Q3 2019 Earnings Call
Good afternoon, everyone and welcome to MDC partners third quarter results Conference call.
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At this time of what you're trying to converts converts you Alex to launch Chief Communications Officer Ma'am. Please go ahead.
Thank you good afternoon, everyone welcome to the MDC partner Conference call for the third quarter of 2019, joining me today are Mark <unk>, Chairman and Chief Executive Officer, and frankly, it out 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.
Subject to uncertainties referenced in the cautionary statement included in our earnings release and slide presentation.
Further detailed in the company Form 10-K , and subsequent 85.
For your reference we posted an investor presentation to our website.
We also referred you to this afternoon's press releases slide presentation for definitions that's fine.
non-GAAP financial data.
And now to start the call I'd like to turn it over to our Chief Executive Officer Mark [noise].
Good afternoon. Thank you for joining us today I'm pleased to be here to discuss Mdcs recent performance and provide an update on progress against our new World plan. During the third quarter. We continue 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 threw out 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 health care and one of the global creative agencies.
Addressing all of these issues as part of the new World plan and I've seen a rebound in new business and some of those areas. Although revenue was down for the quarter net new business was again solid at over $30 million, which several notable wins, including nature's bounty at donor Vodafone global an expanded.
And that's what ancestry dot com at anomaly international creative duties with Electrolux group at FNB Creative Air work for two significant brands from left to know Rijkaard portfolio at Crispin Porter and Qualcomm Alison Partners. In addition last quarter, we reported that we want Haagen Dazs global creative duty.
So that can be.
Makes sense further expanded this relationship to a new general Mills, Brad with another MDC agency.
[noise]. This momentum has continued into Q4 with 72 on Sundays fantastic when.
Audi Global creative duties announced just this morning on top of donors recent win a free Johnson <unk> Johnson's most recognizable brands Tylenol LISTERINE Zyrtec. The latest donor achievement is not only significant win for M.D.C., but says it was one together with the stock broke groups code in theory, it's an indicator of the.
Potential success that can come from such collaboration.
I want to call attention to some of the agencies that are demonstrating significant bottom line growth even in a difficult marketing environment I'd highlight anomaly, it's an agency shine, particularly strong execution with its combination of strategy innovation and creativity hitting the sweet spot in the marketplace today [noise] other stuff.
Nonperformers include donor motto, Allison and partners and digital agencies, why email and instrument.
Optional 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 $27 million to 8 million in the quarter. This result keeps us on track to.
Deliver on my target of generating $100 million.
Free cash flow since I became CEO in March through the year end 2020.
Let me now take a few minutes to provide an update on the execution of our strategy to date against our new World plant 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 are agencies are better together then apart whenever possible.
Data and creativity go hand in hand online and offline creative are one of my Sam today efficient operations across the group enhance great agency cultures and creative [noise].
Investment should be in digital technologies at spur growth not realistic that increases overhead in order to meet these objectives, we're taking smart actions that will organize our offerings reduce our cost 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 M.D.C.
Media partners, and Gail, bringing our media agencies in our sophisticated data data analytics more closely together.
The new team as effectively reuniting media with creative and identified numerous pitch opportunities among existing clients.
We're about to enter the next phase of our plan with the formation of two additional multi agency networks led by two of our flagship agencies that take advantage in a variety of ways of complementary resources knowledge capabilities and geographic reach.
The substantive details had been finalized where in the process of Operationalizing those networks together with the combination of MDC media partners and Gail we expect to reduce our 25 reporting units by nearly half.
Certainly 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 a unified M.D.C., especially as it relates to MDC global pitch activity through multi country entered service scenario interdisciplinary team. These early pitches are definitely proving that we can indeed compete.
Consolidated global pitches and that our world class firmed create a truly unique go to market strategy.
At the same time were furthering the unity of M. B C or cross firms with employees at all levels through the creation of content and communications that were previously foreign to the Federation culture at MDC.
From an operational perspective, we're moving to create more active management at the center for more efficient pooling of finance I T HR and legal resources.
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 run it successful profitable agencies and create headroom to hire the best talent.
We're also rapidly progressing on our real estate consolidation efforts with priority place at our expansive New York portfolio or co location plan is expected to reduce our footprint by nearly 30%, creating synergies, including revenue generating interagency collaboration cross selling opportunities streamlined 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 heartened by all the progress we're making are all fronts, particularly the momentum that we're seeing let's build and put some significant new client wins I'll now turn the call over to Frank to provide more color our third quarter results Frank.
Thank you Mark and good afternoon, everyone.
Before reviewing our financial results I want to point out that we reclassified 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 let us to report revenue of 343 million down, 8.8% and organically down 7.5%.
For the nine month period reported revenue was 1.03 billion down 3.7% on an organic basis from 1.08 billion a year ago.
Pass through costs continued to benefit our reported organic revenue by approximately 1% and 1.5%, but the three and nine month periods respectively.
For the quarter, we saw continued positive momentum and specialist communications segment, delivering 6% organic revenue growth as they continue to capture market share.
We're seeing a 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 the rail a brand meritas. Additionally, our PR agencies are increasingly connected to.
Demos 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 three agencies.
First our media business inclusive of the previously mentioned reclassification declined 28% of which approximately one quarter is related to pass through costs with no related impact on EBITDA. The remaining amount was principally related to the loss of two accounts, resulting from client acquisitions and to a lesser extent.
A deferral of some project work.
These losses had minimal impact on EBITDA.
The second factor was the cycling of two previously announced high profile account losses at one agency and 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 and its future [noise].
Softness in the segment was partially offset by a stronger performance at two 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 health care portfolio reported in our all other segment, which declined by approximately 12% organically.
Delays and regulatory approvals and certain reductions in client spending what a principal drivers, but we expect improvement in this segment. Some solid recent wins position us well for next year.
We also saw strength and 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 to these three 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 nine months.
In both periods adjusted EBITDA was EBIT aided by the significant cost reduction initiatives implemented initially in 2018, and continuing and each of the first three quarters in 2019.
Severance and other charges from incremental cost reduction measures taken in the third quarter drove covenant EBITDA of 51 million, leading to trailing 12 month covenant EBITDA of 179.
We also continued to make progress against our cost savings initiatives in the quarter delivering approximately 2.6 million in restructuring severance, including zero point Sixmillion and charges at the corporate office.
For the nine 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 30 mill $35 million and 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 minority interest distributions and 1 million, an 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 prior quarter.
The funding of acquisition related payments reduce the remaining liabilities related to DAC and minority interest obligations to approximately a $138 million with up to 7 million expected to be paid in the fourth this year.
Overall, we remain on track to exit the revolver by yearend and achieve significant net positive cash flow.
Given the trends through nine months, we're 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're focused on expeditiously executing against our new World plant driving the strategic initiatives are combining creativity with strategy and fostering enhanced cost agency collaboration while simultaneously eliminating unnecessary costs, improving profitability and strengthening our balance sheet. Thank you.
Operator would you please open the lines for questions.
Ladies and gentlemen at this time will begin the question and answer session.
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Okay.
Our first question today comes from Avi Steiner from JP Morgan. Please go ahead with your question.
Thanks, I got it.
Couple of here.
I recognize how difficult is forecast this business.
But I'm wondering if you can talk a little deeper into what happened.
I heard you mentioned the deferral.
Some account losses health care.
But I'm really trying to understand what happened I guess from early August when.
I spoke to the market.
Through the end of a quarter.
Yes.
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 thank you.
So I think there's a couple of pieces to that RV, but the first thing is as you know a fair amount of budget is based on projected revenues for project work, an 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 in sometimes it doesn't.
So there's a little bit of that going on.
Second we win and lose business every day. So you know you get softness in client spending.
You get regulatory delays, which happens in certain of our businesses, which just as 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 right and this is mark I mean, I think I look 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 wins were seeing are really you know as you can see you know we've had to back to back quarters. After if you go back to the first quarter had significant net loss of new business, we've had two 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 contract and the agencies brought on the old agencies.
Oh taken off off the business as it goes and I see that that we're beginning to have some of the first.
A major wins now as we did but Johnson and Johnson and an outage. So I think that those things are occurring in the sequencing. The things I think I think that's what that's what really has resulted in somewhat less revenue than we were hoping for through the end of the year.
Understood and that's a good segue to my next question.
Hi profile wins that you've talked to and we've seen in the trade press.
Sounds like a timing is uncertain I want to make sure we shouldn't assume anything in the fourth quarter number one number two I think you'd mentioned at least one of the wins.
Was achieved in partnership with stag, well and I'm trying to understand maybe what the economic splits are how to think about.
A win.
Recent MPC versus.
Well I got I think we have we had a you know projected out the fourth quarter revenue without the anticipation of these wins. So so they came in and in the fourth quarter, whether exactly when they'll come online and that can.
Not going to predict as as clients, sometimes take take longer or shorter, but I think.
These are significant wins in terms of things that might be done in collaboration as I always say you know 100% of nothing's nothing so I think both agencies benefit here.
Not going to go through the the the amounts but these are were significant.
Six figure wins for both agencies involved so so I think that I think that on balance that that kind of our co-operative win has solid economics in that increases the percentage probability of winning and in that case I think they displace agencies that had been there for over 60 years.
As a servicing servicing that account. So we're hopeful that that kind of thing will continue to.
You know have have benefits in the city in the future as agencies become comfortable or working with each other across disciplines and the other thing that's happening there in those partnerships as they typically will involve two disciplined 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.
Okay.
2020 targets.
Mark I believe reiterate.
Free cash flow target for 100 million from the time you join 20.
Thank you had previously.
I want to get myself.
Thank you 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's ending and some of the new business when you talked about earlier.
[noise] Swabi I think right now we're 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 will factor that into.
Our guidance for 2020, we'll update you at the end of the next quarter and I I think it's important to note. In this business is just as a loss that happens in the beginning the year as I came on cycles through the entire year a win this time also cycles in the other direction across the next year.
Fair enough and I want to go back to.
But.
I think to one of my earlier questions.
Thank you talked about kind of the shift to more project work can you kind of dimensionalize that.
For us kind of project versus other well I look I think it's a comes in a number of forms some agencies by their nature are mostly project work, but even at some of our larger agencies.
We will be one of number of agencies on a roster.
Even though the 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 know you can make an estimate you can use unlike I said, some macro sort of math on it but in the yen.
It may be plus or minus to what you estimate. So this is mark let me just also comment on that that the look to the extent people switch from a or worse to project work than the generally they're switching from one agency to several agencies on a roster.
And our response to that is a to adapt to roster life when 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 arrow our on creative now it could instead be project work across three or four 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 of announcing over the next few weeks that wells that will reduce our operating units from 25 to about half of that is critical in responding to the marketplace on this.
I appreciate the time, gentlemen, I will hand back in queue. Thank you.
Once again, ladies and gentlemen, if he would like to ask a question. Please press star and then one to withdraw yourself from the question Q, you May press star and too.
And ladies and gentlemen at this time and showing no additional questions I'd like to turn the conference call back over to my pen for any closing remarks.
Thank you I see the matters to ask the questions for the group.
We are appreciative I think that Oh, we think we've given a timely update of the on the new were plan that is that is currently in progress and we'd hoped that this combination of momentum that we're saying with the plan will produce significant results for this company as we move forward. Thank you again for listening.
Ladies and gentlemen that does conclude today's conference call. We did thank you for attending today's presentation. You may now disconnect your lines.
[noise].