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Edited Transcript of MDCA earnings conference call or presentation 7-Aug-19 12:30pm GMT

Q2 2019 MDC Partners Inc Earnings Call

NEW YORK Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of MDC Partners Inc earnings conference call or presentation Wednesday, August 7, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexandra Delanghe Ewing

MDC Partners Inc. - Chief Communications Officer

* Frank P. Lanuto

MDC Partners Inc. - CFO

* Mark J. Penn

MDC Partners Inc. - Chairman & CEO

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Conference Call Participants

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* Avi Steiner

JP Morgan Chase & Co, Research Division - Executive Director and Senior Analyst

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Presentation

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Operator [1]

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Good day, and welcome to MDC Partners second quarter results conference call. (Operator Instructions) Please note this event is being recorded. I would like to turn the conference over to Alexandra Delanghe, Chief Executive Officer (sic) [Chief Communications Officer]. Please go ahead.

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Alexandra Delanghe Ewing, MDC Partners Inc. - Chief Communications Officer [2]

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Thank you. Good morning, everyone. I'd like to thank you for taking the time to listen to the MDC Partners conference call for the second quarter of 2019. Joining me today from MDC are Mark Penn, Chairman and Chief Executive Officer; and Frank Lanuto, Chief Financial Officer.

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 related to earnings guidance are subject to uncertainties referenced in the cautionary statement included in our earnings release and slide presentation and are further detailed in the company's Form 10-K and subsequent SEC filings. For your reference, we've posted an investor presentation to our website. 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 start the call, I'd like to turn it over to our Chief Executive Officer, Mark Penn.

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Mark J. Penn, MDC Partners Inc. - Chairman & CEO [3]

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Good morning. Thank you for joining us today. I am pleased to be here to discuss MDC's performance in the second quarter as well as our strategic plan for returning to growth. In terms of performance, I'm pleased with our execution in the second quarter. We delivered 8% year-over-year growth in adjusted EBITDA, 20% if you adjust for the divestiture of Kingsdale in March. Margins were up 150 basis points versus prior year, and we delivered strong cash generation with continued reduction in leverage. Revenue, as expected, was down modestly in the quarter given negative net new business in the first quarter. However, net new business rebounded strongly to a positive $43 million in Q2, our strongest number in years.

Notable wins in the quarter include General Mills global Häagen-Dazs account, AutoTrader, William Hill, PokerStars, Porsche and BMW's experiential account. The new business momentum has continued through July and the pipeline remains strong. These wins, together with the strategy we've begun to roll out, sets the company up for a return to profitable revenue growth. This progress in expanded EBITDA and net new business wins gives us confidence to reaffirm our 2019 financial guidance. Given our positive progress and results so far, I carefully considered raising guidance. But I'm a new CEO who understands the ups and downs of this business and ultimately decided this is not the time to make such an adjustment. We are reaffirming both 2019 and 2020 financial guidance as well as the $100 million of free cash flow since I became CEO in March up until 2020.

Our agencies also continued to be recognized for their breakthrough client work, with Anomaly winning accolades at the Effie Awards for its work with Johnnie Walker and F&B securing the Cannes Lion Grand Prix, the highest possible accolade for its work with Volvo.

While I'm encouraged by the positive momentum, we remain focused on the industry trends that our business continues to face. Today's CMOs have been transformed from brand builders to performance marketers focused on measurable results and increasing their use of data, analytics, research and digital services to connect better with their customers. At the same time, clients are continuing to move away from appointing single agencies of record to enlisting more and more services on a competitive project or roster basis. In turn, we must position and organize our agencies to be nimbler and more responsive to the changing landscape.

So how does MDC compete in this new world order? Over the past few weeks, we've begun executing against the comprehensive new plan to organize our offerings, reduce our costs, capitalize on our strengths and enhance our go to market. At the high level, our new world plan is built around the following principles: Our agencies are better together than apart whenever possible. Data and creativity must go hand in hand. Data is useless without creativity and creativity can be useless without data.

Online and off-line creative are one and the same today. Efficient operations across the group enhance great agency cultures and creativity. Investments should be in digital technologies that spur growth, not real estate that increases overhead. We will reduce our 25 reporting units down to 7 to 10, retaining individual brands but creating networks that can go to market with the larger bundle of services that meet more the needs of modern clients. By bringing together our existing assets, we can offer the client the combination of data, creativity, strategy, research, public relations and execution across new and old media. Smaller agencies will find a sure path to market to the many RFPs as large agencies receive, and the leaderships of larger companies will have enhanced roles leading new networks. Our agency partners are thrilled with the new opportunities being created through this process, which is just kicking off.

To win larger client assignments, we're also beginning to create multicountry interdisciplinary teams that offer services as One MDC. Given the world-class nature of our firms, we can effectively take on, compete and win against even the largest of holding companies and the most sophisticated of consulting firms. These new pitches are already underway.

Another key aspect of this plan is to sell more media combined and coordinated with Creative. Last month, we moved to a line under the common leadership, MDC Partners, including its lead agency, Assembly, with Gale Partners, a global data technology CRM and addressable content agency. Driven by its sophistication with data, Gale also happens to be MDC's fastest-growing agency over the last several years. This effort marks the first in a series of actions and the bringing together of the best talent across MDC into collaborative networks to elevate our offering for the benefit of our clients by establishing a new group built around data, technology, media and content.

The new media network includes 7 global offices and a multidisciplinary team of over 600 employees led by MDC veteran, Michael Bassik, who most recently served as CEO of MDC specialist network, Yes and Company; and Brad Simms, the founder and CEO of Gale.

While retooling our organizational and go to market strategy, we'll continue to find savings of tens of million of dollars at the corporate and partner level. Our aim is $35 million of run rate savings and enhancement by the end of the year remains in place. To accomplish this, we are targeting: a, reduction of overhead and agencies that operate above the mean in terms of administration; b, reductions in corporate overhead; c, reorganization of our real estate portfolio to drastically reduce our footprint and bring agencies together; d, enhanced management of the compensation to revenue ratio and CapEx budgets.

Finally, the payments of earn-outs are coming down. With approximately $141 million remaining and rather than renewal extending, we'll gradually shift all incentives to annual awards related strictly to performance that take into account individual, company and MDC performance.

Before I turn the call over to Frank to walk through the financials, I'd like to offer some thoughts. A great plan is just a plan without a great team to execute it. David Ross, Ryan Linder and Alex Delanghe are all experienced executives who will work alongside new team members including Frank Lanuto as CFO, Seth Gardner as COO and Jonathan Mirsky as General Counsel. Also just starting this week at corporate is [Nate Napier], a former P&G executive who will focus on client service and global pitches. This is a team ready and able to roll out this new world plan.

I continue to believe that the assets of MDC Partners are fundamentally underappreciated given the level of creativity, clients and accolades for the work they do. They punch way above their weight. I remain dedicated to implementing the plan and enhancing shareholder value and believe today we are moving in the right direction. Thank you, and now I'll turn it over to Frank.

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Frank P. Lanuto, MDC Partners Inc. - CFO [4]

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Thanks, Mark. Good morning, everyone. I'm very excited to be a part of the MDC family and to be here with you today for my first earnings call. So let's get started.

As expected, revenue in the quarter continued the trend of modest declines, with reported revenue down slightly more than 4% to $362 million and organic revenue down 2.4%. Growth and pass-through revenue contributed to help our organic revenue by approximately 2%. Adjusted EBITDA, however, increased 8% to $46 million in the quarter and increased 34% to $68 million for the first 6 months, aided by the significant cost reduction initiatives put in place in 2018 and continuing through 2019.

Severance and other charges from incremental cost reduction moves taken in the second quarter drove covenant EBITDA of $50 million, leading to trailing 12-month covenant EBITDA of $188 million, up from $183 million at the end of the first quarter. Overall, we are pleased with the progress of the business and continue to manage costs tightly while still investing in revenue-generating initiatives.

Let's look at revenue a little more closely. Our best-performing segment was Specialized Communications (sic) [Specialist Communications] which continues to gain market share on the public relations space and saw a 15% increase in organic revenue. The Media Service segment also rebounded to nearly flat organic revenue following declines in recent quarters. Offsetting these improvements, the Domestic Creative segment declined 10% approximately 1/3 of which was pass-through revenue having no EBITDA impact. The remaining decline related principally to volatility at 2 of our project-based agencies.

The All Other segment also declined 8%, which was largely due to regulatory delays at clients and our health care portfolio and the timing of Other project business. That said, we expect improvement in this segment as the additions reverse in the coming quarters. And lastly, our decision to close 2 of our U.K. offices impacted organic revenue unfavorably in the quarter by nearly 50 basis points.

In the quarter, we also incurred severance and other expenses related to restructuring initiatives of $3.3 million, not including the changes made at corporate when Mark joined the company. These amounts are the primary driver of the variance between our adjusted EBITDA and our covenant EBITDA, and they're expected to contribute approximately $12 million of savings on an annualized basis. Given the strategy that Mark has articulated, I would expect incremental restructuring actions in the second half of the year.

I'd like to now move on to the balance sheet. The second quarter showed a strong bounce-back of working capital as the company converted the increase in EBITDA to cash. At the same time, we funded approximately $29 million of deferred acquisition-related payments and $30 million of semiannual interest on our senior notes. After funding these obligations, we were still able to reduce borrowings on our credit facility to $27 million and net debt to $900 million, down from $907 million in Q1. Given the strong cash performance and growth in covenant EBITDA, our total leverage ratio on the revolver fell 0.2 turns to approximately 4.9x.

Funding of the deferred acquisition payments reduced the remaining liabilities related to DAC and minority interest obligations to approximately $140 million, with about $13 million expected to be paid in the second half of the year. Overall, we are on track to exit the revolver by year-end and achieve significant net positive cash flow.

We are pleased with the current quarter's performance and remain committed to improving the balance sheet further over the next several years. But most importantly, the entire management team and I will be implementing the new world plan to foster greater cooperation among the agencies, bring data and digital services to the floor and promote integrated network-wide pitches while eliminating unnecessary costs.

And now before I turn over the call to the operator for questions, I just want to take a moment to say a special thank you to David Doft and Mitch Gendel for all the work that they have done over the past 6 weeks significantly contributing to the smooth transition of the company's matters to the new management team. From me and the team, we wish them all the very best in their new endeavors.

Thank you. Operator, we'll open the line for questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Avi Steiner with JPMorgan.

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Avi Steiner, JP Morgan Chase & Co, Research Division - Executive Director and Senior Analyst [2]

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I've got a few here. First on the net new business win metric that obviously bounced back nicely, and you highlighted some of the new business wins. But can you tell us I guess just around notification what changed from Q1? Was it just timing of pitches getting resolved? Or was there something else there? And in thinking about those wins, will they fall more into the Creative category, PR? Or how do we think about that revenue coming off?

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Mark J. Penn, MDC Partners Inc. - Chairman & CEO [3]

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Sure. I think before I came on that some of the agencies had lost a few AORs. And so there was clearly a significant dip in new business. I mean obviously at corporate here, we spent a lot of time on new business. We have a CMO, an active new business group. But you know it's often true that after agencies lose a couple of things, they go out and find a couple of new things. And so I think they reenergized the pitch process. I think they're refiring on all cylinders. They went after a bunch of accounts. There are some new accounts even in July that are not yet public. I think it's pretty -- it's a pretty good mix. I think it's -- I think the kinds of wins here and some very good strength in PR, good strength on experiential. But the big agencies are the big winners here of very significant new accounts.

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Avi Steiner, JP Morgan Chase & Co, Research Division - Executive Director and Senior Analyst [4]

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Great. And you'd also mentioned the symbiotic relationship between creativity and data. You highlighted Gale. And I'm curious if that portends at all the collaboration with the Stagwell group of agencies or any of those agencies. I mean has anything ever been done on that front yet.

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Mark J. Penn, MDC Partners Inc. - Chairman & CEO [5]

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Yes. I mean it does. I think that every new pitch that I see comes across, it says what do we really want, why are we doing this pitch. It's because, well, the marketing world has changed and now we need data plus creativity. And I think that we are seeing some cooperation. And we are seeing the initiation of some specific projects to create unique intellectual property that are kind of premature to announce at this time. But we are -- that's specifically the area of greatest focus, concentration and cooperation because that is the fundamental change. We have tremendous creativity. Also MDC has Instrument, which is a core digital agency; Gale, which is a core data agency. But the more resources we have in that area combined or within MDC, coupled with the incredible creativity, that is the key to new business, no question about it and that is our primary focus.

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Avi Steiner, JP Morgan Chase & Co, Research Division - Executive Director and Senior Analyst [6]

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Excellent. A few more here. Mark and Frank, maybe this is for both of you. Mark, you mentioned shifting earn-out of annual rewards tied to both agency and company performance. And I'm curious how long until that can be effectuated. What, if any, has been the preliminary response from perhaps some of those agencies that will experience that shift? And Frank, what is the cadence of the payout I guess of the $127 million of earn-outs left after the $13 million you highlighted to be paid in the third quarter?

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Frank P. Lanuto, MDC Partners Inc. - CFO [7]

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So after we pay down the $13 million in the back half of 2019, based on current projections, we have approximately the same level for 2020, call it mid-40s, and roughly the same for the following year, maybe a tick higher in the following year. Then after that, it winds down.

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Mark J. Penn, MDC Partners Inc. - Chairman & CEO [8]

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And so we are actively right now I think formulating our plans. And I would expect by the end of the year to have in place for the following year kind of a significant new incentive plan that takes the people who have kind of gotten past earn-out and gives them the kind of incentives that are typical of good service-oriented companies that rely on great people to do great things. And I think that so far internally, the response to what we've been designing has been quite good. And I think it will meet the needs. I was at other holding companies and I saw the things that I didn't like and that were inadequate incentives. I was at Microsoft where I saw some great people incentives. So I think we're really carefully designing this to work well and also to promote a cohesion among the companies. So we're not in a position to announce it yet, but this will be in place by the end of the year.

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Avi Steiner, JP Morgan Chase & Co, Research Division - Executive Director and Senior Analyst [9]

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You had considered raising guidance. Does that mean this year's guidance is conservative? How would you characterize your level of visibility given where we are in August for the full year? And maybe lastly, and thank you all for the time, if you can remind us where you want to take leverage or what your comfort level is -- leverage level is?

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Mark J. Penn, MDC Partners Inc. - Chairman & CEO [10]

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I don't think I'm going to express a view or characterization other than to say that I feel quite comfortable reaffirming our guidance and that I considered raising it. But there are a lot of ups and downs in this business. There were a lot of unexpected ups and downs last year. I think as you look at this, revenue was declining. But you look at the new business wins, and therefore, the new business wins indicates a very strong turnaround in business. And obviously, the trends in EBITDA have been consistently, I think, strong now. And we still have things to do. So I'm going to, as the new CEO, kind of kick the can down here a little bit. Let's see another quarter of the year. But I think I'm pretty positive about the direction that the company is on right now as I make this report.

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Frank P. Lanuto, MDC Partners Inc. - CFO [11]

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And Avi, to your question about the leverage, we're at 4.9x here at the end of Q2. We expect to sort of hover around the same area and finish out the year roughly in the same range.

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Operator [12]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mark Penn for any closing remarks.

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Mark J. Penn, MDC Partners Inc. - Chairman & CEO [13]

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Thank you. Thank you for attending. I think that as we're in the next quarter, I think the company continues I think to rebound in terms of very strong net new business. We continue to make improvements in the business to create more cash flow and stronger EBITDA. And most importantly, we have a plan for growth that takes into account the changes in the marketplace by bringing our agencies together, by emphasizing data plus creativity, by going out and making One MDC pitches where I think we're second to none including the larger, slower, bigger holding companies where we can be nimbler, more effective, more creative and more data oriented. Thank you for taking the time. Thank you for coming on this morning.

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Operator [14]

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The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.