Q1 2021 MDC Partners Inc Earnings Call
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Good day and welcome to the M. D. C partners first quarter results conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask the question. You May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to Michela Parsky Vice President of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone welcome to the MDC Partners Conference call for the first quarter of 2021.
Joining me today are Mark Penn Chairman and Chief Executive Officer, frankly, neither of them Chief Financial Officer, David Ross.
General Counsel and Irwin Simon lead independent director of the M. D. C. 's board of directors and share of the special Committee of independent members of the M. D C Board.
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 the earnings guidance of subject to uncertainties referenced in the cautionary statements included in our earnings release and <unk>.
Slide presentation and are further detailed in the company's form 10-K, and subsequent SEC filings for your reference we've posted an investor presentation on our website.
We also refer you to this morning's press release and slide presentation for definitions ex.
Alan Nations 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 Penn.
Thank you Kevin Good morning, and thank you for joining us for today's call.
With a review of MDC as Q1 performance amidst an improving macro environment.
I'll, then turn the call over to Franklin enough to provide an update on our operating results and balance sheet.
Following that I'll invite our lead independent director of the Mdc's Board of directors and chair of the Special Committee of independent members of the MDC Board Irwin Simon say, a few words on behalf of the special committee in relation to the combination with the background.
Separately Stag World released its first quarter results earlier today, as well and we will hold the call at nine a M to review those results.
Turning to <unk> results for the quarter I'm pleased to say, we're off to a solid start to the year and showed a faster than expected recovery from pandemic closed while we held the line on expenses driving record first quarter adjusted EBITDA of 52 million balance.
Q1, 2021 was our strongest first quarter adjusted EBITDA performance in the MDC history.
Growing 31% over the prior year, which was the previous record for the first quarter adjusted EBITDA.
Adjusted EBITDA margins climbed to 16, 9% from 12, 1% in Q1 of last year driven by the continued benefit of cost actions taken in 2019 and 2020.
In addition, MDC reported its highest net income nearly three years this quarter, we see a robust market for our services with demand picking up the many important economic sectors as we head into the historically active two two pitch season.
Looking more closely at our top line performance Q1 revenue declined 6% to $308 million on a GAAP basis, but was down only 1% year over year on a net revenue basis.
Against strong pre pandemic results a year ago.
Organic revenue showed similar trends down just 2% year over year, despite lapping a quarter of industry, leading growth as such of organic net revenue of two year comp stack is roughly flat ranking towards the high end of the peer group looking in more detail on our performance. The majority of the revenue decline was driven.
By continued COVID-19 related pullbacks, and experiential and travelling tourism, but we expect to see recover later in the year means.
Meanwhile, we continue to see impressive growth in our digital agency performance across the network from names like why I'm now instrument and Gail our digital businesses grew 60% year over year on the quarter the.
Overall, the overall business also benefited from improved year over year trends in key sectors, including healthcare food and beverage financials and technology.
In short we're encouraged by the pace of the recovery on the progress made towards our revenue growth targets, while maintaining discipline around costs and leverage this resulted in LTM covenant EBITDA of $201 million.
The 6% sequential increase and up slightly over the prior year. We ended the quarter with net cash of $93 million in cash flow from operations of $47 million, our leverage ratio declined to $4. One in Q1 versus $4 four last quarter and 4.3 a year ago.
On.
On the new business front. This was our eighth consecutive quarter of positive new business wins, the net new business totaled $10 $2 million in the quarter versus $8 4 million a year ago LTM net new business came in at $92 million as compared to <unk>.
$90 million in the fourth quarter. This includes a 40 $42 million in wins against $32 million of losses as clients typically move accounts in the first quarter.
Notable client wins in the quarter include J&J as Libre darn brand Travelocity and L. L. Bean of donor an expanded relationship with AB Inbev at 72, and Sunny adding projects for their Jupiter less index brands out of Amsterdam the Sui.
This gaming lottery and F&B AAA at the volume Al Subzero Wolf Cove at Hunter.
Puma biotech and more work with Nova Nordisk concentric denny's on by anomaly out of their New York Office, the espresso with the global brief but by anomalies Berlin office, plus multiple new assignments with the ask here.
Meanwhile, in the I'm always technology clients also saw significant growth with new assignments, both domestically and globally across Buber, Google and Facebook.
In addition, we're demonstrating the power of MDC and stockpile with new wins across two networks, including one of the country's largest energy companies Con, Ed which appointed Scott growth could in theory as its agency of record in partnership with MDC Partners Assembly on media buying and planning the responsibilities.
And just last week Johnson <unk> Johnson's baby in the female Baby U S was awarded to donor and partnership with COVID-19 theory further expanding the relationship with J&J that began in 2019 with tylenol LISTERINE in search ex.
What is evident is that we've come out of the gate running this year with several key strategic moves that not only reinforced our differentiated positioning but are a testament to our ability to attract the top tier talent and ambitious scale clients on.
On the talent from earlier this year, we talked about our hiring a chief media officer due to the mcglashan to involve MDC global media and data tech capabilities, and we followed that with the hire of Rebecca routes of senior director of key client relationships, Rebecca joins us from <unk> capital the deep Silicon Valley relationships.
And is responsible for working with the centralized MDC global team and leading key client engagements for the global network.
We've made several key strategic investments in crucial agency leadership recently, we named John boiler cofounder and creative co chair of <unk> 72, and Sunny to the role of chair of Nbc's constellation. The collective of creative companies that include 72, and sunny as far the CPP digital and brand experience firm.
<unk> strategy and design company Red Scott and production firm Petro Studios.
Meanwhile, at TPB, we brought on Maryann Molina as global CEO Marianne spent over two decades of GST N M and her leadership is further enhanced by an entirely new ambitious leadership team of the agency just announced last week.
We also launched a global affiliate program in February creating partnerships with proven local talent in key international tubs of create that scale of the creative performance media and technology capability brands needed to thrive in today's global economy, we're off to an incredible start with this program and.
Only a couple of months, we've established presence in the middle East Eastern Europe, Taiwan, mainland, China, Hong Kong, India, Russia, and most recently Latin America.
Key to the Operationalization of that network and our global integrated capabilities is a proprietary technology born out of stag low tech locate SaaS campaign management platform. The connects technologists creative and clients across the globe on a single real time platform.
We set a target of 50 partnerships by the end of the year and we've already established 23, putting us on track to build out the formidable global network we plan.
Our goal is never again to lose of global pitch due to lack of global coverage will have a truly comprehensive diverse and differentiated talent pool fit for clients of any size and geography.
We found global entrepreneurial agencies extremely receptive to our partnership these growing digital first companies are looking for the scale of modern capabilities and access we offer. Meanwhile, they've been untouched by major traditional holding companies, who assembled networks 40, or 50 years ago and are now in the process of culling rather than expanding.
We see four key benefits out of the affiliates program.
When global clients, creating a flow of business from these new relationships gaining revenue from providing additional services and creating an M&A pipeline.
While these are all important steps transforming NBC to of modern marketing company. The most impactful step on our strategic Revolution is our planned combination with stag low I believe the combination provides a clear pathway to mitigating investor concerns that have led to MDC as current and historical discount to peer evaluations.
You may have seen the open letter I released in April which lays out the reasons why I think this combination represents an opportunity for investors to be part of a major growth story.
In that letter I lay out of four key growth drivers for the combined company scaling up digital transformation on online media delivering true creative performance marketing rolling out new SaaS digital marketing products and competing for and winning big global marketing contracts.
Bringing together of the unparalleled creative talent of MDC with the digital leadership of Stag ROE were created the next big thing in marketing services.
Global top 10 marketing services company will compete and win versus the old holding companies because we will have the digital knowhow the global scale on the unparalleled talent marketers want and need to thrive.
We're already seeing excellent progress on synergies across the groups as I noted earlier with major new business wins, another area in which we're demonstrating the power of the combination with our expanded portfolio of SaaS products, including the launch and progress of profit. The IPR tool that helps determine how a piece of news will be received the <unk>.
And pitched this product is managed by a new unit of MDC, while developed by stack low tech.
After starting to sell the product in January we've now closed their first five sales on the platform already has 28 trial users of assessing it including clients like Iron man of major CPG.
Brand, a leading technology company and the prestigious NGO. These digital products represent a whole new revenue stream made possible by the combination.
I built stack well.
From the ground up over the last six years and I focus my energies on MDC partners over the last two years, making not just a financial investment go on.
Of time and energy as we brought a new team and style of leadership to work with the partners here to achieve these record setting results, but no quarter of returns can dissipate the secular headwinds from changes in marketing that I believe are the best met and overcome through the combination of the great talent that MDC with the digital first set of service.
As of Stag well together I believe is the path to unlimited growth on the top and bottom line and maximum return for all investors.
Finally.
Let me touch on our outlook.
At this time, we are reiterating MDC is 2021 financial outlook initiated last quarter, we're on track to deliver 7% to 9% organic revenue growth from 7% to 13% adjusted EBITDA growth of $190 million to $200 million and adjusted EBITDA. This outlook is driven by the continued rebound in organic revenue and ongoing strength in our digi.
It'll assets.
<unk> demand for PR and communications, a rebound in creative agencies and the return of some experiential work.
Based on the information on the Special Committee has received from Stag well. We can also reiterate the combined guidance for MDC and stockpile as presented in our December 21, 2020 investor presentation.
GAAP revenue of $2, one 1% to $2 5 billion adjusted EBITDA of $325 million to $340 million before synergies adjusted EBITDA of $355 million to $370 million, including $30 million of synergies excluding cost to achieve.
Now for more on Mdc's financial results, let me pass it over to Franklin either right.
Thank you Mark good morning, everyone.
We started the year strong in 2021, delivering a solid performance in the first quarter as we continue to narrow the revenue declines from the pre pandemic period in the prior year and delivered the highest Q1 adjusted EBITDA from the company's history, and our highest net income of nearly three years.
For the quarter revenue declined six 2% to $308 million or six 9% on an organic basis.
Net revenue excluding pass through costs declined one 4% to $271 million.
While organic net revenue declined two 1%.
The spread between GAAP and net revenue is largely attributable to our experiential business.
<unk>, Canada at higher levels of pass through costs.
Looking at our revenue from the client sector standpoint, we saw growth this quarter in health care consumer products and financials.
Both technology and food and beverage further narrowed the revenue GAAP from 2020 levels continuing recovery trend.
The auto and travel tourism sectors remain the softer with lingering impacts from 2020.
Our experiential division, which took across various industry sectors continues to impact our GAAP revenue and accounts for approximately 70% of the revenue decline, although with a much smaller impact on net revenue as previously mentioned.
Partially offsetting these declines our digital business continued to grow rapidly up 60% for the quarter.
Our recovery trend accelerated in Q1 the.
The year over year quarterly revenue declines have narrowed each quarter from its peak of 28% in Q2 of 2020 declined to 17% in Q3.
14% in Q4 and down to 6% in Q1.
The improving revenue trend has been broad based as each of our reportable segments improved its year over year trend this quarter as compared to Q4 2020.
In integrated network day revenue.
Revenue increased 13% against prior year.
Moving from a 3% decline year over year in Q4 2020 the.
The improvement was driven by growth in digital communications, and our health care business.
In integrated network revenue was down 6% against prior year, improving from the 17% decline year over year in Q4 of 2020.
The improvement was driven by continued growth in digital and narrowing declines and our creative agencies.
The media and data revenue was down 10% against prior year, improving from the 16% decline year over year in Q4, 2020, driven by several new client wins in both media and data.
In all other revenue decreased 27% against prior year, improving from a 31% decline year over year in Q4.
On a net revenue basis, however, the year over year declines of the 16%.
It's worth noting this segment is impacted by our experiential business and we anticipate stronger year over year of growth in the second quarter, given the pandemic impact on our 2020 revenue.
With respect to operating expenses, we continued to benefit from actions taken at the outset of the pandemic as well as previous strategic initiatives to improve our operating efficiency.
For the first quarter controllable costs were lower by $16 million of.
For the 7% compared to prior year, driven by lower compensation occupancy costs travel and administrative expenses moving.
Reported approximately $2 9 million in restructuring charges in the first quarter from both severance and real estate actions.
Adjusted EBIT for the year increased 31% to $52 million.
From $40 million from the prior year.
Covenant EBITDA for the last 12 months increased to $201 million up 6% from $190 million last quarter and up slightly from a year ago.
The related adjusted EBITDA, and Covenant EBITDA margins increased sharply to 16, 9% and 17% respectively, reflecting the positive contributions of our cost savings actions.
Moving to our balance sheet liquidity remained strong as we generated $47 $1 million in cash flow from operations and ended the quarter with net cash of $93 million.
<unk> of $113 million of cash and $20 million in borrowings under our revolver.
We continue to lower our leverage of four one times down from four four times at year end of 2020, and four three times a year ago.
With respect to our acquisition related liabilities, we funded approximately $2 million during the first quarter with the majority of our payments occurring in the second quarter.
We anticipate a similar level of payments in 2021, as compared to last year or about $55 million.
Our M&A obligations increased to $159 million in the first quarter compared with 151 million at year end, principally driven by stronger results from one of our digital agencies on the earn out.
With respect to capital expenditures, we expect about $12 million to $15 million of net new capex in 2021 and incurred less of $1 million in the first quarter on.
New York Real estate transformation project was completed on time and on budget with final expenditures disbursed in the first quarter.
You will see reflected in the $13 million of Capex reported on our cash flow statement, which was accrued in 2020 and paid in the first quarter.
With respect to the company guidance as Mark said earlier, we reaffirm the full year 2021 guidance, we issued last quarter as we remain confident in the year ahead.
In closing I want to thank all our employees and other stakeholders for their continued support we are optimistic about the recovery business environment and our continued progress to improve operating performance.
We are also excited about the pending business combination of stag low as possess the unique opportunity to join complementary assets capable of accelerated revenue growth.
The ability to drive further significant cost synergies.
Improved operating performance and cash flow generation and further strengthen our balance sheet. We look forward to successfully completing this transaction in the upcoming months.
And now I would like to turn the call over to Irwin Simon.
Okay.
Thank you very much mark and Frank and team MDC and good quarter in these times I wanted to take a moment to share an update on the MDC partners merger process with stagger on media.
As you well head of C. We have filed several amendments to our S. Four as we've been working through the commentary with the SEC. We are hopeful that we are close to the end of that process and we will be able to file our proxy statement prospectus in the coming days.
I can tell you our special committee work tirelessly on behalf of MDC shareholders sought the advice of financial advisors and negotiated over a long period of time to ensure MDC shareholders receive fair value for the shares in MDC.
As you've heard Nbc's Q1 results show that their efforts and diligence were debt our efforts and diligence we're accurate the special committee's projection models predicted mdc's performance.
What day narrow belief that the combination is powerful and most importantly.
The exchange ratio is fair to our MDC shareholders. We've.
We've also watched the appreciation in value and the volume traded in MDC stock and believe that is due in part to the enthusiasm for the combination and the.
New of most shareholders at bringing the companies together will improve the balance sheet create revenue growth cash flow that will generate value for MDC MDC shareholders as we move forward.
The Special Committee is excited about this transaction and I believe that all MDC shareholders should be as well it rewards MDC shareholders for their investment in support of the company while at the same time from provide the MDC shareholders significant ownership in the combined company.
MDC and stag will combined we'll have a better portfolio of agencies that are at the forefront, which is so important today of innovation and marketing operating the best Creative digital technology and strategic communications solutions in the marketplace, together MDC and stag will agencies.
I'll be able to compete and win global client assignments with larger budgets better margins afforded in the best in class advertising and marketing. We believe this merger on the terms agreed to is truly a win for MDC a win for our clients of wind for our employees and as more.
Most importantly, a well earned wins for MDC shareholders for MDC shareholders. The Special Committee and I believe this is a great combination.
I know, it's taken a little time to get there.
But patients as often rewarded and we are confident that this will be the case here. Thank you.
Thank you operator, please open it up for questions at this time.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Anytime you question Thats been addressed and you would like to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble of raws.
Our first question will come from Tom White with D. A Davidson. Please go ahead.
Great. Good morning, Thanks for taking my question.
Mark I guess I was hoping to maybe hear your view on.
Whether the competitive landscape for MDC.
And I guess, the stag will also.
Maybe sort of evolved here over the course of the pandemic kind of on what is the what does that landscape look like kind of is it significantly different now that we're kind of emerging from the pandemic and you guys are getting a better sense.
And also I guess related.
Have your views of appetite around maybe possible further M&A down the line changed at all.
Once you combine the two companies and then I had a quick follow up.
Right.
Look I think the we're.
We're beginning really the C companies.
Go back to marketed understand that theres going to be of robust consumer marketplace by the by the end of the year and so consequently, I think we saw.
Return, particularly on the long term creator of the it takes months to scale I think coming out of the pandemic. The principal change continues to be.
Those through.
Of those who don't have of digital stack half the increase their investment in the digital stack and the shift more and more of digital marketing, which of course is what the.
What the entire combination thats about <unk>.
My General.
<unk>, though of the competitive landscape really hasnt changed in the sense that there are there are four big players, who got $60 billion.
We haven't been challenged at scale for for decades here and that as we build the combination up and we expand out into the global marketplace. So that we compete on technology, we compete on creativity and we have the full global coverage, we will be able to reach up and when the.
Larger contracts away from those companies, which are you see increasingly the combination can do that in the United States as a combined say COVID-19 in theory of J&J with with donor and Youll see those very substantial wins. The previously had been occupied by the big four the principally of the market structure remains very much the same.
And our M&A plan to focus on competing on the global market and advanced leading technologies I think is very much intact and factory as previously outlined.
Okay.
Thanks, and then you talked a little bit about the.
Some of the newer SaaS kind of marketing.
The technology products.
As you look kind of I don't know 234 years out.
One's presuming that the the merger goes through but how big of a part of that of the combined business do you think these new products could could represent an.
Are there any of the products in particular that you think have of potential to be.
I guess what has the most potential the kind of be a needle mover you think kind of in the near term when you look at the pipeline of these products.
Well I think the digital products, where we tend to have particularly as we're selling <unk> products really tend to have a kind of a slow snowball.
Outlined in the next four years getting the revenue up to $75 million.
As you kind of can't I don't think Thats I think thats, a conservative call if we get a hit.
I think we're seeing rolling out I think profit is on a very nice trend we've gone from.
Introduction to demo to trials.
Sales of deployment and so.
And I think that has significant opportunities in the PR space and doesn't have a competitive it does exactly what it does use AI to predict.
Stories will be covered.
We've taken qualified which we.
Which we did with P&G and qualifies the Influencer marketing platform and I think that has very solid potential of.
On the Harris.
Total terminal.
Has a.
Is probably showing the strongest run rate went up.
300% in the last couple of months.
And it's also seeing kind of trial introduction.
Purchase and then and then use.
And I think the biggest product of all is going to be the the product of consumer understanding and engagement, which brings together all our data.
From the polling the first party of third party data to create audiences without cookies that has the potential to be $1 million of year sales. So I think we have.
For in the Hunt really already right.
Going to be in the sales process.
This year or now we're going into the next year. So I think it's.
A reasonable estimate I'd hope to beat it if we if we have of ship.
And of course, the value of any product like this that is primarily driven by SaaS revenue hasnt incredibly high value and could be spun off to create more value to shareholders.
Great. Thanks for the color.
This concludes our question and answer session I would like to turn the conference back over to Mark Penn Chairman and CEO for any closing remarks.
Thank you all for joining us today.
Just to note, we'll be attending a few investor conferences in May So look for us at the Needham Technology and media conference on May 18th the.
Sidoti Investor Conference on May 19, and the Jpmorgan technology Media and Communications conference on May 26.
You again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.