Q2 2019 Earnings Call
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I would now like to turn the call conference over to your host Ms. Bridget Freas. Please go ahead.
Good afternoon, and welcome to our second quarter 2019 earnings call. Joining me on the call today are rich Saturday, our Chief Executive Officer, Don Pearson, Our Chief Financial Officer, We issued a press release with additional information earlier today, which is available on our website www dot I Nwk dotcom.
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 factor 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.
The company's earnings release issued today for a reconciliation of these non-GAAP measures the most comparable GAAP measures.
This call is intended for analysts and investors, who may not be reproduced in the media in whole or in part without our prior consent I'll now turn it over to rich.
Good afternoon, and thank you for joining us.
Our top priorities for this year continue to be lowering our costs operational excellence and profitable growth.
Our second quarter results demonstrate consistent execution against a robust plan focused on these three priorities.
We're very pleased with the progress we're seeing in realizing the benefits of our cost reduction plans, while effectively managing cost required to serve new clients.
Our adjusted EBITDA in the second quarter was the highest in nearly two years and more than double that of the first quarter.
A profitability expectation for the second half of the year is even stronger.
Well, we still have a lot of work ahead to execute our plans our progress so far is giving us confidence in raising our full year adjusted EBITDA guidance today as Don will outline later.
We're not solely focused on the bottom line. However.
We also want to continue to grow our revenue and support an expanding list of brands are driving excellence in their marketing organizations.
There are a few areas of a revenue I'd like to tell you about.
The first is our impressive list of new client wins year to date.
At 135 million of new revenue at full run rate. This is by far the strongest year to date signings we've ever had.
At this point in the year.
Even more notable in our view is the high quality of this revenue.
Due to the robust new business review process, we put in place at the start of the year.
We believe as a group these new wins will provide better economics than the new business awarded in recent years.
This was achieved by finding more opportunities to maximize value for the client while still securing the right economics for us.
The strong profitability of this new revenue will take a little time to show in our results as these client wins ramp.
This improved mix of revenue gives us even greater confidence for EBITDA growth in the coming years.
One of the new wins I'd like to highlight for you is a five year exclusive agreement, we signed last month with a brand we have long served in the retail environments category.
This global sportswear company. It was one of our largest clients until a shift in their marketing strategy caused a significant decrease in business with us in 2018.
Only one year later this same client has now signed a new enterprise contract for us to provide a comprehensive two D and three D retail and wholesale program for North America.
Encompassing in store graphics temporary fixtures and displays store windows digital displays ceding kits and events.
In addition, we will provide creative services design engineering.
And installation.
Unlike our legacy retail environment relationship with this brand we will have an on site team managing this program with a significant minimum annual spend commitment.
Meanwhile, our legacy relationship with managing new store openings for this client continues.
The end result is a transformation of the client relationship into a long term enterprise solution, making the relationship significant stable and consistent.
Once ramped we expect the total revenue from this relationship to roughly equal its historical peak with us.
Not included in our new wins. This year is additional business coming to us from our acquisition of Madden Communications announced earlier this week.
Well not a large transaction financially Madden brings new clients in the beer wine and spirits vertical.
In particular attractive relationships with Millercoors and Mike's hard lemonade.
This acquisition will add to our revenue in 2019.
The greater significance is in the capabilities we have inherited.
Madden has a robust logistics offering that adds to our capabilities in the fulfillment services, we provide to our clients.
In addition, maddens creative studio add talent to our creative services offering an area. We believe holds promising growth potential.
This acquisition is not meaningful to our bottom line on day, one, but we believe it can be a stronger contributor to our growth and profitability overtime.
We're very excited to welcome this new talent from Madden to the inner workings family.
One final point I want to make on revenue.
While the Madden clients and the organic contract wins will give our 2019 revenue a boost our revenue guidance is unchanged. As this effect is offset by year to date foreign currency headwinds we've experienced.
And the removal of certain client revenue that we decided to walk away from this year.
We are highly focused on trading are less profitable revenue for the high quality revenue growth, we are starting to ramp.
We are confident this is the right strategy to drive value for our shareholders and it reinforces our path to sustainable profitable growth.
I will now turn it over to Doug.
Thanks, Rich Hello, everybody.
Our second quarter gross revenue was $284 million, an increase of 1% over the second quarter of 2018, excluding currency impact gross revenue increased 3%.
Our gross profit or net revenue was $69 million in the second quarter.
Fair to $65 million in the same period of last year.
Our net revenue increased 6% in the second quarter and 8% excluding currency impact.
Our gross margin was 24.3% in the second quarter compared to 23% a year ago.
As anticipated our gross margin improvement is due to a more favorable revenue mix supply chain initiatives and a continuing focus on optimizing client profitability either by improving our terms or exiting low margin business.
Our second quarter, adjusted EBITDA was $13.6 million compared to $8.2 million in the second quarter of last year, which represents growth of 66%.
For the year to date period, adjusted EBITDA increased 30% from 15.5 million to $20.2 million.
We expect to demonstrate further year over year growth in adjusted EBITDA in the second half of 2019, as we realize the benefits of our cost reductions and an improvement in the mix of revenue as rich discussed earlier.
The plan to optimize our accounts staffing model developed in partnership with third party consultants is complete and we're well into the implementation.
Altogether, we have actions and $16 million and cost reductions from the plan, we announced last summer.
We are on track to action against $15 million in cost reductions from this second phase announced in March.
We expect to realize a minimum of $3 million in savings in 2019.
From Actioning at least nine of the $15 million phase two cost reductions this year.
With the balance to be action in 2020.
Our second quarter non-GAAP diluted earnings per share was six cents compared to one cents in the second quarter of last year.
For the year to date period, our non-GAAP diluted earnings per share was seven cents compared to a loss of one cents in the first six months of 2018.
Turning to the cash flow statement or the balance sheet.
Cash provided by operating activities was $1.3 million year to date.
We expect cost reductions and profit enhancement initiatives will drive improvements in our operating cash flow going forward.
Our capital allocation priority is to use excess cash to pay down debt.
At June Thirtyth, our net debt position was $124 million.
On July 16th we completed the refinancing of our debt and a new long term structure, which provides us the liquidity and flexibility we need to execute our strategic and financial plans.
Now turning to the outlook for 2019.
We are maintaining our full year guidance for gross revenue and non-GAAP diluted earnings per share and we are raising and narrowing our adjusted EBITDA guidance based on the pace at which we are actually executing our plans to date.
We expect 2019 gross revenues to be in the range of $1.15 billion to $1.18 billion and adjusted EBITDA in the range of $44 million to $47 million up from the prior guidance of $42 million to $46 million.
We expect non-GAAP diluted earnings per share to be in the range of 20 to 24 cents.
And now I'd be glad to answer your questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Your first question comes from the line of George Sutton.
Craig Hallum. Your line is open.
Good evening. This is Adam on for George Thanks for taking my question.
Rich I was wondering if you could talk a little more about.
The additional changes you made over the quarter in the business development review it seems like it's going really well loved to hear.
This has happened.
Yes, So I would say look this is a process that we implemented at the beginning of the year and I think it is now a process that is hard wired into the way we run our business.
There is obviously a bit of a catch up when you build that in and you have to catch up to some sales proceeds.
Make it may not have been part of the process. So everyone is clear on the way the process works when the engagement happens what the different functions are that are involved and I think I would argue that this has been a critical strategic driver of incremental improvement in the economics of the contracts. We are signing go forward. So I think you're right to observe that it is.
It is going well and it is.
A key part of the discipline, we will sustain going forward.
Yes, and then just dovetailing off of that can you speak to the pipeline has there been any effect on your own.
How how why you've been able to reach or the amount of time been able to spend a search for new business.
Yes, I would say the pipeline continues to remain.
Robust.
Clearly, we're very happy with the.
Pace, we've seen in the annual run rate of 135 million year to date Thats very strong for us.
I would say that I would suggest that if you are have any temptation to take that $135 million in double it thats, probably the wrong approach right remember we are.
The timing of signings is really has a lot to do with clients and the client engagement in nature the engagement, but.
These are great clients, great wins, a nice ramp and we have a strong pipeline go forward.
Great and one final question.
Could you give us an idea of the timing of the 3 million savings this year.
Yes. This is this is don will start to see some a bit in the.
Hard to back half of Q3, and then into Q4.
Great. Thank you.
Thank you.
Your next question comes from the line of Chris Mcginnis with Sidoti and company. Your line is open.
Good afternoon.
Thanks for taking my questions.
First our gross.
I guess as a follow up on.
The contracts won so far this year, if you ever being a little more you know careful what you're bringing in maybe talk about whats driving structure.
Such a strong start for the first six months.
Yes, So look I would say you know the this management team has been together now for.
Complete for the last since the beginning of the year. So for the last two quarters I think you're seeing a team that is really focused on executing you're seeing some of the leads that some of this team brought with them start to manifest themselves.
And just a real.
Our real laser like focus on the right growth chasing the right growth. We've spent a lot of time last year on getting much more visibility to our pipeline, ensuring we're focused on the right opportunities and spending time on pursuits that we believe we have a higher likelihood to win and have the most value for the client in the most value for us. So I think it's sort of a.
The logical conclusion, a lot of those efforts in sort of the back half.
Last year into this year.
Okay and can you maybe just.
Hi, like maybe the rate of.
Growth coming in.
New versus existing.
It's roughly 50 50, or maybe 60 40, new versus existing but it is pretty close to 50 50.
Okay, and then just one last question.
It would be with the help of the third party out now where where are you on the I guess on the network if you want to call it.
With that backdrop back office optimization that I guess, you were thinking about it.
In terms of it being streamlined good this quarter on a percentage basis.
Are you, referring to sort of the back office functions.
Yeah, Yeah, I mean, I guess more optimization.
Is that fully complete at this point or are you still being adopted.
Yes, so he's referring to our restructuring.
The County, it's got $10 million so selwyn.
When you take a look more at again, we as a reminder, we spend above in first four or five months of this year rigorously planning and designing this is.
This action and activities.
With the outside consultants and our team the implementation of that started I'd say late in June So really just the very end of the second quarter into the first couple of months of.
Q3 and.
We expect to action about $9 million of the 15 this year. So we're.
We're not quite done with the 9 million, we probably got US several million dollars to go on that but we're on pace as to what we had planned and we expect to hit the targets that we laid out for you today.
Thanks, I appreciate the time Tonight and good luck in Q3.
Thanks, Chris.
Your next question comes from the line of Kevin Steinke with Barrington Research. Your line is open.
Thanks.
Maybe talk a little bit more about the.
The five year enterprise agreement with the global Sportswear company.
How that came about following obviously the significant reduction you had.
What was the approach.
What was the clients.
View of the work you're doing obviously they were happy with it but just maybe if you can just give us a little more detail on how that all came about.
Yes, Great question, Kevin I look I think this is an indicator of the power of the diversified service offering then innerworkings brings to the table. So the client had a shift in strategy as they had that's the shift in strategy. It seemed to us that there was an opportunity to pivot the offer to the core innerworkings offer around and enterprise contract that could drive efficiency speed savings and embedded.
On site team enabled by technology, and so that coupled with building the right relationships to go back in with a different offer.
It was a conscious decision on our part to say, we think we think given where you are in the strategy. You have go forward. We can help you in a different way and we were successful in converting that.
There was it was a really fantastic example of collaboration between the existing team already doing the retail environments work and a new team that we put together to bring the new offer to the table.
Okay, that's good to hear.
Maybe just talk a little bit more to about how the the man and acquisition came about and that sounds like it's kind of more of a one off and not necessarily a.
You know a switch in your strategy that you're going to ramp up acquisition activity or anything like that but maybe just talk about how that came about in your overall philosophy with regard to acquisitions going forward.
I'm glad you brought that up Kevin. So you are 100% correct. This is not a shift in our strategy you know we've been organic since 2014, the Madden acquisition developed as we were onboarding and beginning to implement the.
Some new business that we won.
Early in that we announced in Q1 that was part of that 75 million in Q1 and as we did so.
There was an incumbent relationship with Madden nano warehouse that existed.
That we actually took over that warehouse as we move the relationship to inner workings that was a really collaborative effort.
The Madden team was doing a great job and that led to a broader conversation around potentially.
A larger.
A move of the entire Madden business to Innerworkings I think it provides a great home for some really talented people in Madden, it's accretive to our capabilities in the logistics warehousing space as well as.
Some really talented creative studio folks.
Bring some great new clients, but this is not we're not quote unquote back on the acquisition trail. It by any means and as I said in my remarks. This is really immaterial from a financial standpoint, so it really is about capability and talent.
Okay, Great that's helpful and.
You mentioned.
Walking away from some less profitable revenue.
Sounds like that helped out the gross margin.
Maybe as you look at the portfolio client portfolio do you have are there more of those out there I mean do you think you are pretty much through the review process renegotiation process or should we just trying to think about this is an ongoing.
Process improvement in activity.
Yeah, I think look I think there was another discipline that we've built that we actually haven't talked about which is the account performance reviews that we do every month.
And invariably a comp performance is not a static thing it changes by type of work, we're doing it changes depending on volume and so we're always reviewing how how is every account performing is are there opportunities for us to improve that performance internally.
And so I think it is a regular disciplined to just sort of look at the portfolio of businesses that we have and say are we doing can we optimize I would say we are in the latter half of last year are sort of Q4 into Q1 and a little bit into Q2, we probably had more.
More identified issues to solve and will begin to move more toward just I'll call. It just a regular maintenance approach. It says where can we optimize part of this again is building the discipline into the organization to be highly focused on this.
Okay and.
Yeah, you're talking about gross margin benefiting from that improvement in client profitability as you walked away from some business also favorable revenue mix supply chain initiatives.
How should we think about gross margin in the back half of the year or do you expect that.
Favorable revenue mix to continue I mean, I guess, we'd get some of the run rate from walking away from that business in the second half. So maybe just how those factors all play out in the second half as you see it.
Yes as of this time, we're still looking at 24% is kind of a sweet spot for the year.
Now there is some upside down.
Upside to that certainly we've been hit with surprises in the past so we're really targeting 24% for the year.
Okay. Thanks, and then lastly.
You raise the EBITDA guidance a bit.
EPS guidance unchanged should we think about maybe higher interest expense associated with the new.
Credit agreement and maybe that having a factor in the EPS guidance on being unchanged.
Yes, so that will definitely be a factor.
At least in the first year, Andy the new debt agreement is a much higher interest rate.
Okay, well that's helpful.
Congrats on the nice results and thanks for taking the questions.
Thank you Kevin.
Your final question comes from the line of Sam 'cause warm with William Blair. Your line is open.
Hey, guys good afternoon.
Hi, Sam.
Oh, we have a quick question relating to your new business wins is there a difference in margin between the new contracts and contracts that are being renewed thanks.
I think in jail look the economic profile that were looking to as a company is.
It doesn't matter, whether it's new or or or renewal I will say on a new business. The one dynamic that's different is the ramp time is slower we are beginning to implement we're probably putting some people on site and so we will see the profitability improve as the revenue ramps, whereas with the renewal if the service that is the same Europe , you're probably already yet as sort of an efficient run rate of revenue in staffing. So that's the only really material difference yet I think what I would just add to that is I think.
It's a higher level of achievement of the underwritten gross margin that really make a step change, whereas in the past we might have a desire to get in the gross margin, but we just didn't rate achievement I think we have a much higher.
Possibility in achieving the contracted gross margins because of this more rigorous process.
Perfect. Thanks, guys best of luck in Q3.
Thanks Sam.
This concludes today's teleconference. You may now disconnect.
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Okay.