Stagwell Inc.

Good morning, everyone. Welcome to the Stagwell, Inc. webcast for the fourth quarter and full year 2021. On today's webcast, Mark Penn, Chairman and Chief Executive Officer, will first provide an overview of Stagwell's full year results, followed by a review of fourth quarter and full year financial results from our Chief Financial Officer, Frank Lenuto. We will then take questions, which you can submit through the chat function on the video webcast portal. Before we begin our prepared remarks, I'd like to remind you that the following discussion contains forward-looking statements and non-GAAP financial data. Forward-looking statements about the company, including those relating to earnings guidance, are subject to uncertainties referenced in the cautionary statements included in our earnings release and slide presentation. and are further detailed in the company's SEC filings. Unless otherwise stated, the results discussed on this webcast will be pro forma for the combination, giving full effect to historical results as if the combination had been completed on January 1, 2020. For your reference, we've posted an investor presentation to our website at stagwellglobal.com. We also refer you to this morning's press release and slide presentation for definitions, explanations, and reconciliations of non-GAAP financial data. And now to get started, I'd like to turn it over to our Chairman and Chief Executive Officer, Mark Penn.

Thank you, Michaela. Good morning, and thank you for joining us to discuss our fourth quarter and first full-year combined company results for Stagwell Inc. for 2021. Today's results demonstrate that the merger is not only working, but is working even better and faster than expected. Three key factors are propelling the network. First, our high concentration of digital capabilities aligns us with the fastest growing areas of the market. Second, we scale the new markets through key acquisitions and a network of global affiliates. And third, our focus on flexibility, integration, and collaboration is resonating with larger clients, leading to bigger, more impactful wins throughout the network. Today's results and our continued momentum are separating us from the legacy competitors and positioning us well to exceed our 2025 GAAP revenue target of $3.4 billion. Our strong outlook is a result of numerous strategic moves we made in 2021, starting with the combination. We created a network structure to facilitate integrated solutions and put in place incentives to drive collaboration, leading to many of the year's eight wins, each worth more than $10 million in annual revenue. We created an omnichannel media powerhouse to deliver data and technology across the full funnel. We scaled international markets through investments on our global network of more than 50 affiliates. And we refined our go-to-market with an experienced global solutions team to service some of our largest accounts. We also executed our plan to strengthen our balance sheet and optimize our capital structure. We refinanced our bonds, converted our preference shares, and reduced net leverage, resulting in credit upgrades by both major credit rating agencies. Further, we provided investors with increased transparency and certainty around future M&A liabilities by ending all material legacy uncapped earnouts. The result of our execution is a strategic platform for growth and operational efficiency that is fueled by robust free cash flow. Stagwell's approach reflects our belief that a truly lasting growth path is created through a combination of disciplined capital deployment and organic growth, not through frenetic investment financed by the looting shareholders. Before I turn to our 2021 results in detail, I want to take a moment to address the international situation. While we all watch the horror of what's happening in the Ukraine and are doing what we can to support those there, I note that Stagwell has no offices in the country and only a less than 10-person office in Russia, which we are in the process of now closing down. Turning to our record full year 2020 results on a pro forma basis, GAAP revenue grew 6.6% to $2.2 billion, exceeding our initial 2021 guidance for $2.14 to $2.18 billion. Our revenue grew 16.4% year over year to $1.93 billion with 14.5% organic growth. Net revenue, we believe, is the best measure of our company's performance because gap revenue includes significant pass-through expenses that vary by the services we offer. Excluding our cyclical advocacy businesses, which saw an expected decline as they lapped the 2020 elections, our 2021 growth was even more impressive as gap revenue grew 18.2% and net revenue increased by 20% year over year with 18% organic growth. Our top line growth allowed us to continue to grow our pro forma adjusted EBITDA, which has $378 million for the year, not including synergies versus an initial guidance of $325 to $340 million, exceeding the midpoint of that range by $45 million. This represented 20% year-over-year adjusted EBITDA growth and 41% growth when excluding advocacy and was a 19.6% margin on net revenue. Our robust margins were the result of continued diligence around costs which were outpaced by revenue growth and a strong performance across our digital capabilities. As we projected, more than 50% of our EBITDA converted to free cash flow, which we expect to be even higher this year. Growth was broad-based across all our principal capabilities, especially our digital capabilities, which are digital transformation, performance media and data, and consumer insights and strategy. Our digital transformation businesses grew 25% organically year over year, driven by more than 40% organic growth at our non-advocacy agencies, the largest being Code & Theory, Gale, Instrument, and YML. The digital acceleration during the pandemic continued as clients allocated more of their budgets to transforming their marketing businesses, digital platforms, and applications, turning to Stagwell for design and engineering excellence at scale. Our performance media and data capabilities grew more than 10% organically in 2021 with building momentum through the year, delivering 31% growth in the fourth quarter, driven in part by large contract wins at Assembly. The wins come on the back of the consolidation of digital marketing agency Forward PMX under the Assembly brand, creating a scaled omnichannel powerhouse with cutting edge data and technology. Assembly now generates more than 75% of its revenue from digital channels, and its digital-first offering is resonating powerfully with bigger clients looking to consolidate media partnerships as the landscape becomes increasingly complex. The creation of the Stagwell Media Network has not only provided the scale to service larger accounts, but to do so more competitively. We've been able to start signing commercial and strategic deals with the largest global advertising platforms giving our agencies earlier access to ad platform innovations, exclusive access to premium inventory for our clients, and enhanced training only provided to the largest media buyers. Our consumer insights and strategy businesses grew in excess of 40% organically, with particular strength at the National Research Group, which had a record year across all of its top 10 clients and include the biggest entertainment technology companies in the world. Over the past few years, NRG has become the premier data and analytics-driven consultancy for content creators, streamers, and big tech, providing crucial insights that drive content optimization, product innovation, and marketing strategy. We also saw similarly strong growth at the Harris Poll, driven by increased demand for its brand insights and strategy services, as well as its Harris Poll brand platform, which allows clients to track consumer brand sentiment in real time against their competitors. Our creativity and communications capabilities grew 7% year over year with strong growth across our public relations practices, our recovery in experiential, and strength at our flagship creative agencies, such as Anomaly, which is forging a path of creative evolution with its design, innovation, and transformation assignments, leading to growth at clients like Diageo and Google, and new business with Nexpresso, Amazon, and Dunkin', just to name a few. Our creativity and communications companies helped open the door to key, larger wins. turning to new business. We continue to build on three consecutive quarters of strong new business, generating a record $75 million of net new business in the fourth quarter. During 2021, we want eight contracts that we anticipate will generate more than $10 million in annual revenue each, with a ninth soon to be announced at the start of the year as assembly was awarded multi-region media duties for a global Fortune 500 technology company. We also significantly expanded our relationships with several high-quality Blue Chip customers like Nike, Google, Amazon, Apple, Novo Nordisk, Abbott Labs, Johnson & Johnson, Epic Games, and added a slew of fantastic clients like Dunkin', LegalZoom, and QHealth, as well as two new Fortune 100 clients in technology and healthcare services. Nothing demonstrated the Stagwell energy better than our omnichannel work around the Super Bowl. We ran seven ads during the big game for clients ranging from Meta to Polestar to Expedia and for the NFL. In addition, we did numerous digital client activations, including work for Captain Morgan, Milk Pep, Budweiser, and Groupon. We also continue to receive strong industry recognition. Allison and Partners brought home the title for the best in show at the Provoke Sabre Awards, and their work for Budweiser won across all categories in which they were shortlisted. Announced just this morning, Creative Agency Observatory has been named for the third year in a row to Fast Company's list of world's most innovative companies for its work with Chipotle, Nike, Netflix, and more. Our investment team has had an active year as well, as we closed the transformative combination and quickly turned our sights to investing for the future. In December, we completed the 100% acquisition of Good Stuff, the second largest independent media agency in the UK, which was recently awarded Campaign Magazine UK's prestigious Agency Media of the Year award. The strategic transaction brings deep expertise in offline media buying and planning that will complement Assembly's digital capabilities in Europe, allowing the media network to deliver omnichannel excellence in the region, critical to win larger contracts. Also in December, our strong cash flow allowed us to acquire the remaining 49% of Instrument, one of our fastest growing digital transformation design agencies. We were able to fund these investments while reducing net debt to 2.8 times LTM adjusted EBITDA at year end. We also made key investments in new talent to lead the Stagwell Marketing Cloud, bringing on Abe Geiger as the Chief Product Officer, Elizabeth Rollert as Chief Marketing Officer, and Matt Lochner as Managing Director. This team of proven digital product and marketing leaders will drive SAS and DAS innovation for our suite of technology products we're building to support our clients' in-house marketing transformations and leveraging emerging technologies. In January, we launched Around, an augmented reality tool for live sporting events, which we showcased at CES. While it's still in its very early stages, we're pleased to welcome the new leadership team to take us into lift-off phase of the Stagwell Marketing Cloud. Looking ahead, we've had a strong start to the year and are expecting pro forma 2022 net revenue growth of 18 to 22%. and 13 to 17% when excluding advocacy and adjusted EBITDA of $450 million to $480 million, which is expected to be back half-weighted given the normal seasonality of our non-advocacy businesses, amplified by the significant back half-weighting in our advocacy businesses, which typically see strong growth in the third and especially fourth quarter of an election year. Relative to net revenue, we expect gap revenue growth to exceed net revenue growth by mid-single digits due to the higher pass-through costs in our advocacy businesses. We also anticipate a strong year for free cash flow, which we expect to grow approximately 30% versus 2021. We plan to use roughly one-third of this cash flow to fund existing M&A. one-third to fund new investments in our global presence digital capabilities and the Stagwell Marketing Cloud, and keep one-third to continue to deleverage with a new long-term target of 2.5 times net debt to LTM-adjusted EBITDA. Further deleveraging will continue to strengthen our balance sheet and provide increased capital flexibility. We're also considering a plan to allow for buybacks to offset dilution from equity issuance related to compensation or investments. Unlike our legacy competitors, our growth is continuing to soar and is driven by our high digital concentration, upside in the Stagwell Media Network, large wins at our flagship creative agencies, unique exposure to strong secular growth and advocacy, and recovery to new growth in our travel business. But most importantly, we've seen a significant shift in the understanding and appreciation for the Stagwell story in the industry, which has led to a notable improvement in client retention, which is allowing our larger wins to drive real growth. Our positive momentum is also helping us to better attract and retain talent during a challenging period for the labor market, positioning us for a successful 2022. If you've missed some of what I've said or find these calls rather dry, we've put together a video to highlight our year, and then we will be hearing from our CFO, Frank Lenuto, with some additional details on our performance.

2021 was a breakthrough year for Stagwell, the challenger network built to transform marketing. We combined Stagwell Marketing Group and MDC Partners, together creating the world's newest top 10 marketing services firm. With 10,000 people in 34 plus countries, 1,200 engineers and 4,000 blue chip clients. Our pro forma net revenue grew 15% organically and 18% ex-advocacy to nearly $2 billion. We delivered $378 million in adjusted EBITDA. We built a value creation platform with strong margins and cash flow. Three factors drove our success. Our digital business grew net revenue 29%, excluding advocacy, achieving scale in the fastest growing areas of the market. 51% of our net revenue came from digital capabilities. We made key acquisitions of industry innovators and built a global affiliate network with over 50 partners. Bigger, more impactful wins, including numerous contracts north of $10 million. And we did more than grow. We strengthened our balance sheet, refinanced bonds, brought leverage down, and we earned credit upgrades for Moody's and S&P. What was the result? Great work for clients, unique opportunities for our talent, and tremendous value for shareholders. The best part? We're just getting started. Scaling the Stagwell Marketing Cloud, a proprietary suite of SaaS products for in-house marketers. expanding our technology leadership with investments in our core digital platforms, creating a culture of collaboration to scale our global reach. There is no other company in marketing today offering this combination of talent, technology, and growth. 2022 guidance as of March 8th, 2022. Join us.