Q2 2019 Earnings Call

Good day, so what gets you MDC partners second quarter results conference call.

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I would like to turn the conference. So that's one example of the knowledge and she said 60 Vafi. Sir. Please go ahead.

Thank you good morning, everyone I'd like to thank you for taking the time to listen to the MDC Partners conference call for the second quarter of 2019.

Joining me today from MDC are Mark Penn Chairman and Chief Executive 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 that the company, including those related to earnings guidance. They are subject to uncertainties referenced a cautionary statement included in our earnings release and slide presentation and further detailed in the Companys Form 10-K [laughter] 85.

For your reference we posted an investor presentation to our website. We also refer you to this mornings 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 Chief Executive Officer Mark.

[laughter] I'm pleased to be here to discuss Mdcs performance in the second quarter as well as our strategic plan for returning to growth.

In terms of performance I'm pleased with our execution in the second quarter, we delivered 8% year over year growth in adjusted EBITDA, 20%. If you adjust for the divestiture of Kingsdale in March.

Margins were up 150 basis points versus prior year, and we delivered strong cash generation with continued reduction in leverage.

Revenue as expected was down modestly in the quarter given negative net new business in the first quarter. However.

Net new business rebounded strongly to a positive $43 million in Q2, our strongest number in here.

Notable wins in the quarter include General Mills.

Global Haagen Dazs account auto trader, William Hill, Pokerstars, Porsche Audi and BMW user experience for account.

The new business momentum has continued through July and the pipeline remains strong.

These wins together with the strategy, we began to rollout sets the company up for a return to profitable revenue <unk> revenue growth.

This progress in expanding EBITDA and net new business wins gives us confidence to reaffirm our 2019 financial guidance, given our positive progress and results. So far a carefully considered raising guidance, but I'm, a new CEO , who understands the ups and downs of this business and ultimately decided this is not the time to make such an adjustment. We are reaffirming both 2019 2020 financial guidance as well as the $100 million, our free cash flow since I became CEO .

And the and in March.

[noise] in order up until 2020.

Our agencies also continue to be recognized for their breakthrough client work with anomaly winning accolades at the Effie awards for its work with Johnnie Walker and FNB, securing a condo wind Grand Prix at the highest possible accolades for its work with volatile.

Well I'm encouraged by the positive momentum we remain focused on the industry trends and our business continues to face today CMO has it been transformed from brand builders to performance marketers focused on measurable results in increasing their use of data analytics research and digital services to connect better with their customers.

At the same time clients are continuing to move away from appointing single agencies, a record two enlisting more and more services on a competitor project or roster basis in term, we must position and organize our agencies to be nimbler and more responsive to the changing landscape.

So how does M.D.C. compete in this new World order.

Over the past few weeks, we began executing against a comprehensive new plan to organize our offerings reduce our costs and capitalize on our strengths and enhance our go to market.

At a high level, our new World plan is built around the following principles.

Our agencies are better together, then apart whenever possible.

Data and creativity Moscow, and then had.

Data is useless without creativity and creativity can be useless without data.

Online and offline creator are one and the same today efficient operations across the group enhance great agency cultures, and creativity investment should be in digital technologies that spur growth not real estate that increases overhead.

We will reduce our 25 reporting units.

Down to seven to 10, retaining individual brands for creating networks that can go to market with a larger bundle of services that meet more of the needs of modern clients by bringing together our existing assets. We can offer to clients. The combination of data creativity strategy research public relations and execution across new and old media smaller agencies will find a sure path to market to the many RFP is our large agencies receive and the leaderships of larger companies will have an enhanced role leading new networks.

Our agency partners are thrilled that the new opportunities being created through this process, which is just kicking off.

To win larger client assignments were also beginning to create multi country interdisciplinary teams that offer services as one MDC.

Given the world class nature of our firm who can effectively take on compete.

And win against even the largest holding companies and the most sophisticated consulting firms. These new pitches are already underway.

Another key aspect of this plans to sell more media combined.

And coordinated with creative last month, we moved to a line under common leadership MDC partners, including its lead agent.

Your sleeve agency Assembly with Gale partners, our global data technology, CRM and addressable content agency.

Driven by its sophistication with data Gal also happens to be Mdcs fastest growing agency over the last several years. This effort marks the first in a series of actions aimed at bringing together the best talent across MDC into collaborative network to elevate our offering for the benefit of our clients by establishing a new group built around data technology media and content.

The New media network includes seven global offices, and a multidisciplinary team of over 600 employees led by MDC veteran Michael Ballack, who most recently served as CEO of MDC specialists network, Yes, and company and Brad Sims, the founder and CEO of gap.

While returning our organizational and go to market strategy will continue to find savings of tens of millions of dollars that the corporate and partner level. Our aim of $35 million of run rate savings and enhancing the ended the year remains in place.

To accomplish this we are targeting a reduction of overhead that agencies that operate above the mean in terms of administration be reductions in corporate overhead see reorganization of our real estate portfolio to drastically reduce our footprint and bring agencies together the enhanced management of the compensation to revenue ratio and Capex budget finally.

The payments or earn outs are coming down.

With approximately 141 million remaining and rather than renewal or extend them will gradually shift all incentives to annual awards related strictly to performance, we take into account individual company and MDC performance.

Before I turn the call referring to walk through the financials I'd like to offer some closing thoughts.

Great plan is just to plan without a great team to execute it David Ross, Ryan Lindner and Alex to launch for all experienced executives, who will work alongside new team members, including Franklin, who don't as CFO , Jeff gardener as COO and Jonathan Mirsky as General Counsel also just starting this week at corporate as Nate Nappier, a former PNG executive who will focus on client service and global pitches. This is a team ready and able to roll out this new world player.

I continue to believe that the assets of MDC partners are fundamentally underappreciated, given the level of creativity clients and accolades for the work they do.

They punch way above their way I remain dedicated to implementing the plan and enhancing shareholder value.

I believe today, we are moving in the right direction. Thank you and now I'll turn it over to Frank.

Thanks Mark.

Good morning, everyone.

I'm very excited to be part of the MDC family had to be here with you today for my first earnings call.

So let's get started.

As expected revenue in the quarter continued the trend of modest declines with reported revenue down slightly more than 4% to $362 million and organic revenue down 2.4%.

Growth in pass through revenue contributed to help our organic revenue by approximately 2%.

Adjusted EBITDA, however, increased 8% to $46 million in the quarter and increased 34% to $68 million for the first six months.

Aided by the significant cost reduction initiatives put in place in 2018 and continuing through 2019.

Severance and other charges.

From incremental cost reduction moves taken in the second quarter.

Drove covenant EBITDA of $50 million, leading to trailing 12 month covenant EBITDA of $188 million.

Up from $183 million at the end of the first quarter.

Overall, we are pleased with the progress of the business.

And continue to manage costs tightly while still investing in revenue generating initiatives.

Let's look at revenue a little more closely.

Our best performing segment specialized communications, which continues to gain market share on the public relations space and saw a 15% increase in organic revenue.

The media service segment also rebounded to nearly flat organic revenue following declines in recent quarters.

Offsetting these improvements the domestic creative segment declined 10% approximately a third of which was pass through revenue having no EBITDA impact.

The remaining decline related principally to volatility at two of our project based agencies.

The all other segment also declined 8%.

Which was largely due to regulatory delays at clients and our health care portfolio and the timing of other project business.

That said, we expect improvement in this segment as these issues reverse in the coming quarters.

And lastly, our decision to close two of our UK offices impacted organic revenue unfavorably in the quarter by nearly 50 basis points.

In the quarter, we also incurred severance and other expenses related to restructuring initiatives of $3.3 million not including the changes made a corporate when mark joined the company.

These amounts are the primary driver of the variance between our adjusted EBITDA and our covenant EBITDA and they're expected to contribute approximately $12 million of savings on an annualized basis.

Given the strategy that Mark has articulated I would expect incremental restructuring actions in the second half of the year.

I would like to now move onto the balance sheet.

The second quarter showed a strong bounce back of working capital as a company converted the increase in EBITDA to cash.

At the same time, we funded approximately $29 million of deferred acquisition related payments and $30 million of semi annual interest on our senior notes.

After funding these obligations, we were still able to reduce borrowings on our credit facility to $27 million and net debt to $900 million down from $907 million in Q1.

Given the strong cash flow.

And growth in Covenant EBITDA.

Our total leverage ratio on the revolver fell 0.2 turns to approximately 4.9 times.

The funding of the deferred acquisition payments reduce the remaining liabilities related to DAC and minority interest obligations to approximately $140 million.

With about $13 million expected to be paid in the second half of the year.

Overall, we are on track to exit the revolver by year end and achieve significant net positive cash flow.

We are pleased with the current quarter's performance and remain committed to improving the balance sheet further over the next several years.

But most importantly, the entire management team and I will be implementing the new world class to foster greater cooperation among many agencies bring data and digital services to the floor.

Promote integrated network wide pitches.

While eliminating unnecessary cost.

And now before I turn over the call to the operator for questions I just wanted to take a moment to say a special thank you to davidoff and Mitch again for all the work that they have done over the past six weeks.

Significantly contributing to the smooth transition of the company's matters to the new management team.

Well from me and the team we wish them all the very best in their new endeavors.

Thank you.

Operator, we will open the lines for questions now.

We will now begin the question and answer session to ask a question human breast.

I have touched on so.

If at any time. Your question has been addressed your questions. This best of luck.

The first question is from Avi Steiner with JP Morgan. Please go ahead.

Good morning, and thank you for taking the questions I've got a few here first on the net new business win metric that obviously bounced back nicely.

Oh, and you highlighted some of the new business wins.

Can you tell us.

I guess just around education, what changed from Q1, what is it just timing of pitches getting resolved or was there something else there.

And then thinking about those wins would they fall more into the creative category PR <unk>, how do we think about that revenue coming on.

Sure.

I think.

Hey, I I think before I came on.

That some of the agencies had had lost a few A.O. ours and so there was clearly a significant dip in new business.

Obviously.

Corporate here, we spent a lot of time on new business. We have a CMO has an active new business group, but you know it's often through that after agencies lose a couple of things. They go out and find a couple of new things and so I think they re energize the pitch process I think there are firing on all cylinders. They went after a bunch of accounts or some new accounts, even July that or not.

That are not yet public I think it's pretty it's a pretty good mix I think it's.

I think the kinds of wins here.

In some very soon.

Good strength in PR, good strength on experiential, but the big agencies or the big winners here.

For significant new accounts.

Great and.

You'd also mentioned the symbiotic relationship between creativity and data highlighted gale and Adam.

Curious if that portends that all collaboration with.

The state.

She's for any of those agencies and has anything even been done on that front.

Yes, I mean, it does I think that every new catch that I see comes across it says what do we really want why are we doing this pitches because well the marketing world has changed and now we need data plus creativity.

And I think that that we are seeing some cooperation and we are seeing the initiation of some specific projects to create unique intellectual property that are kind of premature.

To announce at this time, but we are that's specifically the area of greatest focus concentration the cooperation because that is the fundamental change.

We have tremendous creativity also MDC has instrument, which is a core digital or digital agency, Gail which is a core data agency, but.

But the more resources, we have in that area.

Combined or within MDC, coupled with the incredible creativity that is the key to new business No question about it and that is our primary focus.

Excellent a few more here.

Mark and Frank maybe this is for both of you.

Mark you mentioned.

Shifting earnouts annual rewards.

Tied to both both agency and company performance and I'm curious how long until that can be effectuated.

What if any has been the preliminary response from perhaps some of those agencies that we'll experience that shifts and.

Frank what is the cadence of the payout I guess of the 127 million.

Of Earnouts left after the 13 million you highlighted to be paid in the third quarter.

So after we pay down the 13 million in the back half of 2019.

Based on current projections, we have approximately the same level for 2020 call it mid fortys.

And roughly the same for the following year, maybe a tick higher in the following year and then after that you know if it winds down.

And.

So we are actively right now I think formulating formulating our plans and I would expect by the end of the year to have in place for the for the following year kind of a significant new incentive plan that takes the people who have kind of gotten past earn out and give them. The kind of incentives that are that are typical of sick of good service oriented companies that rely on great people to do great things and I think that so far internally. The response to what weve been designing has been quite good.

And I think it will it will meet the needs.

No I was at other holding companies and I saw the things that I didn't like and that were inadequate incentives I was at Microsoft where I saw some great people incentives. So I think we're really carefully designing this to to work well and also too.

Promoter cohesion among the companies so we're not in a position to.

Announce it yet, but this will be in place by the end of the year.

Terrific I appreciate all the color and I'll end my Monopolization here, you had considered raising guidance.

Does that mean this year's guidance is conservative.

How would you how would you characterize your level of visibility given where we are in August for the full year and maybe lastly, and thank you all for the time, if you could remind us.

Where you want to take leverage or what your comfort level is.

Leverage level is and thank you again.

[laughter].

Well.

I don't think I don't think I'm going to express a view where characterization other than to say that I feel quite comfortable reaffirming.

Reaffirming our guidance and that I considered I considered.

Considered raising that but there are a lot of ups and downs in this business. There were a lot of unexpected ups and downs last year.

I think as you look at this.

Revenue was declining but you look at the new business wins, and therefore, the new business wins indicate very strong turnaround turnaround in business and obviously the trends and EBITDA have been have been consistently I think strong now and we still have we still have things to do so I'm going to.

As the new CEO kind of kick the can down here, a little bit, let's let's see another quarter of the year, but but I think I'm pretty.

Positive about the direction that the company is on right now is how to make this report.

And obviously to your question about the leverage you know we're at 4.9 times here at the end of Q2, we expect to hover around the same area to finish out the year roughly in the same range.

Okay. Thank you very much.

Again, if you have a question. Please press Star then one.

[noise].

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

[noise] Oh. Thank you. Thank you for attending I think.

Yeah, I mean, as we as would be as were in the next quarter.

The company continues I think to rebound in terms of very strong net new business, we continue to make improvements in the business.

To create more cash flow and and stronger EBITDA and most importantly, we have a plan for growth.

That takes into account the changes in the marketplace by bringing our agencies together by emphasizing data plus creativity by going out and making one MDC pitches, where I think we are second to none, including the larger slower bigger holding companies.

Where we can be nimbler more effective more creative and more data oriented. Thank you for taking the time. Thank you for for coming on this morning.

The conference call has now concluded thank you for attending today's presentation.

You may now disconnect.