Q3 2020 MDC Partners Inc Earnings Call

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Ladies and gentlemen, thank you for your patience. Please remain on the line, while we gather additional participants and again, we do appreciate your patience. Please remain on the line your conference will begin momentarily. Thank you.

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Good day, ladies and gentlemen, welcome to your MDC partners third quarter results Conference call. All lines have been placed in a listen only mode and the floor will be opened for your questions and comments following the presentation.

As a reminder, today's call is being recorded if you should require telephone assistance throughout the conference. Please press Star then zero.

They tend to 15% decline in revenue this year.

But now expect that we will meet or exceed last year's covenant EBITDA.

This is a result of continued success in bringing our partners together into networks centralizing back office operations and real estate, while modernizing our services and offerings.

Specifically covenant EBITDA improved 12% year over year in the quarter and 14% on an LTM basis to $56 million and $199 million respectively.

We reduced our cost base by 16% year to date 123 million as compared to the prior year with nearly 40% of those cost reductions taking place in the third quarter improving fundamentals also led to the strong margin expansion.

With pitch activity resuming in earnest in the quarter revenue rebounded nicely off of the second quarter lows, increasing 9% on a sequential basis.

This was driven by revenue growth in three of four reporting units with only our all other segments and continued contraction due to softness in our experience actual business.

Year over year organic revenue declined 16% in Q3, and 14% year to date, consistent with our outlook and expectations net.

Net revenue excluding pass through costs declined 15% in Q3, and 12% year to date on an organic basis.

This quarter, we increased the financial strength of our balance sheet, adding $31 million in cash flow from operations.

We ended the quarter with $37 million in cash and no borrowings on our revolver, even after having repurchased $30 million in bogs earlier in the year.

We also brought our leverage ratio down to 4.4 from 5.0 a year ago.

Looking more closely at our revenue trends in Q3, the overwhelming reason for the slowdown is paused or delayed revenue.

From a few specific co that impacted sector.

Nearly half the revenue decline is driven by a slowdown in both our experience real business and the transportation and travel sector.

Another third of the decline is from reduced spend within the technology sector as those companies slowed down new product launches.

We observed less than normal client churn and so the revenue loss was largely a temporary reduction from clients that we know will be back to advertising in the future.

Importantly, we are seeing resume new client activity and engagement recorded significant new business wins in the quarter net new business totaled $32 million in the quarter up from $20 million in Q2 and totaled just under 100 million over the last 12 months.

Despite the challenges of the pandemic.

We are conducting more collaborative and more global pitches than ever before.

Both in net new business is a clear demonstration of the power of our network model from the nod to the success of our transformation over the last year. According to our strategic plan.

What we're seeing is an urgency among clients to disrupt the traditional holding company model.

We recently won guide.

Like chronic food and beverage granite charged with reversing the fortunes of a $20 billion to $30 billion category. This client was specifically attracted to mdcs central premise of a superior integrated data and creative offerings.

The charge includes everything from strategy data and media digital creators social public relations for both B to C and b to B.

Right.

[laughter] needs in a mouse between 60 and $65 million in billing.

Like many others. These clients are looking for a nimble seamless solution across the entire customer journey and we're delivering just that.

Other notable wins in the company in the quarter includes Sodi vision unsound, but the terms or at general Mills.

Looking at the IPO and Oppo always anomaly addition.

Additionally, we won albertson's that line media lab, Merck animal health the Concentrix meals on wheels at Manon net on net at FCB Holiday Inn vacation club Boyd gaming and constellation brands would be term. We've also expanded our relationships with clients, including the AG or at the IPO target Abbott labs.

Samsung among others.

Our digital solutions continue to deliver extremely strong growth increasing over 50% in the quarter aided by a network model that now brings these services together with our major creative agencies to meet integrated client needs.

Similar to last quarter, our PR and corporate communications verticals continue to deliver year over year growth.

We are beginning to see improvement in our media and data segment up 17% sequentially against Q2 experience will remain soft, though it has successfully introduce scaled virtual event production to its product offering for clients and.

And we anticipate that being an advantage well into the future.

Looking at our revenue on a client sector basis.

Retail and consumer products sector business rebounded strongly in Q3.

Those sectors fruit percentage points over Q2 as companies ramp spend end markets open back up to consumers health care also continued to see solid sequential growth.

As did almost all of our clients segments with the exception of automotive which remained flat.

Even as we battle the pandemic business is not standing still.

Were implementing year two of our new worlds marketing plan to make us the company of choice for the modern marketing.

This means not just centralizing costs, but creating the right integration between data technology and creativity, but as possible with the exceptional partners here at MDC.

Feasibilities had been expanded and extended with increased collaboration together with the complementary offerings at stag will remain hopeful that we will be able to combine the companies, creating the eighth largest marketing company in the world.

Having achieved the promise cost reductions and more as evident in todays results. We are focused on the four pillars of the new strategy to give us new digs to be digital integrated global and strategic.

We're operating on three levels when it comes to the digital World first we are creating new digital experiences for our customers. For example, we recently won the digital transformation work for major consumer products chain to create the entire online experience for their customers second.

Second we are modernizing the internal workings of our network using technology to streamline operations and third we are developing proprietary access products that combine our technology and client experience to create new kinds of revenue streams.

We recently released profit.

The first ever AI driven platforms with the PR community designed to help predict media interest sentiment and spread before story is even pitched similar to the way movie Studios and book Publishers are using AI to predict the commercial potential for script.

[noise] leveraging data.

[laughter] enables.

Teams to more intelligently developed strategies around both positive news and emerging threats drives greater efficiency and effectiveness and PR professionals interact with journalists. We believe there is a significant market for this product in order tens of millions of dollars.

On the integration front, we recently announced the formation of our global Technology Group, a bold new vision of technology infrastructure designed unleased collaboration on a global scale.

Tapping a roster of seasoned intra network technology leaders the global Technology Group will drive global strategy crosses network in areas, including security systems design and cloud architecture.

This month marked the completion of the first phase of our real estate transformation with Mdcs corporate team now operating out of our new one World Trade Center campus, where by the end of our vendor of the year 13 of our agency brands will reside.

In all I feel very good about where the business stands today and how we have managed to the pandemic thus far.

We delivered a solid quarter with year over year, EBITDA growth and saw a nice rebound in the underlying fundamentals.

We expect to see continued improvements in Q4 and are executing on our year, chief strategic and operational priorities, while continuing to reinforce our fundamentals and deliver exceptional work for all our clients across disciplines with that let me turn things over to Frank.

For a deeper look at our financial performance Frank.

Thanks, Mark good morning, everyone.

We have made good progress this year, despite ongoing disruption from the pandemic.

We took actions early and swiftly implemented comprehensive cost measures across the company that more than offset our revenue decline and helped us deliver higher year over year EBITDA in the third quarter and year to date more.

Margin surpassed previous five points balance.

Balance sheet improve further from the prior year.

For the quarter organic revenue declined 16% to $283 million and on a year to date basis declined 14% to $870 million.

Pandemic related slowdowns in our experience show and technology clients accounted for approximately 70% and 50% of the organic decline for the quarter and year to date periods respectively.

Partially offsetting these declines our digital business continued to grow rapidly up 50% year over year in Q3.

And up 19% sequentially.

Specialist Communications also grew in the third quarter, continuing a trend we've seen for several periods.

Sequentially revenue rebounded from the pandemic driven boes of the second quarter, increasing by 9%.

Revenue rose three of the four reported segments led by integrated networks be up 20%.

Media and data up 18% and.

Integrated networks, a up 5%.

The all other segment declined 8% from the second quarter, driven principally by continued softness in our experiential business.

With respect to operating expenses, we continue to benefit from actions taken at the outset of dependent as well as those made in the latter part of 2019.

For the third quarter global costs were lower by $46 million or 19% compared to prior year.

With over 70% of the savings coming from staff costs.

Through nine months costs were lower by $123 million or 16% from the prior year with similar percentage savings coming from step us.

We recorded $2 million in charges in Q3, and approximately $10 million year to date, primarily for severance to affect the after mentioned cost savings.

We have taken a range of actions to generate the savings some permanent some temporary.

We will continue to manage our costs carefully in line with the revenue recovery.

Adjusted EBITDA in the quarter increased 10% to $54 million versus the prior year and the related margin increased approximately 480 basis points to 19.1%.

Excluding the impact of our Kingsdale Sloan divestitures, adjusted EBITDA increased by 12%.

On a year to date basis, adjusted EBITDA increased 11% to $130 million and margins rose by 360 basis points to 14.9%.

Our trailing 12 month covenant EBITDA increased to $199 million up 14% from $175 million a year ago, a sequentially higher from Q2 by 3% from $193 million.

Moving to the balance sheet liquidity remains strong as we ended the quarter with net cash of $37 million and no borrowings under our revolver.

Leverage at September improved to 4.4 times.

Down from five times, a year ago, and 4.6 times at the end of the second quarter.

With respect to acquisition related liabilities, we have already funded $48 million through September and expect to fund approximately $6 million in Q4.

Our remaining M&A obligations currently stand at $112 million as compared to 152 million at the end of 2019.

With respect to Capex, we continue to manage expenditures lower in 2020 versus prior year.

Through the nine month period, we had $11 million and Capex down from 14 million a year ago.

We have made significant progress with our New York City Real estate transformation project in the quarter.

Our full corporate team recently moved in and we expect to complete the project on time and on budget in Q4 overall.

Overall for 2020, I expect our net capex will be in the range of $25 million for the full year.

In closing I want to thank all our employees and other stakeholders for their continued support.

We remain on track with our plans to deliver long term growth and profitability and are excited to take on the next phases of our plan.

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

Operator.

Thank you the floor is now open for your questions or comments. If you do have a question. Please press Star then one on your telephone keypad to join the queue.

Are using a speakerphone. Please pick up your handset to provide the best sound quality again, ladies and gentlemen, if you do have a question or comment. Please press Star then one on your telephone keypad at this time I will touch briefly to assemble the queue.

Yes.

[noise] Mr. Penn It appears at this time, we have no signals for questions or comments.

Oh sure I will give people a.

You people in another minute.

Thanks very much.

[noise] [noise] [noise] kind way do you have any signal summit Maxwell with Baird. Please go ahead.

Oh, yes, good morning, guys very nice quarter, just a couple if I could I'm Mark could you guys talk about your you bought some bonds back in April I know and obviously, they're a much higher price levels now, but whether you'd be interested in buying any more back and any update you can give us on the timing from the special Committee Anne.

And how you think things might play out next there.

Ah I think in terms of bonds, we at the time, but oh.

The allowable baskets that we had now that we have so.

Now and M. I I would look to Cosan and talk about the prices. They were then trading you know they they were they were a considerable bargain I wish I had the same function buying more [laughter]. So I you know right now there are not entirely different price level, so that presume.

Oh, we have other uses for cash.

Capital I've got this kind of price level that they are right now.

The.

In terms of the special Committee I have to look at Special Committee, you know speak for itself obviously.

Oh stock loan, we announced today an agreement in principle and so the next steps obviously or to to go into the next level agreement and [noise].

And beyond the fact that I think I remain hopeful that a optimistic that we'll be able to bring the companies together and.

Another specific request should go to the special Committee.

Could I just ask is it is just taking longer than expected or sort of on the timeline as expected.

[noise] [laughter] a in the modern world a complex combinations simply just just have a lot of Oh.

A lot of the value of those and legal steps, so oh I won't comment directly but I don't there is nothing unusual in the process that I've seen so far.

It's just and some Sampson education and ER.

And just how one has to die every 90 in a in a very significant transaction such as this.

That's certainly fair and very helpful. Thank you.

And Mr. 10, there are no further signals would you like to go on to closing remarks.

Sure.

I just want to I guess, thank everyone for for.

Continued faith and interest in MDC partners I see you can see how's the reorganization of the firm position that two to come through kind of the worst of the pandemic you know again in strong financial shape, you will remember that at the beginning before.

The pandemic, we actually had reversed revenue declines has actually in that industry setting growth.

And.

We hope to be able to resume you know growth once again as these client sectors that have pulled back.

Come back here eventually over time as the the pandemic overseas it may take longer than everybody wanted but it but it will happen and it will go to <unk>.

Bring back close well costs and the marketing sector.

Into I think a strong and vibrant way coming out of that thank you all very much.

Thank you. This does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time have a great day.

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