in as we see and think fit.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

But I would say to you that the three year plan that we put together for 25% to 7%, which the first year was the budget, was, I think, a little bit better in terms of performance than we've seen in the last couple of years. So I wouldn't be drawn on what the specific numbers are, but I would say that that people's views of the business are quite healthy in terms of what they see the potential in 'twenty six and 'twenty seven. Do you want to add anything like that, Mary? I mean, you dealt with it blow by blow.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

No, I think you've covered it all. Thank you, Martin.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

All right.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Scott, do

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

you want to add anything?

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

No, nothing from me, Martin.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Okay. All right.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Go ahead.

Julien Roch
Julien Roch
Managing Director at Barclays

Then second question is on media. So Scott, on Page 21 of the slide, went through Glassbox Media, say more focused on transparency. But Interpublic actually said one of the reason we struggled recently is principal media because clients now prefer cheaper non transparent media versus fully transparent but more expensive media. So are you just talking your own book? Or is there really another u-turn in the market from transparent to principal back to transparent?

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Scott, do you want to kick off on that and I'll come into that?

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Yes, sure. I mean, I don't think clients preferred nontransparent approaches and you know, recent police raids in China and India would suggest that the market doesn't necessarily prefer that either. And I'd also say that, you know, I think some of the groups have that offering, and push it down clients' throats quite aggressively. I think the reality is clients look at their media cost. It's their number one cost item when it comes to marketing.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

So it's not really agency fees, it's media cost. And they really want to see that that's spent in an effective and efficient way. And I think from a trust perspective, they want to measure that in a transparent way. So I think we feel pretty confident that that's something that clients really want.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

I think there's a difference of view, Julian, to the IPG Omnicon merger was also a justification for it was that IPG Media brands needed scale. I don't think in the digital media area, you necessarily need scale. You need data, certainly first party data, not third party data, first party data, which is basically client consumer consented data that clients control, not that agencies control, but clients control, plus the signals from the platforms. And in an era of algorithms, quantum and most importantly, probably blockchain, I don't think frictions in the system are going to survive. In other words, if you're building a media business on discounts, Those discounts will come under huge pressure.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Scott mentioned that the raids that took place in India last week, purportedly around IPL pricing and collusion on IPL pricing. But maybe it's to do with discounts as well. We have to see how it pans out. But there are very few markets, I think, where which will survive opacity, I think transparency is going to become more and more important.

Julien Roch
Julien Roch
Managing Director at Barclays

Okay. And then the last one is on AI. So you said you are at the forefront, but Publicis did a session on AI on March 6 and they said they were the best category of one. Nobody could do what they do. WGP had a presentation on open in December and they say it was great.

Julien Roch
Julien Roch
Managing Director at Barclays

So as usual, I have no idea. I can always say you're amazing. We're none the wiser. So where do you feel you are truly ahead and differentiated? What can you do that other agencies cannot do?

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Okay. All right, Scott, do you want to have a go and I'll chip in as well? And Henry maybe

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

I think, listen, everyone's very focused on AI, so it shouldn't come as a surprise that, now I'd be worried if agencies weren't presenting their sort of AI credentials. I would say we've been very consistent. So every single quarter in this call for now, I think, eighteen months, you've had an AI update. That's not the case with any of our competitors, I think. I think most of them have done two, maybe three presentations max.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

Some of them have done none. I think one of the consistent things you've seen from us is client case studies. And again, in some in most of the other presentations I've seen, at best you get an anonymous example, but not an actual case study. We have market and work. We've had at Cannes last year, we had Google presenting our work.

Scott Spirit
Scott Spirit
Chief Growth Officer at S4 Capital

We had Meta presenting our work live on stage and we were the only agency that had that. So I think our promise, as Henry said, was that we'd be first and fast. And I think that's what's really differentiated us so far. But Henry knows far more than me. So

Henry Cowling
Henry Cowling
Chief Innovation Officer at Monks

Glad to be. I double down on what Scott said. The work in market, the results that we're getting for clients, the proof and the progress that we're making, all in my view speak for themselves. I think we're especially strong in our partnerships with technology companies as the work that I just shared with NVIDIA for Puma demonstrates. And I think we are really where the rubber hits the road in terms of implementing AI in our clients and helping them unlock the value of it.

Henry Cowling
Henry Cowling
Chief Innovation Officer at Monks

I think we because of our fast and fast mentality in this space, we've been quite aggressive in unlocking the value of AI and disrupting commercial models wherever we can using it. And we see it primarily as a conquesting opportunity for Monks, hence the notable wins with GM last year.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Yes. Just to add, I don't think we see it as market leader. We see it as a challenger, as a disruptor. So I think that's one point which Henry just underlined. I think the second point that's really important is that our technology understanding of those 7,000 people, and in particular, those people that focus on the AI area that we're talking about, which now permeates pretty much all of our business, have deep technical knowledge.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

I know one of our partners said a few months ago that it was unusual for agencies to append their programs, their code language work to presentations, that we tend to do that. And that what was unusual about us is that when those technology partners tested coded programs, they worked. They said in many other cases, the it doesn't the programs are offered, but they don't work. So I think it's just an example of what or another example would be what we're doing in outside broadcasting with NVIDIA, with AWS and Adobe, around converting what I would call old outside broadcasting, our truck, using a truck for a football match or whatever, as opposed to using AI cloud and remote broadcasting systems. So I think deep technical knowledge is what our people have, and I think that does differentiate this.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

And it results in things like awards, the Adweek award and others in terms of performance. But Julien, at the end of the day, you'll see the answer to your question in the long run.

Julien Roch
Julien Roch
Managing Director at Barclays

Okay. Thank you very much for those detailed answer.

Operator

Thank you. Our next question is from Steve Lichty from Deutsche Nummies. Please go ahead.

Steve Liechti
Media Analyst at Numis Securities Ltd

Yes. Good morning, everybody. Okay. First question, please. On can you actually break out in 2024 what tech services like for like was if you stripped out the client loss, which I presume is First American, and where exactly that stops in 'twenty five?

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Yes. I think the answer where it is stopping 'twenty five in terms of the comparisons as we get into Q2, Q3. Mary, do you want to it's very difficult for us to strip it out. I mean, it would be much more stable, obviously, as a result. And can you hazard a guess on that?

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

Yes, sure. Hi, Steve. So if we look at the group as a whole, that particular client in tech services accounted for about half of our decline. So it has a very significant impact on both the group as a whole and on technology services. In terms of the comparator, so we saw net revenue from this client in the first half of twenty twenty four.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

So it will be as we move into H2 that we fully clear the comp.

Steve Liechti
Media Analyst at Numis Securities Ltd

Okay. So has that client completely stopped spending with you?

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Yes, pretty much.

Steve Liechti
Media Analyst at Numis Securities Ltd

Yes. Okay. Cool. All right. Thank you.

Steve Liechti
Media Analyst at Numis Securities Ltd

And then second question, just on the unified brand and everything you've been doing to bring everything together, I can see and you said about the ERP, you've given a timeline on that. But as far as you're concerned as a business, are you now in the place that you need to be from an internal management perspective to get it back on the front foot rather than kind of looking inward as you have been doing for the last, well, let's say, two years.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

When you say internal management, are you talking about systems or what?

Steve Liechti
Media Analyst at Numis Securities Ltd

Yes, I guess, I'm asking lots of different things here. One is that the unified brands, I. E, bringing together all the agencies, so that's the first thing. And the second thing is the management controls and infrastructure that you've got in place now to go forward and we're assuming that the financial controls are pretty much done ex ERP.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Yes, I think that's fair. I mean, JB, do you want to comment on that?

Jean-Benoit Berty
Jean-Benoit Berty
COO at S4 Capital

Yes. So obviously, we continue to simplify and harmonize across the board. We are pretty much where we would like to be in terms of governance and processes. We continue to rationalize our tools. We continue to build some of our dashboards, so we have greater visibility and predictability of our business.

Jean-Benoit Berty
Jean-Benoit Berty
COO at S4 Capital

So we'll continue to make tweaks in 2025, but we have made great progress in 2024.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Just to add to that, I think we have a little bit further to go in terms of management structure, Steve. And I think so there's a little bit more work to do. I mean, on ERP, Mary, I mean, just so we're clear, you're basically saying the ERP will be implemented by next year.

Mary Basterfield
Mary Basterfield
Group Chief Financial Officer at S4 Capital

Yeah. That's right. We're making good progress on the rollout of the ERP, and we have, done a large part of DDM, all of technology services. And through 2025, we'll be rolling out on content, and the remainder of DDM with some tail of the content business in 2026. I'm very pleased with how it's going, and the team are, you know, motoring away now to move the rest of the entities across.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

And I think they they be I mean, it's fair to say that we're we're starting to get some decent it's taken long enough time, but we've take starting to get some decent data on pricing and billability utilization. You want to say any more about

Jean-Benoit Berty
Jean-Benoit Berty
COO at S4 Capital

that? Yes, yes, definitely. We obviously, because of the legacy of Monks bringing together 30 plus companies together, it took us a while to obviously get a true basic picture of our performance across the business. We now have much better metrics and data, so we don't understand where we are performing, where we're not performing well enough. And that is definitely helping us be a little more targeted in terms of where we want to improve our utilization, availability, our cost base from a workforce perspective and understand also what drives profitability from a client perspective and from a project perspective as well.

Jean-Benoit Berty
Jean-Benoit Berty
COO at S4 Capital

So 2025 is going to benefit from having those new data sets that we have now.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Any more on that?

Steve Liechti
Media Analyst at Numis Securities Ltd

No, no, I think that gives me a good flavor.

Steve Liechti
Media Analyst at Numis Securities Ltd

But the key point that I'm trying to get across is that it kind of feels like the heavy lifting's done in terms of the restructuring, and you can kind of be more on the front foot into 25 on the new business front and from there. Is that a fair comment?

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

I think that's fair. I think we're getting our act together in terms of the structure and the processes. I think there's more focus on various areas. And Bruno Lampertini is getting heavily into the marketing services part of the business, which is by far the biggest part of the business and Nicky Gifford and JB keeping a watching brief on it on Technology Services. And as we've indicated, we've made a significant hire from a major business process outsourcing company to help with the tech services pipeline, somebody who worked with Nikki previously in her previous existence as well.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

So it's building a stronger team in terms of tech services and marketing.

Steve Liechti
Media Analyst at Numis Securities Ltd

Great. Thank you. And last one, it's interesting you've kept your guidance pretty much the same from your trading update that you did in January, and it kind of feels like the macros have got a lot worse overall or concerns have got a lot worse.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Well, I think that's an important distinction. You said it's got worse, and then you said concerns. I think probably the latter is true. I don't know whether a lot worse is the right thing, but now I'm sitting here in Beijing, and there's a whole group of people here of American and European businesses. And I I again, that's whether they're they're sort of guests of the Chinese government and therefore are are naturally, as a result, optimistic.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

But I would say actually that the feelings about the Chinese economy are sort of positive, but that may be because they're visiting and wanna be nice to be cynical about it. But there is no doubt that there is uncertainty around the President Trump's Trump two point zero tariffs, its impact on pricing, impact on inflation and impact on uncertainty. So I think you're right. And we did say in the report that uncertainty had ratcheted up. That was the phrase we used.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

But as to whether that's materialized in, you know, people cutting contracts, I think one of the things we have seen is an inclination for people to delay things. And that's understandable. When there's delay when there's uncertainty, there will be delay. I mean, I sat in a room, I remember two weeks ago, where Canadian tariffs in the morning were at 25% by midday had doubled to 50% potentially. And by the time we left the room in which we were sitting, we're back down to 25%.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

It's very difficult to conceive that anybody can run a business effectively when you're dealing with that sort of uncertainty. But as to whether that's translated into we've heard it on DOGE contracts. I think Accenture said words to the effect that the activities of Elon Musk and Doge on government contracts, where we, for example, are not heavily exposed to at all, had caused cuts. So maybe in those areas, Steve, we've seen it, but beyond that, I don't think as yet, not in terms of defined actions yet.

Steve Liechti
Media Analyst at Numis Securities Ltd

Great. Thank you very much.

Operator

Thank you. With this, I'd like to hand the call back over to sir Martin for any additional or closing remarks. Over to you, sir.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Okay. Well, looks like thanks, Dave. Not any more questions. Mary, Scott, JB, myself, Henry, who got up again or is up at a very early one and has to stay up actually because we're going to do another one of these calls in a few hours' time. Thank everybody for joining us.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Any further questions, let us know. Unless there's anything else up, great, and we can finish there. We'll see you for the first quarter in a few months' time.

Executives
    • Martin Sorrell
      Martin Sorrell
      Executive Chairman
    • Mary Basterfield
      Mary Basterfield
      Group Chief Financial Officer
    • Scott Spirit
      Scott Spirit
      Chief Growth Officer
    • Jean-Benoit Berty
      Jean-Benoit Berty
      COO
Analysts
Earnings Conference Call
S4 Capital H2 2024
00:00 / 00:00

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