STW Group earnings drop by 5 per cent with CEO Mike Connaghan blaming lack of new business

Mike Connaghan July 2014 (2)STW Communications Group’s earnings dropped 5 per cent last year with CEO Mike Connaghan pinning the blame on the group’s new business record, signalling it is undergoing a “strategic and structural review of the business”.

While company revenues were up 10.1 per cent to $442.9m for the year ended December 31, earnings before interest, tax, depreciations and amortisation (EBITDA) were down 5 per cent to $83.3m, with underlying net profit down 7.8 per cent to $45.6m.

The announcement of the group’s financial results follows on from the resignation of chief operating officer Chris Savage on Wednesday.

Shares in the company have plunged over the last 12 months, although they have picked up from a low of 88c on January 29 and are trading today at $1.025, amid speculation the group could be an acquisition target for WPP.

In a statement to the ASX Connaghan said: “Clearly, we had a tough year in 2014, particularly in the second half and we are very disappointed with the full year profit result.

“The results were impacted by key client losses during the year and subdued demand leading to weaker than expected earnings in the final quarter of the year, with the critical month of December being particularly weak.”

The part WPP-owned holding group agencies include Ikon Communications, Ogilvy, Howorth, TCO, Tongue, The Brand Agency and JWT.

Last year creative agency Ogilvy lost the Myer account while media agency Ikon lost Coca-Cola and Diageo.

Last year the group also bought digital agency Bullseye, with Connaghan saying that and other acquisitions had accounted for the increase in revenues of around 10 per cent for the group.

Echoing comments he made at the company’s half yearly results he added: “Our organic revenue was in fact down by 0.6 per cent, which is largely a function of our new business win/loss record.

“We had a number of businesses losing client mandates, particularly in the first half of 2014, and not enough new business to bridge the gap. Pleasingly, we have improved our win/loss strike rate in the second half, but all the same, losing clients and in some cases large clients has hurt us.

“During the year, we have brought some great new partners into the group and continue to see opportunities to bring our group companies closer together to build scale and do a better job for clients in an ever more complex marketing environment.

“In 2014, we made a very significant acquisition in Active Display Group (“ADG”), which is heavily vested in the shopper and retail activation space.

“It was a big deal for us, one which we have been very pleased with to date. ADG provides us with a business of scale that enables us to offer additional solutions to clients in both print and digital display.”

In the group’s half yearly results released in August last year the acquisition contributed to the company’s gross debt increasing to $177.4m. As at December 31, the group’s cash and gross debt and finance lease liabilities were $19.9m.

During the year the group’s senior executives also took a pay cut, with Connaghan’s fixed remuneration dropping from $850,000 in 2013 to $828,750.  Outgoing COO Chris Savage saw his pay drop from $700,000 in 2013 to $682,500 and chief financial officer Lukas Aviani had his $400,000 pay drop to $390,000.

On the year ahead Connaghan said the group is not providing “specific full year guidance at this state”.

“Whilst we do expect year-on-year growth, we would not predict anything more than low single digit growth in net profit after tax at the current time. We have initiated a strategic and structural review of the business.

“We are firmly of the view there are significant opportunities to streamline the way we go to market, manage our cost base and drive organic growth within the business, which will deliver profit growth for our shareholders. We will update the market on the outcomes of the strategic review in the middle of the year.”

Miranda Ward


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