Stagwell Inc.

Good morning, everyone. Welcome to the Stagwell, Inc. webcast for the third quarter of 2022. On today's webcast, Mark Penn, Chairman and Chief Executive Officer, will first provide an overview of Stagwell's third 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 the following discussion contains forward-looking statements, 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 1st 2021 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, and thank you for joining us to discuss Stagwell's third quarter 2022 results. Stagwell delivered another quarter of double digit organic growth, strong margin expansion, reduced net debt and record net new business. We continue to outgrow most of the large technology companies and are taking share from global marketing service incumbents. 3Q revenue was $664 million, a pro forma increase of 17% over the prior year with 16% organic growth. Year-to-date revenue is $1.98 billion, up 23% on both a reported and organic basis. Net revenue, which excludes pass-through costs, grew 12% to $556 million and was driven by 11% organic growth. Year-to-date, net revenue increased 16% to $1.64 billion, 17% organic growth. In addition to top line growth, third quarter margins and profitability were strong. Adjusted EBITDA increased 15% year over year to $115 million, and margins expanded 60 basis points to 20.7% of net revenue. Year to date, EBITDA is up 19% to $328 million, with margins expanding 50 basis points to 20%. We continue to manage labor costs effectively while making investments to support our rapid growth and new business generation. Our margin remains strong, even as our operating expenses include an incremental roughly $5 million in investments in Stagwell Marketing Cloud, which we'll discuss in greater length in a few minutes, and investments in technology services. Overall, our comp-to-revenue ratio remained consistent at 63%. Third quarter net new business was $86 million, our highest on record, and pitch activity has remained healthy, giving us confidence going into 2023. Our top 25 clients contributed an average of $6.1 million in net revenue per client, also a new record. Our strong growth in margins led to even more significant bottom line growth. Net income was $35 million in the third quarter and gap earnings per share were $0.08 and $0.21 on an adjusted basis. Year to date, we have generated $93 million in net income with gap earnings per share of $0.27 and $0.68 of adjusted EPS. We are on track for an estimated $0.90 per share of adjusted EPS. By any measure related to adjusted EPS, we believe our stock remains significantly undervalued in the marketplace. But I believe our story is beginning to get wider traction. In looking at Stagwell, some key facts and trends are emerging. One, Stagwell is positioned to gain share in the marketplace. Two, Stagwell has achieved far greater relative scale of the digital service layer than competitors while combining it with a full service creative offering. Three, Stagwell is effective at managing costs on both the upside and the downside. And four, Stagwell will not stand still, but will keep evolving to add significant SaaS offerings and new media platforms alongside its service business while maintaining our margin. Evidence is growing that we are gaining share in the marketplace, and this underscores the confidence we have in our capability to achieve our long-term growth scenario of 10 to 12% per year. As I reported, new business lagged in the second quarter, but after we went in force to the ConLion International Festival of Creativity, it picked up strongly and resulted in the record $86 million of net new business this quarter, which augurs well for 2023. Our creative agencies had numerous impressive wins, most notably at Anomaly and 72 and Sunny, primarily through scaled engagements in the range of $3 to $10 million in annual revenue. Anomaly secured the marquee creative pitch of this year when it was chosen to manage Bud Light's North American Creator. Other notable agency wins, including major new assignments from Dropbox, NFL, Stella, and Topgolf, and notable expansions with Microsoft, Salesforce, 3M, and General Mills. As with Bublite, we are increasingly in pitches against the big five holding companies and winning a proportionate share of them. We have eight major pitches in flight now against these competitors, and we'll have a record of over $1 billion of pitch opportunities this year as a result of our increased scale in the marketplace. Last month, we officially rebranded the Stagwell Media Network to the Brand Performance Network to reflect its integrated offering of creative media and connected commerce. As Edwig put it recently, the move means, quote, Stagwell clients and potential clients will view the network as a holistic marketing partner as opposed to a media-exclusive offering, end quote. Our digital layers, digital transformation, performance, media and data, and consumer insights and strategy continue their impressive performance. Combined, they grew net revenue 21% in the quarter on top of 38% growth in 3Q21 and have grown 30% year-to-date. Our digital transformation businesses led the network with 30% net revenue growth driven by triple-digit growth at our fully integrated digital agency, Gale, and our advocacy fundraising business, Targeted Victory. Creative Technology Code and Theory Network delivered another quarter of double digit growth and has grown 130% since 3Q 2020. Targeted Victory's growth was driven by online fundraising for political clients leading into the midterm elections next week. The fundraising season, which ramps up in late September, got off to a somewhat muted start relative to the presidential 2020 cycle. Polls show growing Republican leads and fewer hotly contested markets leading to lower engagement with low-dollar donors, especially in a persistent inflationary environment. We also saw a sizable one-time impact from Hurricane Ian, pausing our operations in Florida, a key market during the important quarter and push and well into October. At the same time, a potential runoff in Georgia could provide a boost, which would be even larger if it decides control of the Senate. We expect engagement to normalize next year as primaries kick off for what will undoubtedly be a record presidential cycle in 2024. Our performance media and data businesses increased 13% versus the prior year, driven by 60% growth in our travel media business as travel volumes returned after the pandemic, as well as strong demands for our connected TV and digital out-of-home offerings. Our third digital layer, consumer insights and strategy, also increased 13%, with continued strong demand at the Harris Poll, where Fortune 500 C-level executives are leading into larger brand strategy assignments. A critical part of the Stagwell structure is that we are organized now into discrete divisions run by dedicated and experienced leaders. While some others in the industry have let their labor costs get out of control, we have balanced productivity with labor costs so that our comp to revenue ratio has remained level this quarter. Our core services team is rapidly putting in standardized accounting and HR systems on schedule to enable lower-cost accounting services and capture synergies. We expect to be substantially done with this process by the middle of 2023. Strong free cash flow during the quarter allowed us to reduce our net debt by $125 million on our net leverage ratio to 2.7x towards our long-term goal of 2.5x. The third quarter also marked substantial progress for the Stagwell Marketing Cloud, our suite of proprietary SaaS and DAS solutions for in-house marketers. In September, we expanded upon our senior cloud leadership by welcoming Chief Technology Officer Mansoor Basha, who joins us from Accenture Supplied Intelligence Practice. At Accenture, Mansoor advised Fortune 500 companies on data transformation and applied artificial intelligence. He is leading SMC's technology roadmap, including cloud integration and development of a unified data architecture to connect the wealth of data generated across our cloud offerings. SMC is being structured around four divisions, each serving a specific type of marketer and executing against multibillion-dollar addressable markets. These include, first, the Research Data Hub, which will empower and enhance research professionals with convenient real-time tools for data analysis. We believe this is a $6 billion marketplace. The second cloud division is the context unit, which empowers and enhances communications professionals through artificial intelligence. These tools will be sold into the 55,000 PR firms in the U.S., nearly 3.5 million PR professionals worldwide. Third, the Media Studio Division will empower self-service media buyers with comprehensive capabilities to build audiences, plan to buy media across channels, and analyze the resulting campaigns on a do-it-yourself basis, which we estimate to be a nearly $20 billion market. Finally, our Specialty Media Division will empower and enhance media buyers with innovative ways to reach, engage, and monetize key consumer segments. This will take the form of new media channels across travel, sports, news, and dining. In August, we launched Around, a shared augmented reality experience for stadiums that was rolled out with the Minnesota Twins. Around is rolling out in the NFL, and we are in late stage planning with a major soccer league team as well, among numerous others. With Around, brands will soon be able to sponsor experiences and advertise to fan bases across three major sports. With more than 2,100 large-scale stadiums globally, we are just getting started. Over the coming quarters, we'll more formally be transitioning select products and businesses to the Stagwell Marketing Cloud as we execute against this roadmap. We'll be deploying these products across our own networks as well and leverage our 4,000-plus clients to bring them to the marketplace. Including the acquisitions we've made this year, we now expect the Stagwell Marketing Cloud, as we have defined it here, to generate roughly $140 million in revenue in 2023. We believe it has the opportunity to grow to a profitable $500 million run rate over the next five years. Learn more at www.stagwellmarketingcloud.com. course, the most frequently asked question is, is there a slowdown and what will you do if there is one? Frank will discuss our balance sheet, improved cash position, and reduced DAC payments. We will tread responsibly and cautiously into the next year, watching closely as we always have our expenses where they focus on maximizing cash flow. I believe we can use the next year to drive our debt ratio down further while launching the Stagwell Marketing Cloud and gaining share from competitors. Moving to our outlook, we're reaffirming our guidance for 13% to 17% net revenue growth, excluding advocacy, and $450 to $480 million of adjusted EBITDA. With additional visibility to the contribution from advocacy fundraising, we expect consolidated net revenue growth of 16% to 20% for the full year. We also expect to generate roughly $0.90 in adjusted earnings per share. As Stagwell continues to outpace rivals, I think more are coming to understand how our unique combination of talent and technology is transforming marketing and achieving high-value growth. We're gaining share with record new business wins, rapidly growing our digital services, managing and even increasing our margin, and are fast developing new offerings and high-tech products that can take us to the next level. Now here is what I call earnings the movie, a short film encapsulating the quarter, followed by Franklin Udo, our CFO, who will delve into more of the numbers.

Stagwell achieved another quarter of double-digit growth. Take a look at how the Challenger Network performed in Q3 2022. We delivered industry-leading growth and margins, including $556 million in net revenue and $115 million in adjusted EBITDA. Our growth was driven by continued strength across digital transformation, integrated media, and consumer insights. Stagwell remains the only full-service marketing network with a digital majority revenue mix. with 57% of our net revenue from digital services. New clients are joining us globally, with record new business wins setting us up for future success. And the Stagwell Marketing Cloud is accelerating with new acquisitions, new technology, new talent, and new solutions for marketers. We remain fiscally disciplined and expanded margin. We also generated strong free cash flow, reduced net debt by $125 million, returned capital to shareholders, sharpening our 2022 guidance. Q3 2022, another strong step forward. Learn more at stagwellglobal.com.