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Edited Transcript of MDCA earnings conference call or presentation 5-Nov-19 9:30pm GMT

Q3 2019 MDC Partners Inc Earnings Call

NEW YORK Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of MDC Partners Inc earnings conference call or presentation Tuesday, November 5, 2019 at 9:30:00pm 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 afternoon, everyone. And welcome to MDC Partners' Third Quarter Results Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Alex Delanghe, Chief Communications Officer. Ma'am, please go ahead.

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

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Thank you. Good afternoon, everyone. Welcome to the MDC Partners Conference Call for the Third Quarter of 2019. Joining me today 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 discussions 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 statements 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'll 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 Chief Executive Officer, Mark Penn.

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

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Good afternoon. Thank you for joining us today. I'm pleased to be here to discuss MDC's recent performance and provide an update on progress against our new world plan. During the third quarter, we continued to move quickly to execute on our strategic priorities, pursuing initiatives that we believe will position the business for growth and profitability. In terms of performance, the significant cost reduction actions taken in late 2018 and throughout this year in tandem with prudent financial management, helped deliver a 6% increase in adjusted EBITDA on a year-to-date basis.

Q3 adjusted EBITDA was down year-on-year against a strong 2018 third quarter. Revenue softness was driven by declines in media, healthcare and one of the global creative agencies. We're addressing all of these issues as part of the new world plan and are seeing a rebound in new business in some of those areas. Although revenue was down for the quarter, net new business was again solid at over $30 million with several notable wins, including Nature's Bounty at Doner, Vodafone global and expanded assignments with Ancestry.com at Anomaly, international creative duties with Electrolux Group at F&B, Creative AOR for two significant brands from the Pernod Ricard portfolio at Crispin Porter and Qualcomm at Allison & Partners.

In addition, last quarter, we reported that we won Häagen-Dazs global creative duties with F&B, and we've since further expanded this relationship to a new General Mills brand with another MDC agency. This momentum has continued into Q4 with 72andSunny's fantastic win of Audi global creative duties announced just this morning on top of Doner's recent win of 3 Johnson & Johnson's most recognizable brands Tylenol, Listerine and Zyrtec.

The latest Doner achievement is not only a significant win for MDC, but since it was one together with the Stagwell Group's Code and Theory, it's an indicator of the potential success that can come from such collaboration. I want to call your attention to some of the agencies that are demonstrating significant bottom line growth even in a difficult marketing environment. I'd highlight Anomaly as an agency showing particularly strong execution with its combination of strategy, innovation and creativity hitting a sweet spot in the marketplace today. Other strong performers include Doner, Mono, Allison & Partners and digital agencies YML and Instrument.

Operationally, our disciplined cost management and other efficiency improvements across the business helped to offset much of the decline in revenue. We also drove strong cash generation, as we successfully reduced our revolver from $27 million to $8 million in the quarter. This result keeps us on track to deliver on my target of generating $100 million of free cash flow since I became CEO in March through the year-end of 2020.

Let me now take a few minutes to provide an update on the execution of our strategy to date against our new world plan that we laid out on our last call. As a reminder, at a high level, our strategy is built around the following key transformational principles: our agencies are better together than apart whenever possible; data and creativity go hand-in-hand; online and offline creative are one in the same today; efficient operations across the group enhance great agency cultures and creativity; investment should be in digital technologies that spur growth not real estate that increases overhead.

In order to meet these objectives, we're taking smart actions that will organize our offerings, reduce our costs, capitalize on our strengths and enhance our go-to-market capabilities. In terms of organizing our offerings during the second quarter, we announced the alliance between MDC Media Partners and Gale, bringing our media agencies and our sophisticated data analytics more closely together. The new team is effectively reuniting media with creative and has identified numerous pitch opportunities among existing clients. We're about to enter the next phase of our plan with the formation of 2 additional multiagency networks led by 2 of our flagship agencies that take advantage in a variety of ways of complementary resources, knowledge, capabilities and geographic reach.

The substantive details have been finalized and are in the process of operationalizing those networks. Together with the combination of MDC Media Partners and Gale, we expect to reduce our 25 reporting units by nearly half. Importantly, we also expect that these actions will drive significant synergies, both in terms of go-to-market opportunities and cost savings. I look forward to sharing more details on both of these new networks within the coming weeks.

I've also been extremely pleased with the way that our partners have rallied around the imperative of our unified MDC, especially as it relates to MDC global pitch activity through multi-country interdisciplinary team. These early pitches are definitely proving that we can indeed compete the consolidated global pitches and that our world-class firm made a truly unique go-to-market strategy.

At the same time, we're furthering the unity of MDC across firms with employees of all levels through the creation of content and communications that were previously formed to the federation culture and MDC. From an operational perspective, we're moving to create more active management of this center with more efficient pruning of finance, IT, HR and legal resources. At the same time, we're bringing disciplined management to cost structure, particularly the compensation to revenue ratio, administrative expenses and CapEx. Proper management of these factors is integral to running successful profitable agencies and create headroom to hire the best talent.

We're also rapidly progressing on our real estate consolidation efforts with priority placed on our expensive New York portfolio. A co-location plan is expected to reduce our footprint by nearly 30%, creating synergies including revenue-generating interagency collaboration, cross-selling opportunities, streamline administration services as well as a natural hedge to fluctuating real estate needs. We expect to complete our full New York transformation by the end of 2020 and generate future annualized cost savings of about $10 million.

As we move forward, I'm excited to see what the future holds and have heartened by all the progress we're making on all fronts, and particularly the momentum that we're seeing that's building significant new client wins. I will now turn the call over to Frank to provide more color on our third quarter results. Frank?

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

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Thank you, Mark, and good afternoon, everyone. Before reviewing our financial results, I want to point out that we reclassify one of our agency businesses from the domestic creative to the Media Services segment at the beginning of the quarter. The realignment is based on the operational management of the business under the recently announced media network. Prior periods have been reclassified to facilitate the comparability of results. As Mark mentioned, in the third quarter, we had some strong performances at a number of agencies, and at the same time, we experienced continued challenges in a select number of our businesses. This led us to report revenue of $343 million, down 8.8% and organically down 7.5%.

For the 9-month period, reported revenue was $1.03 billion, down 3.7% on an organic basis from $1.08 billion a year ago. Pass-through cost continued to benefit our reported organic revenue by approximately 1% and 1.5% for the 3- and 9-month periods, respectively. For the quarter, we saw continued positive momentum in our Specialist Communications segment, delivering 6% organic revenue growth, as it continued to capture market share. We are seeing our public relations agencies take on larger and larger remits as corporations recognize the growing importance of the Chief Communications Officer in an environment where one tweet or mismanaged business decision can swiftly and severely derail a brand narrative. Additionally, our PR agencies are increasingly connected to CMOs with larger budgets in this environment. This unique specialty positioning in our PR businesses continues to drive results. Offsetting this, the downward pressure we experienced was largely driven by 3 agencies. First, our media business, inclusive of the previously mentioned reclassification, declined 28%, of which approximately 1/4 is related pass-through costs with no related impact on EBITDA. The remaining amount was principally related to the loss of 2 accounts resulting from client acquisitions and, to a lesser extent, the deferral of some project work. These losses had minimal impact on EBITDA.

The second factor was the cycling of 2 previously announced high-profile account losses at one agency in our Global Integrated segment. We expect the impact of these losses to run its course by the end of the year and be offset in 2020. This is a fundamentally strong award-winning and resilient business as evidenced by recent account wins, and we continue to have great confidence in its future. Softness in this segment was partially offset by a strong performance at 2 global leaders in the group, resulting in an overall 6% organic decline in the segment for the quarter.

The final contributing factor was in our healthcare portfolio, reported in our All Other segment, which declined by approximately 12% organically. Delays in regulatory approvals and certain reductions in client spending were the principal drivers. But we expect improvement in the segment as some solid recent wins position us well for next year. We also saw strength in our digital agencies in this segment in Q3, as demand continues to rise at the intersection of consumer experience and technology-enabled creativity.

Excluding the impact of these 3 businesses, EBITDA would have been up over 20% year-to-date. For the quarter, adjusted EBITDA decreased 17% to $49 million as compared to an unusually strong performance in the prior year, but increased 6% to $117 million through the first 9 months. In both periods, adjusted EBITDA was aided by the significant cost reduction initiatives, implemented initially in 2018 and continuing in each of the first three quarters in 2019. Severance and other charges from incremental cost reduction moves taken in the third quarter drove covenant EBITDA of $51 million, leading to trailing 12-month covenant EBITDA of $179 million.

We also continue to make progress against our cost savings initiatives in the quarter, delivering approximately $2.6 million in restructuring severance including $0.6 million in charges at the corporate office. For the 9-month period, we recorded a total of $8 million in charges, including $2 million at the corporate office with estimated annualized savings of nearly $30 million. Notably, we have reduced our corporate overhead by over $8 million on an annualized basis. We are committed to delivering further improvements, and therefore, I would expect incremental restructuring actions in the fourth quarter that will help us achieve our goal of $35 million in run rate savings by the end of the year.

Moving to the balance sheet. We delivered another solid working capital performance. We funded approximately $7 million of deferred acquisition-related payments, $2 million in minority interest distributions and $1 million in interest and cash taxes, while further reducing borrowings on our credit facility from $27 million to $8 million. Net debt was $901 million, flat, as compared to Q2, but down from $959 million at year-end.

Given the cash performance and change in covenant EBITDA, our total leverage ratio on the revolver was essentially flat to the prior quarter. The funding of acquisition-related payments reduced the remaining liabilities related to DAC and minority interest obligations to approximately $138 million with up to $7 million expected to be paid in the fourth quarter of this year. Overall, we remain on track to exit the revolver by year-end and achieve significant net positive cash flow. Given the trends through 9 months, we are maintaining our 2019 covenant EBITDA guidance of $175 million to $185 million. Though on lower forecasted organic revenue, which we anticipate will be down 3% to 5% for the full year.

As we look ahead, we are focused on expeditiously executing against our new world plan, driving the strategic initiatives of combining creativity with strategy and fostering enhanced cost agency collaboration, while simultaneously eliminating unnecessary cost, improving profitability and strengthening our balance sheet.

Thank you. Operator, would you please open the line for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Avi Steiner from 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 couple here. So I recognize how difficult it is to forecast this business. And I'm wondering if you could dig a little deeper into what happened on the revenue side? I heard you mentioned the deferral, some account losses on the healthcare side, but I'm really trying to understand what happened I guess from early August when we -- you last spoke to the market through the end of the quarter, did that all materialize at the back half? And then on the deferral part, how do we think about that coming back into the numbers? And then I've got a few more.

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Frank P. Lanuto, MDC Partners Inc. - CFO [3]

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So I think there's a couple of pieces to that, Avi. The first thing is, as you know, a fair amount of budget is based on projected revenues for project work, and increasing portion of our work has become project-oriented. So therefore, you don't always have the visibility that far out. But you use some macro approach to try and estimate what those trends will be. Sometimes that work shows up and sometimes it doesn't. So it is a little bit of that going on. Second, we win and lose business every day. So you get softness in clients spending, you get regulatory delays, which happens in certain of our businesses, which just is a part of the business. So your expectations aren't always met on that. So I think that's overall, sort of, where some of the softness comes from.

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Mark J. Penn, MDC Partners Inc. - Chairman & CEO [4]

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And -- this is Mark. I mean, I think, the third quarter last year was particularly strong one and as several of the losses that occurred just as I was coming on cycle through some of the winds we're seeing are really, as you can see, we've had 2 back-to-back quarters after, if you go back to the first quarter, had significant net loss of new business. We've had 2 quarters of net wins of business, but it takes longer I think for revenue to come onstream these days, because the business has to be finally fully contracted, the agencies brought on, the old agencies taken off the business as it goes. And I see that we're beginning to have some of the first major wins now as we did with Johnson & Johnson and Audi. So I think that those things were coming in the sequencing of things. I think that's what really has resulted in somewhat less revenue than we were hoping for through the end of the year.

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Avi Steiner, JP Morgan Chase & Co, Research Division - Executive Director and Senior Analyst [5]

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Understood and that's a good segue to my next question. So for the high-profile wins that you talk to and we've seen in the trade press, it sounds like timing's uncertain. I want to make sure we shouldn't assume anything in the fourth quarter, number one. Number two, I think you had mentioned at least one of the wins was achieved in partnership with Stagwell and I'm trying to understand may be what the economic splits are? How to think about a win vis-à-vis the contribution of MDC versus...

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Mark J. Penn, MDC Partners Inc. - Chairman & CEO [6]

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Well, again, I think we have -- we had projected out the fourth quarter revenue without the anticipation of these wins. So they came in, in the fourth quarter, whether exactly when they'll come on, I'm not going to predict as client sometimes take longer or shorter. But I think these are significant wins. And in terms of things that might be done in collaboration, as I always say, 100% of nothing is nothing. So I think both agencies benefit here. I'm not going to go through the amounts, but these are -- were significant six-figure wins for both agencies involved. So I think that on balance, that kind of a cooperative win has solid economics and that increases the percentage probability of winning and, in that case, I think they displace agencies that have been there for over 60 years servicing that account. So we're hopeful that, that kind of thing will continue to have benefits in the future, as agencies become comfortable working with each other across disciplines. And the other thing that's happening there in those partnerships is they typically will involve 2 disciplines. So the average sale itself is higher and so it's not as though either agency is losing, they're able to get a bigger contract by working together across several disciplines.

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Avi Steiner, JP Morgan Chase & Co, Research Division - Executive Director and Senior Analyst [7]

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Okay. 2020 targets, I heard you, Mark, I believe reiterate your free cash flow target of -- for $100 million from the time you joined to the end of '20. I think you'd previously, and I don't want to get myself or anyone else in the trouble here, but I think you'd previously talked about 2% to 4% organic revenue growth for next year. And I'm wondering how you feel about that in context of how this year is ending and some of the new business wins that you talked about earlier?

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Frank P. Lanuto, MDC Partners Inc. - CFO [8]

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So Avi, I think, right now, we are not changing our 2020 forecast for guidance at this time. We're in the middle of our budgeting process and as we start to collect even this very new news of winning accounts, we'll factor that into our guidance for 2020, and we'll update you at the end of the next quarter.

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Mark J. Penn, MDC Partners Inc. - Chairman & CEO [9]

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And I think it is important to note in this business is just as a loss what happens in the beginning of the year, this is where it came on cycles through the entire year, a win at this time also cycles in the other direction across the next year.

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Avi Steiner, JP Morgan Chase & Co, Research Division - Executive Director and Senior Analyst [10]

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Fair enough. And I want to go back to, and I apologize, I'll get off shortly. But I think to one of my earlier questions, Frank, you talked about kind of the shift to more project work. Can you kind of dimensionalize that for us on a project versus other.

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

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Well, look, I think it comes in a number of forms. Some agencies by their nature are mostly project work, but even at some of our larger agencies, you will be one of a number of agencies on a roster. And even though, you're sort of pre-cleared with the client, you may find yourself sort of competing with another agency or two for some of that work throughout the year. So you can make an estimate. You can use some, like I said, some macro, sort of, math on it. But in the end, it may be plus or minus to what you estimate.

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Mark J. Penn, MDC Partners Inc. - Chairman & CEO [12]

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So this is Mark. Let me just also comment on that, that the -- look, to the extent people switch from AORs to project work then generally they're switching from one agency to several agencies on a roster. And our response to that is, a, to adapt to a roster life when, in fact, clients choose that as their preferred route. Some do, some don't. I think most importantly, the alliances that we're announcing that bring together multiple services also counter that because they sell into clients coherent packages of services. And so even if it's not an AOR on creative now, it could instead be project work across 3 or 4 different disciplines. And so that's why we believe that the alliance or network strategy here that we're putting together and that we're in the process of announcing over the next few weeks that we'll reduce our operating units from 25 to about half of that is critical in responding to the marketplace on this.

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Operator [13]

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(Operator Instructions) And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Mark Penn for any closing remarks.

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Mark J. Penn, MDC Partners Inc. - Chairman & CEO [14]

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Thank you. I see they've managed to ask the questions for the group. We're appreciative. I think that -- we think we've given a timely update of -- on the new world plan that is currently in progress, and we hoped that this combination of momentum that we're seeing with the plan will produce significant results for this company as we move forward. Thank you, again, for listening.

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Operator [15]

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Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.