Q4 2019 Earnings Call
Thursday
dead dead
Thursday
Dead dead good day and welcome to the MDC Partners fourth quarter, and year-end results, participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be opportunity to ask questions. Do you ask a question? You may press * then 1 on your touchtone phone to withdraw your question, please press * then two.
Please note.
This event is being recorded. I would now like to turn the conference over to Alex delange chief Communications officer, please go ahead.
Thank you. Good afternoon. Everyone. I'd like to thank you for taking the time to listen to the MDC Partners on hold and call for the fourth-quarter and full-year of 2019 joining me today for life or Mark Penn chairman and chief executive officer and Franklin noodle Chief Financial Officer or begin. Our prepared remarks remind you that the following discussion contains forward-looking 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 off and fly presentations and are further details in the company's form 10-K and subsequent SEC filings for your reference. We posted an investor presentation to our website. We may refer you to the 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 home.
executive officer Mark pass
An update on the progress we have made on our new world strategic plan the business delivered a solid performance to round out 2019 with a strong finish our prudent cost money and focus on driving profitable growth led to a year-over-year increase in adjusted ebitda a 14% in Q4 and 13% for the full year, excluding the impact of our Kingsdale divestiture building off this Covenant total of 184.2 million in the fourth quarter of 7% wage increase versus prior year and at the high end of our guidance range top line revenue also rebounded nicely after a soft Q3 with Organic Revenue down 1.5% in Q4 and down 3% in 2019 in line with expectations for the year.
The revenue bounced back in the quarter was driven by particularly strong continued organic Revenue growth of 15% in our specialty communication segment and 3% organic growth Global integrated segment following stag Wells investment, and and my joining the company Net new business, and the last three quarters surged a hundred and five million dollars, including thirty-seven million in the fourth quarter up from -11000000 to 1 net new business was over ninety three million in 2019 wage best annual performance in four years notable wins in the quarter include the previously-announced VIN, but he had seventy-two and sunny Johnson & Johnson at donor along with California Pizza Kitchen and TGI Fridays at Manitoba Harvest. It's cpb apps Brewpub.
Thank you. Good afternoon. I'm pleased to join all of you to discuss our fourth quarter and full-year results and to provide.
MDC media and
Anomaly added products with Facebook and more brands with General Mills. In fact convergence is recently released creative new business barometer in parameter MDC placed third in the ranking of wins, despite being only a fraction of the size of the mass of holding companies that finished both ahead and behind us off this remarkable result even prompted the study CEO to comment quote by placing third. This is the first time she has landed so high in our rankings as a result You could argue that domestically they are legitimate threats to the big six marcom holding companies can quote
In addition client retention is shown a dramatic improvement over the last three quarters has our net new business wins indicates losses shrank from sixty million in q12 under eight million in the fourth quarter down Sevenfold and positioning us for growth in the coming year. We're also seeing continued and encouraging growth and delivering creative technology solutions for clients from Partners, like instrument why a male and Gail well as Innovative production and Technology from our full service agencies like anomaly and seventy-two and sunny.
Operationally I'm very pleased.
How the combination of net new business wins and our rigorous cost management increased our cash position in the quarter successfully lowered our leverage ratio to 4.5 from five times as we eliminated our revolver borrowing and ended the year with an impressive cash balance of over $100 this performance Keeps Us on plan to deliver that our Target of generating a hundred million dollars of free cash flow through year-end 20/20 from when I started 2019 has been a year of transition and fast food nation of our new world plan. We have accomplished a lot of change in a short period of time though. There's also much more to do we are on a Relentless rh2 in ourselves as the modern marketing company of choice combining data and creativity and unique and game-changing ways. We are also transitioning from a holder of companies to an altar. Yep.
Give to the holding companies.
One that is Nimble cost-effective and yet offering the kind of creative that has set him apart from its larger Rivals one component of this plan was to bring together the best in technology creativity and Communications into new networks that bring to Market all of the great deals with in MD.
Or multi-agency networks have been formed to solve client challenges more directly and holistically support organic growth share resources and knowledge and build on existing capabilities.
The MDC Media Partners in Gale network. Is this New Media technology and Data Network designed to bring address ability to the center of advertising strategy and Creative Media expectation the donor partner Network brings together donor one of our largest US advertising agencies with six complementary specialist agencies the anomaly Lions some of these led by one of our most highly recognized agencies anomaly and its leader Carl Johnson and our most recent networks known as constipation a collective made up of seventy-two and sunny cpb petrol.
that show
And red Scout these are in addition to two other networks already in place the Allison and Partners group and the forstmann and voting for his Network formed fall of 2018. We now have over 85% of our Revenue organized networks. We are putting more businesses in the hands of our most experienced and entrepreneurial managers while improving customer offerings streamlining costs and creating new shared service opportunities.
In addition to reorganizing our offerings we have actively trimmed their overall cost structure to establish nimbler and more competitive organizations.
Our efforts in this area have been focused on lowering our compensation to revenue ratio reducing administrative support costs and raining in corporate costs as promised Thursday. We moved our corporate headquarters from the expensive and swanky 5th Avenue Palace to excess space in our Network we have now signed a deal to bring 11 of our new york-based agencies into one World Trade Center the Freedom Tower when complete later this year centralization of our New York real estate portfolio will allow for significant cost thousands of ten to twelve million dollars annually starting in 20 21 better efficiencies in alignments among our agency partners and enhanced inter-agency collaboration. We will be reduced cost while furthering the key goals of our transformation plan.
Adding to this we made.
African progress in reducing our compensation to revenue ratio over the past several months. We work closely with our agencies to increase reader in this area and move towards more competitive targets as a result. We've actually lowered our partner Network, to revenue ratio by 2% in the fourth quarter and expect to see continued improvements of another 1.5% in 2020 combined these efforts have helped us achieve our goal of thirty five million dollars of run rate savings and enhancement. We reduced corporate overhead Alone by over eight million dollars overall. I'm very pleased with what we've achieved to date delivering significant progress against our plan and creating the energy early wins and momentum. We need to succeed. We see an excellent initial progress from our Network strategy as agency collaboration has already resulted in some incremental new business.
As we look ahead to twenty twenty empty is today far better positioned to compete in the new world of marketing on all fronts. We're seeing strong client activity supported by the pipeline of new pictures across agency and sectors our group of Highly talented and entrepreneurial leaders are motivated and committed to the Future and the growth of the business. We are seeing greater collaboration across agencies and continued game-changing Client Solutions applying technology and creativity to drive marketers success in an evolving Market Place in 2020. We will execute the next level of our strategic plan now formed our new network, so hit the ground running and work more closely than ever with our data and media operations will be positioned to go after larger Network pitches both with these new combinations and am missing the full power of our one point five billion dollar sweep of talents along with the companies. That's Bagwell.
Greater emphasis will be put on internally harnessing are unique Technologies and data offerings to get the Right add to the right person at the right time.
We will incubate the best outside and internally develop products and this year will be launching a Predictive Analytics product to serve both Brands and agencies in the communications field. It will be our first subscription product. We will complete our New York real estate consolidation which will bring together eleven agencies in ways that will cut their wage average of 36% and yet provide modern attractive workspace that will help Drive talent and marketing and cost synergies.
We have now formed a new business operations Group, which is poised to leverage our combined purchasing power and make smart Investments across the portfolio will implement the next set of central is to benefit our agencies across areas like TNT legal it and others. We are committed to saving an additional twenty-five million dollars in run rate by the end of 2018 through these initiatives and real estate ith our legal travel and other back-office functions will continue to focus on improving our compensation to revenue ratio by another 1.5% to make our agencies more competitive more profitable and ensure we are investing efficiently and talent.
this is an industry that
Requires both great work and continually lowered costs and we're achieving both as evidenced by the results this quarter.
Given the recent Trends in our business and the annual agency review process. We just completed we're maintaining our current twenty-twenty Outlook with Organic Revenue in the in 2020 of two to four percent growth and Covenant of two hundred to two hundred and ten million. I took on the role of chairman and CEO and invested a hundred million dollars off part of stagwell of the Stag Boat Group and a year ago because I knew this company was nowhere near meeting its potential. I knew that would motivated leadership a discipline plan a degraded collaborative operations the extraordinary Collective assets that make up this network could thrive in a way as never before I'm proud to report that we're beginning to see the results that strategic New World plan in the last year. We have implemented our Network structure significantly improved our net new business expanded profit margins reduce costs money.
lowered our Leverage
Pay down all borrowings and importantly deliver transformative work for clients in every category we represent but a fraction of this industry and yet every day we turn heads with creative wage outside results inspires consumers to action and emotion and challenges the status quo and closing. I'm excited for what lies ahead of the new year and is made up of Industry leadership and many of the very best agencies in the world. We intend to claim our rightful place in this industry and deliver ambitious sustainable growth as we position ourselves for long-term success. What's that? Let me turn things over to Frank to run through financials.
Thanks, Mark. Good afternoon. Everyone as Mark mentioned in the fourth quarter. We delivered sequential Revenue growth.
Pulling this is at several agencies as we benefited from improved Revenue Trends relative to earlier in the year. We reported revenue of $382 down 3% off and organically down 1.5% for 2019 reported Revenue was 1.4 $2 billion dollars down 3.1% on an organic basis off from 1.48 billion a year ago, excluding the impact of our Kingsdale divestiture adjusted ebitda increased 14% in the fourth quarter and 13% off for the full year as reported adjusted ebitda, increased 10% to $57 million in the quarter and 7% to 174 million for the full year.
in both.
Adjusted ebitda was aided by the cost reduction initiatives implemented initially in 2018 and continuing throughout 2019 Severance and other restructuring charges are 3.2 million dollars from incremental cost reduction actions taken in the fourth quarter drove Covenant a $61.
For 2019 we recorded a total of $11 in restructuring charges, including two million dollars at the corporate office with estimated annualized Savings of approximately thirty-five million dollars. Approximately half of the estimated savings were realized in 2019. And the rest will be realized in 2020 notably. Corporate overhead by over eight million dollars on an annualized basis and in total our actions led to trailing-twelve-month Covenant evidence of a hundred eighty thousand million dollars near the upper end of our guidance now breaking down the results by segment. We saw a continued strength in our specialist communication segment down 15% organic Revenue growth in a quarter and 9% growth for the year as it continued to capture market share.
adjusted ebitda
Sent in the quarter and 26% for the full year.
Largest segment Global integrated delivered 3% organic Revenue growth and 24% ebitda growth in the fourth quarter was strong progress in our largest global agency.
Little food year Revenue was essentially flat as the segment rebounded from client losses in the beginning of the year while adjusted ebitda increased 16%
the all other segments delivered organic Revenue growth of approximately 1% in Q4 and excluding the effect of the Kingsdale divestiture delivered adjusted ebitda growth of nearly sixty percent of the same.
At the same time we continue to experience top-line pressure in our domestic creative and media service segments. We took action however to reduce costs during 2019. Both businesses positioning them for improved profitability and as a result domestic creative more than offset Revenue softness and delivered 29% growth in a just wage, but for the full-year immediate selective new business winds pushed Revenue higher sequentially from the third quarter and we're seeing those Trends continue into early 2025. We are encouraged by the combination of media and data and expect the increased agency collaboration from our recently formed networks to generate more opportunities for our media platform.
No.
moving to our balance sheet
We generated $92 in cash flow from operations in the fourth quarter driven by increased the good working Capital Performance and seasonal improvements in media cash refunded approximately Thirty million dollars in interest on our notes and revolver 1 million dollars of the third acquisition-related payments and three million dollars a month already interest distributions.
We exit the revolver during the quarter reduce our total leverage to 4.5 times lowered our net debt to $832 from $959 a year ago and ended the year with a hundred and seven million dollars of cash on our balance sheet.
Funding of acquisition-related payments reduced the remaining liabilities related to a minority interest obligations partially offset by increases related to improve agency performance resulting in an overall small net increase acquisition-related liabilities to a total of $149.
We expect to fund approximately $65 million dollars in acquisition-related liabilities in 2020 with the largest outflow in the second quarter consistent with historical Trends. Although seasonal Trends will affect working capital. We expect continued progress toward our goal of reducing leverage by three-quarters of a turn annually.
In terms of ongoing initiatives and opportunities as Mark mentioned we are on schedule with our New York real estate transformation project having signed our lease at One World Trade Center, June eleventh of our New York agencies into one location to promote collaboration create a natural hedge against shifting space needs and ultimately reducing administrative costs.
Savings from the move will reduce our occupancy costs by at least ten million dollars annually and we expect to realize most of those savings beginning in 2021.
Now turning to our guidance. We currently anticipate organic Revenue growth of 2% to 4% for the full year. But the first half of the Year softer as we anniversary wage losses from q1 2019 followed by more robust growth later in 2020.
Swimming propelling FX rates. We expect Covenant of approximately $200 to $210.
Our capex is expected to be approximately 30 to 35 million dollars in twenty-twenty inclusive of the costs related to our New York real estate consolidation program.
Regarding the corona news coronavirus is excuse me. We are a people business and our first concern is for the safety of our talent, but let me also point out less than 2% of our Revenue comes from China and Japan. So we have much less exposure to the region than some of our peers and we have not made any adjustments to our 2020 Outlook page will continue to monitor the situation closely.
Final note we completed the sale of our Sloan subsidiary to skdk a division of stag real early in q1 2020. The estimated sales price is approximately twenty-six million dollars including a performance-based are now this sale completes our divestiture of shareholder Services businesses that began with the sale of Kingsville in q1 2019.
As we look ahead. We are excited about our plan and remain focused on continued execution and 20/20 driving growth through our strategic initiatives while simultaneously increasing costs proving profitability and strengthening our balance sheet. Thank you operator. Please open the line for questions. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble the roster.
First question today comes from David Steiner of JPMorgan, please go ahead.
Thank you. Good afternoon. I want to start here if I can starting with your reiterated positive outlook for 20 Mark how much of this reflects specific actions taken? And and how much does this reflect an improvement in the ad and pitching environment and relatedly given you've Consolidated now and take six ten poll Partners. How much of that page was designed to deliver maybe more compelling and robust offerings to existing and prospective clients and how much of that was designed to streamline and eliminate costs and that have got a few others. Thank you. Let me let me take the the last part the the coming together of the Network's was meant to do a number of things first. It was meant to take off were individual units of varying size and enabled them to leverage off of eachother combining the skills because most typically buy, you know today multi-service.
Says they used to just buy advertising and media today. They're buying.
For eight different services and it was important to meet those needs. So first and foremost, I think it's about it's about serving clients and marketing on a more efficient basis to those clubs second. It's letting the business be driven by those very best leaders as opposed to all twenty-five units or so individually reporting into corporate having them work with our leadership teams with each other right down in the trenches is I think going to be far more effective in terms of both winning business and making decisions. And then finally, I think there are some costs energy elements, you know through the ability of much greater ability to do centralized services. So so I think for those are all of those reasons now, none of those things are really baked into the plan because they were just formed and we are now getting the the they're just going to market now.
What was your first question the first element of your question, the first part was and I I had a lot of words in there. I apologize but really just trying to understand how much of this positive outlook reflects the positive actions you've taken since you've been there in March versus kind of improvement in the ad environment. If there is one I I wouldn't say any of it reflects Improvement own not in the ad industry. I think that the industry continues to go through, you know, some level of of transformation, you know is offline spending decreases and online spending money, you know increases and project work increases. I think that they're the this these projections are based on two major elements of of change of one. In fact that you know the net new business before I came sixty million dollars went out to went out the back door in q1 or 2019 that has been reduced to a trickle
12 of 8 million
And that means that the company itself has fully I think stabilized in that fashion has a group of incredibly loyal and energized and excited clients. And that means it's far easier with even the same level of new business to achieve net positive growth and we've seen a very good uptick in new business wins going into the fourth quarter of the typically reverberates into the following year just as early losses in the fourth quarter would have reverberated into the into the following year as we had to live through in 2019. And then on the second leg of it the second leg is that that they will do, you know, they will be able to you know have greater margins walk through greater efficiency and our our emphasis there I think is Frank said and Frank want to add a comment is just clearly is clearly paying off a Frank. Do you want to add a comment to that?
Sleeping at the moment Mark. Sorry, I think you said it all.
Great. Thank you Mark. That's appreciated Frank. Maybe that to pick on you a little bit if I can so the hundred million of free cash flow through 2020 was reiterated wage you help us with what that means for free cash flow and 2020.
Yeah, we we we see that by the end of the year. We believe we're still on target. Certainly. One of the changing variables is the signing of the lease at World Trade Center, which is a significant investment for us. However, we believe that with the sales proceeds that we have from the sale of Sloan plus, you know, all of the other costs initiatives we've taken that we're still on track to deliver that
Okay, just in terms of seasonality you touched on 65 million of seasonality of cash flows, but sixty five million, it's Ford acquisition consideration going to be paid out. I think you said most of that is the second quarter. If you just help us with kind of cash flow seasonality through the year and any other cash uses away from capex. We should be thinking about you know, so we we have the traditional the traditional items that will use cash. It's Thirty million semi-annually for our interest the capex. We've Quantified cash taxes will be 708 million dollars in 2020. So not a significant draw. Those are some of the big items and of course the DAC payment 6500 represents the second largest obligation for us.
Okay.
Last last two for me very quickly the the 26 million Sloan sub sale that you talked about. I think you have remind me you may have some some Bond buyback flexible from asset sales. Am I correct in that and and how do you think about that use of cash?
That's correct. We do we haven't made any decisions about any uses of cash. But yet but that is correct. We do have that flexibility. Okay and Thursday last one. I hopefully an easy one the Delta between Covenant and adjusted ebitda in 2019 was about ten million dollars. So I guess how do we should we think about the severance and maybe other items off between your guidance to if I want to get to adjusted and thank you for the time everyone.
Frank so while we we as as you know, we don't forecast and budget for structuring items. That's principally what stands between adjusted ebitda and Covenant with us. So we don't forecast those items cuz we can't time them exactly. So right now the 202 to 10:00 reflects essentially adjusted Eva.
Okay. Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Mark Penn chairman and CEO for any closing remarks.
Thank you. I think for those of you who've followed MDC for a long period of time. I was really thrilled to take over the church and ship and CEO role and to implement this this strategic plan and I think that as you can see through these results if the kind of wins that they're doing the job creation, I think of the of the of the networks the kind of work that's that's being done out there by our companies and and partners that this plan is beginning to show real fruit juice that we're managing to take a lot of the fat out of the costs that we're that we're sitting there because the network wasn't as well managed as it could be and at the same time being able to age table our best talent to do the best work and to adapt to this changing field and I think that you're beginning to see those results and we're going to continue to press this plan forward just as quick wage.
If not more, so thank you very much.
Just now concluded. Thank you for attending today's presentation. You may now disconnect.
to come for