Q4 2020 MDC Partners Inc Earnings Call

Good day and welcome to the MDC partners fourth quarter and year end results conference call.

All participants will be in listen only mode.

After todays presentation, there will be and opportunity to ask questions should you need assistance and he said no and conference specialist by pressing the star keep on with zero and.

Please note. This event is being recorded I would now like to turn the conference over to Alexandra. Please go ahead.

Thank you and good morning, everyone welcome to the MDC Partners conference call for the fourth quarter and full year 2020 Joy.

Joining me today are Mark Penn Chairman, and Chief Executive Officer, Franklin Rudow, Chief Financial Officer, and David Ross General Counsel.

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 and are subject to uncertainties referenced in the cautionary statements included in our earnings release and slide presentation and are further details and the company's form 10-K, and subsequent SEC filings.

For your reference we've posted an investor presentation to our website. We also refer you to this morning's 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 chairman and Chief Executive Officer Mark.

Yeah.

Thank you Alex good morning, and thank you for joining us will cover a few important topics on the call today.

And we'll review M. D C S progress and Q4 and 2020 against the backdrop of uniquely challenging global conditions on.

I'll discuss our planned combination with Scott on the opportunities we see ahead.

Menudo will give further detail on mpc's operating results and balance sheet.

And then we'll be happy to answer any questions. You may have separately, we understand that stag world will shortly announce a date and time to release its financial results for 'twenty and 'twenty and that they will hold a call to review those results.

Let me first review M D C S performance and 2020.

Justice MDC partners achieved renewed industry.

He said and growth in Q1 of 2020.

The pandemic hit and changed everything.

Our industry came to a virtual halt stock and bond values of the company plummeted.

Experiential and travel related businesses ground to a complete stop tech companies cut back pitches dried up and most marketing budgets were cut significantly reducing this year's revenue.

We responded to these challenges on all fronts, we extended our revolver purchased $30 million of our bonds at a steep discount and cut $168 million of expenses and lowered staff costs margins by 200 basis points.

And said, we expected revenue declines for the year to be and the 10% to 15% range and regain the cooperation of all our agency partners serve margins and employment for our talented teams through these difficult times.

Meanwhile, in contrast to the general industry, our digital and tech offerings or more than 50% growth in their businesses and.

And as more clients acknowledged the shift to ecommerce and digital performance marketing.

Peer companies also showed growth as companies pivoted to new messages.

Today [noise].

I can report that we closed out the year meeting the expectations of a revenue loss and the 10% to 15% range and yet achieving adjusted and Covenant EBITDA.

<unk> 2019 levels.

At the same time business is being rebuilt quarter by quarter as the pandemic begins to recede and marketers get back the business. We are delivering consistent net new business, while it will take and 2022 to get back to pre pandemic revenue levels, our execution of the new World plan provided.

The backbone for a quick response to the crisis and the cost savings implemented in 2019 continue to benefit us.

We expect the momentum of strong sequential growth in Q3, and Q4 to continue with 7% to 9% organic growth in 'twenty and 'twenty, one with similar results on the bottom line EBITDA.

Because Q1 of 'twenty and 'twenty was one of the strongest quarters and firm history. We expect Q1 of 'twenty and 'twenty wanted to be a tough comparison.

Subsequent quarters offer opportunity for significant year over year performance.

Looking more specifically and M D six results.

And a sign of improving fundamentals M. D. C. S fourth quarter revenue improved 15, 8% sequentially on strong segment growth with consumer products and technology segments up 45% and 35% respectively from Q3.

We also saw double digit sequential growth and health care food and beverage financials and automotive in Q4. These segments rebounded from lows and the second quarter for the full year net revenue declined 13, 9% in line with our 10% to 15% revenue guide for the year.

Year over year organic revenue declined 13, 7% and Q4 and 13, 9% for the full year consistent with our expectations.

Net revenue excluding pass through costs.

And 13% and the quarter and 12, 3% for the full year on an organic basis.

Disciplined cost management helped us deliver our strongest covenant EBITDA and the last three years at $190 million for the full year, 'twenty and 'twenty up five 3% year over year.

'twenty and 'twenty adjusted EBITDA margins increased sharply by 250 basis points to.

And to 14, 8% from 12, 3% and 2019 on improving fundamentals and diligent cost management.

We ended the year and a strong cash position with $61 million and net cash and no revolver borrowings and our leverage ratio continued to decline.

Two four point Forex.

On the new business front, we consider continue to see resumption and client activity and engagement with a robust new business wins recorded in the fourth quarter.

Our net new business totaling $30 million and Q4 as compared to $31 9 million and Q3.

Full year, 'twenty and 'twenty net new business was a solid $93 million versus $93 5.002 million 19, a strong performance considering the challenges COVID-19 presented to our business and others.

Notable wins in the quarter.

Hum include Jimmy John's hotels Dot com.

Sexual rewards and Netflix at anomaly, Indeed at 72, and Sunny Yeti and Pollstar at Y a male sky vodka and life space and mono Miracle, you're a donor behr paint and May Atlantic at Allison partners free Tau on tree torn and visit Sweden adaption and B.

Milk Pep funded by the nation's milk companies and dedicated to educating consumers and increasing fluid milk consumption on.

Also selected the Gale Assembly network, and Hunter and a mission to modernize its approach to marketing and the $20 billion to $30 billion category.

M. D. C also performed extremely well and the Super Bowl, which saw the company bring seven national spots to the biggest sports and marketing arena of the year, including work for clients like Indeed, Jeep room, Jimmy John's and of course the NFL.

As a network, we represent less than 1% of the global AD market, but accounted for more than 10% of the ads and this great creative showcase, particularly a year and which marketing and it's been so disruptive and clients have had so few opportunities to connect with audience and a scaled way our outside presence and the game underscores the unique value that clients.

And M D C 's ability to reflect and drive culture.

Building on our momentum we're now building out a differentiated global offering in February we announced a new global affiliate program that formalizes agreements with several new International Agency partners and the mid East, Russia, Taiwan to scale to creative performance media and technology capabilities brands need to thrive and.

Todays global economy.

We expect to have 50 affiliates by year's end, making us even more attractive and scaled global pitches.

Supporting our commitment to providing modern global marketers with innovative data driven and integrated solutions. We also recently announced the hiring of Dr. Dre Mcglashan as Chief Media officer, the newly created position will focus on continuing to evolve.

D C is global media and data technology capabilities, leading global media pitch opportunities and offerings scale clients advanced solutions that drive superior business results.

We're not pausing and our plan to turn MDC into the modern marketing company of choice, we're keeping and place the cost reductions achieved so far the enhanced management structure and are adding central marketing capabilities to enhance our success with larger global contracts, but the centerpiece of the strategy today is the combination.

And with stockpile.

Today M D C S celebrated for bringing our award winning creative firepower to the world's leading and most ambitious companies, while stag well was built with deep and sophisticated technology at its core together, we will form a top 10 global integrated marketing services company and.

Alicia and the power of talent and technology around the world.

On the Stag will side I started the company with the intention and the building of new kinds of marketing company that is firmly positioned to take advantage of the global digital transformation.

With this platform and just five years, we've quietly built stack well into a growing digital first market leader with nearly $900 million and run rate GAAP revenue.

The majority of stag gross revenues are derived digitally based work with brands that span four categories of marketing services. These include digital transformation and performance marketing.

Research and and insights marketing communications.

And marketing communications and digital content, all run by flagship agencies within their respective disciplines together, we intend to create and growing revenue stream of digital SaaS products and are already bringing this muscle and expertise to MDC and.

In 2020 M D C launch profit.

And that's.

Capital P. R O P. H E T jointly developed between stag on M. D C. Using AI to predict how news will be received and covered and the media.

Bringing M D C and staggered together will ultimately give us a thoroughly modern marketing company, creating a $4 4 billion dollar spend integrated media and data powerhouse with enhanced scale and sophistication more.

More importantly, we will have a path to continued growth over the coming five years together, we are prime to grow to $3 billion and revenue by 2025. This will be achieved through a mix of acquisition organic growth and new digital products.

We anticipate that our integrated services will also drive upward or $30 million of annualized cost synergies does not include the cost to achieve and expect it will take roughly two years to deliver 90% of these savings further the combination will accelerate M. D. C S concentration and data powered media offerings and more than trip.

Oh, it's high growth digital offerings to 32% of the combined business.

This combination with its lower leverage ratio also opens up the possibility of improved financing terms and with today's lower interests could save as much as $20 million a year and interest expense and we are examining those alternatives.

We continue.

We expect the combination to close in the first half of 2021.

Finally, turning to M. D. C is outlook for 'twenty and 'twenty. One we currently expect to deliver approximately 7% to 9% organic revenue growth and 7% to 13% adjusted EBITDA growth or 190 to 200 million and EBITDA and adjusted EBITDA up from 177.

In 2020.

Our outlook is driven by the continued rebound and organic revenue out of the pandemic lows from earlier 2020 included continued strength and our digital assets, which grew rapidly and 'twenty 'twenty and continued demand PR and communications.

Rebound and our creative agencies and the return of some experiential work as well.

That let me turn things over to Franklin <unk> our CFO.

Thanks, Mark good morning, everyone.

We have made good progress during 2020, despite significant ongoing disruption from the pandemic, we took actions early and swiftly and implemented comprehensive cost measures across the company debt more than offset a revenue decline and helped us deliver higher year over year EBITDA in 2020.

Adjusted EBITDA margins improved by 250 basis points over prior year, and our balance sheet remains flexible and BRL $61 million and cash and no borrowings under our revolver.

For the quarter revenue declined 14, 1% to $328 million and on a full year basis declined 15, 3% to $1 2 billion.

Organic revenue declined 13, 7% and 13, 9% for the quarter and full year respectively.

Net revenue declined 13, 6% to $271 million for the quarter and 13, 9% to 1 billion for the year.

Organic net revenue declined 13% and 12, 3% flow.

Quarter and full year, respectively.

Pandemic related slowdowns, and our experiential and technology clients accounted for approximately 60% and 50% of the organic decline for the quarter and full year periods respectively.

Partially offsetting these declines our digital business continued to grow rapidly up over 50% for the quarter and more than 40% for the full year.

Sequentially revenue continued to rebound from a pandemic driven lows of the second quarter.

<unk> by 9% and 16% and the third and fourth quarters, respectively.

Revenue rose.

And our reported segments.

Led by integrated network day.

Up 37%.

All other segment up 20%.

Media and data up 7%.

And integrated networks be up slightly.

The continued sequential growth was driven by double digit revenue growth and virtually every client sector.

Led by consumer products and technology health care automotive.

Food and beverage and financials.

With respect to operating expenses, we continued to benefit from actions taken at the outset of the pandemic as well as those made and the latter part of 2019.

For the fourth quarter controllable costs were lower by $33 million or 13% compared to prior year.

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

For the full year costs were lower by approximately $168 million or 16% from the prior year with a similar percentage of savings coming from Stifel.

Excluding Sloan and Kingsdale, the savings were $30 million for the quarter and $157 million and for the year.

We anticipate that approximately $45 million on these cost savings will be permanent.

We recorded approximately $11 million and charges, including 2 million and Q4, primarily for severance to effect these cost savings.

During the fourth quarter. We also completed on New York Real estate transformation project and.

As we moved into the World Trade Center.

In connection with the completion of the project, we recorded approximately $22 $6 million and planned charges related to the properties exited.

Which will generate approximately 10 million and savings annually.

During the fourth quarter, we also recorded approximately $73 $7 million.

Non cash goodwill and <unk>.

Tangible asset impairment charges related principally to COVID-19 driven business for class.

Yeah.

We have taken a range of options to generate cost savings and some permanent some temporary and we will continue to manage our cost careful and aligned with the revenue recovery.

With revenue.

<unk> to recover and EBITDA outperforming 2019.

We have restored some of the temporary cuts made across the organization during the year, including benefit plan contributions and management salaries across the organization.

Adjusted EBIT for the year increased 2% to $177 million.

174, and the prior year.

Covenant EBITDA for the year increased to $190 million up 5% from 180 million a year ago.

The related adjusted EBITDA, and Covenant EBITDA margins increased sharply to 14, 8% and 15, 8%, respectively, reflecting the positive contributions of our cost savings actions.

With respect to income taxes, the companys cash income taxes have been less and $10 million and over the past three years.

And 2020, the company recorded a provision for income taxes of $117 million consistent of a noncash charge of $130 million to establish a valuation allowance against previously recorded U S deferred tax assets.

Offset partially by tax benefits recorded for certain international jurisdictions.

The charge does not limit the company's ability to utilize existing Nols and other tax deductible items to offset future taxable income.

Moving to the balance sheet liquidity remained strong as we generated $32 $6 million and cash flow from operations.

Ended the year with net cash of $61 million and no borrowings under our revolver.

Leverage further improved to four four times down from four five times a year ago.

With respect to acquisition related liabilities, we funded $54 million during 2020.

Sequentially, our M&A obligations increased from $112 million and Q3 to 151 billion and Q4.

And decreased from $152 million a year ago.

The limited number of our remaining agencies on the earn out led by our digital agencies delivered strong performance during 2020, leading to an increase and our M&A partners.

With respect to Capex, we incurred costs of $24 million versus $18 million a year ago, driven principally by our New York Real estate transformation project.

As previously discussed we moved into the World Trade Center and the fourth quarter completing the project on time and on budget.

And closing.

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

We are excited about our opportunities and look forward enthusiastically to the combination with stag low and the year.

And now I would like to turn the call over to the operator for any questions.

Sure.

Yeah.

We will now begin the question and answer session and you ask a question you May Press Star then one on your Touchtone zone.

You are using a speakerphone please pick up your handset before pressing the key to us.

Your question. Please press Star then queue at this time, we will pause momentarily to assemble the roster.

Yeah.

That's great question is from Avi Steiner with Jpmorgan. Please go ahead.

Thank you and good morning.

I want to start maybe big picture, if we can.

And what is the tone from Cmos.

Companies talking to are they itching to get out there and spend and market as the world gets better or is it still more of a cautious tone.

I think the.

I think the CMO as the RNA and they get back to business.

And the tone, there, we've been and hibernation for a period of time and so we're seeing a.

Relative flood of of Rfps and business coming up for bid. So I I would call. It a time to get back to business kind of mode. I think there are a little uncertain about whether that back to businesses and the summer or the fall, but nevertheless that me you know and marketing and you really need to start preparing three months.

Out.

And then if I could dovetail that last answer with the company's guidance, which I assume is MDC only.

Sitting here today March 2nd.

What sort of visibility do you have into the year or going forward at all.

Well I think we've given clear guidance just as I gave clear guidance at the at the beginning of the pandemic.

I think obviously travel and tourism and.

Experiential are the laggards here because they require a high degree of safety, but but the rest of the of the industry automotive you know packaged goods.

Services.

You know those those those seem to be I think I think coming along nicely and as I said we.

Have a nice net new business wins moving forward. So so based on the kind of extensive budgeting process that we that we go through each year, we believe that the 7% to 9%.

Growth.

<unk> is achievable and represents kind of a good leg back as I said and I don't think we can recover on a revenue entirely.

And a year, but but after the year and were down.

And <unk> 12, or 13% and organic net revenue and at the same time up and EBITDA. So we can keep building on that base too.

As as revenue gets gifts.

Toward and and one.

Terrific and and one more big picture, one if I can.

Clearly during the pandemic it seems theres been this greater shift to digital.

From linear platforms and.

And you noted digital and tech offerings I think in your opening.

<unk> grew more than 50% I don't Wanna Misquote, you, but.

My question really is is this a permanent shift and your view and if so how do you see MDC positioned going forward.

Well it is a permanent chest.

And I think most clearly so it has been a permanent shift for the last decade. It it got accelerated as people realize that they had been.

Too slow too I think transfer to kind of a creative performance marketing I think I think a M. D. C. You know about 9% of the companies are are in that high high growth digital areas and so we saw a lot of growth and that and some of them are on earn out.

And which also meant that our that our earn out obligations went up but that's a good thing and the sense that where we're getting a much higher value because they're they're being appreciate it and have a really solid book of business.

Part of the point of the of the combination is that will greatly increase to 32% the combined level of of high growth digital services at much and a much bigger number of digitally based services and I think I think that's one of the key underpinnings of the combination.

Is to greatly increase that number to take advantage of the transformation.

And the happening and the marketplace.

Terrific and I will leave it here on this last one and the early February announcement of the global affiliate program.

If you could just spend a little more time walking through what that means for the company.

And maybe how we can think about it from economic perspective, whether it's investments or anything else that would be terrific and thank you for the time.

Great.

Elliot program I think you know is the fastest way to close gaps that we were discovering and in emerge, particularly emerging and certain marketplaces around the world. So by by bringing on global affiliates within these areas. We it it really is a win win for the affiliate.

And in those areas they will get pieces of global contracts. They will also they may also have business that they may refer to us.

And.

And they also put us in a stronger position.

Competing against bigger holding companies.

And that have and agency and every single location, because we we oftentimes I see us winning on the creative winning on the application of technology, but not having global enough wings and this is a low cost way to extend those wings and and a very effective basis and it turned out that that there were a lot of.

Really up and coming terrific companies and these markets looking.

For affiliation with companies like us to get access into those markets and then these affiliates will serve as a farm team for potential acquisitions.

And I think that will give us experience working on the network and there will be resources available to the entire network to.

And to compete more effectively globally. So you can look at it as giving us a better position enhancing our marketing offers.

Feeling and and.

Enhancing our position and global pitches and serving as a farm team for acquisitions to close to two permanently enhance the footprint of the network.

I appreciate the time as always thank you.

Sure.

Yeah.

This concludes our question and answer session I would like to turn the conference back over to Mark Penn for any closing remarks.

Thank you and I think.

Thank you I I hope this is giving you an overview of the of the progress that we continue to make during the difficult.

And try and here I think this company all the partners all the people and the employees are we're looking at a dire situation on March and April They responded incredibly well this company emerges from this one with higher.

EBITDA with a stronger financial position great.

Cash position and look forward to the possibilities are.

On a combination of ore stockpile and stag will will shortly announce a call and which it will detail it's year end and full year financials. So that people can get.

All the information they need and thank you very much.

Yeah.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.