Full Year 2019 Kin and Carta PLC Earnings Presentation
London Oct 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Kin and Carta PLC earnings conference call or presentation Wednesday, October 2, 2019 at 10:59:00am GMT
TEXT version of Transcript
* J Schwan
Kin and Carta plc - CEO
* Chris Kutsor
Kin and Carta plc - CFO
J Schwan, Kin and Carta plc - CEO 
Okay, thanks, folks. Appreciate you all coming today. It has been a year of significant change here at Kin + Carta. And as we have kind of worked to position ourselves for the opportunity in front of us, we've made a tremendous amount of progress and I'm excited to share some of that progress with you today.
Before I dive into that, I would like to introduce our new Chairman designate, John Kerr. John is sitting here in the front row, for those of you who might not have had a chance to meet him. John recently retired as the CEO of Deloitte Consulting and is one of the creators of Deloitte Digital, which is the largest digital transformation consultancy in the industry -- or one of the largest, I should say.
John has already been a valuable addition to the Board; very much looking forward to continuing to work with him going forward. And I look forward to you guys spending some time with him in the weeks and months ahead. So thanks for being here, John.
I'm going to go through some highlights. I will turn it over to Chris for some financial results. We are going to dive into a little bit of the opportunity, spend some time on some case studies and some cool work that we are doing in the space that you might be interested in. And then I will go through some progress on all the changes that I alluded to, and then open it up for questions.
So overview. We are continuing to bring in solid blue-chip customers, doing really meaningful work in the digital transformation space. And I will share some of those stories in a moment. We are seeing ongoing double-digit growth in our innovation pillar. This is the core of our business. It continues to grow on both sides of the Atlantic at the pace that we would expect, so very happy with where we are within our innovation pillar.
Strategy. We had some work to do this year, which we knew, to re-orient it to serve the digital transformation sector head on. So some significant but successful restructuring of the previous -- over the last year. We took some disparate, very high-value consultancies and took pieces of those to form Kin + Carta Advisory. And we launched KCA in September as essentially the front door to our holistic digital transformation proposition for our customers.
We are seeing those changes come through with improved performance this year. So we are happy with the pace at which strategy is moving going forward and the contribution that KCA is already making, so we will talk a bit more about that.
From a communications standpoint, communications was a bit more of a project than we had anticipated. And we had to make some significant changes from leadership to proposition to go-to-market strategy. We have implemented a bulk of those changes. We are seeing stabilization in that pillar. We are getting it pointed in the direction that we wanted, so we are happy with the progress. There is still a little bit of work to do, but we are pleased with the direction.
And comms, by the way, is now being led by our first Chief Connective Officer, Charlie Wrench, which is another one of our executive appointments we made this year. And he is on the case and doing well.
We also launched a central demand team. So we mentioned early last -- or we mentioned last year that we are investing in the business. We were going to build a central sales marketing partnerships function. That team has stood up. So we have built that team from the ground up from folks both within the connective and outside of it. And they are contributing. They closed over 40 deals in the first year that we stood that team up and they are looking to increase that contribution significantly in the next year. So we are happy with the results so far and the traction that they are making.
We also expanded geographically. So we opened four new offices this year, and that expansion brought all three of our pillars to the United States for the first time, where we really just had a base in innovation. So now we have the entire connective proposition both in the UK and the US and poised to expand regionally from there.
And then the last bit we will touch on today is the expanded capabilities that we have invested in and we are seeing great traction with around both artificial intelligence and cloud transformation. So these are really high demand areas of the knowledge economy and some really interesting work that we are doing that we will touch on in a moment.
So with that, I'd like to turn it over to Chris Kutsor. Chris is our new CFO, for those of you who haven't met him yet. Chris comes to us from Motorola Solutions. He is about 90 days in, so go easy on him. But in all seriousness, I have known Chris for almost 20 years. He is a difference maker and he is already making a difference in the short amount of time that he has been here. So we are very pleased to have him on board. Chris.
Chris Kutsor, Kin and Carta plc - CFO 
Thank you, J. So good morning, everybody. Good to see some familiar faces and some new ones look forward to catching up with. As J said, I'm Chris. Very pleased to be here. It has been a short time, but I am quite excited to help shape the growth journey that Kin + Carta is on. That is the challenge, that is some of the early traction J has talked about, and eager to dig into more there.
But let me start with a few financial highlights for the year. So net revenue was GBP148 million, up 2% on a like-for-like working day basis. That gets back to the difference in the year that we had in 2018, the number of days therein. When including FX, growth was flat.
Our innovation business continues to grow as you would expect and is now well over half of Group revenue. Our 2019 results also include 13% adjusted operating margin, which is inclusive of the GBP3 million of growth investments that we've previously discussed.
We intend to maintain the full-year dividend at 1.95p per share. And we ended the year with GBP38.4 million of net debt and this includes approximately GBP20 million of deferred consideration related to prior acquisitions of Solstice and TAB. Our net debt to EBITDA ratio ended at 1.68x.
I also want to point out and give you a brief overview of the Kin + Carta profile and some things within there that I think are important beyond just the numbers on the page. So first, our 1,500 people around the world provide enough scale and the talent to compete and win the most desirable of global clients. And J will talk more about some of those clients in the following slides, but I think that is an important marker to the type of work we do and how it is valued by the marketplace.
The shift in revenue to innovation and to the US is where the largest and most lucrative markets in which we compete are. So that is another positive sign that we like. And then finally, I guess I will remind you that we are focusing on five industry sectors where we see the greatest DX opportunity in front of us. And that is financial services, retail, industrials and ag, transportation, and healthcare. And some proof points about the Connective model that I think are interesting.
Healthcare wins have included Blue Cross/Blue Shield and Health First. These are seven-figure deals that we've won in 2019 that are on track to roll into 2020. And that was brought by or introduced to our innovation pillar by expertise we had in strategy previously.
Another example is in financial services, where our UK innovation business has won three deals with three of Europe's largest banks: RBS, Santander, and Barclays. And that leveraged expertise elsewhere in the firm, both within strategy and the US, that introduced that to our UK innovation business. So I think those are positive signs in a real-world case.
Looking at the income statement. So while our net revenue is flat, innovation was a major growth driver with its higher-value DX work in the US that I just touched on. And that offsets some of the underperformance that we had in strategy and comms.
Operating margin was 13% and PBT ended the year at GBP17.6 million. Our adjusting items were much lower this year, as the previous year included GBP27 million of contingent consideration and a goodwill impairment of GBP12 million. 2019 has no goodwill impairment and GBP2.4 million of contingent consideration, which again is related to the prior acquisitions.
We returned to a statutory profit of GBP1.8 million. And our earnings per share of 9.22p is a result of lower adjusted earnings and has an ending share count of approximately 153 million shares.
Cash flow. Our adjusted EBITDA was GBP22.1 million, inclusive again of the GBP3 million of growth investments. This compares to GBP25.5 million of adjusted EBITDA in the prior period. Our working capital was a drag on cash of GBP6.8 million and this was driven primarily by the move away from media buying in the communications business and that reduces our payables. So that is something we would expect. I do expect similar levels of investment in working capital next year, fiscal 2020. That is going to be driven primarily by growth.
We did spend approximately GBP3 million in CapEx, primarily on office and lease fixtures, as well as the implementation of a new ERP system that is rolling out. Finally, we made payments of GBP19.9 million of deferred consideration for acquisitions in prior years. And this was partially offset by the proceeds on the disposal of a legacy building. We incurred typical DB pension-related funding and a small restructuring cost that resulted in net free cash outflow of GBP9.3 million.
So I'd like to end with a few comments on cash for this slide. This is a major focus for me and has been since the day I started here. And we have begun to institute a few changes now that I hope can increase our focus and some results therein. It is a little early to be overly prescriptive, but do know that is a focus for me and my team.
For fiscal 2020, I expect broadly similar underlying free cash flow in the neighborhood of GBP10 million with potential, as I said, for improvement thereafter. So more to come on that in subsequent meetings.
Looking at the balance sheet, just a few of the items I'd like to point out. Goodwill and intangibles are down slightly on typical amortization. The working capital buildup is related to the lower payables that I previously mentioned in the comms business.
Our net debt is higher by GBP12 million compared to the prior year due to GBP20 million of the payments related to the prior acquisitions of TAB and Solstice. Those are mostly complete. We have moved back to a pension surplus from the interims as a result of changes to underlying calculation assumptions. And finally, deferred consideration, as I mentioned, is virtually over. There is approximately GBP2 million related to the TAB acquisition which will be paid in 2020.
And outlook. So I will provide a few comments here on 2020 specifically. Hopefully the numbers speak largely for themselves and give additional transparency as to how J and I think about managing the business. First, I would like to point out the continued investments that we have talked about will continue to impact our first-half profitability, but will begin to pay back in the second half with accelerating net revenue growth. In total, we expect net revenue growth of 10% to 12% year over year in fiscal 2020 and growing into the low teens over the next few years thereafter.
Second, we expect fiscal 2020 operating margins to be in the range of 12% to 13% and also growing into the low teens over the medium term, driven by higher net revenue. Finally, we expect our fiscal 2020 net debt to EBITDA multiple to be approximately 1.5 times to 1.75 times and in the range of 1 times to 2 times over the medium term depending on the opportunities in front of us.
So before I hand it back to J, a few parting thoughts. Obviously 2019 was a year of significant change and progress, which you will hear more about, that really is about building a foundation for sustainable profitable growth thereafter. Innovation is leading the way, as we would expect, and the rest of the business is in better shape than it was a year ago. Our balance sheet is solid and we are well positioned to take the opportunity that the investments have made to start executing on that profitable growth.
So that is all I have for now. J, back to you.
J Schwan, Kin and Carta plc - CEO 
Thanks, Chris. All right. I won't go through this in detail because we have touched on some of it, but there is a couple things that I just want to make sure that we are clear on. Chris and I expect and demand growth and we are going to find it. We are in a market that has it. And I ran a company for over 10 years where we were managing to double-digit growth and I know that we can get there. So we have got some legacy to deal with, but we are going to get the business there.
Very few companies our size have all three of these capabilities that they can deliver to customers in an integrated way. It is unique and the fact that we have that in two of the largest economies in the world in the US and the UK is a very solid foundation and gives us the ability to expand further regionally.
And finally, we have got depth in the sectors that have the most opportunity or the most risk depending on where they are sitting from a digital disruption standpoint. So we are in a great market that continues to grow at 18%. We have got a great opportunity in front of us and we intend to seize it.
The thing that -- I guess the underlying information about this business that I think is incredibly important is the quality of the client base that we have. We are working with many of the largest and most forward-thinking organizations in the world and we continue to win meaningful DX remit.
So bringing on Barclays this year in our innovation division. After working with them in our strategy division, now we are working with them and launching new ventures for digital services for the youth segment. ABC may not be a familiar brand to you here, but it is the largest roofing company in the US. We landed a multi-seven-figure multiyear project to completely reimagine their B2B e-commerce capabilities.
LNER was actually historically a communications campaign-focused client and now we are doing mar tech, marketing technology platform consulting and enablement. That is the shift that we wanted comms to make. And the fact that they have shifted and taken one of their long-term clients there is a great sign from my perspective.
Ipsen is a French EUR2 billion listed pharmaceutical company. Hired us to deploy a global scientific messaging platform for their new cancer drugs. Corteva, we are going to talk about in a little bit. It is a $14 billion agriscience business, doing some really cool things. So we continue to bring on new meaningful clients in the DX space.
This is a slide that we had in the appendix last year. I just wanted to bring it up to the forefront because I think it is a powerful notion of the longevity and stability of the client base that we have. So one, you see the spend coming from our top 10 and really our top 30 clients continuing to grow. So our strategic clients are spending more with us year over year and we've seen that trend continue, which is a good sign.
33 of our top 100 clients have been with us for six years or more. And in fact, 78% of them have been with us for two years or more, which is a good sign. And if you look at even the revenue spend, 56% of the revenue spend comes from annual clients of three or more years. And only 10% coming from what we would call project-based work that we would not necessarily expect to renew, which is down from 20% a year ago. So we are seeing -- or 19% a year ago. So we are seeing the churn of the client base that we would hope. And that is a good platform to grow off of.
I want to take you through three examples and really to highlight three different things. One is the fact that companies are turning to us to help them deploy artificial intelligence as a means of competitive advantage. We all read about AI in this kind of higher level kind of context and thinking, but we are actually practically deploying it to make a meaningful difference for businesses. We are going to talk about how we are doing that.
We are going to talk about how we are modernizing the legacy enterprise with cloud transformation. A lot of big words in there, but essentially it's a lot of big work rewriting software that has been written over the last 40 years and moving it to the cloud. Tremendous undertaking for many businesses. We are at the center of it. And finally, we are going to talk little bit about driving valuations for private equity firms, which is a new sector that we are going to be focusing on going forward that has got great potential.
So the first example is a company called Corteva, which recently spun out of Dow DuPont; it is their agriscience division. And they engaged us in a multiyear program -- we are entering the second year of that now -- to build a suite of tools for employees and what they call growers or farmers to better manage their crops.
And one example of the work that we have done for them is around crop yield estimation. So previously they would have -- a farmer would have to have a trained agronomist that would go out into a field of corn. And they would have to take samples of corn from multiple locations in that field. And by looking at the ears of corn, they would be able to determine the health of the crop. That is the number of kernels that are on the corn and how healthy those kernels are would determine what the ultimate yield of that crop would be. Very manual process, laborious process, required a very highly educated individual to do it.
So we created an application for Corteva as part of this suite that allows even a low skilled worker to take a picture of an ear of corn and automate that entire analysis using machined visioning and data decision intelligence. So we essentially were able to create an algorithm that did what these agronomists could do in minutes instead of hours.
So this has created some great publicity for Corteva; many are calling it a revolution in the agriculture industry. This recently launched and debuted at a show in Decatur. The app has seen over 100,000 yield estimates just in the first two weeks. And now we are working with Corteva on automating drone flight paths so farmers can deploy drones over these fields and use aerial photography and machine visioning to get even more information about the health and potential yield of crops.
So really interesting, very applicable work on how we are driving meaningful change in our clients' industries using AI. And partnering with some of the biggest tech companies in the world to deliver it in the process.
On the cloud front. So you may wonder how do we continue to work with customers after six years on that one side. Discover is a great example of that. They have been a customer of ours for over eight years. The reason we have been able to continue to work with Discover -- and Discover Financial Services is one of the biggest credit card and banking and loans companies in the US. But the reason we have been able to work with them for so long is because digital is not slowing down. It continues to offer new capabilities for businesses and new areas of change.
And the first era of digital in some ways was putting lipstick on a pig because we were creating all these great customer experiences with mobile apps and self-servicing tools on the web. But if you really looked under the covers for most businesses, all the processing is still happening in this old legacy green screen mainframe type technology.
Well, business has now gotten to the point where they understand they have to rewrite some of that legacy code in order to unlock the next set of innovations. And that is a huge undertaking. Many of these systems have been built over decades.
So Discover is one of those areas where we came in and helped them deploy their mobile platform over the first few years. And now have gone back in the stack and have teams of people rewriting the core systems of Discover and migrating those systems from their data centers into our partners' clouds.
And this is one of the fastest growth areas for us as a business. So we are working with many of the Fortune or Global 2000 and helping them move from these legacy software systems into next-generation cloud-based systems, which then will enable another set of innovations in the years to come. So these are seven-, eight-figure deals, annual run rate deals, large multiyear programs. So very, very interesting work.
Last example I wanted to share with you is in the private equity sector. So Cinven, which is a private equity firm based here, global PE firm, came to us after purchasing a company called JLA, which is an asset leasing and management company. They basically provide servicing of commercial appliances for over 25,000 businesses: fire and safety systems, commercial clients, those sorts of things.
So Cinven saw an opportunity to take what is a very analog business with a large footprint and convert it into a digital business with a digital platform where that could then expand globally. So a great investment case where they could potentially increase scale and valuation with the applications of digital.
So they hired Kin + Carta Advisory, our new strategic front end, to come in who did a holistic strategy for JLA. And that was everything from the target operating model to what we call the data spine for the business of how we were going to aggregate all their data to power their customer acquisition strategy, to IoT enabling their assets or Internet of Things enabling their assets to make their field service workforce more productive and predictable.
So KCA outlined that entire strategy and now our innovation and comms pillars are in there implementing that strategy that KCA outlined in a seven-figure deal that is running into this year. That is a great example of how our three pillars work together and will continue to work together going forward. And it is also a great example of the opportunities in the private equity sector.
So part of KCA came out of our consultancy Pragma, which was the private equity diligence area of Pragma. And those are some of the consultants that we moved over because obviously there is an opportunity to go in and do technical diligence, opportunity analysis, and then implement those opportunities for PE going forward. So that will be a big focus of ours going forward and you will hear more about over the course of the year. So three good examples of some interesting work we are doing.
At the beginning of last year, I laid out some key strategic priorities that we had to evolve the business in the direction that we wanted. We've made some significant progress at all of those. I already touched on from a growth standpoint we stood up our central demand teams. 40 cross-specialism deals valued at roughly over GBP11 million sold in that first year.
We are looking to increase the revenue contribution from that team significantly without necessarily increasing its cost base. So we are expecting to get some more growth from that team going forward. And we will also be scaling our partnerships function further in the US and the UK, as that is a great channel for us to do the type of work I just described.
From a proposition standpoint, we had a lot of meaningful work done. We hired our first Chief Connective Officer, Charlie Wrench. We launched KCA, as I mentioned. We evolved these new capabilities in cloud modernization and AI. We doubled down on our sector focus in healthcare and financial services. Chris talked a little bit about some of the wins that have resulted from that.
Going forward, we are going to continue to iterate on our DX proposition as we bring these pillars together. And what you are going to see over the course of the next year is a simplification to our brand structure. So we launched Kin + Carta Advisory, which is the core brand for our strategy pillar.
We will be launching a core brand for our innovation pillar and a core brand for our communications pillars, all Kin + Carta led to make it much easier for our customers to understand and engage with the brand going forward. So moving from a portfolio model to an integrated consultancy model to make it simpler for our clients to buy and for our employees to move across the business.
From a people standpoint, it is very important in order to win that we create an environment that attracts and retains the best talent in the industry. We work hard at this; there is more to do. Over the last year we have put in a number of different employee experience initiatives. We've won seven Best Places to Work awards globally.
There is still more to be done. Our eNPS went up from 15 to 27. That is an employee Net Promoter Score; that is how we measure employee engagement. 27 is a good score; there is more room for improvement and we intend to continue working on that.
The other big piece of the puzzle here, and this is with a mostly millennial-based workforce, is giving our employees a sense of purpose that expands even further beyond what we do for our clients every day. And with that, we introduced a triple bottom-line focus for our individual specialisms, where they are measured not just on their profits but their impact on the communities they serve or people and planet.
And there is a way to certify a company as a triple bottom-line company: it is called B Corps. It is a significant movement in the industry right now around corporate and social responsibility. We are getting behind that movement and we plan to certify our individual specialisms over the next couple years. We have four targeted to certify in this next year. You can read more about B Corps at bcorporation.net. But it is very motivating for our employees to know that they are part of an organization that is looking to make a difference, not just with the work that we do for our clients but more broadly.
The next piece of the puzzle is our platform. We need to build an operational platform that is scalable, that is best in class, that is standardized so we can expand globally. And we did a lot of work this year around that. So not only did we roll out our new organizational structure and refresh the Board, put in our new strategic planning framework, but we have rolled out new collaboration systems, new financial systems, new project delivery systems across the Group.
And next year we will complete some of that rollout as well as rolling out standard CRM systems and HRIS systems. So again, this is all bringing that portfolio-based model into an integrated model that can then be expanded regionally as we continue to grow the business. So great work has been done on the platform and we will continue to invest in that.
And finally from an expansion standpoint, I shared this earlier. We launched an innovation office up in Edinburgh. We launched a communications office in Chicago. We launched KCA offices in New York and London. We planted a flag in Brussels to mitigate any impacts from a hard Brexit from a data movement standpoint. We now have all three of these core capabilities in the US for the first time.
And going forward, as we mentioned last year, we will be turning our attention to potential acquisition opportunities of DX services firms in the US and Europe with a near-term focus on the western and southern parts of the US, which I mentioned last year is an area that we are not playing in right now and an opportunity for us to expand.
So to kind of wrap this up, turn it over for questions, we continue to do very meaningful leading-edge work in some of the hottest areas of DX. So with all the restructuring we are doing with those pillars, I don't want to lose sight of what is actually driving that business and the meaningful work that we are doing there. How we are reorienting the other pillars around that opportunity. Our leadership team has strengthened.
The platform, the Connective platform is now rolled out. It is resonating and it gives us a platform to expand from. We are seeing the investments beginning to show results. We believe there is more to see this year. And as Chris mentioned, our whole intention and all the work we did this year is to create a platform for sustainable double-digit market -- double-digit growth in the DX market going forward. So Chris gave you some outlook information earlier, but we are expecting double-digit net revenue growth for FY20 with double-digit operating margins, which will increase in the medium term.
So hopefully that gives you a taste of everything that has been done and where we are headed.