Q2 2020 MDC Partners Inc Earnings Call

And to our participants presently standing by for today's MDC Partners <unk> Conference call. At this time, we're going to allow another few minutes to allow additional colors to be checked in for the days call. We thank you all for your participation as well as your patience I may ask that you. Please continue to standby.

[music].

Please standby we're about to begin.

Ladies and gentlemen, good day and thank you all for joining this MDC partners second quarter 2020 results conference call. All lines are in a listen only mode, but after todays prepared remarks instructions on how does your question will be given to our audience to get it started with opening remarks and introductions I'm pleased to turn the floor to Mr., David Kirby's Welcome David.

Thank you operator, and good morning, everyone.

Welcome to the MDC Partners conference call for the second quarter of 2020.

Joining me today are Mark Penn, Chairman, and Chief Executive Officer, and frankly, <unk> Chief Financial Officer.

Before we begin our prepared remarks I'd like to remind you that following discussion contains forward looking statements and non-GAAP financial data.

Forward looking statements about the company, including those relating to earnings guidance are subject to uncertainties referenced in the cautionary statements included in our earnings release and slide presentation.

Further detailed in the company's form 10-K.

And subsequent FCC filings.

For your reference we posted investor presentation to our website.

Please also refer.

Also refer you. This morning. So this mornings press release and slide presentation for definitions explanations and reconciliations of non-GAAP financial data.

And not to start the call I'd like to turn it over to our Chief Executive Officer Mark.

[noise], Thank you and good morning.

Second quarter brought the full economic social and political forces of cold. It 19 on our clients economy, and the marketing service industry.

The results affirm the basic strength and resilience in MDC partners in the face of the more than 30% contraction in GDP.

While we have to take significant cost reduction measures you continue to implement the key elements of the new World marketing plan that I announced a year ago to position us for a strong rebound as the economy recovers to continue to operate in a positive net cash position, even as the virus extends economic shutdown.

The underlying economics, and the business and then preserved and extended adjusted EBITDA margins have expanded and we have ample liquidity.

As we anticipated revenue declined 15% in the first six months or the year.

Scanning revenue was down 12.9% fueled by a strong first quarter. This was followed by softer Q2 performance as organic revenue declined 26%.

Leading direct pass through costs, our net revenue was.

It was down 10% in the first half and down 22% in the second border significantly stronger than the recent GDP declined 32%.

After three months of clients paring back yet delaying projects.

Extending contracts as expected we are seeing clients again.

Look to restore finding a new pitches are restarting our client relations relations remains strong.

Revenue loss was driven heavily by client postponements not client losses.

And anticipation of the softer topline we were extremely diligent in protecting the bottom line through our cost management efforts.

In the first six months, we reduce cost by 16% <unk> $82 million as compared to the prior year.

75% of those cost actions are over $60 million were taken in the second quarter, notably we were able to offset 86% of the year over year net revenue declined in the second quarter with cost reductions at 110% of the decline across the half yeah.

This translated into a covenant EBITDA improvement or 18% in the first half. Despite the revenue decline an LTM covenant EBITDA of $193 million I head of 188 million, we reported a year ago.

Adjusted EBITDA totaled 76 million in the first half 17% ahead of last year, excluding the impact of our divested businesses Sloan Kings Dan.

On a reported basis, our margins increased 9.8% a year ago to 12.9% in the first half of 2020.

We continued to operate with significant financial flexibility during the quarter paying down nearly $90 million and liabilities, including M&A payments interest on our bond.

Partial bond repurchase and still maintain.

Instead of net cash balance of $23 million at quarter end.

At the same time, we continue to record solid new business wins across the <unk> networking due to an LTM basis, new business totaled 97 million, including 20 million generated in Q2.

And the first half of 2020, we delivered $29 million net new business up 10% from a year ago. Despite the pandemics.

Notable wins in that in the quarter include Budweiser Allison <unk> partners.

Sooner as energy Tcs Bank loves furniture, Pilgrim's pride at donor Merck at concentric Sky Vodka, Bino Nestle waters legend tighter care at at Hunter and assignments from Wells food Baby Mad Fannie Mae at White male and mini.

Rocket pain as well as Coca Cola's, New global Foodie platform, an anomaly and its we saw only yesterday nominally has now been awarded Coca Cola brand North America.

Also expanded our relationships with clients, including Salesforce, Google the Axio, Molson Coors and Nike among others.

Our digital experience in technology solutions continued to show strong growth in this environment growing 29% in the quarter and 24% in the first half its companies move business online and consumers required richer online experience. It appear on corporate communications team also continue to be inside the.

Dan.

As has been the case in recent years.

Meanwhile, so our experience actual events business remained soft in the second quarter I'm proud of the pivots in innovation than we've seen from this discipline.

We need to see noticeable positive progress our colleagues at experience will agency team I've been hard at work for months grading remarkably engaging online platforms brand that continued to need large corporate gatherings personalized communications and consumer facing Shakespeare.

Once it suggests this weekend experience a spiritual agency relevant unveiled a new socially distance destination for new Yorkers that fear 17 in South Korea seaport proving the creativity in this sector is alive and well even under seemingly impossible circumstance.

In general we're observing a notable evolution client request since the start of the pandemic Oh, each client and sector is unique we're driving less crisis and reactor communications than in March April may as more brands focus on brand building and proactive business building an optimistic campaigns.

Going into the fall and fourth quarter.

Were lining all the time was spent together over meals and around the table filmed remotely during the quarantine. The film showcases 13 real family couples housemates and household from eight.

Different cities around the world.

On all branch that might've pause our efforts this spring coming back to the market with new messages can positive ambitious programs.

The new business front as well the last six weeks abroad, a significant increase in pitch activity.

See this both and resumed pictures.

And new ones and every area from digital experiences and transformation to mass personalization creative pitches P. R and even some experiential though it's still early days one thing to note.

Many cases were actually seen shorter pitch towns unusual is marketers are easy to get going again with their efforts.

Our success and managing our business throughout the first half of the year and our ability to lead clients to the disruption.

A testament to the work we've put behind on new World plan begun in earnest over a year ago.

Through enhanced agency cooperation focus on digital first thinking and smart actions aimed at protecting our balance sheet, we made market improvements over key metrics on and LCM basis, we have expanded covenant EBITDA to $193 million and net new business, which was a negative territory when our giant.

Ah steadily increased during my tenure narrow at $97 million over the last 12 months at the same time was consistently lowered are leverage ratio and delivered increasing cash flow from operations. During the last year with both metrics to prove from year ago.

We also prioritize the need for smart actions around cost serving following the 35 million and run rate reductions in 2019, we establish a network structure that allowed us to rapidly reduced cost in 2020 and responses of challenging marketing conditions from the pandemic through the first half of 2020, we've reduced our cost.

Structure about $82 million or 16% from a year ago.

Lions structure allows for a better more collaborative comprehensive response to client needs.

I am pleased with our execution on the performance in one year in an environment, where the inevitable industry shifts and disruption of legacy structures of accelerated we built a stronger backbone of operations and financial rigor tennis up for greater central innovation for the benefit of our clients as we move into year to where we.

[noise] you building on the progress focusing around four key priority.

Digital leveraging are digital focus we're creating a beta powered media offering the combined CRM offline media and performance marketing between world-class digitally focus platform, we plan to rollout our first internally incubated technology product in the neck.

Few months related to core marketing fields, and it will be offered SaaS type products more on that.

Coming weeks second will continue to integrate and centralize are back office services.

Or move to World Trade Center of this year will tie the MDC network around one centralized MDC, New York campus utilizing the talents of all disciplines, improving minimalist and driving efficiency. The movies on schedule and we continue to expect to deliver additional cost savings of $10 million to $12 million a year.

A third priority is focusing on the global network partnerships through affiliations.

In order to make sure that the network as a whole can compete for larger and larger contracts for we are increasingly going to market as a single entity for more scaled and integrated assignments.

To move this forward, we recently higher junior Hammon as president of a new division of MDC folks exclusively observing servicing larger integrated accounts.

New group will build on last year's formation of networks within MDC.

Based on current client trim cost action on our operational objectives. We continue to expect 2020 organic revenue decline of approximately 10% to 15% from the prior year in line with my comments last quarter Covenant EBITDA should be down in a similar range for the year, we plan to continue.

To provide a high level of transparency on what we see for the remainder of the year across our business on each quarterly call no matter what the actual changes in the economy turn out to be we will be vigilant and model modulating the company to respond to these changes quickly and efficiently.

Overall, our actions to establish our strategic networks reduce costs and improved cash flows have position MDC well to navigate the downturn.

A trusted partner an advisor to our clients submitted challenging environment, while continuing to deliver excellent work across disciplines.

In short I feel good about where the business stands today.

And.

Continue to slog through Cove at 19, and it's effects and be ready for very strong rebound as the economy picks up with that let me turn things over to France.

Thanks, Mark good morning, everyone.

Our business performed in line with expectations and the second quarter and first half of the year. The cold with 19 pandemic is presented many challenges to our business clients and team members globally.

I believe we have executed well during the prices responding quickly and positioning the business to whether the storm and ultimately emerging from this period is a stronger and Nimbler organization.

Looking at our financial results and the first half of 2020, we delivered revenue a 587 million.

Down 12, 9% on an organic basis.

And the second quarter organic revenue declined 26, 4% to $260.

Excluding the disproportionate impact on direct billable costs during depend dot.

Net revenue declined 10, 5% organically and the first half and 21, 8% and the second quarter.

Looking at a regency's by discipline or digital business continues to grow rapidly. Despite current conditions, followed by our specialist communications business, which remains in strong demand.

Experiential businesses, though small has been particularly impacted right now and are working on alternate strategies with our clients to offset the decline.

Much of a media and advertising business experienced colder driven softness and the second quarter as many clients reduced or later portion of their spending programs.

With respect to operating expenses, Susan we acted swiftly at the beginning of depend on it to further reduced cause beyond the reductions we made previously in 2019.

And the first half, we reduced controllable costs by 82 million.

Or 16% from the prior year.

Over 75% of the savings were on staff costs, and just under 10% we're from reduced <unk> expense.

For the second quarter controllable Costco lower by 62 million.

424% compared to prior year with over 80% of the savings and staff costs.

In terms of restructuring actions, we have taken $8 million of charges and the first half.

Over $5 million, which are in the second quarter unrelated primarily to 700 expense.

We have employed a host of actions to generate these savings some permanent some temporary but we will continue to manage are of course carefully an adjustment gradually in line with the speed of the revenue recovery.

We expect the combination of prior in recent actions to drive higher sustainable margins going forward.

Adjusted EBITDA in the first have increased 11, 5% to 76 million.

And the related margin increased approximately 310 basis points to 12, 9% verse prior year.

Excluding the impact of our Kingsdale and Sloan divestitures, adjusted EBITDA increased by 17%.

And the second quarter adjusted EBITDA was 36 million.

Down 22% from a year ago, though margins were higher by 110 basis points most of prior period at 13th 9%.

Covenants either in the first have increased to 83 5 million.

Aw 18, 1% from $71 million per year ago.

On a trailing 12 month basis, we delivered covenant EBITDA of $193 million up from 188 million reported in a year ago period.

Moving to the balance sheet, we made notable progress in a few key areas and the second quarter as we extended our credit facility, we purchased approximately 30 million of our bonds at a discount.

Funded over 30 million and M&A obligations and paid to semiannual interest on our notes.

Extra funding just under $90 million of obligations and the quarter. We ended Q2 with net cache of 23 million.

As compared to a small milk borrowing physician a year ago.

We reduce our preemptive revolve withdraw bye have to 62 $5 million and reported $85 million in cash on the balance sheet at quarter L.

Our leverage at June 30th was four six times down from four nine times, a year ago, though up slightly from four three times at the end of the first quarter.

With respect to our acquisition related liabilities, we currently expect to fund.

Approximately 65.002 million 25th about 70% of that already funded and the first half of the year.

Ah remaining M&A obligations currently stand at $116 million as compared to $152 million at the end of 2019.

We will continue to manage our capex lower in 2020 as we have in recent quarters through the first half of 2020, we had just under 4 million and capex less than half the amount from a year ago.

And while we were still continue with our New York USA transformation project will have tightened limits on any other capex spending.

Overall of 2020, I expect a net capex will be in the range of 25 million.

For the four year.

And closing I want to thank for our team members for their continued hard work and commitment over the past several months delivering exceptional work and innovative ideas to our clients globally have missed an extremely challenging environment.

Our ability to succeed as a company is a direct result of their continued execution and dedication to our clients and we appreciate all redo and our ongoing commitment to our business.

We are looking forward to the opportunities ahead and continued progress with our initiatives.

And now I'd like to open the line for any questions you may have.

Mr. Lanugo. Thank you and thank you to the rest of the leadership team for their remarks today to our audience. If you would like to ask a live question over your telephone lines simply press star and one on your telephone keypad pressing star and one will place you're lying into a Q and we will take your questions. One at a time a friendly reminder, that if you're joining us this morning on speaker.

Phone. Please return to your handset prior depressing star and wanted to be certain that you're signal does reach our equipment. Once again, ladies and gentleman that is star and one and we'll pass for just a moment or two to give everyone a chance to signal.

Once again, ladies and gentleman that is star and one if you would like to ask a live question over your telephone lines will here first from Sean Merkel I Hope I'm, saying your last name correctly.

Sean Mikel with northwest. Please go ahead your line is open.

Thanks have a as in this call today guys. My question revolves around on sure.

<unk> <unk> well.

Both the potential takeover can you speak to that.

What are some of the challenge zero facing in reaching a decision and just shed some light on that please.

Okay.

Hello.

Did you ever connection problems.

Are you.

Sorry, I can't I got it sorry.

I can't give you any information that beyond words publicly available other other than that there's a special committee that's been formed by the board.

Special Committee has retained Morris and BLA Piper Stag Rolf has unattached.

J P Morgan and fresh fields and.

Processing is continuing along and they will make announcements from the special committee as appropriate mass development occur.

You have a sense of the timeframe associated with that decision.

I can't I can't really comment anything specifically Erwin Simon his head of the special Committee.

I know that each side is working as quickly as possible, there's no hesitation or delay I think but.

But this is being organized and evaluated on all sides.

Relatively.

P D M villager manner.

Thank you very much.

And gentleman will take just another moment or two to allow the audience an opportunity the signal for a question with star and one on your telephone keypad, ladies and gentlemen.

Mister Pan Mr. Lanugo, we have no signals from the audience alternative back to you for any additional are closing remarks that you have.

Or actually gentlemen, I apologize I spoke to soon we do have a signal coming from Mister Brian Hirschfeld at at capital.

Hi, guys. Thanks, very much for taking the question and for the details can you.

Please give us some give us a little bit more clarity around at two different groups of integrated networks that you break out on pages 11 12 of the presentation.

Alright.

Certainly.

So.

Range.

It is from the first quarter when we reported these two groups as a single group.

It's really it comes down to our discussions with the staff at the SCC.

And based on those discussions we concluded that the bifurcation of the single Ah reported this segment into two pairs together the agencies that where most economically.

Historically I'd like to point out that we believe that on a prospective basis those differences.

Will.

The verge over to all those children converge over time.

Appear.

So this was basically just.

Her potatoes Mavericks in our discussions with <unk>, there's no difference in the businesses.

Qualitative standpoint, the services they offer or the way they go to market.

Okay, and apologies if I, if I missed it somewhere else in the disclosure, but do you actually detail, which agencies are in which basket.

Or group.

We're still working on our our.

Discloses right now, but we can share that information with you.

It should be in there when the 10 cures printed.

Understood.

Thank you very much and just one one last one.

Furniture, and the you mentioned speaking sort of from the the towards Special Committee standpoint has stag on the flip side has stag well through it's.

Continued diligence is was laid out in the.

In the proposed.

The proposed merger has encountered any.

Holdups or concerns red flags that it that would put the put it proposal in jeopardy of getting two of axle and committed proposal.

Putting my stagger I'll have onto to answer that question.

I have seen nothing.

Nothing that has come up.

Presented a roadblock a hindrance.

Diligence consistent speedy worker and our across all lines and nothing that though.

Nothing that has changed the outlook circumstances or the desire to.

To bring the combination about.

Thank you very much.

And gentleman at this time, we have no further questions from the audience.

Great. Thank you for joining us today.

Alright. This these challenging conditions.

I'm pleased with the progress the company was able to make I think that H T M. In the leaders throughout the companies.

Really moved quickly in order to preserve the basic economics of a business.

Put us in a position.

Sure.

Growth when the economy it comes back.

Get past the.

Pandemic the troubles, both us all emotionally personally.

And this economy. Thank you very much be safe.

[noise].