MDC Partners, Inc. (MDCA) CEO Mark Penn on Q4 2020 Results - Earnings Call Transcript

MDC Partners, Inc. (MDCA) Q4 2020 Earnings Conference Call March 2, 2021 8:30 AM ET

Company Participants

Alexandra Ewing - Chief Communication Officer

Mark Penn - Chairman and Chief Executive Officer

Frank Lanuto - Chief Financial Officer

Conference Call Participants

Avi Steiner - JPMorgan

Operator

Good day, and welcome to the MDC Partners Fourth Quarter and Year-End Results Conference Call. All participants will be in a listen-only mode. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Alexandra Ewing. Please go ahead.

Alexandra Ewing

Thank you, and good morning, everyone. Welcome to the MDC Partners conference call for the fourth quarter and full year 2020. Joining me today are Mark Penn, Chairman and Chief Executive Officer; Frank Lanuto, 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, are subject to uncertainties referenced in the cautionary statements included in our earnings release and 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 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 Penn.

Mark Penn

Thank you, Alex. Good morning, and thank you for joining us. We'll cover a few important topics in the call today. First, we'll review MDC's progress in Q4 in 2020 against the backdrop of uniquely challenging global conditions. I'll discuss our planned combination with Stagwell and the opportunities we see ahead. Frank Lanuto will give further detail on MDC's operating results and balance sheet. Then we'll be happy to answer any questions you may have.

Separately, we understand that Stagwell will shortly announce a date and time to release its financial results for 2020 and that they will hold a call to review those results.

Let me first review MDC's performance in 2020. Just as MDC Partners achieved renewed industry pacesetting 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 cost margins by 200 basis points. We said we expected revenue declines for the year to be in the 10% to 15% range, and we gained the cooperation of all our agency partners to serve margins and employment for our talented teams through these difficult times.

Meanwhile, in contrast to the general industry, our digital and tech offerings saw more than 50% growth in their businesses as more clients acknowledged the shift to e-commerce and digital performance marketing. Our PR companies also showed growth as companies pivoted to new messages.

Today, I can report that we closed out the year meeting the expectations of a revenue loss in the 10% to 15% range, yet achieving adjusted and covenant EBITDA above 2019 levels. At the same time, business is being rebuilt quarter-by-quarter as the pandemic begins to recede and marketers get back to business. We are delivering consistent net new business. While it will take in 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 2021 with similar results on the bottom line EBITDA. Because Q1 of 2020 was one of the strongest quarters in firm history, we expect Q1 of 2021 to be a tough comparison. But subsequent quarters offer opportunity for significant year-over-year performance.

Looking more specifically at MDC's results. In a side of improving fundamentals, MDC'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 in Healthcare, Food, Beverage, Financials and Automotive. In Q4, these segments rebounded from lows in 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% in Q4 and 13.9% for the full year, consistent with our expectations. Net revenue, excluding pass-through costs declined 13% in the quarter and 12.3% for the full year on an organic basis. Disciplined cost management helped us deliver our strongest covenant EBITDA in the last three years at $190 million for the full year 2020, up 5.3% year-over-year. 2020 adjusted EBITDA margins increased sharply by 250 basis points to 14.8% from 12.3% in 2019 on improving fundamentals and diligent cost management.

We ended the year in a strong cash position with $61 million in net cash and no revolver borrowings. Our leverage ratio continued to decline to 4.4x.

On the new business front, we continue to see resumption in client activity and engagement with robust new business wins recorded in the fourth quarter. Our net new business totaled $30 million in Q4 as compared to $31.9 million in Q3. Full year 2020 net new business was a solid $90.3 million versus $93.5 million in 2019, a strong performance considering the challenges COVID-19 presented to our business and others.

Notable wins in the quarter include Jimmy Johns, Hotels.com, Fetch Rewards and Netflix at Anomaly, Indeed at 72andSunny, Yeti in Polestar at YML, Skyy Vodka and LifeSpace at Mono, Miracle-Ear at Doner, Air Paint and [indiscernible] at Allison & Partners, [indiscernible] and Visit Sweden at F&B, MilkPEP, funded by the nation's milk companies and dedicated to educating consumers and increasing fluid milk consumption, also selected the Gale Assembly Network and Hunter in a mission to modernize its approach to marketing in the $20 billion to $30 billion category.

MDC also performed extremely well in 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 Johns and, of course, the NFL.

As a network, we represent less than 1% of the global ad market that accounted for more than 10% of the ads in this great creative showcase. Particularly a year in which marketing has been so disrupted and clients have had so few opportunities to connect with audience in a scaled way, our outside presence in the game underscores the unique value that clients see in MDC'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 in the Mid-East, Russia and Taiwan to scale the creative performance media and technology capabilities brands need to thrive in today's global economy. We expect to have 50 affiliates by year's end, making us even more attractive in 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 Deirdre McGlashan as Chief Media Officer. The newly created position will focus on continuing to evolve MDC's global media and data technology capabilities, leading global media pitch opportunities and offering scaled clients advanced solutions that drive superior business results.

We're not pausing in our plan to turn MDC into the modern marketing company of choice. We're keeping in place the cost reductions achieved so fa, 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 with Stagwell. Today, MDC is celebrated for bringing award-winning creative firepower to the world's leading and most ambitious companies, while Stagwell was built with deep and sophisticated technology at its core. Together, we will form a top 10 global integrated marketing services company unleashing the power of talent and technology around the world.

On the Stagwell side, I started the company with the intention of building a new kind of marketing company that is firmly positioned to take advantage of the global digital transformation. With this platform, in just five years, we've quietly built Stagwell into a growing digital-first market leader with nearly $900 million in run rate GAAP revenue. The majority of Stagwell's revenues are derived digitally based work with brands that span four categories of marketing services. These include digital transformation and performance marketing; research and insights; marketing communications -- and marketing communications; and digital content, all run by flagship agencies within their respective disciplines. Together, we intend to create a growing revenue stream of digital SaaS products and are already bringing this muscle and expertise to MDC.

In 2020, MDC launched PRophet, that's capital P-R O-P-H-E-T, jointly developed between Stagwell and MDC, using AI to predict how news will be received and covered in the media.

Bringing MDC and Stagwell together will ultimately give us a thoroughly modern marketing company, creating a $4.4 billion spend integrated media and data powerhouse with enhanced scale and sophistication. More importantly, we'll have a path to continued growth over the coming five years. Together, we are primed to grow to $3 billion in 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 of $30 million in 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 MDC's concentration in data-powered media offerings and more than triple its 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 though with today's lower interest could save as much as $20 million a year in interest expense, and we are examining those alternatives. We continue to expect the combination to close in the first half of 2021.

Finally, turning to MDC's outlook for 2021. We currently expect to deliver approximately 7% to 9% organic revenue growth and 7% to 13% adjusted EBITDA growth or $190 million to $200 million in EBITD and adjusted EBITDA up from $177 million in 2020. Our outlook is driven by the continued rebound in organic revenue out of the pandemic close from earlier 2020, including continued strength in our digital assets, which grew rapidly in 2020, continued demand of PR and communications, a rebound in our creative agencies and the return of some experiential work as well.

With that, let me turn things over to Frank Lanuto, our CFO.

Frank Lanuto

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 that more than offset our 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 remained flexible at year-end with $61 million in 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% for the quarter and full year, respectively.

Pandemic-related slowdowns in our experiential and technology clients accounted for approximately 60% and 50% of the organic declines 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 the pandemic-driven lows in the second quarter, increasing by 9% and 16% in the third and fourth quarters, respectively. Revenue rose in all four of our reported segments in the quarter, led by integrated networks A, up 37%; the all other segment, up 20%; media & data, up 7%; and integrated networks B up slightly. The continued sequential growth was driven by double-digit revenue growth in virtually every client sector, led by Consumer Products, Technology, Healthcare, Automotive, Food and Beverage and Financials.

With respect to operating expenses, we continue to benefit from actions taken at the outset of the pandemic as well as those made in 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 staff costs. Excluding Sloane and Kingsdale, the savings were $30 million for the quarter and $157 million for the year. We anticipate that approximately $45 million of these cost savings will be permanent.

We recorded approximately $11 million in charges, including $2 million in Q4, primarily for severance to affect these cost savings. During the fourth quarter, we also completed our New York real estate transformation project as we moved into the World Trade Center. In connection with the completion of the project, we recorded approximately $22.6 million in planned charges related to the properties exited, which will generate approximately $10 million in savings annually. During the fourth quarter, we also recorded approximately $73.7 million of noncash, goodwill and tangible asset impairment charges related principally to COVID-driven business declines.

We have taken a range of actions to generate cost savings, some permanent, some temporary. And we'll continue to manage our cost carefully in line with the revenue recovery. With revenue continuing 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 EBITDA for the year increased 2% to $177 million versus $174 million in 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 company's cash income taxes have been less than $10 million annually over the past three years. In 2020, the company recorded a provision for income taxes of $117 million, consisting 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 in cash flow from operations and ended the year with net cash of $61 million and no borrowings under our revolver. Leverage further improved to 4.4 times, down from 4.5 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 in Q3 to $151 million in Q4 and decreased from $152 million a year ago. The limited number of our remaining agencies under earn-out, led by our digital agencies, delivered strong performance during 2020, leading to an increase in our M&A obligations.

With respect to CapEx, we incurred cost 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 in the fourth quarter, completing the project on time and on budget.

In 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 Stagwell and the year ahead.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Avi Steiner with JPMorgan. Please go ahead.

Avi Steiner

I want to start maybe big picture, if we can. What is the tone from CMOs the company is talking to? Are they itching to get out there and spend in market as the world gets better? Or is it still more of a cautious tone?

Mark Penn

I think the CMOs are in a get back to business tone there. We've been in hibernation for a period of time, and so we're seeing a relative flood of RFPs and business coming up for bid. So I would call it a time to get back to business kind of mode. I think they're a little uncertain about whether that back to business is in the summer or in the fall, but nevertheless, that -- in marketing, you really need to start preparing three months out.

Avi Steiner

And then if I could dovetail that last answer with the company's guidance, which I assume is MDC only. Sitting here today, March 2, what sort of visibility do you have into the year or going forward at all?

Mark Penn

Well, I think we've given clear guidance just as I gave clear guidance at the beginning of the pandemic. I think obviously, travel, tourism and experiential are the laggards here because they require a high degree of safety. But the rest of the industry; automotive, packaged goods, services, those seem to be, I think, coming along nicely. And as I said, we've had nice net new business wins moving forward. So based on the kind of extensive budgeting process that we go through each year, we believe that the 7% to 9% growth is achievable and represents kind of a good leg back. As I said, I don't think we can recover revenue entirely in a year. But after the year, then we're down 12% or 13% in organic net revenue and, at the same time, up in EBITDA. So we can keep building on that base too as revenue gets restored and won.

Avi Steiner

Terrific. And one more big picture one, if I can. Clearly, during the pandemic, it seems there's been this greater shift to digital from linear platforms. And you noted digital and tech offering, I think in your opening, grew more than 50%. I don't want to misquote you. But my question really is, is this a permanent shift in your view? And if so, how do you see MDC positioned going forward?

Mark Penn

Well, it is a permanent shift, I think most clearly. So it has been a permanent shift for the last decade. It got accelerated as people realized that they had been too slow to, I think, transfer to kind of a creative performance marketing. I think MDC, about 9% of the companies are in that high-growth digital areas. And so we saw a lot of growth in that, and some of them are in earn-out, which also meant that our earn-out obligations went up. But that's a good thing in the sense that we're getting a much higher value because they're being appreciated and have a really solid book of business.

Part of the point of the combination is that will greatly increase to 32%, the combined level of high-growth digital services and a much bigger number of digitally based services. And I think that's one of the key underpinnings of the combination is to greatly increase that number to take advantage of the transformation under -- happening in the marketplace.

Avi Steiner

Terrific. And I will leave it here on this last one. 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 an economic perspective, whether it's investments or anything else, that would be terrific?

Mark Penn

Great. The affiliate program, I think, is the fastest way to close gaps that we were discovering in particularly emerging and certain marketplaces around the world. So by bringing on global affiliates within these areas, we -- it really is a win-win for the affiliates 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 they also put us in a stronger position, competing against bigger holding companies that have an agency in every single location because 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 in a very effective basis. And it turned out that there were a lot of really up and coming terrific companies in 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 in the network, and there will be resources available to the entire network to compete more effectively globally. So you can look at it as giving us a better position, enhancing our marketing, filling in and enhancing our position in global pitches and serving as a farm team for acquisitions to permanently enhance the footprint of the network.

Operator

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

Mark Penn

Thank you. I think -- thank you. I hope this has given you an overview of the progress that we continue to make during the difficult and trying year. I think this company, all the partners, all the people, the employees, we're looking at a dire situation in March and April. They responded incredibly well. This company emerges from this with higher EBITDA, with a stronger financial position, great cash position and look forward to the possibilities of a combination with Stagwell. And Stagwell will shortly announce the call in which it will detail its year-end and full year financials so that people can get all the information they need. Thank you very much.

Operator

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