Q1 2020 Earnings Call
Thursday
Thursday
Yes.
Thursday Thursday
Dead dead dead dead dead.
Yep.
Good day and welcome to the MDC Partners. First quarter results conference call all participants will be in listen-only mode. Should you need assistance, please signal come from a specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions. Please note to see phone is being recorded at this time. I'd like to turn the conference over to Alexandria the loans Communications officer, please go ahead.
Thank you Allison. Good morning everyone. I'd like to thank you for taking the time to listen to the MDC Partners conference call for the first quarter of 2020 joining me today from MDC. This is Mark Penn chairman and chief executive officer and Franklin Udo Chief Financial Officer before we begin our prepared remarks. I'd like to remind you that the following discussion contains forward-looking statements and non-gaap financial data forward-looking statements about the company including those related to earnings guidance are subject to uncertainties referenced in the cautionary statement included in our earnings release and slide presentation and are further detailed in this company form 10-K and subsequent SEC filings.
Or you referenced we've posted an investor presentation to our website. We also refer you to this morning's press release and slide presentation for definitions and reconciliations off of non-gaap financial data, and now to start the call. I'd like to turn it over to our chairman and chief executive officer Mark Penn.
Alex thank you and good morning throughout this pandemic. I have been cleared with all our employees and partners safety first business second and they work tirelessly to adapt to the changing needs of our clients in this time of great crisis. Perhaps the greatest crisis in our lifetimes one major factor in our ability to manage through this challenging. Is the plan we have been implementing for the last year to reshape and reform the company.
The results of which are reflected in our fourth quarter results and to an even greater extent in the first quarter in the first quarter results here today First Choice perhaps foremost. We had it returned to organic growth of 2% The first time there's been net organic growth since the third quarter of 2018. We are the only major advertising and major marketing company to show organic growth at this level globally in q1 as outlined in our last earnings call the partners achieved significant in Q4 the propelled us into a strong first-quarter more importantly we achieved this growth despite pull back but started to manifest themselves in mid-march growth was achieved with the integrated agencies and in particular in our P PR agencies, the growth was also spread across major client segments.
second
The combination of cost-cutting our reorganization and two new networks and greater corporate efficiency. Let us to 110% year-over-year growth wage adjusted ebitda, excluding the divestitures of Kingsdale and slung from 19 million to 39 million, David. Increased to $42 million up down 93% from a year ago and exceeded $200 million on a trail on a trailing 12-month basis the growth in revenue and earnings also drove a significant improvement in our year-over-year cash position at the end of q1. We have total cash of $95 million not including a hundred twenty five million precautionary draw on our revolver better than the thirty million at the end of q1 last year the operating cash performer.
In the quarter significantly improved from typical first quarter seasonal Trends our leverage ratio also continue to improve to 4.3 in the quarter as compared to 5,000 a year ago and 4.5 and two for 2019 new business winds were at a net 8 million or fourth quarter in a row of positive net new business for a total of 114 million of net new business wins over the last year while winds were down from the pace of the last two quarters. They continue to be positive even if some new business pitches were being put on a show called in mid-march in response to the virus note of all winds in the quarter including new lines of business with existing clients including Uber Eats most of course Nike Bots Samsung home electronics and Facebook in addition. We want to have insurance and he be in bed at seventy-two and sunny take-two interactive NBA 2K with anomaly wage.
the truth initiative at Montreux constellation Brands and Boyd Gaming and vetro prevention bio a concentric and a combined win for mono Gail and MDC media off old Dominion's
The coronavirus outbreak has been a tragedy for all of us, but fortunately for MDC Partners. We were far enough along in our plan to put the company in an excellent position to come through the crisis and regain momentum when we go into recovery, we trimmed about thirty-five million and run rate expenses as promised by the end of end of 2019. We created Five scale Network slid by our most entrepreneurial leaders to enable faster and more direct response to the crisis by Business Leaders on the front lines, and we reorganize our serum and media buying companies to work more closely together in a world powered by data plus creativity. We expect that moves to centralize back office functions. Like it guy could be accelerated after wave and the cost savings will by plan and necessity increase both as part of the crisis management and permanently as part of a game.
better organization
Real estate consolidation in New York slated to save at least ten to twelve million a year remains on schedule for later in 2020 and will be enhanced offer employees the safest possible atmospheres for the additional distancing and air filtration measures. As I said, we put Safety First in business second as this crisis developed, we quickly moved to reduce travel and put in place work at home protocols almost all the functions of the company outside of Live Events big Productions were able to transition over to work from home in general. I put clients in 3 business those who face higher demand for their products such as those making orange juice and pizza those that faced a wage collapse and demand such as Airlines and cruise ships and those that are not directly affected by changes in Behavior as a result of the virus, but are affected by the economic slowdown.
Most of our clients fall into the third bucket of those affected in line with the economy. We expect the impact on NBC will be somewhat less than overall impact on the economy wage given are tilted towards large Tech and other big companies clients who may delay or cut back with who will participate strongly in the recovery when it occurs in general the services, we provide also fall into three beds some certain services such as digital platform creation and public relations and equal or even higher divorce and that's companies move more business online and it's Communications during the crisis require new strategies and messaging advertising on media will rise and fall with the economy the wrong and services like experiential events will fall dramatically today experiential events are only about 2% of our net revenue.
We do have a significant presence in Sweden with the government has so far not closed up to the same degree as the us and our China operations report a strong bounce back from the dead to deal with the financial impact of the crisis. We undertook significant, press stress test. We forecast based on incoming information and took appropriate actions tailored to the specific situations of each partner immediate actions included salary and hiring freezes temporary compensation reductions of agency leadership significant cut back of discretionary spending across agencies reducing freelance band as well as TNA and some furloughs and headcount reductions.
We believe we have offset nearly 75% of the expected Revenue declines and expect to reduce cost this year like over 100 million dollars.
While we have like every other marketing company removed our revenue and Covenant e b. Guidance in light of the disruption in the broader economy due to the pandemic. I still want to provide some insight to invest off of what we are expecting as of now, as of now, we're planning against organic Revenue declines in 2020 of approximately ten to fifteen percent from the prior-year. This is based on a soft second quarter with some modest recovery occurring during the second half of twenty-twenty. I'd expect Covenant even in the week down by similar range from the prior-year. I believe transparency particularly in times of Crisis us as such we will continue to closely monitor industry Dynamics client activity and our own financial performance to commit to providing updates each quarter through the year and fear and given given that the economy and the situation is in a constant state of change. However, the
Actual changes in the economy turned out to be we will continue deploy measures in response.
To meet the challenges based on a cost structure that is highly variable nature, whether the recovery turns out to be softer than expected or turns out to be better than currently expected wage Edition our cost-saving initiatives to our cost-saving initiatives. I mentioned a moment ago. We were taking prudent steps to optimize liquidity who delivered excellent cash flow from operations over the last four order and dq1 with more crash better liquidity and lower leverage than we reported in years.
In April, we were able to retire Thirty million dollars of our bonds and two million dollars of annual interest expense at a cost of $22 million dollars and increasing shareholder Equity value, as of last Friday, even after significant earn-out payments earlier in the month. We continue to be in a net cash position with our $250 revolver untouched the exception of a pre-emptive drug addict.
We are not eligible nor are we applying for any US government loans that we will that will be forgiven. We are eligible for the payroll tax deferral which will provide us with an additional $16 of liquidity in 2020 based on the excellent progress. We made in our cash flow go over the last four years. I am even more confident today in our ability to generate cash flow following the crisis. We have clearly demonstrated that my target of generating fifty million or more free cash who have per year is very achievable for this business a level. I know we will return to or better after this crisis subsides the financial actions we've taken in responses to the boxes are only one part of the story or agencies have done a tremendous job working on behalf of their clients to produce new messages platforms and advertising that helps our clients communicate to their Club.
Restoring this unprecedented time a collection of these efforts can be found at hub.com mdc-t as partners in the first few days of the crisis agencies, like seventy-two and sunny donor Metro Studios cpb anomaly and not bootstraps ingenious solutions to ensure that video production continued in part by creating new content through license found and user-generated content glow an animation and Motion Graphics aren't recent investment in catch-and-release a company devoted to making online content available for advertising proved timeline.
By way of a just a few examples the donor team created a powerful film to encourage Metro detroiters to stay home and stay safe all written shot edited and finished remotely in for Thursday. Our hours are launching new work for Tylenol PG 72andsunny created a PSA for the NFL using footage from players in their own homes encouraging people to Jake stay Farm stay strong. The work went from concept to on are in ten days with no film Crews post-production buying a Google Hangouts and all agency staff clients with leitz working entirely from home.
cpv created fantastic
Talk to Dominos, which just a few days ago publicly attested to its attention to lean in even further to get its messages to customers during this period see TV is also a dramatic pivots for clients in the hard-hit travel and tourism sector including launching new American Airlines brand messaging produced in under a week and a commanding that staff and our agency immensely meaningful business initiatives around the world in Sweden enforcement info divorce partnered with the Telecom brand kelia to help family and friends stay connected with their loved ones off providing free unlimited data to customers older than 70 and together with its long-term client Volvo cars Horsemen spearheaded an initiative to offer its demo cars to health care workers need a safe way to get to work as they come back the virus or digital product of design agency. Yml design the interface of of a testing device that received emergency FDA. Yep.
Google to test covid-19 in just 45 minutes, our company is also partnered with the Harris poll over a tag well to keep corporate marketers in managers up-to-date now public attitudes and consumer habits have changed during the crisis. These examples are just a glimpse of the remarkable work being brought to life across the network and does not begin to explore the types of Crisis influencer found new brand Communications platforms being developed by our PR agencies as we look ahead our strategic plan remains focused on becoming modern marketing company of choice and it is based on credible creativity of our agencies combined with turning. What was a loose Confederation of companies into a new little set of talented networks. It was on the verge of turning a corner against much larger competitors that were mostly on declined when the virus hit the world we acted to protect our employees and our business when this crisis is over we belong
Our competitive advantages would be nimbler more creative combined with our reorganized media and data operations will put us in the even greater advantage against the slow cumbersome drives of your life with that. I will turn things over to Frank Luna or CFO to discuss our financials.
Thanks, Mark. Good morning, everyone before I dive into our results. I want to underscore Mark's comments and reiterate that we are well-positioned to whether this crisis the actions. We took over the last twelve months to realign our agencies improve our go-to-market strategy and cut costs are bearing fruit in our results as evidenced by our q1 performance package also places in a stronger position to quickly and nimbly respond to changing client needs and Industry Dynamics giving us great confidence that we will emerge from this crisis and even stronger organization.
Turning to our results. I want to begin by pointing out that I'll press release and our management presentation include new segment reporting to reflect how we are now managing the business. I'm going forward. We will report a result in three segments including the integrated agencies Network the media and Data Network and all other we recast revenue and get results. But the last five quarters to conform the historical to our News segment presentation. I'll talk more about these segments in a moment.
looking at a
Financial results in the first quarter, we delivered revenue of $328 representing organic growth of 2% and less than a 1% decline on a reported basis month. This was driven by solid performances that are large creative agencies in particular.
Excluding the impact of our Kingsdale and Sloane divestitures adjusted either the increased 110% in the first quarter as reported adjusted ebitda increased 84% off to forty million dollars in the quarter aided by the cost reduction initiatives. We've executed over the last twelve months in the first quarter totaled $42 million dollars up 93% from $22 million a year ago and on a trailing 12-month basis, we delivered Covenant of $201 up by more than 11% from home for driven by the strong year-over-year q1 results.
Breaking down results by our new segments you all other and integrated agencies segments grew organic Revenue by 7% and 1.3% respectively off by a 4.5% decline in our media and data group.
Our adjusted ebitda growth in the quarter was driven by a 74% increase in the integrated agencies Network segment and 46% in the all other segments while media and data was up by $2,000 for break even in the first quarter last year.
As Mark mentioned we had been highly focused on managing costs and identifying opportunities for additional cost savings.
As discussed on previous calls, we removed $35 of annualized costs last year, but approximately half the savings realized in 2019 and the remainder being recognized in two thousand and twenty twenty and contributing to our strong q1 results.
Over all our expenses were $19 lower this quarter compared to a year ago inclusive of a 2.1 million restructuring service charge which is expected to yield an additional $10 in savings on an annualized basis.
As Mark noted our evaluation of the impact of covid-19 has led to over one hundred million dollars in additional targeted cost reductions across our agencies took the remainder of the conditions of all will continue to take actions as needed working hard to protect the profit margins.
Moving to the balance sheet as Mark noted. We ended the first quarter with 220 21 million dollars of cash including a hundred and twenty five million of a pre-emptive draw on our revolver, excluding the draw. We finished the quarter with approximately $95 million dollars in cash the highest q1 amount in a number of years. This was driven by the strong performance During the period which also reduced leverage at quarter-end to 4.3 times down from four point five times a year end and 5.5 times a year ago.
To remain very confident in the strength of our business and the changes we have implemented over the last year this led us in April to repurchase approximately Thirty million dollars of our bombs at a discount paying twenty eight million dollars reducing our net debt by eight million dollars and overall future interest obligations by approximately 2 million dollars annually.
With respect to acquisition-related liabilities, we currently expect to fund approximately 55 million dollars in 2020 through April to date. We have funded approximately 28 million dollars or a little more than half as our largest outflow is in the second quarter consistent with historical trends.
In addition, we will continue to manage our capex lower than 20/20 as we have in recent quarters in q1. We had under two million dollars in capex less than half the amount from a year ago June and while we will continue with our New York real estate transformation project will have tight limits on any other capex spending overall The 20/20. I expect our net capex will not be in the range of 25 to 30 million dollars for the full year.
Now I want to take a moment to thank our employees around the country and around the world for their commitment and excellent work during these challenging conditions over the past six weeks. They have worked tirelessly serving our clients delivering innovative ideas and transformative creative work as well as supporting their colleagues throughout the company.
Now I'd like to open the line for any questions you may have operator.
Thank you, and we will now begin the question-and-answer session to ask a question. You may press * then 1 on a touch-tone 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. We will pause for a moment to assemble our roster.
Our first question today will come from Steiner of JPMorgan, please go ahead.
Thank you and good morning, and hope everyone is staying healthy. I'm going to start out with somewhat of a backward-looking question as I move forward here, but maybe talk about how the business page within the first quarter. If you can hear me and we're there I guess more cancellations or pull pull dad's in March. And if and really what I'm trying to get out of business was pulled off or canceled any sense as to whether that is being deferred to later in the year or simply being canceled and that have got a few more thank you, you know as long as I kind of gave the center of the script, you know think of three different kinds of companies, right and some there are some clients if you if you look at them and suck categories that are just pressing forward and or finding, you know increased demand and they'll be working with how to keep their their their new customers. Your typical company is dead.
Our clients, you know hit the pop.
What's going on here that meant a bunch of delays back, you know, they'll be some product cancellations were removed from that page of the Native. They were planning to launch a new product during this period and no pushback. So the psychology on this was all pushed back Paws, uh, you know cut off and then we expect and I expected having you know managed through a number of crises over time and having manage large wpp assets. Mm. Let's put crisis in particular. I think you also see things tilt the other way right in the people say look, we've got to get our customers. There's a fight for market share of there's a recovery going wage. We looked at the numbers as a modest recovery those, you know, Secretary of the Newton would put it higher in some people on T would uh, you know would put it lower.
Principally people hit the pause button, uh, and and then they're going to re-evaluate those budgets and that started to happen in in in basically early to really dead March and so I I think that these numbers would have been even stronger, you know had we not had this thing not started in March, but I think the strength of the business was we still came with from what I could see the highest net growth in across the the the comparable, you know companies, you know in the in the quarter. So whatever impact I did start to see it. How did not stop us from from growing during the court.
Great and your current suggest like many others that the second quarter will be the worst of the year. And and again, I think that's fairly consistent. But you clearly worked on some money to sell another business and and I'm just curious if you can drill down to give us a sense of and I know you probably don't want to go here, but maybe how bad I should be thinking about this quarter and relatedly to your earlier comments. What do you think gets the advertisers kind of confident again, too?
I guess the resume spending is it simply folks getting back to work or do you think there needs to be other factors? And I've got a couple more things.
Well, you know with hurricanes come through right they occur. Cane's come through you build your house strong enough to withstand hurricanes, you know, you lost the sugars or follow through the roof and fix up everything and and then you go through a process of recovery. And and so Thursday 2nd quarter here. Everybody knows is basically kind of a high of hurricane. And then the expectation are that that that we will see, you know, emerge that. I do think that marketing is it's easy to cut back initially on marketing but then the then because of the unique nature is as as those are recovery, you can expect a much faster bounce back and a much faster. I believe switch in Psychology too from how do I suck?
Spending on marketing to how do I get my customers? I'm
Want to make sure I will lose Market here to those two those big cap companies that have in fact continued to spend, you know, quite strongly do this. And there were a number of big companies are said, I've been through these crisis before I'm going to I'm going to spend right through this because I'm going to emerge with other with a larger market here. So I do think that there's a there are these Mass switches and psychology that should start kind of at the top and I do think you're beginning to see, you know, we track two times a week over at Skibo with the Harris poll and in cooperation with the MVC agencies and you begin to see the maximum consumer fear, you know start to come down, you know, ironically people are more afraid to go out in the house less afraid of of the virus and I think that will begin to see people saying okay I can start to go go back to work and I think when people go back to work that will make a huge difference in terms of you know, consumer demand the Outlook and marketing.
Great, and you mentioned Hardman for PR guys as folks do more things online at cetera. You remind us how how big that business is for you?
I don't think we I don't think we break it out. I don't think I have a percentage off the top of my head. I don't know if Frank if you want to but it is it is a significant and growing business life. Yeah, including are all all other segments. We don't really disclose the revenues per agency like that.
All right. Okay, Frank a couple to bother you with and then I'll turn it over with you mentioned and it's it's evident at least by the slimmed-down cash flow statement your your q1 cash balance was a high two years even extra revolver draw. If you look at cash flow from operations, it's much better usage number than historically we've historically seen in in this, you know, first quarter. Can you help us with what's behind that Improvement, please?
Well, I think number one is you've got the strong performance even a performance which is you know, the principal driver but we also have improved working Capital Performance. That's helping to drive it as wage. I think it's those two combination and we've had reduced capex. It's been a very small number approximately a million and a half dollars for the quarter. So a little bit less help flow is on that front as well.
Okay, great. And and then on the bond buyback, I want to make sure I heard 30 million faces retired. And then can you talk about flexibility to do anything or if you wanted to so right now we we we exercise but we thought was The Prudent amount to buy back at this point at the the prices that we saw Marketplace, you know, we still have flexibility and we have the ability to purchase back more opportunistically if we see the prices continue to stay under the Press level, so I'll I'll leave it at that that we have additional flexibility right now.
Perfect. Almost done. Just
Kind of working capital comment you made previously. Is that something that may come back later on and be an outflow or is this, you know, I just wanna make sure there's nothing unusual in this first quarter and it wasn't a delay with no. I mean you you understand the seasonality of our business. So, you know, we did do better this q1 than we have perhaps in the last several coupons, but I think you should expect the normal seasonal flows. No extraordinary ends are out stuff.
Okay, and and lastly for me and I appreciate all the time. I assumed revolver draw was based on Prudence, but curious as to the rationale of drawing only half that revolver life. You always provide helpful, you know Covenant summary. It's back of the presentation but in looking through that how do you feel about your comfort Visa Vie the total leverage ratio, and that's it for me. Thank you all.
Mark, would you like me to answer that or did you want that? Go ahead? Okay, look we took we took we forecasted what our cash needs would be took out the year to fund our capital projects to fund our acquisition-related payments and to also, uh sort of take into consideration to seasonal cash flows. As you know, Q2 seasonally get softer. We took enough money that helped us balance the need to test the banking system at the moment when we would taking the money to make sure that the money would be there but we didn't want to take up so much that would just draw unnecessary interest expense for us. So we we try to find a balance there and that led us to half as a good approximation.
And then the comment on the revolver. And again, thank you all for the time. I'm sorry a comment on the Covenant. I'm sorry what the actual or with it? Just your comfort around go ahead. Yeah, look we we have we have Headroom around our covenants and we believe that you know based on the scenarios. We've looked at that we will continue to have ample Headroom on all our Covenants.
Thank you all gentlemen.
Again to ask a question, please. Press * then 1 our next question today will come from Todd Morgan of Jeffries, please. Go ahead. Thank you. Good morning, and I hope everyone's doing well. Thank you. And thank you for all the the caller ID information and I know you're trying to be as transparent as possible. Could I ask you just a sort of perhaps try to generalize about the sort of General revenue cycle that you see or you could anticipate in other words from the first conversations you might have with the with the mortgage officer about repositioning a brand some of the project work to some of the you know, the production work to finally the ads placements and so on the revenue cycle that that might be and how quickly does that does that come off as those kind of conversations get kicked off.
Well, I mean, I think the best answer your question is.
That people need to plan marketing or advertising. Let's call it in the precognitive ironmen. Probably six to eight months in advance right for what? I think you're going to see here is the shortly not the I got to get back on the air cycle two more like a one to three-month kind of cycle. And so I did think that that people are going to be looking for agencies such as we have an MDC who can run a shorter cycle because when things pivotal are going to have to get back if you assume that the the prime of marketing and selling the season is the is the you know is Black Friday to Christmas or his image. Isn't that. And you assume that things are moving towards for that kind of cover either a lot of marketers who are going to have to work on a shorter cycle because they're not they're going to want to get off.
To that into the into the holiday and they may have caused work and may they may have cut back and they may have slowed their cycle and it may have that have to have to adopt but you know, remember the great the great bulk of our clients are just proceeding as usual and then as I said, you've got the two groups some most clients are proceeding that usual with life back with Prudence. Some are completely in situations that that are directly tied to the virus the virus and they will require a an entirely different kind of program involving consumer safety. It doesn't exist. If you're if you have a product that's affected by the slow down but isn't directly tied to the potential spread of the virus and then others and I said are are are just plowing ahead of moving in. There's a lot more digital work at the moment because people are saying well, I think I may wind up selling more online than I expected faster than birth.
expected in the cycle and we see a fair amount of Rush towards that as well but the principal answer your question is the normal marketing Cycles I think could be a lot shorter and faster these things begin to talk to you know turn and and the the economy starts to open up by the end of the you know by the July.
No thank you that's helpful
ladies and gentlemen this will conclude our question-and-answer session and at this time I would like to turn the conference back over to Mark pen or any closing remarks off thank you I hope everyone is safe and and I you know I only hope that we see things approved here in the in the United States and and the rest of the night hopefully giving you a good picture of the tremendous progress we made with this company over all the tremendous path we were on and and that that pass itself off with us in the position where we can effectively manage through this crisis and the emerge I think nuclear and better organized than most of the competitors here and in this industry thank you very much for your time
The conference has now concluded we thank you for attending today's presentation and you may now disconnect your lines.