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Edited Transcript of INWK earnings conference call or presentation 14-Aug-18 9:00pm GMT

Q2 2018 InnerWorkings Inc Earnings Call

Chicago Aug 30, 2018 (Thomson StreetEvents) -- Edited Transcript of InnerWorkings Inc earnings conference call or presentation Tuesday, August 14, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bridget Freas

InnerWorkings, Inc. - VP of Finance & IR

* Charles D. Hodgkins

InnerWorkings, Inc. - Interim CFO and Senior VP of Corporate Development & Strategic Initiatives

* Richard S. Stoddart

InnerWorkings, Inc. - President, CEO & Director

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Conference Call Participants

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* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the InnerWorkings, Inc. Quarterly Earnings Call. (Operator Instructions) And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Ms. Bridget Freas. Ma'am, you may begin.

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Bridget Freas, InnerWorkings, Inc. - VP of Finance & IR [2]

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Good afternoon, and welcome to our second quarter 2018 earnings call. Joining me on the call today are Rich Stoddart, our Chief Executive Officer; and Chip Hodgkins, our interim Chief Financial Officer. We issued a press release with additional information earlier today, which is available on our website, www.inwk.com.

Please note, this call will include forward-looking statements relating to future results that are made pursuant to the safe harbor provisions of the federal securities laws. These statements are subject to a variety of risks, uncertainties and assumptions that may cause actual results to differ materially from those stated or implied by the forward-looking statements. Additional information concerning these risks, uncertainties and assumptions is contained in our SEC filings, including the Risk Factors section contained in our most recent Form 10-K/A. Any forward-looking statements represent our views only as of today and should not be relied upon as of any subsequent date.

This call will discuss, among other financial performance measures, non-GAAP adjusted EBITDA and non-GAAP earnings per diluted share. Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP measures to the most comparable GAAP measures. This call is intended for investors and analysts, and may not be reproduced in the media in whole or in part without our prior consent.

I'll now turn it over to Rich.

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [3]

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Good afternoon, and thank you for joining us. Based on the market reaction to our first quarter earnings call a couple of weeks ago, taken together with our recent conversations with current and prospective shareholders, I want to be very clear about the strength of our business. Let me assure you, InnerWorkings' business model is rock-solid. Our client retention rate remains incredibly high. We're expanding with existing clients while adding new ones. Our sales pipeline is full of potential. Our reputation, software, breadth of services and global platform give us a clear, competitive edge. We continue to grow, and we'll keep doing so in the future.

We do have one area we need to improve. We need to reduce our G&A expenses. I can assure you that this challenge is very manageable when we have the strength of our enviable customer base, global supplier network and talented employees on our side. Our G&A spending is totally within our control, and we're going after it aggressively. I'm encouraged not only by our plan, but the speed with which we've made progress already in the third quarter. I'll tell you about that plan in a minute. But first, I'd like to share some exciting new client wins.

Our year-to-date total is now $85 million of additional gross revenue at full run rate. I'm excited to say that this is well ahead of where we were at this time last year and includes 2 important client expansions that were awarded to us in the last 2 weeks.

First, we've expanded our long-standing relationship with a global healthcare company. We started our collaboration 5 years ago as this company's worldwide branded merchandise provider. With this new expansion, InnerWorkings will now be the global partner for both branded merchandise and point-of-sale displays, doubling the scope across 10 countries. We'll also support the implementation of integrated digital tools to streamline the user experience related to the company's global E-catalogs.

Second, we're expanding a program that began less than 9 months ago with an iconic CPG food brand. We are already serving this recently onboarded client in their product merchandising programs. With this new scope, we've extended into the additional category of retail point-of-sale across all of their U.S. customers and brands, making us their comprehensive solution for in-store consumer engagement.

Through these new deals, we're reinforcing our mandate to provide a single-source solution to our clients globally. On a related note, in recent weeks, we completed the installation of 2 significant e-commerce solutions that have been in development since late 2017. These were for 2 of our largest new engagements in the beer, wine and spirits vertical. We're excited by the growing number of companies choosing VALO to be their single-source global B2B commerce solution and realize all the benefits, such as global collaboration, demand aggregation, streamlined approvals and management reporting. We're continuing to leverage the power of VALO and have a few advanced discussions with client prospects that we look forward to telling you about on future calls.

I'd like to now tell you what we're doing to improve our cost structure. We're targeting SG&A expenses in 2019 to be in line with that of 2017, though supporting a larger revenue base.

Assuming similar gross revenue growth and gross margin levels as in 2018, we expect this improved SG&A to enable non-GAAP adjusted EBITDA in the range of $65 million to $70 million in 2019, significantly above our expectation for 2018.

To achieve this, we expect to reduce our G&A expenses by an annualized $20 million over the next few quarters, mainly by lowering our headcount in targeted areas.

These identified cost reductions include approximately $7 million specifically related to the lower revenue we're expecting from our large client in the retail environments category as discussed on the last call. The rest of the reductions are being made across our business to realign underperforming operations and better leverage our people across accounts. Our cost reduction plan is already in effect and approximately 50% will be implemented by October 1, though the full benefit will not be realized until 2019.

Meanwhile, we will continue to make investment in our SG&A in the regular course of business to onboard new clients and strengthen our capabilities on our team. We're also making temporary investment to improve operational processes, centralize certain functions and drive consistency across our business. These expenses are largely for third-party professional services firms to provide additional support and expertise. These 3 drivers of SG&A, permanent reduction, high return investment and temporary investment, will together result in a 2019 SG&A level that is in line with that of 2017, driving sustainable operating leverage and scale to enable high-contribution margins from future growth beyond next year.

Let me make clear that the headcount reductions in this plan, intended to better leverage our talent across our accounts, will have no impact on our ability to serve our clients with the level of excellence they expect and will be invisible to them. In addition, we are not impacting our sales and marketing engine as we continue to be a growth company at heart. This is an evolutionary improvement in the way we staff our accounts, centralizing nonclient-facing functions, such as sourcing and billing and instituting operational improvements that will allow for greater centralization over time.

These improvements not only facilitate reacting quickly to changes in marketing spend by our clients, but importantly, they make our business more scalable.

Centralizing nonclient-facing functions is not a new concept at InnerWorkings. We formed a central operations team near Tampa, Florida, a few years ago, in a pilot program that has been successful, but has not been fully rolled out. We've also initiated centralized sourcing functions in our international regions and are already seeing early success of this model in Latin America. We previously limited the scope of work to transition to a centralized model given the lack of consistency in operating practices across accounts. With consistency a top goal of our operational process initiatives already in play, we plan to implement this model with more client accounts at a measured pace.

We remain committed to adding on-site account teams at our clients, but we intend to be smarter about which tasks are performed on-site to better leverage our talent. Our cost plan is ambitious and is being implemented aggressively, but it's not complete. We will continue to reflect -- refine the plan as we go forward and we have the help of a nationally recognized consulting firm. This third-party expert will take a hard look at our business to make sure we leave no stones unturned. I'm optimistic they'll find further opportunities to drive efficiencies in our business and further lower our G&A expenses beyond the $20 million we've identified.

I have full confidence in our senior leadership team's ability to successfully execute our plan as we're all committed to operational excellence and driving value for our clients and shareholders.

Chip will now take us through our financial performance for the second quarter. Chip?

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Charles D. Hodgkins, InnerWorkings, Inc. - Interim CFO and Senior VP of Corporate Development & Strategic Initiatives [4]

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Thanks, Rich. Hi, everyone. Our second quarter gross revenue was $282 million, an increase of 1% over the second quarter of 2017. Excluding currency impacts, gross revenue growth was 4%. Our gross profit or net revenue was $64.9 million compared to $70 million in the same period of last year. Our gross margin was 23% in the second quarter and is 23.5% year-to-date. Second quarter gross margins were negatively impacted by short-term performance in 2 newer accounts in North America. We expect our gross margin to be approximately 24% for the full year due to business mix and supply chain initiatives that we expect to benefit the second half of 2018. Net loss was $0.3 million or $0.01 per share.

Second quarter non-GAAP earnings per share was $0.01, down from $0.12 a year ago. The main differences between our GAAP and non-GAAP earnings per share relate to professional fees incurred in restating our prior-period financial statements. Adjusted EBITDA was $8.2 million in the second quarter, down from $16.5 million in the second quarter of last year. Adjusted EBITDA was 12.6% of net revenue in the second quarter compared to 23.5% a year ago.

Our tax rate in the second quarter was impacted by losses in entities that had valuation allowances against deferred tax assets as well as by other onetime impacts. Excluding these items, our effective tax rate was 25% year-to-date.

Now to the cash flow statement and balance sheet. Cash provided by operating activities was a use of $11.7 million in the second quarter and a cash inflow of $41 million for the trailing 12-month period. As mentioned during the first quarter call, we decided to return our rising cash flow to shareholders. We repurchased $17 million in common stock during the second quarter and have repurchased $25.6 million year-to-date. We have $9 million remaining on our authorized repurchase program, which extends through May 2019.

Our net debt position was $108.2 million as of June 30, 2018, which was approximately 2.4x our adjusted EBITDA for the trailing 12-month period and 3.5x for purposes of our credit facility leverage covenant. We amended the credit agreement to increase the covenant leverage ratio to 4x effective June 30, 2018.

Of course, we always have leverage we could use to quickly and significantly lower our debt balance, but amending the credit agreement allowed us to make better use of our cash. Looking ahead, the lenders in our revolving credit facility are highly supportive of our cost-reduction plans, and we're currently working with them to develop revised terms that align with our plans and working capital seasonality. We're highly confident that we'll refinance the facility by September 30 of this year in a manner that ensures our compliance with all covenants and extends the facility beyond September 2019.

We have 2 property leases that impacted our balance sheet in the second quarter. We signed leases for new warehouses and office space currently being built in Portland, Oregon and Cincinnati, Ohio, which together are worth approximately $31 million. Based on the accounting guidance for build-to-suit, leases InnerWorkings is considered the accounting owner of both, and therefore, we're required to record the fair value of these buildings on our balance sheet as of June 30 with corresponding financing obligation. This had minimal impact on the income statement for the second quarter. Once construction is completed and the buildings are in use, all future rent payments on both leases will be treated as debt service payments on the financing obligation.

Now turning to the outlook for 2018. We're reaffirming our gross revenue guidance at a range of $1.155 billion to $1.19 billion. Non-GAAP adjusted EBITDA is expected to be between $50 million and $53 million and non-GAAP diluted earnings per share is expected to be $0.30 to $0.33. Based on the cost-reduction plan Rich discussed earlier and assuming similar gross revenue growth and gross margins in 2019 compared to 2018, we expect non-GAAP adjusted EBITDA to be between $65 million and $70 million in 2019, which reflects approximately 30% growth compared to our expectations for 2018.

I'll now turn it over to Rich to wrap up.

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [5]

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Thanks, Chip. I want to briefly close by saying that I have a lot of enthusiasm for what our company and our team can achieve, both near and longer term, driving value for both our clients and our shareholders. I've enjoyed getting to know the investment community these last few months and plan to get out in the next few weeks to meet more of our existing and prospective shareholders. Hopefully that will include many of you listening to this call. We scheduled today's call with limited advanced notice and unfortunately, many of our analysts have schedule conflicts. So we might not have as many questions as we usually do. But at this time, we'd like to open the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of George Sutton with Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [2]

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Rich, I wondered if you could talk about the centralized marketing function in terms of what you've accomplished there in the prior work you've done. Really what I'm trying to get at is, we've always thought of a certain dollar per productivity -- or per program manager. And can you talk about what you can do through a centralized marketing function just to give us a sense of the scale?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [3]

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Yes, so the -- a lot of the invoicing that a production manager may do on-site can be highly effectively centralized in 1 location or multiple locations, but centralized with people who are expert at doing that, right? So just creating a scaled function that is expert at both invoicing and, I'll call it, running the operational processes that are not seen by our clients, but are required to deliver the kind of stability and consistency in operations. And I would say that, that central function has been built, but it is not being leveraged as -- or close to across as many accounts and across as many clients as it could be. And that is where we see the potential to scale reasonably quickly.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [4]

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Got you. Now one of the confusions coming after the last call, we've certainly got a lot of questions about this, is you had 1 client that had reduced their spend for the year. And I think people assumed that there was something you had done to cause that and they assumed that there could be others of a similar sort of issue. Can you just talk about the unusual nature of that kind of a move and sort of how you were, I believe, so uninvolved in the reduction?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [5]

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Yes, thank you for the question. It is one that we heard post the call. So let me just step back and say that in my engagement with the existing client base as well as prospective client base, there is no indication that I have of some kind of secular shift in the demand for our services. In fact, I think, as I noted on the call, we're seeing just the opposite. So we're seeing expansion of existing relationships. This was an anomaly in our view and in our view of the business due to a strategic shift created by new management and their choice as to where they wanted to invest for the future. And in fact, we're still engaged with that client very recently about expanding our relationship into a different area of their marketing execution based on our recognition that their priorities have shifted and we can create value in a new way. So this is not in any way an early warning sign in our view, and there is no indication that we have that there are other clients are -- that are in any way in a similar situation.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [6]

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Great. Last question. With 2 new leases that you signed, I found that interesting. So in Portland, is that a replacement for your current EYELEVEL facility? And Cincinnati, is that signaling anything relative to, say, large consumer product companies? I'm just curious what the meaning is behind these new leases.

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Charles D. Hodgkins, InnerWorkings, Inc. - Interim CFO and Senior VP of Corporate Development & Strategic Initiatives [7]

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Sure. The Portland lease actually consolidates several warehouses we have into a -- just a more cost-effective one. And then the -- so it's a replacement. And then the Cincinnati actually is addressing growth, we're out of space in our existing facility.

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Operator [8]

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And that does conclude today's program. Ladies and gentlemen, thank you for participating in today's call. You may now all disconnect. And, everyone, have a great day.