Stagwell Inc.

Everyone, welcome to the Stagwell Inc. webcast for the second quarter of 2022. On today's webcast, Mark Penn, Chairman and Chief Executive Officer, will first provide an overview of Stagwell's second quarter, followed by a full review of the financial results from our Chief Financial Officer, Franklin Nudo. 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, comparisons to prior year periods and historical 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 Stagwell second quarter 2022 results. Stagwell delivered another quarter of strong growth with strong margins, keeping us on track with our full year plan of 18 to 22% organic growth. We're demonstrating that our combination of creativity and technology is working and helping us expand our market share. We delivered industry-leading organic net revenue growth of 16% in the face of our toughest quarterly comparisons for the year. We achieved this 16% growth on top of 29% in 2Q 2021, bringing our two-year stack to 45%. Our digital capabilities propelled our growth, increasing 28% organically on top of the last year's 39% organic growth in the second quarter. Digital services contributed to 57% of net revenue and 62% of adjusted EBITDA in the quarter. Our unique Mix of digital services is contributing to growth significantly higher than legacy companies in the industry and will continue to propel us higher. We're growing our share of wallet with our largest clients. The average client size among the top 25 has grown from about 4.5 million to about $6 million, a 30% increase. To handle all of this growth, we are well on our way to implementing unified systems in accounting, media, human resources, and real estate management. These systems will largely be in place by Q1 2023 and yield promised synergies. We believe many of the prevailing industry trends that are competitive headwinds for some of the dominant advertising platforms can be opportunities for Stagwell. The rise of new platforms and channels like TikTok, connected TV, e-commerce marketplaces, and digital out of home increases the complexity of digital media buying, and so more clients are turning to our state-of-the-art media buying operations in these emerging areas. As we head into the back half of this year, our comparisons ease significantly and we expect to continue to deliver strong growth. Our advocacy businesses, Targeted Victory and SKDK, are also gearing up for the U.S. midterm election cycle, which we expect to benefit our growth and margins in the third and especially the fourth quarter. While we continue to perform ahead of plan, we're taking a prudent approach to full year guidance. While incumbents have minimally raised outlooks to 6% to 7% growth, we're reaffirming our already strong outlook for the year of 18% to 22% organic net revenue growth and $450 million to $480 million in adjusted EBITDA. Taking a closer look at our results, Q2 net revenue was $556 million, a pro forma increase of 16% over the prior year, including 16% organic growth. Year to date, net revenue of $1.08 billion grew 19% with 20% organic growth versus the same period last year. Excluding our advocacy businesses, organic growth was 15% for the quarter and 19% for the first half of the year. Growth was strong across the digital layers of our principal capabilities pyramid, which were up 31% overall and accounted for 57% of net revenue in Q2. Our digital transformation businesses grew 37% organically on top of the 51% organic growth in the prior year. This group was led by Gale, a fully integrated agency within the Stagball Media Network, which grew in the range of 150% organically. Code & Theory and its engineering subsidiary, TrueLogic, grew more than 50% organically in Q2, compounding on similar growth in the prior year. Code & Theory's success continues to be driven by significant expansion in the scope and complexity of their engagements. Our online fundraising businesses also grew more than 50% organically in the quarter. Our performance media and data layer, which includes most of the Stagmo Media Network, grew 17% organically on top of 18% growth in 2Q 2021. Our flagship omni-channel media business assembly had a strong quarter as large contracts, one in the previous six months, scaled into the business. Strength was driven by our travel business, which nearly doubled in the second quarter with the recovery in travel volumes. The media network also integrated Brand New Galaxy, our full-service scaled e-commerce company we acquired in April. Brand New Galaxy is seeing a raft of new business opportunities as agencies across the network are opening up client doors. Our consumer insights and strategy businesses continue their strong growth with 27% organic growth in the second quarter, on top of having grown 64% in Q2 2021. NRG, our technology and entertainment content consultancy, had another good quarter driven by growth with streaming, gaming, sports, technology, and film clients. On the brand strategy side, the Harris Poll had an equally strong quarter, with significant gains in their SaaS product, the Harris brand platform. Lastly, our creativity and communications businesses grew 4% organically on top of prior year's significant 20% growth levels. Our global PR business, Allison and Partners, grew roughly 20% driven by increased spending from existing clients such as AB InBev, Amazon, and Google, along with new business wins from Dyson and Intercontinental Hotel Group. Our creative and PR businesses made a strong, stagnant debut at the Cannes Festival of Creativity, which made its pandemic comeback in June. Anomaly, Forsman & Bodenfors, Observatory, Allison & Partners brought home 18 prestigious lions from the south of France. The Polys, known as the Academy Awards of Political Advertising, took place in May. And SKDK had an amazing night, winning six awards, including Best Overall TV Campaign for Chantal Brown. Adjusted EBITDA was $111 million for the second quarter, an increase of 13% versus the prior year, bringing our adjusted EBITDA to $213 million for the first half, an increase of 22%. We also generated $25 million of net income in the second quarter, equating to $0.08 of fully diluted earnings per share as we continue to grow quarter after quarter of positive net income. Year to date, we've generated $58 million in net income and 18 cents of fully diluted EPS. On a full year basis, we expect a heavier weighting of EBITDA and earnings in the back half of the year due to the holiday seasonality and the impact of the election cycle on our advocacy businesses. Q2 EBITDA margins were strong at 20% of net revenue. We incurred $4 million of incremental travel and entertainment expenses as in-person pitches in the popular Cannes Festival were back in full force, and we still achieved a 20% margin far above most competitors. Our continued focus on cost controls is evident in the improvement of our comp to revenue ratio, which fell to 63% in Q2 versus 65% in the prior year. Our ability to control labor costs is assisted by our network of nearshore and offshore engineering talent that's carefully integrated with onshore technology teams. Others in the industry have not been as careful balancing high growth and yet keeping productivity in check. We expect to see margin expansion during the remainder of the year and continue to target 25 to 50 BPS of annual margin expansion over the long term, driven by a growing mix of higher margin digital capabilities. Net new business was $31 million in the quarter, a healthy number after two record quarters of new business. We observed a rush of new business heading into the end of 2021 as we came out of the pandemic, a slowing of pitches in the beginning of Q2, and now a resumption of strong opportunities as companies prepare for the end of the year and a successful 2023. Her trailing 12-month net new business is $224 million. We had numerous notable business wins and expansions across our principal capabilities. In creativity and communications, we won business with the L.A. Rams at 72 and Sunny, Thomson Reuters at Sloan and Company, GoodRx and TikTok at Allison and Partners, and Johnson & Johnson at Donor. Consumer insights and strategy won work with MetLife at Harris, digital transfer agency YML won business with the Mayo Clinic, while code and theory won new business with Lenovo and significant expansion work with JPMorgan Chase. As we shift from pitches to deeper, more lasting relationships, more and more growth is coming from land and expand across larger clients, which is not captured in the net new business statistic. This is particularly true in the technology sector. Of our six largest clients, four are now mega cap technology companies, all of which reported better than expected second quarter earnings without any cuts to their outlook. After years of procurement separating media from creative, the demands of the digital world are bringing them together again, and we are responding to this trend. These new kinds of media and creative and commerce hybrid accounts are helping fuel 33% growth in the media capability. To further expand the media network's creative breadth, Creative agencies, CPB, Forsman, Boniforce, Observatory, and Vitro are joining the Stagwell Media Network. Additionally, we're helping all our integrated agencies bring media capabilities in-house by implementing the Stagwell Media Studio. These moves will enable all Stagwell agencies to offer different flavors of connected offerings between advertising and media to a broad mix of clients. We also made investments in progress in the Stagwell Marketing Cloud, our suite of SaaS and DAS tools built for in-house marketers. In July, we announced the acquisition of Apollo Program, a real-time AI-powered SaaS platform that uncovers consumer, creative, and contextual insights for scaled modern marketing. This data and analytics technology will be integrated into our consumer understanding and engagement platform, which we call Q, for enhanced audience identification and activation. We are bringing together a cloud specific engineering team and we are on track to launch around our multi-user augmented reality experience for live events and stadiums, which we are launching soon with the Minnesota Twins. In June, we also announced the acquisition of TMA Direct, which sits in the political data area. TMA will be bolted on to targeted victory, and the combined entity will have an enhanced integrated data and technology offering to modernize how campaigns are funded and managed. Our investments in the stable marketing cloud and acquisitions of Apollo and TMA are indicative of our growing focus on building more predictable and recurring revenue streams Through developing and acquiring software and data, we can leverage into our existing client flow. Turning to the balance sheet and capital allocation, our net leverage stands at 3.1x LTM adjusted EBITDA of $416 million. We expect leverage to decline meaningfully in both the third and fourth quarters as we generate significant free cash flow through the year end with bonus payments and nearly all this year's DAC payments now behind us while LTM EBITDA is expanding. In May, Moody's upgraded Stagwell's corporate family rating to B1. During the quarter, we also returned $15 million of capital to shareholders through our stock repurchase plan, which was announced in May, leaving approximately $110 million of the $125 million repurchase authorization in place. We continue to view our shares as being grossly undervalued, given our industry-leading growth and high margins. As a reminder, we're targeting an allocation of one third of free cash flow for M&A payments related to completed acquisitions, one third of free cash flow towards new M&A, and one third towards a mix of debt reduction and share purchases. In sum, one year after the combination, Stagwell is showing we can maintain growth and margins at industry-leading levels. Stagwell is achieving our goal of being the first viable alternative to the legacy holding companies in decades. Our investments in the Stagwell Marketing Cloud, proprietary software, and data position us for continued technology leadership and marketplace expansion. And as we scale the network, we're doing the hard work to fortify and optimize our corporate infrastructure to support future growth and profitability. With that, I am pleased to present a brief video recapping our second quarter results, after which our CFO, Frank Lenuto, will discuss our second quarter financials in more detail. As a reminder, you can ask questions via the chat button. Okay, let's roll the video.

Another strong quarter of remarkable performance as we celebrate Stagwell's first birthday. Our results show Stagwell is the challenger network built to transform marketing. Take a look at our impressive performance in Q2 2022. We delivered industry-leading growth and margins, including $556 million in net revenue and $111 million in adjusted EBITDA. Driven by growth in two key areas, our media network is breaking out. And our digital acceleration continues. Stagwell is the only full-service marketing network with a digital majority revenue mix with 57% of our net revenue from digital services. We're creating transformational work with amazing clients, driving innovation globally, and investing in the Stagwell Marketing Cloud, all while remaining disciplined on costs. We are prepared to navigate uncertainties the future may bring. and reiterating 2022 guidance. Q2 2022, another great step forward, and we're just getting started.