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Edited Transcript of MDCA earnings conference call or presentation 27-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 MDC Partners Inc Earnings Call

NEW YORK Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of MDC Partners Inc earnings conference call or presentation Thursday, April 27, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David B. Doft

MDC Partners Inc. - CFO

* Matthew Chesler

MDC Partners Inc. - VP of IR and Finance

* Scott L. Kauffman

MDC Partners Inc. - Chairman and CEO

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Conference Call Participants

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* James G. Dix

Wedbush Securities Inc., Research Division - VP and Senior Research Analyst

* Steven Cahall

RBC Capital Markets, LLC, Research Division - Analyst

* Thomas William Eagan

Telsey Advisory Group LLC - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the MDC Partners first quarter results conference call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Matt Chesler, Vice President of Investor Relations and Finance. Please go ahead, sir.

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Matthew Chesler, MDC Partners Inc. - VP of IR and Finance [2]

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Thank you, and good afternoon, everyone. I'd like to thank you all for joining us today to discuss MDC Partners' financial performance for the first quarter of 2017. Joining me from MDC are Chairman and CEO, Scott Kauffman; and CFO, David Doft.

Before we begin our prepared remarks, I'd like to remind you all that the following discussion contains forward-looking statements and non-GAAP financial data. As we all know, forward-looking statements about the company 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 posted an investor presentation to our website. We also refer you to this afternoon'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 Chairman and CEO, Scott Kauffman.

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Scott L. Kauffman, MDC Partners Inc. - Chairman and CEO [3]

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Thank you, Matt, and good afternoon, everyone. I'm pleased to report that MDC Partners is off to a solid start in 2017, positioning us well to achieve our full year financial guidance. Our company is significantly stronger compared to this time a year ago. We have an improved balance sheet, a strong new business pipeline, a cost structure that corresponds to our growth profile and solid revenue and earnings momentum.

Here are some of the highlights from the quarter. Revenue increased 11.6% to $345 million. Total organic revenue growth accelerated to 5.6% as we are now ramping new business won in recent periods, and we saw a strong performance in the U.S. with domestic organic growth accelerating to 8.9%. Adjusted EBITDA increased to 9% to $36 million with margins of 10.4%, typical for our first quarter.

Strength was broad-based. Our world-class portfolio of highly creative firms is gaining market share from the larger holding companies. Our media-led offerings are seeing the results of their focus on data and analytics, creativity and transparency. Our emerging firms are gaining traction, scaling in fast growth disciplines such as technology and data science. We secured a healthy $26 million of net new business in the quarter. Highlights we can mention publicly include eBay, Diet Coke, Bayer and MillerCoors experiential. All in all, a very good start to the year. And as we look ahead, we're very well positioned to continue to gain share in our space at a time of significant disruptions across the marketing and communications industry.

Our competitive advantage lies in going to market with a collection of best-in-class agencies, distinguished by brilliant creativity and a track record of delivering transformational results for some of the world's most iconic brands; firms that are media-agnostic with digital and technology at their core; firms that are nimble, allowing for rapid adoption of new tools and technologies across digital, mobile, social and emerging areas like artificial intelligence and virtual reality; firms with a finger on the pulse of popular culture, shifting media consumption pattern and the ability to harness insights and data to influence consumer purchasing behavior.

With that said, my priority for this year and beyond is to ensure that we continue to innovate on a durable and flexible modern business model that constantly anticipates and meets changing client needs. It starts with investing in people through refined recruitment initiatives, expanded training programs and proactive succession planning, reinforcing the strong cultures that differentiate our agencies in the marketplace. We are firmly committed to fostering a culture of diversity and inclusion that is fully reflective of the multicultural world in which we live and in which our clients operate.

It also includes initiatives to accelerate the infusion of data into the creative process across our network, and it means smartly investing in enterprise-wide information technology to make us smarter and more efficient. As we plan our business, we're comfortable that the macro environment remains broadly supportive to deliver on our objectives. We believe that the U.S. consumer is healthy. While there's certainly an undercurrent of volatility that has existed for some time, marketers continue to invest in the growth of their brands and in the innovation of their businesses, and dissatisfaction with legacy agencies' inability to meet client needs in a rapidly changing landscape seems to be at an all-time high.

This has helped drive an active pipeline of new business opportunities for our firms across the portfolio and lines us up for continuing market share gains. All the while, we're committed to preserving our improved credit profile to ensure that we have the financial strength to pursue our disciplined growth strategy and to be in a position to realize incremental value for our stakeholders as our business fundamentals improve.

As you can see, we're optimistic about how our business is performing. We continue to solidify our strong market position and are making the right moves to deliver a financial performance commensurate with that leadership. We're hiring great people, winning new clients and awards, making smart investments in our business and our agencies are energized. We look forward to sharing more of our success over the course of the coming year.

And with that, I'll turn the call over to David, who will provide further detail on our financials.

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David B. Doft, MDC Partners Inc. - CFO [4]

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Thank you, Scott, and good afternoon. As Scott indicated, our first quarter results underscore the renewed strength of our business. This is clear in the recovery of top line momentum that we are seeing and healthy net new business trends. It is seen in the recovery of profits where both top line growth and the benefits of our recent cost initiatives will translate to meaningful margin expansion as we move through the year.

Given the shape of last year's performance, comparisons get incrementally easier over the remaining 3 quarters of 2017. Our strength is also evident in our improved credit profile from smoother working capital trends consistent with what we have indicated on prior calls. Accordingly, we are reaffirming our guidance for 2017. We continue to expect better revenue growth compared to 2016 as our business momentum recovers. Specifically, we're targeting approximately 4% organic revenue growth based on contribution from a solid core of existing clients and as the tailwind from net new business strengthens.

We are also targeting an improvement in adjusted EBITDA margins of approximately 100 basis points on a full year basis. Remember, we have one more quarter before we cycle the acquisition of F&B so 2Q should have similar benefits to the first quarter. We currently estimate that the impact of foreign exchange, assuming currency rates remain the same, will be negative 50 basis points for the full year.

With that, I'd like to add some additional detail about our revenue growth. Overall organic revenue growth was 5.6% with variation by geography. The U.S., where we derive 80% of our revenue, accelerated organically to plus 8.9%. There was broad strength across the company in particular in client sectors including communications, food and beverage and automotive and in primary disciplines including media, integrated advertising, technology and data science as well as experiential and insights.

While the U.S. was strong, both Canada and international declined organically. Canada fell 7.6%, and continues to be a challenging market as it has been for a couple of years. This quarter, the decline was impacted by lower pass-through revenue, which accounted for about 2/3 of the drop. International increased 53% on a reported basis, but declined 11.1% organically. The year-over-year organic decline was due largely to the previously disclosed loss of Samsung across Europe last summer, a reduction in billable pass-through cost and some delayed revenue recognition that we expect to catch up in the second quarter. Last year's 42% organic growth in the quarter also made for a very difficult comparison. We would expect our international growth to even out as we move through the year.

Finally, with regards to revenue, our organic growth for the company was favorably impacted by 50 basis points from increased billable pass-through costs. Our adjusted EBITDA in the quarter was $35.8 million and it's tracking to our expectations as we are benefiting from the growth of our business and cost savings associated with the various actions taken last year.

Margins in the quarter were impacted by pass-throughs. Weakness in Canada where margins are higher, the timing of some revenue recognition and various growth initiatives across the network. I would note that margins actually increased year-over-year on a net revenue basis. So the reported decline was due to the pass-through dynamic.

In terms of cash generation, we experienced a modest $44 million seasonal outflow of working capital in the first quarter, consistent with our expectations of smoothing working capital trends relative to past patterns. You may recall that there was a $138 million outflow in the first quarter a year ago, so this represents a substantial improvement.

On the quarter-end balance sheet, we had just $5 million drawn on the revolver and $23 million of cash. Our balance sheet reflects the proceeds from the convertible preference shares investment by Goldman Sachs, which closed and funded in March. In terms of acquisition-related payments, we expect to make payments of $120 million to $125 million over the course of 2017. This includes $10 million that was already paid in the first quarter; $5 million through the issuance of approximately 0.5 million Class A years; an estimated $90 million to be paid in the second quarter and the balance to be paid in the second half of the year.

In summary, we had a solid quarter and are on a good path for the year.

We'd now like to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from James Dix with Wedbush Securities.

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James G. Dix, Wedbush Securities Inc., Research Division - VP and Senior Research Analyst [2]

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Just 2 questions for me. First, how are your expected reductions in your cost base tracking for the year? And what did you see in the first quarter? And are there any swings that you would call out that might lead to some variances there? And then secondly, when you look across your top agencies like, I don't know, your top half dozen, however you choose to define that, how do the biggest wins and losses that they've had over the past year or so compared to their overall revenue? And how has that been trending? I know you did a break down as to your biggest clients and how big a share revenue they make, but I'm just try to get a little bit of sense as to the volatility that you see and the results of some of your key agencies just because they are pitching, maybe to some extent, above their weight in terms of going after big global accounts even though they're not large agencies.

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David B. Doft, MDC Partners Inc. - CFO [3]

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Sure. Thank you, James. So the cost reductions are tracking as we expected. As we indicated on the last call, they were fully implemented in 2016 to benefit this year. I think that it's important to keep in mind though that, that's a point in time and then our business goes on. And there are areas of the business that are growing and adding people and investing in new initiatives. And there are companies that are similarly keeping their cost tight because they're coming off a tough year and had adjustments last year. And so overall, it's playing out as we would have hoped. Now the first quarter, it is the smallest quarter of the year on a seasonal basis so you tend not to see the full impact of these things because the full revenue run rate isn't fully there until you get to Q2 just by the nature and the seasonality of our business. And so we would expect that more of a margin expansion will become apparent as we move into 2Q and beyond. In terms of the win-and-loss activity, the pipeline has been fairly consistent, I think, in terms of the broad range of large and small opportunities. And similarly, on the loss side, it's the same. Obviously, last year, we were impacted by one fairly large loss, which has been, I think, discussed extensively at this point in terms of Samsung, and that had an impact. But outside of that, we haven't seen any real change in the kind of tone or trend in terms of size of wins and losses. We continue to see our agencies compete for some of the largest opportunities on the creative side. We increasingly see our agencies compete for larger opportunities on media buying-led type opportunities and we surely see -- continue to step up across our other businesses in their ability to at least get into pitches and compete for larger pieces of business whether it's PR or experiential or whatnot. So those trends are consistent and thankfully, consistent in the right direction.

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Operator [4]

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And next question comes from Tom Eagan from Telsey Advisory Group.

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Thomas William Eagan, Telsey Advisory Group LLC - MD and Senior Research Analyst [5]

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I wanted to follow up your comments on the tone or whatever you're hearing from your clients about ad spending. There is a lot of concern on The Street about the -- I guess the willingness to spend from a lot of companies here in the U.S., so I guess what you're hearing about, again your appetite to spend. Secondarily, in terms of overall marketing spend, I'm wondering whether you're seeing any interest in their spending less on, say, market research like less, for example, to IRI and Nielsen and more on the actual advertising campaigns. And then lastly, how many -- how much -- how many of your clients are in the CPG or FMCG categories?

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Scott L. Kauffman, MDC Partners Inc. - Chairman and CEO [6]

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Tom, this is Scott. So on client spending, we read the same things you read. We hear what you hear, but we're seeing something differently, and I think that's reflected in the results from the quarter. And as we said in the prepared remarks, clients are still spending behind their brands. Is the mix shifting a little? I wouldn't say from traditional research into other areas, but I would talk a lot about the increased focus on data and insights that come from data and not just at the media level, but also in the way the data insights inform strategy and the creative process. And so in our go-to-market offerings, we make sure that we meet all of the expanding needs of the CMO and that includes -- you can call it research, it's -- in traditional forms, I think it was third-party market research increasingly, it's first party client data and additional forms of insights that come from all kinds of transactions and activity on the social grid.

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David B. Doft, MDC Partners Inc. - CFO [7]

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In terms of our exposure of our client base, in the investor presentation on our website, we disclosed a pie chart of exposure by category in the quarter. 18% of our revenue came from food and beverage and 11% came from, I'd say, the rest of the broader consumer products category. Now -- and that obviously includes a whole range of things, but it gives you a sense of the exposure there.

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Operator [8]

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(Operator Instructions) And the next question comes from Steven Cahall of Royal Bank of Canada.

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Steven Cahall, RBC Capital Markets, LLC, Research Division - Analyst [9]

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A couple for me. Maybe first, just on your new business. You've had a couple of good quarters, both this one and the fourth quarter. I think you're still tracking a little bit below the 2012 to 2014 run rate for new business. So can you just talk about, with the bigger revenue base and more agencies, how you see the new business pipeline possibly picking up, if it will, to those historical levels? And then maybe just on the DAC as well as working capital, can you just give us an update to where the DAC sits today? And then you talked about smoothing the working capital, what have done on that side in order to make that a little less volatile than it's been in the past?

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Scott L. Kauffman, MDC Partners Inc. - Chairman and CEO [10]

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Steven, on the net new business front, it's lumpy quarter-to-quarter and obviously, it's the net numbers so it's the aggregate new wins minus client losses and it ebbs and it flows. It's been consistently up for us and I look at it from the standpoint of the pipeline for new business opportunities, those searches that are underway right now and the extent to which our agencies are precipitating in those searches, both on the creative side and on the media side. And on both fronts, I mean, historically, we've always done very well on the creative front, but increasingly, with the morphing of our media business from a series of point solutions to a more of a platform play and some iconic wins coming out of last year, we're participating in larger media searches as well. So we've talked a lot about the pipeline historically. We told you on the last call that it was robust. You saw the numbers from this quarter and that pipeline continues to be robust.

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David B. Doft, MDC Partners Inc. - CFO [11]

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And I would just add one thing. If you recall, we commented in the past that our level of growth swings has been as high as ever over the last several quarters. Last year, it was the story of a large loss as well as some delays in some of the new business actually ramping up, which impacted us. But the larger loss surely has an impact on the net number. This quarter, I think, was a solid quarter. It was a 29% increase in net new business wins over the first quarter of last year. And so we think a good start overall and hopefully, our pipeline continues to come through and we'll be able to continue to deliver solid numbers as we move through the second quarter and beyond. Can you clarify again, I'm sorry, your second question?

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Steven Cahall, RBC Capital Markets, LLC, Research Division - Analyst [12]

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Yes, it was kind of 2 questions, just if you could give us an update on what deferred acquisition expense is currently look at for the year? Or on a total balance sheet commitment? And then also, just to maybe give a little more detail on what you've actively done on the working capital side because you talked about the smoothing of working capital. So I'm just curious how you've been able to manage the business in order to make that a little less volatile.

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David B. Doft, MDC Partners Inc. - CFO [13]

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Sure. So deferred acquisition consideration right now sums to about $230 million -- $234 million -- $235 million, sorry, I rounded the wrong way in my head. $235 million for -- that sits on the balance sheet. As we've talked about extensively, that's presented as fair value and so the discounted number. The discounting amount is about $28 million so you can add that to get the gross amount over time and that amount has continued to come down over the last several quarters and has been a very significant quarter and the second quarter, as I said in my prepared remarks, where we anticipate paying down about $90 million. And so as presented on the balance sheet, we'll continue to come down substantially in 2017, barring other activity. And so that's how that's trending, if that's what you're asking about on that front. From a working capital standpoint, we focus on managing the ins and outs of our cash for many years and a lot of it is blocking and tackling around, making sure we're getting our bills out on time, and that our clients are paying on time and that we're also managing the other side as well. But ultimately, given the dynamic last year, which had the change in the client mix at our media business that led to a fairly large outflow of working capital, we had indicated that, that we expected that to be one time in nature, the magnitude of that and that -- that we'd be back to kind of normal course. And that's exactly what you're seeing now is that, that business is healthy, the client base is growing and the seasonality has reverted back to what we had seen in prior years, actually a little less so even than in prior years, based on kind of a different level and mix of billings coming through the media business in particular. And so overall, I'd say we continue to get more sophisticated on tracking and managing the blocking and tackling as we have for many years and then benefit from that change in mix from our -- in our media business that has lower volatility quarter-to-quarter in terms of the media billings.

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Operator [14]

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And as there are no more question, I would like to return the call to Chairman and CEO, Scott Kauffman, for any closing remarks.

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Scott L. Kauffman, MDC Partners Inc. - Chairman and CEO [15]

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Thank you, operator. So in closing, we're pleased with where we sit after the first quarter. And for the remainder of the year, we're highly focused on delivering our numbers and positioning the company for continued success in the quarters and the years to come. I bid you good afternoon from New York City. Thank you.

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Operator [16]

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