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Edited Transcript of INWK earnings conference call or presentation 5-Mar-19 10:00pm GMT

Q4 2018 InnerWorkings Inc Earnings Call

Chicago Mar 7, 2019 (Thomson StreetEvents) -- Edited Transcript of InnerWorkings Inc earnings conference call or presentation Tuesday, March 5, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bridget Freas

InnerWorkings, Inc. - VP of Finance & IR

* Donald W. Pearson

InnerWorkings, Inc. - Executive VP & CFO

* Richard S. Stoddart

InnerWorkings, Inc. - President, CEO & Director

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Conference Call Participants

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* Christopher Paul McGinnis

Sidoti & Company, LLC - Special Situations Equity Analyst

* 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 thank you for your patience. You've joined the InnerWorkings Fourth Quarter Earnings Call. (Operator Instructions) As a reminder, this conference may be recorded. I would now like to turn the call over to your host, 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 fourth quarter and full year 2018 earnings call. Joining me on the call today are Rich Stoddart, our Chief Executive Officer; and Don Pearson, our 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 risk, 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. 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, adjusted EBITDA and non-GAAP diluted earnings per share. Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP measures to most comparable GAAP measures. As a reminder, the financial results released today and discussed on this call are unaudited.

Our audited financial statements will be included in our Form 10-K, which will be filed later this month. 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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Thank you, Bridget. Good afternoon, and thank you for joining us. Before we get into the details of our 2018 results and future outlook, I'd like to reflect on some of the factors impacting 2018. The restatement of our prior year's financial statements that we completed last summer, made it clear that our business was less profitable in 2017 than we thought. This then meant that we came into 2018 with more cost than the business could support and a plan that was fundamentally built on flawed assumptions.

At the same time, a large client's unexpected change in marketing strategy caused the decrease in our retail environments work, which significantly impacted our international operations, putting pressure on our top and bottom lines.

We also saw declines in our transactional and small accounts and margin compression across some enterprise clients, and we were simply too slow to adjust our cost structure in response.

Our profitability in 2018 declined by 50% compared to 2017. Even in light of the challenges we faced, this result is completely unacceptable.

Before discussing what we're doing to get back on track, I'd like to take a moment to recognize three things I'm proud of from the past year. First, we maintained our customer retention rate of 97% in 2018. Second, we added 2 outstanding members to our board of directors, put in place a new organizational structure and after filling key roles, senior management is essentially all new and the leadership team is in place. One of those key hires, our new CFO, Don Pearson, is sitting with me and will speak with you in a moment. Don has a lot of experience in business transformation and exactly the right skill set to help lead the change we need.

In the last 8 months we also hired a new Chief Human Resources Officer, new heads of our Latin American business and our Europe and Asia Pacific operations. A new executive specifically focused on helping us grow with our existing accounts. And our latest addition, who joined our team yesterday, Chief Technology Officer, Adan Pope, who will advance the initiatives we have in-flight, to improve the efficiency of our internal systems and make sure we're extracting more value from our powerful marketing execution platform VALO.

And on this topic, I'm pleased to tell you we recently received a patent for the user interface and associated functionality of our VALO purchasing manager application, our proprietary forecasting tool which aggregates demand across all potential buyers within a client's account.

Finally, and most importantly, we continue to grow a fantastic world-class brand roster with significant expansions at global Fortune 1000 clients, and we built a robust pipeline for growth that we're already seeing convert early in 2019.

We closed out the year with $136 million in new multiyear revenue awarded and came out strong right out of the gate this year, signing more than $40 million in new annual business in the first 2 months of 2019. The new wins this year are a mix of new and existing clients, including a brand-new engagement with one of the world's largest commercial and retail banks and an expansion we announced today with one of our largest clients Beam Suntory, a global leader in premium spirits. The latter win also extends the relationship on our existing work through 2023, a testament to the solid partnership we've built with this client.

Looking at the year ahead, I expect 2019 to be a very different year, one that gives InnerWorkings the necessary platform to expand margins and drive returns for our shareholders. Our priorities for the year are threefold. First, profitable growth. Growth is the lifeblood of our business. It allows us to make investments and fuel innovation in our offerings that helps us lead the marketplace. We are a growth company at a heart and have the strong pipeline and improving track record of growth with existing accounts, but we will not chase growth at the expense of our profitability. Second, managing and lowering our costs. 2018 made it clear that we have too much cost relative to our current revenue. We have taken significant steps in a multiyear transformation to address this, investing the same passion we bring to optimize our clients' platforms to our own. Don will tell you more about this in a moment. Third, operational excellence. Many of the issues we faced in 2018 are the result of a lack of standardization in our systems, processes and controls. Being a nimble, entrepreneurial, client-focused organization has resulted in too many customized workflows. We are putting in place action plans to remove complexity that burdens our enterprise, hampers our ability to report efficiently and doesn't allow us to optimally equip our colleagues managing our accounts with the data and tools required for a business of our size. There's a lot of work underway and plenty still to come on this, but we are laying the groundwork this year.

In closing, 2018 was a difficult year. We came up short in many ways, but we believe the work we did and the actions we took will set us up for a successful 2019 and beyond. We've started the hard work to transform this company, and I look forward to digging in and seeing that all the way through in the coming years.

I am fortunate to have by my side an energetic, creative and hard-working group of business leaders, supported by some of the best talent I've seen. InnerWorkings is a fantastic company with a bright future, and I'm proud and honored to be part of this team.

I'll now turn it over to Don.

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Donald W. Pearson, InnerWorkings, Inc. - Executive VP & CFO [4]

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Thanks, Rich. Hello, everybody. Before getting into details on our financial performance, I'd like to tell you why I joined InnerWorkings and my observations from my first 2 months here, which will expand on Rich's remarks. I've been through several enterprise transformations that resulted in significant improvement in financial performance and shareholder value. I came to InnerWorkings because I see opportunity to create significant value. A company that has real upside, a phenomenal client list, strong client testimonials and the identified need for operational improvements that I'm ready to drive with the new leadership team. The path for InnerWorkings to create shareholder value is clear. We need to lower our cost to serve our clients by improving our processes and accountability across the organization.

I can see that the company had the right ideas when it embarked on its cost reduction program last summer, but it is now clear that those quick wins weren't enough. InnerWorkings needs standard processes and more automated systems to enable permanent cost reductions and achieve a platform for sustainable, profitable growth and operating leverage.

In 2018 we laid the foundation for operational change, but it is in 2019 that the real work has begun to drive this change. In partnership with third-party consultants, we're mapping out standard operating procedures that will be rolled out across our accounts and allow for significantly improved utilization of our staffing. We are also revamping our sales process and how we allocate resources to support sales pursuits. We've refined our client contract review process with a sharper focus on cost to serve and profitability for our business.

We have a work stream dedicated to resolving our disparate, inefficient network of internal systems to make our processes less manual and more efficient. We're reviewing how we incentivize and compensate our employees, how we monitor their performance of our accounts and how we perform all the supporting back-office functions. There is actionable opportunity in all of this and we're going after it now.

And now I'll take you through our financial performance for the fourth quarter and full year 2018. Our fourth quarter gross revenue was $294 million, a decrease of 4% over the fourth quarter of 2018 or a 2% decrease when excluding currency impact.

For the full year, gross revenue was $1.122 billion, a decrease of 1% compared to 2017. Our gross profit or net revenue was $60.1 million in the fourth quarter compared to $68.8 million in the same period of last year.

Our gross profit was negatively impacted by a lower margin mix of clients, including less revenue in our retail environments category compared to the prior quarter.

We also incurred inventory and other write-offs totaling $5.5 million, mainly related to client business that we either lost or are walking away from because we determined it did not have a path to meet our return thresholds.

Excluding these nonreoccurring items, our gross margin would have been 23.2% for the full year.

We are projecting higher gross margins in 2019 due to an improved revenue mix with growth in the retail environments category and due to supply chain initiatives. Our fourth quarter GAAP net loss was $29.3 million.

During the quarter we incurred some primarily noncash charges that I'd like to walk you through. The largest components of the difference between our GAAP and non-GAAP net loss relate to goodwill and other asset impairment charges totaling $20.9 million and an after-tax restructuring charge totaling $2 million related to our previously announced cost reduction plan.

Fourth quarter adjusted EBITDA was $1.3 million, down from $10.8 million in the fourth quarter of last year. This decline is significant, but I want to stress that the fourth quarter was impacted by many factors that are not representative of our near-term earning power. Specifically, there was the $5.5 million nonreoccurring inventory and other adjustments impacting gross profit I previously mentioned as well as elevated bad debt expense in the amount of $2.7 million, also related to the client relationships we are exiting.

If not for these items, our fourth quarter adjusted EBITDA would've been $9.5 million. We never like walking away from a client, but we had several unprofitable, problematic accounts, and we took swift action to terminate and limit further losses.

With that comes the short-term impact from the related write-offs. These actions, both the restructuring and sharper focus on client profitability, set us up for significant profit improvement going forward, and I'll get to the 2019 outlook in a moment.

But first, turning to the cash flow statement and the balance sheet. Cash provided by operating activities was $13 million in the fourth quarter and $23.1 million for the full year. We expect cost reductions and profit enhancement initiatives in process will drive continued improvement in our operating cash flow going forward.

Our net debt position was $116.4 million as of December 31. We are actively pursuing a refinance of our credit facility in a new long-term structure that will provide us sufficient liquidity and improved flexibility at a similar cost of capital. We expect to have this complete during the second quarter.

Now turning to the outlook for 2019. My first couple of weeks at InnerWorkings were spent overseeing the final steps in a much more robust and a well-developed annual planning process. As a management team, we are confident that we have a credible, achievable operating plan for this year.

We expect gross revenue to be in a range of $1.15 billion to $1.18 billion, which represents growth of 3% to 5% compared to 2018. Based on the flow through of this revenue expectation, improved mix, supply chain initiatives and further progress lowering our costs, we expect adjusted EBITDA to be in a range of $42 million to $46 million and non-GAAP diluted earnings per share to range from $0.20 to $0.24, which assumes an effective tax rate of 28%.

This guidance represents about 50% growth in adjusted EBITDA in 2019. While we expect strong earnings growth in 2019, significant benefits from our efforts will materialize in subsequent years. In 2020 and beyond, we are confident you will see a stronger, more efficient, more profitable InnerWorkings. I'm excited to help drive this change and look forward to sharing our progress with you. I also look forward to meeting many of you in the coming months.

And now we would be glad to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from line of George Sutton of 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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I wonder if you could address your go-to-market strategies and how they may be changing or have changed relative to making sure you're dealing only with profitable customers? So have you changed some of the methodology in terms of what kind of returns the customers would ultimately see working with you and kind of the sharing of those savings?

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

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George, thanks for the question. So the primary thing we put into place that Don referred to is a much more robust deal review process that goes across the enterprise to ensure that as we're thinking about new customers, we're accurately capturing every potential impact on our business and setting profitability thresholds that we have a high degree of confidence in. So it's really building a level of stability and confidence in the process and in making sure that when we walk into a client relationship, we believe that relationship will deliver on the profitability. We are also looking at components of the business that have a margin accretive impact. We've talked about some of those in the past, luxury packaging, creative services and growing those businesses as well, which can be helpful as we think about the profitability of a client.

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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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Now as I look at the numbers, it looks like Q4 new bookings was relatively low, and it looks like some of that business might have pushed into Q1. Is that -- can you just give us a sense of the last several months in terms of what you've been seeing in terms of pipeline and then execution against the pipeline?

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

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Yes. So we feel -- as we said in our remarks, we feel very good about the pipeline. Clearly, the first couple of months that north of $40 million in new annual signings is quite strong for us. We have a very robust pipeline. And the month of sort of November to December I think is always a slower month relative -- slower 6-week period relative to signings. If things are in the advanced stages, you just lose a little time relative to people's holidays, but the pipeline is -- continuous to be robust and frankly we see it accelerating.

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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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Last question, if I could. If I'm a customer and you've basically said your cost to deliver is still too high, how am I seeing changes made at the customer level? You obviously have a lot of people embedded within your customer -- at your customer locations, is that going to continue or is that going to change? Just curious, structurally, how's it's going to change from a customer viewpoint?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [7]

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So we're absolutely looking across the enterprise of how we best structure our business to lower our cost to serve. And yet, at the same time I think as we said in our remarks and, not degrade the quality of service that we provide to our clients, which is high-value added. So it's really looking at roles responsibilities, what components of work can be -- could be centralized, but we intend to continue to have and leverage our fantastic and we think world-class on-site staff. And we think that's a critical part of the model go forward. We think that drives stickiness, it drives retention and it frankly drives new growth from existing clients. The Beam Suntory expansion and extension that we announced today is the result of an incredible team on-site that is delivering day-in and day-out and made that possible.

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Operator [8]

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Our next question comes from line of Christopher McGinnis of Sidoti & Company.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [9]

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Just -- I guess thinking about the amount of changes that you're doing to the infrastructure, can you just maybe comment on the position, how you feel about VALO at this point and also bring in CTL?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [10]

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Yes. So we feel that -- we continue to feel that VALO is a competitive advantage for us. As I think I've said to you in a previous call, I've been struck by the fact that literally almost 100% these days of the pursuits that we're engaged in and the advanced discussions we're in, the technology is a critical component of that. A demonstration of the capabilities of the technology, and clearly we feel that, that -- it will continue, because it drives transparency and visibility to the marketing supply chain.

Our -- the hiring of Adan Pope as CTO, the exit of Rob Burkart and the transition to Adan was -- I think it's the right moment and the right time for us. I think we've brought in a really seasoned pro who's been through enterprise transformations. We think that's absolutely critical as a partner to the operations function and to the finance function to enable some of the improvements in automation in systems and processes that will help us get after this in a much more sustainable way.

So we are very bullish that as Adan gets on board and literally it is his second day that, that partnership with finance and operations will help drive incremental value to our shareholders. We think there's upside in terms of the revenue we can generate from our technology as well as just driving down costs to serve, so that is not dependent on people cost but rather to drive more efficiency in how we do the work.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [11]

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Okay, thanks for that. Second question, just around I guess your offering at this point and the company's expanded up until you're getting there in terms of the product offerings. When you're looking through, kind of, thinking about the -- going forward with the company, is there anything that you feel that maybe the company doesn't need to offer and is weighing on the cost structure as well or do you think that, that's good and it's more about the infrastructure?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [12]

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Yes. So I would say, at this point it -- we are actually taking a look at the offering. We're taking a look at -- in partnership with Don, we're taking a look at everything in terms of footprint and offering. We feel that the offering is -- has traction today. We feel that components of the offering that are smaller have room to grow, and components of the offering that are larger have room to be run more efficiently and become more profitable. So we like where we sit. We think we need to continue to push on the digital development side, and that is an area of focus for us. But I don't think you should expect any dramatic us exiting massive service areas in the near term.

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Operator [13]

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Thank you. Ladies and gentlemen, this concludes the Q&A session and our conference for today. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time.